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Health Affairs: Rising Use Of Observation Care Among The Commercially Insured May Lead to Total And Out-Of-Pocket Cost Savings

ABSTRACT:  Proponents of hospital-based observation care argue that it has the potential to reduce health care spending and lengths-of-stay, compared to short-stay inpatient hospitalizations. However, critics have raised concerns about the out-of-pocket spending associated with observation care. Recent reports of high out-of-pocket spending among Medicare beneficiaries have received considerable media attention and have prompted direct policy changes. Despite the potential for changed policies to indirectly affect non-Medicare patients, little is known about the use of, and spending associated with, observation care among commercially insured populations. Using multipayer commercial claims for the period 2009–13, we evaluated utilization and spending among patients admitted for six conditions that are commonly managed with either observation care or short-stay hospitalizations. In our study period, the use of observation care increased relative to that of short-stay hospitalizations. Total and out-of-pocket spending were substantially lower for observation care, though both grew rapidly—and at rates much higher than spending in the inpatient setting—over the study period. Despite this growth, spending on observation care is unlikely to exceed spending for short-stay hospitalizations. As observation care attracts greater attention, policy makers should be aware that Medicare policies that disincentivize observation may have unintended financial impacts on non-Medicare populations, where observation care may be cost saving.