Research shows observation care cuts costs for non-Medicare patients

Hospital entance
Observation care may generate high out-of-pocket costs for Medicare patients, but it offers substantial financial benefits over short-term hospitalization for non-Medicare patients, according to new research. (Getty/Monkeybusinessimages)

New research suggests observation care may lower spending for patients with private insurance. That may complicate policy decisions based on the high out-of-pocket costs for patients with Medicare coverage.

study published in the December issue of Health Affairs found that out-of-pocket spending for commercially insured, nonelderly adults was significantly lower under observation care than for patients admitted for short hospitalizations. That stands in marked contrast to Medicare patients, whose shock at surprise bills spurred the federal government to pass a law earlier this year ensuring that hospitals alert patients when they put them under observation care.

For example, patients experiencing cardiac dysrhythmias, typically the most expensive condition tracked in the study, spent around three times as much for a short-term hospitalization as they did for observation care in 2013. Researchers found similarly substantial savings among patients with skin infections, for whom observation care cost 4.5 times less than hospitalization.


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In addition to the financial benefits, however, the study also noted a sharply rising trendline in terms of both total and out-of-pocket spending on observation care.

Understanding the root causes behind the rise in the number of patients placed under observation care may provide the key to shaping better policy. The study notes that rising reimbursement rates for observation care are equally likely to reflect advancements in the delivery of that type of care as they are to reflect an attempt to generate something closer to parity for provider reimbursement in both settings.

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In the meantime, the divergence in financial benefit between Medicare and non-Medicare patient populations should give policymakers pause as they consider attempts to control costs, according to the study’s lead author, Emily Adrion, Ph.D., of the University of Edinburgh.

“This is important because any Medicare policy aimed at reducing the use of observation care could have the unintended consequence of increasing total and out-of-pocket spending for the commercially insured,” she said in a statement.

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