A new study suggests that emergency physicians in the United States and the United Kingdom value the benefits of observation care, viewing it as an important middle ground when a diagnosis is not yet clear or when more testing is needed, and they generally are wary about any further tightening of the restrictions governing its use. Although it is a challenge staying up to date on regulatory requirements, some physicians in the United States are most concerned about common patient misconceptions about the costs of observation vs. inpatient care — misconceptions that linger despite the new requirement that Medicare Outpatient Observation Notices (MOON) be delivered to patients who remain in observation beyond 24 hours.

  • Delivering MOON forms has created logistical hurdles for some hospitals, especially during weekends when staffing is not as robust.
  • Atlanta-based Emory Healthcare ensures that appropriate observation patients receive the MOON form by distributing it to patients at the same time every morning. Emory also has set up a MOON hotline for patients who have questions or concerns about their observation status or payment.
  • Noting that the literature shows that patients who succeed in observation do so in an average of 15-18 hours, Emory aims to capture 85% of observation patients in an observation unit, and for 85% of those patients to go home within 24 hours.

For years, the use of observation has been under constant assault by critics. While some charge that observation is just a cost-shifting mechanism that disadvantages patients, others gripe it is another layer of needless bureaucracy. Of course, it doesn’t help that the rules governing payment for observation seem to be constantly in flux, with the latest requirement (effective in March 2017) concerning providing Medicare Outpatient Observation Notices (MOON) to Medicare patients who remain in observation beyond 24 hours.

However, despite this friction, the use of observation has increased steadily, and there always has been plenty of evidence that emergency providers truly value the service as a needed middle ground, such as when testing has not yet been completed on a patient or when providers need a bit more time to ascertain whether a patient is safe to be discharged.

For instance, a recent study that gauged emergency physician views on the use of observation status found that providers in the United States and in the United Kingdom value the service because of the potential benefits it offers in terms of patient safety and quality care. This is despite the different regulatory frameworks and payment systems that exist in the two countries.1

However, despite the benefits that observation offers, clinicians who oversee observation units in the United States lament what they view as misinformation about why observation is used and the financial effect of an observation stay on patients. Further, some experts voice concerns that any further tightening of the restrictions around observation could affect care and outcomes negatively.

Clear up Misconceptions

In the study gauging emergency physician views on the use of observation, investigators consulted 10 emergency physicians from a university healthcare system in the Midwest and 14 emergency physicians from two hospitals in the United Kingdom.

Even though the payment rules governing the use of observation in the two countries are entirely different, the reasons given for the increasing use of observation in both countries were quite similar. In particular, participants from both countries believe in the importance of preserving inpatient resources, although this view was more evident among the physicians in the United Kingdom. Further, all the participants emphasized that clinical needs take precedence over administrative or financial factors in their decisions on whether to place patients on observation.

Physicians from both countries viewed observation as particularly valuable when there are clearly defined protocols or treatment pathways that can be completed within 24 hours. For example, it is common practice in both countries to refer patients with chest pain to observation while testing is completed to rule out an acute coronary syndrome. However, U.K. and U.S. physicians agreed that observation can be misused when it serves as a holding place for patients who do not have any clear diagnosis. Nonetheless, both U.K. and U.S. physicians agreed that there are times they need more time to ascertain a correct diagnosis, and that observation plays a useful role in providing a safe space in cases in which patients do not meet inpatient criteria.

Although physicians on both sides of the Atlantic recognized a potential for abuse in the growth of observation, the investigators reported that the physicians also voiced concerns about tighter regulatory reforms that could further restrict a provider’s ability to use the service.

“A lot of the alarming or conspiratorial types of suggestions for why we are seeing an increase in the use of observation have not really been borne out upon further study,” explains Brad Wright, PhD, a co-author of the study and an assistant professor in the department of health management and policy at the University of Iowa in Iowa City, IA. “This is a type of care that seems to serve a lot of valuable roles and purposes, but at the same time there are criticisms and concerns. I think we need to know more before [implementing] a stricter definition of how observation is to be used. There are so many good things that it does.”

Michael Ross, MD, FACEP, FACC, the chief of service for observation medicine at Emory Healthcare and a professor of emergency medicine at Emory University School of Medicine in Atlanta, agrees with these sentiments. However, he notes that patients often believe misconceptions about the costs associated with observation care. “I have heard more and more patients saying they don’t want to be observed because [they believe] Medicare doesn’t pay for observation,” he says.

In fact, such comments stem from a misunderstanding of what happens to a small number of patients who are observed and then transferred to a skilled nursing facility (SNF), Ross explains. “If they didn’t have the three [required] inpatient qualifying days, then Medicare doesn’t pay for the SNF as a benefit,” he says. “It turns out that this group represents 0.7% of all Medicare observation patients. It is extremely rare.”

Ross notes that another common misperception is that patients in observation will pay more out-of-pocket costs than if they are admitted to the hospital. In fact, a report from the Office of the Inspector General (OIG) has found that in the vast majority of cases, the opposite is true. The OIG reports that on average, beneficiaries pay twice as much for a short inpatient stay as for an outpatient visit that includes observation.2

Consider Logistical Hurdles

The new Centers for Medicare & Medicaid Services (CMS) requirement that hospitals provide patients who have been in observation for more than 24 hours with a MOON form does not necessarily clear up all the misconceptions regarding observation vs. inpatient costs, but it is intended to clarify to patients in written and oral form that they are observation patients, not inpatients, and what the cost-sharing implications of this status are, Ross explains.

With the approval of CMS, Emory has added some verbiage to the MOON form to provide patients with more information about why they are in observation. This consists of a series of check-off boxes that give providers a range of reasons as to why the patient is in observation so that the clinician can simply check the box or boxes that apply. The options on the Emory MOON form include:

  • Your diagnostic testing is not yet complete;
  • Further treatments of your condition are needed;
  • Consultation needs to be completed;
  • Ongoing evaluation and management of your condition is needed;
  • You require more care after your surgery but should be able to be discharged within 48 hours;
  • Your Medicare Advantage plan has told your doctor to place you in observation;
  • Other.

Coming up with a way to reliably ensure that the MOON notice requirement is met for all patients who remain in observation beyond 24 hours presented some hurdles at Emory Healthcare’s five hospitals with observation units, Ross explains.

“There are really three ways you can do it. You can wait until the patient hits 24 hours [in observation] and then give [the MOON form] to him, but then the patient could hit 24 hours at [5 a.m.] and then be discharged at [7 a.m.] before the nurse comes by to give it to that patient. We thought that was problematic,” Ross observes.

Another option that Ross considered was simply to give the MOON form to every observation patient. That is permitted by CMS, but Ross nixed that idea because it involved giving the form to patients who didn’t need it. Instead, Ross explains that Emory arrived at a “happy medium” between these two options.

“We know that by [10 a.m.], the rounds have occurred ... so what we do is have the nurse give [the MOON form] to every observation patient at that time, whether they have crossed the 24 hours in observation or not,” he says. “We know that if we do this consistently, we will always [supply the form] to patients before they are discharged. What is also nice is that if somebody comes and goes from observation between [the times when the form is given], then that patient hasn’t been in observation for 24 hours, so there is no concern about missing the patient.”

By using this approach, Emory can fulfill the MOON requirement in a systematic way that ensures reliability. “It allows us to consolidate our staff and workflow,” Ross offers. However, he acknowledges that it has been more challenging to cover the weekends when staffing is not as robust. “There are all kinds of logistical things that have popped up,” Ross observes, noting that, regardless, the MOON forms are given to appropriate patients.

How does Ross ensure that providers are kept informed about all the regulatory changes affecting observation care, such as the MOON form requirement? “I think you just hard-coat what is needed into the workflow,” Ross says. In addition, Ross regularly disseminates written information about any regulatory changes to the physicians, and he will make liberal use of phone contact, too. “We have a monthly meeting for our CDUs [clinical decision units] where we discuss all issues, and I attend the care coordination meetings monthly where nurses that deliver the MOON forms discuss it,” he explains. “They have said that, by and large, most patients sign the forms, and some people will ask questions ... but it really hasn’t changed very much of what we do.”

Emory also has established a MOON hotline for observation patients who ask questions about their status or payment issues, although thus far there have not been too many takers, Ross reports. “Every hospital comes up with a different way to [handle the MOON form requirement],” he says. “Some places are using registration clerks, and some are using [electronic tablets] instead of paper documents where the patients sign their names electronically.”

When Medicare budgeted for the MOON process change, the agency understood hospitals were going to need added resources, Ross recalls. “They estimated [the process] would take five or 10 minutes of time [per patient], so they increased payment for that.”

Push for Regulatory Tweaks

While there have been several significant regulatory changes to observation in recent years, Ross, who served on an ambulatory payment classification (APC) advisory committee to CMS, believes Medicare is getting closer to a well-defined service. “The comprehensive APC for observation packages everything into a single payment,” he explains. “The emergency visit and the observation visit are combined.”

That means for a chest pain patient, for example, the stress test, MRI, echocardiogram, and everything the patient gets during an observation visit are combined. Medicare would cover the visit, with patients paying a 20% copay, Ross explains.

“That is almost always going to be less than what an inpatient deductible would be for the patient,” he adds.

The only two things that are not covered by Medicare are self-administered drugs and the SNF benefit when inpatient requirements are not met, but the American College of Emergency Physicians is advocating that those issues be addressed, Ross explains.

In particular, Ross would like to see a change to the requirement that patients spend three days as inpatients to be eligible for the SNF benefit. “It is clear that observation is at least comparable to inpatient level care, if not higher in many cases with type 1 observation units,” he says. “I think Medicare needs to do what Medicare part C plans do and either drop the three-day rule or include time in observation toward the three-day rule.”

For example, if a patient is observed and gets admitted, start the clock with observation rather than when the patient was admitted, Ross advises. “Such a change would go far with patients,” he says.

Regarding self-administered drugs, Ross understands that some of these drugs are very expensive, and that Medicare is reluctant to cover such costs, but he believes this problem could be addressed by simply placing a cap on the amount that Medicare will pay for these medications.

“If a patient is in observation for a GI bleed, you don’t want him to take aspirin or Coumadin, so really for quality and safety reasons, hospitals are going to want to [be in charge of administering] those medications,” he says.

Much of the handwringing over observation stems from the decision by Medicare officials to adopt the diagnosis related groups (DRG) system decades ago, Ross shares. “They created a dichotomous world where everything was inpatient or outpatient, and they didn’t realize at the time that this was like saying that everyone can fit into a small T-shirt or a large T-shirt, and there was no such thing as a medium T-shirt,” Ross explains. “Observation patients are really neither inpatient nor emergency patients. They truly are a separate, distinct, middle category.”

The intent of observation is to see if someone must be admitted, but such patients really fall between inpatient and outpatient, Ross notes. “If you don’t have that option, you are going to admit people who don’t need to be admitted, or you are going to send home people who should have been admitted,” he says.

Over the years, it has become clear in the literature that patients who succeed in observation do so in an average of 15-18 hours, Ross advises. “If you hit 15 to 18 hours, and you are still spinning your wheels, you have reached a point of diminishing return, and keeping the patient additional hours [in observation] is probably not going to make a difference unless there is something missing, like a stress test,” he says.

Otherwise, Ross notes that it is probably better to admit the patient at that point. “Our goal is to capture 85% of observation patients in an observation unit, and for 85% of those patients to go home within 24 hours,” he says.


  1. Martin G, Wright B, Ahmed A, et al. Use or abuse? A qualitative study of emergency physicians’ views on use of observation stays at three hospitals in the United States and England. Ann Emerg Med 2017;69:284-292.
  2. Department of Health and Human Services, Office of Inspector General. Vulnerabilities Remain Under Medicare’s 2-Midnight Hospital Policy. Available at: http://bit.ly/2if88Ky. Accessed June 27, 2017.


  • Michael Ross, MD, FACEP, FACC, Chief of Service, Observation Medicine, Emory Healthcare; Professor of Emergency Medicine, Emory University School of Medicine, Atlanta. Email: mross@emory.edu.
  • Brad Wright, PhD, Assistant Professor, Department of Health Management and Policy, University of Iowa, Iowa City, IA. Email: brad-wright@uiowa.edu.