Along with growing demand, rising costs and lower payments have threatened the financial viability of many hospitals, resulting in ED and hospital closures and a mismatch of supply and demand for acute care services. Considering these recent trends, efforts to improve healthcare efficiency are shifting focus toward enhancing hospital efficiency.

Delivering care in observation units is an alternative to admitting patients who cannot be safely discharged to their homes following ED visits. Observation units are dedicated spaces where patients receive care, usually for up to 24 hours. Studies suggest that care in observation units is equal or better in terms of quality and lower in cost than inpatient care for specific conditions. The strongest evidence supporting the benefits of observation care is specific to care delivered in dedicated observation units. Unfortunately, only one-third of hospitals deliver this care in an observation unit.


Potential Cost Savings with Observation Unit Use

Understanding the financial impact of increased use of observation unit care is important for healthcare delivery redesign. In an issue of Health Affairs, my colleagues and I published a study that quantified the potential cost savings from decreasing avoidable inpatient admissions by using dedicated observation units more frequently in hospitals that could justify opening one. We performed a systematic literature review to find the average cost savings per observation unit visit and then used a Monte Carlo simulation model to estimate the number of avoided inpatient admissions and associated cost savings at the hospital and national level.

According to our results, wider use of hospital observation units could save the healthcare system billions of dollars each year. The average amount saved could be $1,572 per visit when using an observation unit instead of inpatient admission for eligible patients. A hospital would save $4.6 million a year by avoiding 3,600 inpatient admissions. The healthcare system as a whole would save $3.1 billion a year by avoiding 2.4 million inpatient admissions.

Significant Implications on Healthcare Savings

Considering our results, future policies that focus on saving costs for the healthcare system should include support for observation units as an alternative to short-stay inpatient admission. Hospitals that would benefit from having an observation unit include all those with more than 50,000 ED visits per year, and many hospitals with 20,000 to 50,000 ED visits a year. Efficiencies generated by the use of observation units can also ease constraints on hospital capacity.

The greatest potential for lowering hospital costs as a result of observation unit use is to direct patients away from more costly and less efficient inpatient care in those who do not meet criteria for inpatient admission but are unable to go home after the initial ED evaluation. The direct and indirect cost savings from using this strategy are difficult to estimate, but the potential cost savings are significant. Large hospitals need to seriously evaluate opening an observation unit if one does not already exist. In addition, it’s possible that care may actually be improved— patients may be safer, feel more satisfied, and receive equivalent outcomes—with increased use of observation services in the right setting.


Baugh CW, Venkatesh AK, Hilton JA, et al. Making greater use of dedicated hospital observation units for many short-stay patients could save $3.1 billion a year. Health Affairs (Millwood). 2012 Sept 26 [Epub ahead of print]. Available at:

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