SUMMARY Each year, more than 3.4 million Medicare beneficiaries are hospitalized as outpatients under observation. These observation stays have comprised a rapidly increasing proportion of unscheduled hospitalizations among older adults in the US. Controversial Medicare policies, including the Recovery Audit Contractor (RAC) Program and the 2-Midnight Rule, have greatly incentivized hospitals to care for patients via observation instead of an inpatient admission. Additionally, the Hospital Readmissions Reduction Program (HRRP), which penalizes hospitals with higher-than-expected rates of readmissions for certain conditions, may have also had the untoward consequence of incentivizing hospitals to use observation to avoid readmission penalties. Yet, despite their growing importance in hospital care and the complex policy environment driving their use, few studies have examined how observation stays impact patient’s quality of care and outcomes. Recent evidence shows that 30-day readmissions are increasing among patients with observation stays, despite concomitant declines among inpatients. These disparate trends are significant given that federal quality programs, such as the HRRP, have thus far entirely ignored observation stays in hospital-based care delivery. Similarly, hospitals are not held accountable for other outcomes for patients hospitalized under observation, such as mortality. As a result, there has been little incentive for hospitals to ensure high-quality and effective care for patients with observation stays relative to inpatients. In this context, this study aims to fill critical gaps in our understanding of the consequences the growth of observation stays on patient outcomes. Using longitudinal Medicare claims and quasi-experimental methods, we will specifically answer the following questions: 1) What is the contemporary national landscape of readmissions, post-discharge ED use, mortality, and acute care costs for patients with observation stays, and how does this compare to inpatients across hospitals?; 2) How have current Medicare payment reforms, including the Recover Audit Contractor (RAC) program, 2-Midnight Rule and HRRP, impacted the use of observation stays, and more importantly, have they had unintended consequences on patient outcomes?; 3) Finally, how should observation stays be accounted for in national quality programs to fully reflect the care needs of older adults requiring hospital care? This study will be the most comprehensive examination to date of outcomes for Medicare beneficiaries with observation stays, and is specifically designed to inform clinical and policy decision-making around observation care for older adults.

NARRATIVE By better understanding the causes and consequences of observation stays on older adults’ health, and their impact on readmissions in particular, we expect our findings to provide crucial evidence to inform policies related to observation stays, including contributing to the refinement of CMS readmission measures. Such evidence is needed to ensure that federal quality efforts align care delivery with the needs of the entire population of older adults requiring hospital-based care.