Charging observation hours

I have recently learned that a large healthcare system is charging a flat hourly rate for observation. Currently we charge different rates based on acuity levels of service. We would like to explore the opportunity to go with a flat rate because we feel like we are losing revenue in the ED since we charge a lower rate. Any thoughts/Recommendations?


  • These days charges rarely correlate with revenue. For example, Medicare pays Observation stays (with a few cavetas) as a comprehensive APC- one fixed payment so the charge does not matter. If you have commercial plans that pay Obs as a line item based on charges, then it seems you should charge more per hour for an ICU Observation patient than for a routine med/surg patient. 
    Also of course your charges do go into cost reporting that is used by CMS to set rates, so that might be another reason to differentiate ICU obs from telemetry obs charges since your costs are higher. 
    Hope others contribute their answers.
  • Our hourly observation charges are based on the most used charge on the nursing unit and is 1/24th of the room charge. Years and years ago when I first started in the charge world, I was told to use 1/24th of the room charge so regardless of IP vs OP, the patient would be basically charged the same. I'm being told that this is "old school" and not necessary. We are converting to a new system and will be using a flat rate for all observation patients regardless of the unit.

  • My understanding from our auditors is that 24 hours of observation cannot be priced higher than your inpatient room rate. We are a CAH, so I don't know if that makes a difference.

  • Interesting. Theoretically and in practice, an observation patient is getting more care than an inpatient. Their care is measured in hours not days and they are receiving a lot of services and more intense monitoring in a shorter period of time. Does that not warrant a higher rate?

  • I think this was originally established with the idea that many of these services are billed/paid separately on an outpatient claim, where a lot of them are included in the inpatient room rate (e.g., drug administration services, bedside procedures, etc.) I don't know that the payers have deviated from this since the beginning.

Sign In to comment.