Observation status has always been a balancing act: patients require hospital-level care, but reimbursement rules often leave providers and hospitals with slim margins. In recent years, the stakes have grown higher. Length-of-stay pressures are intensifying, and compliance requirements around notices like MOON and HOON continue to expand.
At the 2025 Hospital Observation Patient Management Conference, one theme was clear: hospitals that elevate their utilization review (UR) teams into strategic roles are best positioned to thrive. UR, in partnership with physician advisors (PAs) and case management (CM), is not simply an administrative or compliance function; it is a driver of financial resilience, patient flow, and organizational strategy.
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UR as a Strategic Lever for Financial Performance
Observation can be described as the “gray zone” of hospital care. For payers, it is a cost-control mechanism. For hospitals, it is a financial vulnerability. Misalignment in status assignment can cost millions annually in lost reimbursement, compliance penalties, and downstream denials.
Key strategies for positioning UR as a financial catalyst include:
- Deploy UR/PA Teams Proactively: Status decisions should not be reactive! UR and PA teams must actively manage observations at the point of entry in real-time, reducing missed opportunities for conversion.
- Dedicate Specialized Resources: Leading organizations are aligning UR by process, assigning dedicated observation reviewers or teams that bring sharper focus and consistency.
- Recognize the Financial Imperative: As one speaker emphasized, “assigning patient status accurately may be the single greatest opportunity to improve hospital finances.” Correct placement ensures appropriate admission, strengthens appeal defensibility, and improves bottom-line reimbursement.
- Balance Risk and Reward: Observation-to-inpatient conversions must be managed in tandem with monitoring short-stay inpatient trends to avoid triggering payer audits or recovery audit contractor (RAC) scrutiny.
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Operational Integration and Patient Throughput
Observation management is not a silo: it is an operational pressure point that touches clinical care, patient experience, and discharge flow. Forward-thinking organizations embed UR within clinical workflows to strengthen throughput and minimize avoidable costs.
Key practices include:
- Aggressively Manage Avoidable Days: Real-time tracking of care delays enables UR and CM teams to push care progression and prevent unnecessary observation extensions.
- Create Structured Escalation Pathways: Hospitals should implement daily or twice-daily reviews of observation patients, with clear escalation when thresholds or payer rules are reached. Ensure UR team members are a central part of interdisciplinary/multidisciplinary rounding so that status can be reviewed with the larger team.
- Educate to Influence Behavior: UR plays a critical role in reinforcing payer requirements and other important payer or regulatory considerations with attending providers, reducing friction and strengthening compliance. Collaboration with CDI can also be highly effective, as aligned UR-CDI efforts promote accurate documentation of medical necessity, optimize DRG assignment, and reduce payer pushback by strengthening the clinical rationale for admission status.
- Support Dedicated Observation Units: Clinical Decision Units (CDUs) can only succeed when supported by equally focused observation UR processes, ensuring timely and correct status assignment and transition. Observation status alone can lack the focused oversight and structured processes of a dedicated Observation Unit, resulting in longer stays, missed conversion opportunities, and inconsistent care progression.
- Guarantee Regulatory Compliance: UR is the safeguard for timely delivery of MOON/HOON notices, protecting both the organization and patients from compliance fallout.
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Emerging Trends: What to Watch
Observation management is shifting under payer pressure and evolving regulatory expectations, including:
- Tightening Payer Scrutiny: Commercial and Medicare Advantage plans are increasingly using observation as a denial lever, especially targeting short inpatient stays and status conversions (for example, Aetna’s Medicare Advantage “Level of Severity Inpatient Payment Policy” scheduled to take effect on November 15).
- Stricter LOS Benchmarks: Many payers are setting more rigid observation length-of-stay limits, demanding real-time escalation and UR involvement.
- Increased Patient Communication Expectations: Regulatory emphasis on transparency means MOON/HOON compliance will remain under the spotlight.
Hospitals that fail to invest in UR capacity for observation risk only revenue leakage but also may experience risk exposure.
Leadership Imperative: UR as a Strategic Operator
A key insight from the 2025 Hospital Observation Patient Management Conference is that UR must evolve from compliance monitor to strategic operator. Status management should not be a back-end fix, but instead a front-line opportunity to safeguard margins, ensure compliance, and support patient flow.
Hospitals that strategically align and scale UR resources to address meaningful observation patient management will elevate their organizational resilience. Contact us to learn more about leveraging UR and creating an effective observation management strategy.
