To treat observation care as simply a loophole that allows hospitals to avoid the Medicare penalties from readmissions — as Brad Wright, an assistant professor of health management and policy at the University of Iowa did earlier this month — is to take a short-sighted approach to a complex health issue.

Observation care in fact aims to address several of healthcare’s thorniest challenges head on. In the process, a well-run observation unit can not only help reduce hospital readmission rates, but it can reduce crowding and speed throughput in the ER, save patients an extended first hospital admission (let alone a re-admission), and perhaps most importantly, improve patient outcomes.

To see how, and to clear any misconceptions some like Wright could have about observation care, it might be helpful to do some Q&A.

How long are patients usually held in observation care?

Medicare defines observation as 23 hours or less, so if a patient stays longer than that, the hospital likely won’t be reimbursed for the cost. Medical Emergency Professionals runs two observation care units, one at Western Maryland Health System in Cumberland, MD, the other at Shady Grove Adventist Hospital in Rockville, MD. Patients at these two units average a stay of 20 hours and 16 hours, respectively.

That is not to say that some other hospitals don’t keep patients in “observation” for days, or even weeks. One example might be a homeless person with a serious foot infection. A physician can prescribe antibiotics, but with no insurance and no way to follow up with the patient, they may not meet the criteria for a safe discharge. The patient doesn’t require an inpatient level of care, but the hospital can’t find an alternative environment for them to go that is considered safe. So the hospital will likely get reimbursed for the first two days of stay under observation status, but anything beyond that the hospital would swallow the cost. Furthermore, the hospital can’t get reimbursement by admitting the patient because the level of care required wouldn’t justify in-patient care. Given the situation, it’s hardly fair to say the hospital is simply exploiting a loophole. More accurately, the hospital is doing the best it can while swallowing the cost of uncompensated care that is the inevitable result of a broken healthcare system and greater societal problems.

Does observation compromise the quality of care received?

Just the opposite, in fact. Observation care seeks to treat patients whose condition doesn’t justify a hospital admissions, but may still need follow-up, testing, or a little bit of “wait and see.” For example, a patient who shows up in the ER with abdominal pain may just be constipated, or they may have appendicitis. Observation care provides the focused, rapid medical evaluations to determine the level of care needed. If further testing is needed, observation care aims to speed test results.

The reason observation care results in better patient outcomes is largely because both hospitals and emergency rooms have been historically poor at dealing with these types of patients. In both environments, resources tend to gravitate elsewhere, whether to the gunshot victim who needs immediate attention, or to the patient with the sore throat who can be treated easily and sent home right away.

Another reason is that observation care doesn’t just help reduce re-admissions, it helps prevent admissions in the first place. The longer someone is in the hospital, the greater the change they will contract a hospital-acquired illness or infection. As a recent study in Annals ofInternal Medicine showed, hospitals that reduce the length of stay also see reduced mortality and readmission rates. This risk may be worth it for patients who truly demand in-patient care, but those who don’t, keeping them out of the hospital in the first place should be a priority.

Is it more expensive for the patient to be in observation care?

Unfortunately, yes. Observation care is generally considered out-patient, and most insurance plans ask its customers to pay a greater percentage of out-patient costs. On the other hand, what patient wouldn’t want to avoid a multi-day hospital stay?

Still, this is an area where the regulatory environment is way ahead of the insurance market. Our policies have shifted toward encouraging out-patient care, because it’s cheaper and often more effective, but the rate structures of insurance plans still encourage patients to choose in-patient care. That needs to change in the future.

Is observation care a loophole for hospitals to exploit?

By now, the obvious answer to this question should be “no.” But in case it’s not clear, here is a prediction: hospitals will get eventually get penalized for re-admissions to observation units as well as in-patient services. In fact, we’ve already heard anecdotally of one hospital getting penalized for a re-admissions to observation, and all signs point toward that trend continuing.

Is there another way for hospitals to avoid the Medicare penalty?

Yes: by providing better care. Hospitals that simply move some numbers around, re-classify patients one way or another, cook the statistics a bit, calculate something differently, or otherwise try to game the system will find themselves left behind. That’s what we’ve been doing in healthcare for years, and it won’t work any more.

The future of healthcare is about providing better, more efficient care, leading to better patient outcomes. Observation care pushes hospitals to change their view of healthcare delivery, to do it in a timely fashion, and slowly but surely move them to a different reimbursement structure. That’s a good thing for hospitals, and for the U.S. healthcare system.

Robbin Dick is Observation Medicine Services Director, Medical Emergency Professionals. He also blogs at the EmergencyDocs Blog.