Specialized hospital units for patients under observation status could dramatically reduce the number of seniors forced to pay out-of-pocket for skilled nursing care, according to findings in the current issue of Health Affairs.

Investigators analyzed information from case studies of observation units in Atlanta hospitals, statewide discharge data for Georgia, and national survey and discharge data. They found strikingly better results in hospitals with “type 1” observation units. These are dedicated specifically to caring for patients under observation and have defined protocols for doing so. Fewer than one in six U.S. hospitals has a type 1 unit, according to lead author Michael Ross, M.D., of the Emory University School of Medicine.

Patients in a type 1 unit had a 23% to 38% shorter length of stay, the researchers found. These patients also were less likely to have a subsequent inpatient admission. By implementing type 1 units, hospitals stand to save $1 billion or more per year, the researchers estimated.

Wider adoption of type 1 units also would help address a Medicare loophole that is sticking seniors with costly bills for skilled nursing and rehabilitation care, according to the researchers.

After spending days in the hospital, some Medicare beneficiaries are surprised to learn they were never admitted as an inpatient but were held under observation status. This becomes especially problematic if they need follow-up care in a skilled nursing facility, because this Medicare benefit only kicks in after a beneficiary has spent three midnights as a hospital inpatient.

About 7% of observation patients spend more than 48 hours in the hospital in that status, but this number plunges to 0.1% for patients in type 1 units, according to Ross. Type 1 units are tasked specifically with making admission decisions within a day.

Patients in a type 1 unit are likely to “get into inpatient care faster” and are “less likely to lose their nursing home benefit,” Ross said in a PBS NewsHour interview.

Critics counter that patients who are discharged from a type 1 unit still will not qualify for Medicare coverage of any needed skilled nursing or rehab. This sticking point would be resolved by a bill to eliminate the three-midnight requirement. The measure, introduced by Rep. Jim McDermott (D-WA), is part of an increasingly urgent effort to close the observation stay loophole, which also has involved other legislation, legal action and regulatory changes.