Hospital costs and reimbursement for short-stay inpatient versus observation status hospitalizations for children with medical complexity.

Background: There is a lack of uniformity across hospitals in applying inpatient versus observation status for short-stay (<48 h) pediatric hospitalizations, with negative financial implications associated with observation. Children with medical complexity (CMC) represent a growing population and incur high costs of care. The financial implications of inpatient and observation status for CMC have not been studied.

Objectives: To compare costs and reimbursement for short-stay hospitalizations for CMC by inpatient and observation status, overall and stratified by payor.

Methods: We performed a cohort study of short-stay hospitalizations for CMC from 2016 to 2021 at 10 children's hospitals reporting reimbursement in the Pediatric Health Information System and Revenue Management Program. The primary outcome was the cost coverage ratio (CCR), defined as an encounter's reimbursement divided by the estimated cost.

Results: There were 89,282 encounters included. The median costs per encounter were similar across observation ($5206, IQR $3604-$7484) and inpatient ($6547, IQR $4725-$9349) encounters. For government payors, the median CCR was 0.6 (IQR 0.2-0.9) for observation encounters and 1.2 (IQR 0.8-1.9) for inpatient. For nongovernment payors, the median CCR was 1.6 (IQR 1.3-1.9) for observation and 1.6 (IQR 1.4-2) for inpatient. Government reimbursement was associated with increased risk for financial loss (OR 13.91, 95% CI 7.23, 26.77) and with a median net loss of $985,952 (IQR $389,871-$1,700,041) per hospital annually for observation encounters.

Conclusions: Government-paid observation encounters for CMC are associated with significant financial loss at children's hospitals. This reimbursement model may pose a threat to children's hospitals' ability to care for CMC.