To examine the association between hospital, patient, and local health system characteristics and the likelihood, prevalence, and duration of observation care among fee‐for‐service Medicare beneficiaries.

The 100 percent Medicare inpatient and outpatient claims and enrollment files for 2009, supplemented with 2007 American Hospital Association Survey and 2009 Area Resource File data.

Using a lagged cross‐sectional design, we model the likelihood of a hospital providing any observation care using logistic regression and the conditional prevalence and duration of observation care using linear regression, among 3,692 general hospitals in the United States.

Critical access hospitals (CAHs) have 97 percent lower odds of providing observation care compared to other hospitals, and they conditionally provide three fewer observation stays per 1,000 visits. The provision of observation care is negatively associated with the proportion of racial minority patients, but positively associated with average patient age, proportion of outpatient visits occurring in the emergency room, and diagnostic case mix. Duration is between 1.5 and 2.8 hours shorter at government‐owned, for‐profit hospitals, and CAHs compared to other nonprofit hospitals.

Variation in observation care depends primarily on hospital characteristics, patient characteristics, and geographic measures. By contrast, local health system characteristics are not a factor.