Using observation units in hospitals to provide care to certain patients can be more efficient than admitting them to the hospital and can result in shorter lengths-of-stay and lower costs. However, such units are present in only about one-third of US hospitals. We estimated national cost savings that would result from increasing the prevalence and use of observation units for patients whose stay there would be shorter than twenty-four hours. Using a systematic literature review, national survey data, and a simulation model, we estimated that if hospitals without observation units had them in place, the average cost savings per patient would be $1,572, annual hospital savings would be $4.6 million, and national cost savings would be $3.1 billion. Future policies intended to increase the cost-efficiency of hospital care should include support for observation unit care as an alternative to short-stay inpatient admission.