The Centers for Medicare and Medicaid Service's policy on nonpayment for certain hospital readmissions has reduced their incidence. However, this policy change may have unintended consequences. One possible outcome is an increased number of patients who return to the hospital being placed on observation status. Comparing readmission rates and observation stays for targeted and nontargeted conditions, this secondary data analysis examined how observation stay rates changed in parallel with readmission rates. The authors found that readmissions decreased, consistent with prior studies, and observation stays increased. Interestingly, a within-hospital analysis determined that the decline in readmissions was not explained by an increase in observation stays. This finding should allay concerns about this specific unintended consequence of the readmission policy, although other issues such as length of stay changes should be addressed.