BACKGROUND This project aimed to design and implement an emergency department-managed observation unit that improves inpatient bed and emergency department stretcher capacity, decreases observation patient length of stay, earns high patient satisfaction scores, and generates a positive fiscal impact on the organization. METHODS This quality improvement project followed a 1-group, pre- and postprogram implementation design. RESULTS In the first year of operations, 40% of the total observation patients treated in this hospital were managed in the new observation unit. Emergency department observation unit length of stay across all patient complaints was half of the average length of stay for observation patients located on hospital inpatient units. In most cases, the emergency department observation unit was in the top 25 percentile of hospital Press Ganey inpatient satisfaction categories. The hospital estimates a contribution margin of three-quarters of a million dollars in the first year. CONCLUSIONS This effective and efficient hybrid observation unit possessed specific aspects of inpatient and emergency department patient care models. Placing providers and nurses at the workstation for faster communication expedited care. Prioritizing all observation patient testing, transportation, phlebotomy, and intravenous (IV) services shortened disposition times. Emergency nurses transitioning to the observation unit were challenged to acquire inpatient care knowledge. Observation unit management struggled to maintain staffing while under an inpatient productivity model managed by the inpatient house supervisor. Reducing patient disposition time required clear communication between observation unit and inpatient staffing managers, between physician consultants and advanced practice nursing providers, and among nurses, patients, and providers. Observation units are 1 solution to decrease observation patient length of stay and improve emergency department capacity.