August 25, 2014

The “two-midnight rule” was established by the 2014 Medicare inpatient prospective payment rule.  According to the policy, inpatient admissions extending through at least two midnights generally qualify for Medicare Part A payments.  Surgical procedures, diagnostic tests and other services are presumptively appropriate for inpatient hospital admission and payment when (1) the physician “reasonably” expects the patient to require a stay that crosses at least two midnights and (2) admits the patient to the hospital based upon that expectation.  Inpatient stays lasting fewer than two midnights are considered and should be billed as outpatient or observation services under Medicare Part B.

CMS introduced the policy to monitor Medicare reimbursement for short inpatient stays and to reduce the number of inpatient admissions deemed non-medically necessary.  Aggressive auditing by the Recovery Audit Contractors (the RACs) had recovered more than $2 billion a year from hospitals over the two fiscal years prior to June 2013, according to the American Hospital Association.  The problem, as noted by Joe Carlson in CMS considering alternatives to 'two-midnight' rule (Modern Healthcare, May 20, 2014),

is that many Medicare patients could technically qualify for inpatient or outpatient care, depending on how the admitting physician interprets the medical evidence at hand.  The decision carries huge financial consequences for hospitals, which stand to collect three times more money for inpatient care than outpatient observation.

The classic example is a beneficiary who arrives at a hospital emergency room with chest pains.  One hospital could admit the patient for inpatient care, while another could hold him in the hospital for outpatient observation and testing.  Although the services and lab tests would be similar if not identical, inpatient payments for short-stay inpatient care average $5,142, while outpatient observation payments average $1,741.

The two-midnight principle is not particularly easy to apply, or to audit.  The admitting physician’s subjective expectation is dispositive.  Outpatient observation services or services in an emergency department, operating room or other treatment area at the hospital may reasonably enter into the physician’s determination, but the time a patient spends as an outpatient before the formal inpatient admission order is not inpatient time.  CMS identified certain circumstances in which the physician’s expectation of a patient inpatient stay spanning two or more midnights would be reasonable, even though the stay ended up being shorter.  These were:

• Unforeseen patient death,
• Unforeseen transfer,
• Unforeseen departure against medical advice, and
• Unforeseen clinical improvement.

The negative reaction to the rigid but unclear two-midnight rule was swift and forceful.  Hospitals also stand to lose money, of course, when it takes effect in October.  The rule could decrease revenues for hospitals by $3,000 to $4,000 per case as more stays are classified as outpatient.  Inpatient stays have Medicare reimbursement rates that are, on average, two or three times higher than outpatient cases.  (H. Adamopoulos, Moody's: Most Hospitals Will See Less Revenue Under Two-Midnight Rule.  Becker’s Hospital CFO, March 14, 2014.)  The American Hospital Association and several health systems have sued CMS, arguing the rule is 'arbitrary' and 'capricious.'  The complaint states that the rule "unwisely permits the government to supplant treating physicians' judgment."  (H. Adamopoulous, 100 things to know about Medicare reimbursement.  Becker’s Hospital CFO, August 1, 2014.)

On April 1, 2014, President Obama signed into law the Protecting Access to Medicare Act which, among other things, extended the time during which CMS was to continue medical reviews under the contractor “Probe and Educate” (rather than recoup) process for six months, until March 31, 2015 and which also prohibited the RACs from conducting reviews on claims with dates of admission from October 1, 2013 through March 31, 2015.  In May, in light of the rule's unpopularity, CMS asked for public comment on how to improve payments for short stays and create a less rigid structure.

According to Bob Herman (Hospitals hope for relief from two-midnight purgatory.  Modern Healthcare, August 21, 2014),

Experts mostly agree the two-midnight rule is unlikely to be scrapped but that it may take a new form with more flexibility.  Ted Doolittle, who worked as deputy director of the CMS' fraud and abuse unit from 2011 to early 2014, said the agency has to find a happy medium from its current “all-or-nothing” payment approach.  “Let's turn it to a ski slope instead of a cliff,” said Doolittle. . . .

One proposed solution involves removing the criteria that patients spend two consecutive midnights in the hospital.  The Medicare Payment Advisory Commission said that requirement creates a “timing inequity, whereby cases are paid differently depending upon whether they were admitted just before or just after midnight."

If the rule is not scrapped, the ongoing shift from inpatient to outpatient services will accelerate.  The impact would be greatest on low-acuity community hospitals that tend to have a greater proportion of short-stay cases.  Larger hospitals and academic medical centers that rely on inpatient revenues would also experience revenue declines.  Those that perform relatively high volumes of inpatient-only procedures would not be hit as hard, since procedures on the “inpatient-only” list are exempt from the two-midnight rule.

Anesthesiologists are not the admitting physicians who make the advance determination whether a given patient will require at least two nights in the hospital (and who must document their reasons in some detail).  In the interests of anesthesiologists’ partnerships with their hospitals, fellow physicians, and patients, though, it will be important to continue to manage patients’ pain—post-operative and medical, if the anesthesiologists have taken on the responsibility of a general pain service—so as to permit timely discharges.

With best wishes,

Tony Mira
President and CEO