The "two-midnight rule" has been controversial since CMS first announced it in August 2013. Created in response to aggressive recovery audit contractor (RAC) claim reviews discovering high error rates for medically unnecessary Part A inpatient services which should have been submitted by the provider as Part B outpatient services, the rule required physicians to make “medically necessary” inpatient admissions. The patient’s treatment would need to require at least a two-night hospital stay.
Federal lawsuits against HHS still pending
Medical groups, including the American Medical Association (AMA) cried foul, stating the rule undermined physician’s medical judgment, and “gets in the way of the physician-patient relationship.” In April 2014, the American Hospital Association, along with four delivery systems (Banner Health, Mount Sinai, Einstein Healthcare Network and Wake Forest Baptist Medical Center) and four state hospital associations (Greater New York, New York State, New Jersey and Pennsylvania) filed two federal lawsuits against the now-former HHS secretary Kathleen Sebelius.
One of the suits called the rule “arbitrary and capricious: It undoes decades of Medicare policy. It unwisely permits the government to supplant treating physicians’ judgment...[I]t defies common sense."
Additional complaints include required written physician orders for Medicare payment of inpatient stays, which the plaintiffs claim force hospitals “to spend hundreds of thousands of dollars, and hundreds of hours of personnel time, to change their medical records systems, admissions policies and procedures and documentation protocols, harming hospitals and consuming resources that instead could be invested in patient care.” The cases are still pending.
Facing financial burdens
A Moody’s report from March 2014 estimated the rule could reduce average reimbursement per case between $3,000 and $4,000. According to the Advisory Board’s Daily Briefing, this lost revenue estimate goes against CMS’ prediction the policy “will create $220 million in additional Medicare expenses because a larger proportion of extended stays will be billed at inpatient rates.” Overall, the Moody report stated the rule would increase the shift from inpatient to outpatient care and do nothing to stop the increase in observation cases.
Some hospital chains disclosed the effect of the rule on fourth-quarter earnings last year. Tenet Healthcare said it anticipated losing $25 million on volume and earnings before interest, taxes, depreciation and amortization. Community Health Systems said the rule caused a $5 million loss in earnings and the hospital chain’s total admissions fell 10.5% (1,000 admissions) during the fourth quarter last year, according to CFO Larry Cash. But, interestingly, HCA said the rule did not change its financial results, but it did drop inpatient admissions by 1.8%.
Patients paying more
Patients are also affected by the rule because those who are classified as “observation stays” are responsible for a 20% co-pay and do not get covered for certain medications given in the hospital for post-acute care, according to an article in HealthLeaders Media. In addition, these patients are not covered by Medicare for a skilled nursing rehabilitation facility unless they have been in the hospital for three days. Many experts said this imposed a great deal of confusion for patients who thought they were considered “inpatient” because they were in the hospital.
Virginia recently joined four other states (CT, MD, NY, PA) when it recently passed a state law requiring hospitals to inform patients when they are in “observation” or other outpatient status and the consequence of not being admitted as an inpatient. The Center for Medicare Advocacy said in a statement that although the agency supports such notification, “we see the legislation as insufficient, by itself, to solve the problem of observation status for hospitalized Medicare patients.”
Banner Health CFO, Dennis Dahlen, who called the rule “detrimental,” told BizWest in May 2014 that when patients are classified as under observation care versus inpatient status the hospital makes close to 80% less for the same treatments. In addition, he estimated those classified under observation care and who only stay one night in the hospital could cost Banner Health $35 million per year system-wide. Banner operates in seven states and has two hospitals in Colorado, with a third under construction. Healthcare Dive reached out to Banner Health for comment but was unable to obtain a response prior to deadline.
More recent rule changes
The latest proposed changes to the rule acknowledges physicians' medical judgment and restores case-by-case assessment for inpatients expected to stay less than two nights. Physicians must carefully document the medical reason for the short stay. Documentation must include signs and symptoms of medical severity, medical predictability of adverse consequences and the need for diagnostic studies more appropriately performed outside the hospital.
Dan Steingart, a vice president and senior analyst at Moody’s told Healthcare Dive the recent changes are "modestly positive for hospitals because they allow hospitals to exercise more discretion in determining when patients are classified as inpatients (higher reimbursement) or observation patients (approximately one-third the reimbursement of inpatient). As currently written, the two-midnight rule doesn’t allow for much discretion.” He also added “the proposed change will mitigate some of the negative effects of the two-midnight rule, but doesn’t reverse it.”
Another key change in the rule involves changing medical review authority from Medicare Administrative Contractors and RACs to Medicare Quality Improvement Organizations. QIOs are private contractors that monitor the quality of care provided to Medicare patients. This is set to take effect October 1. RACs will only be authorized to review hospitals with consistently high rates of denial from QIOs.
A final rule is expected for release in November 2015. A CMS spokesperson told Healthcare Dive it was unable to respond to questions before the rule is finalized.