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two midnights policy

SGR bill would extend delay of 'two-midnights' policy

By Joe Carlson
Posted: March 26, 2014 - 4:45 pm ET

The House Ways and Means bill to temporarily prevent Medicare physician payment cuts also would deliver an Easter gift to hospitals—a six-month extension to comply with a controversial new inpatient payment rule for hospitals.

The existing “two-midnights” rule says admitting physicians must have good reason to believe that a patient will need two nights in the hospital before Medicare will pay full inpatient rates under Part A for the stay. Lacking such documentation, Medicare auditors will generally classify the stay as outpatient observation, which pays hospitals much less under Part B and sticks the patient with a 20% copayment. That rule went into effect Oct. 1. But it was modified so that Medicare's aggressive recovery auditing companies could not overturn claims under the new policy until Sept. 30, 2014.

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The new bill, introduced in the House Wednesday (PDF), would require Medicare to extend that recovery-auditing moratorium until March 31, 2015. It also would give Medicare officials the discretion to extend what's known as the “probe and educate” process until the same date next year. Under that process, a different set of companies, known as Medicare administrative contractors, can audit a small number of short-stay inpatient claims and train hospitals on how to submit more accurate bills.

Hospital groups praised the decision to extend the moratorium on recovery auditing—a provision that was added to the bill at the last minute. “We are pleased that it has been added,” said Ken Raske, president of the Greater New York Hospital Association. His group and the American Hospital Association worked with allies in Congress over the past several hours to insert the provision, he said. He specifically thanked Sens. Chuck Schumer (D-N.Y.) and Robert Menendez (D-NJ).

Medicare officials originally estimated that the rule would create a net increase in payments for hospitals. But the policy has proven deeply unpopular among healthcare providers, who complain that it will cost them money—up to $4,000 per hospital case, according to an analysis by a bond ratings firm.

The two-midnights policy was intended to clarify a growing controversy in hospital medicine—the difficulty in determining which patients are sick enough to justify full Medicare inpatient rates.

Medicare's auditors have cracked down on cases in which patients were admitted from the emergency department without documentation that proved they need admission. In many cases, auditors say, patients could get tested in the hospital and be observed by staff in a hospital bed without needing full inpatient services. But that crackdown created a spike in observation care, which raises out-of-pocket costs for patients by requiring co-payments, and precludes Medicare coverage of costly post-acute rehabilitation care.

Some patients don't find out they were under observation care until they are discharged. Others are admitted as inpatients and then have their status downgraded retroactively, after spending hours or even days in a hospital bed. Both scenarios create major financial uncertainty for patients. That issue spawned an ongoing class-action lawsuit against Medicare.

The two-midnights rule was designed to spell out exactly how to treat patients in the gray zone between hospitalization and observation. But critics say the rule relies on a legal construct that disregards clinical judgment.

“It strikes me as something that lawyers came up with instead of clinicians,” said Emily Evans, a partner and legislative-regulatory analyst with the health policy analysis firm Obsidian Research Group in Nashville.

Patient advocate groups have long opposed outpatient observation care because of its financial impact on patients.

Follow Joe Carlson on Twitter: @MHJCarlson

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