Auditing inpatient stays

CMS officials know that Medicare patients spend too much time with the murky status of outpatient observation, which leaves them on the hook for higher out-of-pocket costs.

But a rule going into effect Oct. 1 may do little if anything to reverse the trend. Experts warn it may prompt hospitals to find new ways to balance the goals of increasing payments and reducing Medicare auditor scrutiny.

It all depends on how hospitals, admitting physicians and auditors react to the new “two midnight” rule that was included last month in the 2014 Medicare inpatient payment policy. The rule says hospitals will get the benefit of the doubt on physicians' decisions to admit a patient for full-blown hospital care covered by Medicare Part A if the patient's stay lasts more than two midnights.

The rule was intended to decrease the aggressive auditing of short inpatient hospital stays that led to the spike in observation care. The increase stems from the fact that observation care, which pays hospitals less, is not subject to the same level of scrutiny as one- or two-day inpatient care. The number of observation patients per 1,000 Medicare beneficiaries increased 27% between 2007 and 2011, according to CMS data analyzed by Modern Healthcare and the American Hospital Directory.

The new two-midnight rule is also intended, according to CMS officials, to decrease the financial hardship of observation care on patients. The rule even allows hospitals to claim that time spent in observation care should count toward the two-midnight test if lab results or clinical observations eventually result in the Medicare patient being admitted.

But a July report from HHS' inspector general's office predicted that some hospitals may respond to the rule by trying to keep patients for an extra midnight.

“The weird thing about this rule is it gives a perverse incentive to have people stay in the hospital longer,” said Dr. Daniel Handel, the emergency department clinical director at Oregon Health & Science University in Portland.

Dr. Pawan Suri, chairman of the Observation Medicine Division at Virginia Commonwealth University, said it will be interesting to see if Medicare data from 2014 show a spike in hospital admissions at 11:59 p.m.—a sign that hospitals raced to admit patients to get credit for two midnights.

Because of such concerns, hospital claims involving two-midnight inpatient stays will not receive total immunity from the auditors—only a presumption of reasonableness. Short inpatient stays still can be challenged if Medicare officials believe a hospital is gaming the system.

That kind of hedging is causing some critics to worry that Medicare's recovery auditors will continue to probe short stays with the same level of intensity as now.

But another potential effect is that some hospitals will decide that virtually all Medicare patients initially should be classified for observation care, then flipped to inpatient admissions after their second midnight on a hospital floor. That could subject more patients to the higher cost-sharing associated with observation care.

For hospitals, that scenario also could create two decreases in Medicare reimbursements. First, they will face a decline in inpatient admissions. Second, the inpatient payment rule that included the two-midnight guideline contained a small decrease in Medicare rates to make up for the CMS' assumption that the policy would increase short hospital stays.

“Hospitals are afraid they are going to get hit twice,” said Dr. Christopher Baugh, medical director of the observation unit at Brigham and Women's Hospital in Boston.

Follow Joe Carlson on Twitter: @MHJCarlson