Two-midnight rule expected to pressure hospital earnings

Hospitals are getting more support for their belief that they'll suffer under the CMS' controversial “two-midnight” rule, which uses length of stay to determine whether Medicare admissions were legitimate.

A new report from Moody's Investors Service said the policy, intended to curb the rise of long hospital stays billed as observation visits, has the potential to reduce the average reimbursement per case by $3,000 to $4,000.

That could be especially challenging for community hospitals that generally see less-complex patients over shorter visits.

The report could add fuel to hospitals' concerns that they'll be underpaid for shorter stays that clinically warrant inpatient care. The CMS, however, estimated that the change will actually create $220 million in additional Medicare expenses because a greater number of longer stays will be billed at inpatient rates.

Moody's report, however, says the change will accelerate the shift to more care being delivered in the outpatient setting as well as the rapid growth in observation stays. The new rule will have the greatest impact on those hospitals that still see a high proportion of inpatient cases, Moody's said.

Amid an aggressive backlash from hospitals, the CMS said last month it would delay the application of the policy by its recovery audit contractors until after Sept. 30.

Investor-owned hospital chains provided the first glimpse into the financial impact of the two-midnight rule when they reported fourth-quarter earnings last month. Yet their experiences suggest that the effect may be uneven.

Tenet Healthcare Corp., Dallas, said on its earnings call that it anticipates a significant effect on both volume as well as earnings before interest, taxes, depreciation and amortization—to the tune of $25 million.

That estimate was echoed by Community Health Systems, Franklin, Tenn., which said the two-midnight rule made a $5 million dent in its earnings before interest, taxes, depreciation and amortization in the fourth quarter. The effect on volume was about 60 basis points, or 1,000 admissions, Chief Financial Officer Larry Cash said on an earnings call. The chain's total admissions declined 10.5% during that period.

But HCA, Nashville, denied that the rule had a material effect on its financial results. While it did drag down its admissions numbers, HCA was able to cut costs associated with outside audits, CFO William Rutherford said. About 50 basis points of the 1.8% decline it saw in its total admissions could be attributed to the rule, he added.

Moody's acknowledged that the silver lining for hospitals is that greater standardization would provide clarity and perhaps some relief from expensive reviews by recovery audit contractors. Admissions practices represent one of the most heavily audited areas that hospitals face.

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