Hospitals hope for relief from two-midnight purgatory

The heavily criticized Medicare two-midnight rule involving short inpatient stays has technically been in effect for the past year. But providers, regulators and healthcare observers are not sure the rule will hold up in its current makeshift form.

The two-midnight rule entered the healthcare vernacular last year after it was finalized in Medicare's fiscal 2014 inpatient rule. But enforcement and details of the rule have been far from concrete since then. “It's just been a lot of change and a lot of confusion for hospitals,” said Regan Tankersley, a healthcare attorney with Hall, Render, Killian, Heath & Lyman.

The two-midnight rule attempts to define a medically necessary Medicare inpatient admission. The rule says when an admitting physician reasonably expects a patient will need a hospital stay that spans at least two midnights, the hospital is eligible for Part A reimbursement. But if a patient stays in a hospital for fewer than two nights, hospitals have to list the encounter as observation and bill Medicare for the lower Part B payment, which also imposes higher cost-sharing on patients. Further, patients under observation care are not eligible for Medicare-covered nursing and rehabilitation services, which require three nights as a hospital inpatient.

Although Medicare's recovery audit contractors can't review hospital claims for compliance with the rule until April 2015, the policy appears to be changing behaviors. Community Health Systems, Franklin, Tenn., said it recorded 5,000 fewer admissions in its first quarter this year because of the two-midnight rule. Minneapolis-based Allina Health and the Cleveland Clinic also said in their second-quarter financial statements that the two-midnight rule was partially responsible for lower admissions and increased observations. Observation stays already have been on the rise as hospitals try to avoid preventable readmissions and their associated penalties.

At the very least, the two-midnight policy is forcing hospital systems to closely evaluate how they are treating patients who only need a couple of days in the hospital. “Right now we're not sure it's had a systemwide dramatic impact on the bottom line,” said Lydia Jumonville, chief financial officer of SCL Health System in Denver. “But it's continuing to cause everyone to appropriately manage observation and inpatient stays.”

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, who now works as an attorney for LeClairRyan.

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.”

Instead, observers say the CMS could establish a sliding payment scale that prioritizes specific hours of care and services provided. For example, if a patient is admitted and stays in the hospital for 32 hours, the hospital could break down what services were provided in four eight-hour periods. If the most expensive care was delivered in the first 16 hours, Medicare could pay hospitals inpatient rates for that timeframe and lower rates for the latter half of the stay.

It's a complex arrangement but it could bridge the large gap in reimbursement. “There's not this big win or big loss,” Doolittle said. An hours-based claims system also could encourage doctors to make patient decisions based on their best clinical judgment rather than unreliable time predictions. “The incentives are to rely less on your medical training and more on your creative writing training to see if you can justify that second midnight,” Doolittle said.

Other short-stay suggestions include paying a per-diem rate that is lower than the full inpatient amount. This strategy is used today for hospitals that transfer inpatients with a short length of stay to another hospital.

Theresa Edelstein, a vice president at the New Jersey Hospital Association, said one of the biggest issues is making sure any new short-stay payment methodology is budget neutral for the government. If the CMS were to create new payment bundles for short stays, money to cover them would have to come from existing Medicare dollars. “There's still a lot of work that would have to be done to get that finalized,” she said.

Priya Bathija, a health policy director at the American Hospital Association, said the main theme from the two-midnight public comments is simple: If hospitals can't get paid inpatient rates for short stays, payments should at least not drop to much lower outpatient rates. In addition, commenters said observation patients should be deemed inpatients for the purpose of protecting them from higher Part B coinsurance and qualifying them for Medicare coverage of rehab care.

The two-midnight policy has been on the books since Oct. 1, 2013. Currently, Medicare administrative contractors are allowed to audit 10 to 25 short-stay claims per hospital on a prepayment basis. The CMS is calling this a “probe and educate process,” as MACs are supposed to coach hospitals on how to improve short-stay claims.

The CMS will evaluate that coaching process this fall before it issues new guidance on the rule. MedPAC is also expected to offer alternatives to the two-midnight policy this fall. Although changes are expected to favor hospitals and Medicare patients, no timetable has been set for any definitive solution. “I just don't see that happening all that quickly,” Tankersley of Hall Render said.

Follow Bob Herman on Twitter: @MHbherman