Hospitals hope for relief from CMS' two-midnight rule

Lots of people have ideas about how to change Medicare's unpopular two-midnight rule for short patient stays. But based on the public comments the CMS solicited in May, there's no consensus on what a new policy should look like.

Experts mostly agree the two-midnight rule is unlikely to be scrapped, but 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.

The two-midnight rule was part of Medicare's fiscal 2014 inpatient rule. It attempts to define a medically necessary Medicare inpatient admission. It 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 should list the encounter as observation and bill Medicare for the lower Part B payment, which also imposes higher cost-sharing on patients. Another issue is that patients under observation care are not eligible for Medicare-covered nursing and rehabilitation services, which require three nights as a hospital inpatient.

In light of the rule's unpopularity, the CMS asked for public comment on how to improve payments for short stays, but there was no consensus on a new policy, CMS spokesman Alper Ozinal said.

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.

An hours-based claims system could reduce the large gap in reimbursement and encourage doctors to make patient decisions based on their best clinical judgment rather than unreliable time predictions, advocates say. Under the current rule, “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.

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.

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

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.

Currently, Medicare administrative contractors are supposed to coach hospitals on how to improve short-stay claims, in what the CMS calls a “probe and educate” process. The agency 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,” said Regan Tankersley, a healthcare attorney with Hall, Render, Killian, Heath & Lyman.

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