Moody's: Two-midnight rule will cost hospitals

Fourth-quarter earnings suggest policy is a 'mixed bag' for providers

Hospital earnings will likely take a hit under the "two-midnight" rule for Medicare inpatient admissions, particularly among community providers that treat less complex patients over shorter visits, according to a new report from Moody's Investor Service.

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The controversial two-midnight policy—included in Medicare's inpatient payment rule for 2014—calls for physicians to make only "medically necessary" inpatient admissions; specifically, a physician is supposed to expect that the beneficiary's treatment will require at least a two-night hospital stay.

The rule aims to limit the growth in extended observation stays at hospitals, which have skyrocketed in recent years. Although the rule was set to take effect Oct. 1, 2013, pushback from health care providers prompted CMS to repeatedly delay enforcement. Under the latest delay, Medicare's recovery auditors must now wait until after Sept. 30 of this year to begin using the rule during audits.

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According to Moody's, the two-midnight policy could end up reducing average reimbursement per case by $3,000 to $4,000, given that outpatient cases typically reimburse hospitals at lower rates. Moody's warning directly contradicts CMS's prediction that the change will create $220 million in additional Medicare expenses because a larger proportion of extended stays will be billed at inpatient rates.

Additionally, Moody's concluded that the two-midnight policy will likely accelerate the shift from inpatient to outpatient care and do little to stem the growth in observation cases. And hospitals that see a high proportion of inpatient cases will be disproportionately affected—for example, smaller community hospitals with a less acute case mix.

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Early impact on volumes, earnings

The report will likely add fuel to hospitals' concerns that they may be shortchanged under the new inpatient policy, Modern Healthcare's Beth Kutscher reports. Last month, investor-owned hospital chains provided the first glimpse into the financial impact of the two-midnight rule in their fourth-quarter earnings. Their experiences were decidedly mixed:

  • Tenet Healthcare anticipates losing up to $25 million on both volume and earnings before interest, taxes, depreciation, and amortization.
  • Community Health Systems said the rule led to a $5 million gap in earnings before interest, taxes, depreciation, and amortization. The hospital chain's total admissions also declined 10.5% (1,000 admissions) during the fourth quarter, according to CFO Larry Cash.
  • However, Nashville-based HCA denied that the rule swayed its financial results. CFO William Rutherford said the system was able to reduce costs associated with outside audits, though the policy did drive down inpatient admissions by about 1.8%.

In its report, Moody's acknowledged that the silver lining of the two-midnight rule for hospitals is greater clarity around length of stay, which may provide some relief against costly reviews from Medicare's audit contractors. Admissions audits represent the most heavily audited areas faced by hospitals, the firm noted (Moody's report, 3/12; Kutscher, Modern Healthcare, 3/13 [subscription required]).

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