Fights over two-midnight rule, observation care continue

Patients may suffer over outpatient v. inpatient confusion

Fewer patients appear to be classified as "observation" because of the two-midnight rule, but hospital groups say the policy compromises beneficiaries' care and then sticks them with costly, unexpected bills, Jayne O'Donnell writes in USA Today.

About the two-midnight rule

The controversial two-midnight policy—finalized in Medicare's inpatient payment rule for 2014—assumes a hospital admission to be admissible for payment if a physician expects a beneficiary's treatment to require a two-night hospital stay and admits the patient under that assumption.

The 'two-midnight' rule: What you need to know

The rule aims to limit the growth in extended observation stays at hospitals, which have skyrocketed in recent years. (Although as a percentage of overall visits, they remain small.)

After significant pushback from hospitals, CMS implemented a "probe and educate" period, which limited how recovery audit contractors may use the rule for fund recovery.

CMS says early data show that the rule is working, as the number of lengthy outpatient stays has declined.

Patients are being harmed, patient advocates say

Alice Bers, an attorney for consumer group Center for Medicare Advocacy (CMA), told USA Today that patients may be confused by the difference between inpatient and observation visits and may wrongly think they are getting all the cost-sharing benefits of inpatient care because they have slept in a room overnight—but were actually coded as an outpatient.

CMA says it hears from people who "are still regularly being harmed" by the confusion because they cannot afford post-discharge treatment. CMA Executive Director Judy Stein says she has not seen any evidence that the rule is helping. Being treated as an outpatient or in observation also limits a patient's eligibility for post acute care coverage in a skilled nursing facility; time in observation status doesn't count toward the three-day requirement for SNF coverage, for instance.

And hospitals are caught in the middle, according to Joanna Hiatt Kim, the American Hospital Association's (AHA) vice president of payment policy.

"Hospitals are between a rock and a hard place," Kim says, adding "If they admit someone, there's the potential risk of not being paid for that admission if (auditors) deny it as inappropriate. ... But if they put that person under observation, they risk their patient being upset with Medicare's cost-sharing rules."

CMS signals it might ditch the two-midnight rule

In April, AHA and hospitals in five states sued HHS, saying that the two-midnight rule is "arbitrary" and complicates physicians' ability to make sound medical decisions. Before the House Committee on Ways and Means Subcommittee on Health in May, CMS defended the intent of the rule and said it would consider a new system for defining and paying for short hospital stays.

The rule does mirror the ultimate goals of the Affordable Care Act to keep costs low, says Andy Hyman, senior program director at the Robert Wood Johnson Foundation.

Care transformation blog
Is the two-midnight rule here to stay?

"Hospitals do need to better balance the use of inpatient vs. outpatient care and ultimately reduce unnecessary utilization," says Hyman, adding "The goal can't be to fill hospital beds" (O'Donnell, USA Today, 7/13).

The Advisory Board's take

Eric Fontana

Members continue to raise questions around the "two-midnight rule," from how to interpret CMS policy to how to implement it.

And one question that we often get—and one that's raised by this article—is pretty straightforward: Is the rule working?

The answer to that question will differ depending who you ask: CMS, hospital administrators, clinicians and beneficiaries are likely to have varying perspectives. Is it achieving CMS's goals around controlling cost? Is the rule reducing administrative burden for hospitals? Is it helping rein in observation utilization as intended or better help Medicare beneficiaries with their own care?

Taken together, the answers to those questions make for a mixed picture. But we'll continue to be tracking and report any developments on the evolving discussions in Washington.

Interested in learning more from Eric on the FY 2015 Proposed Inpatient Rule?

Join him Tuesday, August 19th for a webconference on the key changes and public comment surrounding CMS’s recently released final regulations, including

  • Modifications to inpatient payment rates;
  • Pay-for-performance initiatives such as the VBP, readmission, and HAC programs;
  • Analysis related to the two-midnight rule; and
  • Other related changes.

Join the webconference

Get your two-midnight impact assessment

Which of your cases are most at risk of moving to outpatient under the "two-midnight" rule?

Download an institution-specific report that details your inpatient Medicare cases potentially at risk for payment denial and your observation cases that may be eligible for inpatient admission.


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