How proposed changes to the two-midnight rule and RAC audits could affect providers

A Law Review Q&A

In November 2014, the House Ways and Means Committee's Subcommittee on Health released the Hospital Improvements for Payment (HIP) Act, which is a 146-page discussion draft that seeks to address a number of Medicare hospital policies. This bill is part of the Committee's broader effort on comprehensive Medicare reform.

Title One addresses significant provider-specific policies, such as CMS's "two-midnight rule," Recovery Audit Contractor (RAC) program audits, and the appeals process, while Title Two of this bill contains 19 different hospital reform bills previously introduced by various members of the Ways and Means Committee, such as the removal of the moratorium on physician-owned hospitals.

We spoke with Ilisa Paul, MPP, President of the District Policy Group at Drinker, Biddle, & Reath, LLP to discuss how the HIP Act's provisions, particularly those related to the two-midnight rule and RAC audits, may affect providers.

What is the HIP Act of 2014 trying to accomplish?

The Subcommittee is trying to fix the problems created by a chain of events initiated by RACs examining, scrutinizing, questioning, and sometimes denying short inpatient stays. As a result of this scrutiny, hospitals put more patients in outpatient observation stays than inpatient, sometimes causing Medicare beneficiaries in outpatient status to not have three-night inpatient stays required to qualify for skilled nursing facility (SNF) care.

CMS then released the two-midnight rule to clarify these issues, which actually only confused providers. Congress eventually stepped in and implemented a partial moratorium on RAC audits on most hospital short stays related to medical necessity; however, Congress is now trying to statutorily "unscramble the egg" with the HIP Act by:
  • Extending the current moratorium on RAC audits of short inpatient stays;
  • Repealing the 0.2% payment reduction associated with the two-midnight policy;
  • Creating a new hospital prospective payment system (HPPS) by fiscal year 2020 and an alternate payment rate for inpatient short stays for fiscal years 2016 through 2019 until the new HPPS is available;
  • Establishing a new definition of short inpatient stays;
  • Clarifying that outpatient observation stays would count towards the three-day stay requirement for qualifying for SNF care; and
  • Reforming some of the RAC audit practices as well as the Medicare appeals process.

What operational and financial challenges will providers face if this legislation is passed?

There are some provisions in this bill that will be of concern to providers if they are retained. Within Title One, the new payment system for short hospital stays may be the right thing to do theoretically, but providers are already subjected to two very complex payment systems and this would add a third. As a step toward creating the new rates for this new payment system, the draft bill requires providers to submit two separate claims—one inpatient claim and one outpatient claim—for every patient. Maintaining compliance under this dual-claims system likely would be operationally burdensome for providers.

Also, if providers fail to submit the required claims data, the current draft of this bill allows RACs to collect a fee. However, it is unclear in the draft what level of non-compliance constitutes the assessment of this financial penalty, and providers are demanding greater clarity and detail in the bill’s definitions.

Lastly, while there are some reforms of the RAC auditing program in the bill that providers would welcome, the bill still does not go far enough to reform the RACs. Even though there are new requirements for RACs, it is unclear how RACs will be held accountable for them.

For instance, if a RAC identifies a questionable claim, the bill currently allows a 30-day period for providers to question a RACs' scrutiny before entering into formal denial processes and must confirm with the provider or supplier a request for such discussion within three business days of the date of such request. However, what happens if a RAC does not respond to a provider's inquiry within that during that 30-day window? What recourse does the provider have?

This situation and others can be operationally burdensome to providers, and hopefully the final bill will effectively address some of these clarification and implementation concerns.

What actionable steps should providers take now that this bill is in the discussion phase?

The HIP Act is still in its infancy, as it is only a draft proposal, and the Committee is currently combing through all of the feedback and considering/incorporating changes. We expect the next version to be different and reflect at least some stakeholder input.

The most important thing providers should do right now is to weigh-in with their respective policymakers because the bill is not yet a final proposal. Policymakers like to hear from trade associations, but policymakers also need input from local providers about what their particular experiences have been to better understand what specific fixes are necessary to help their communities and constituents. Overall, policymakers want constructive feedback on the front end of the legislative process and individual providers should proactively provide it.

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