Two-Midnight Rule: Ready For the Clock to Strike 12?

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two-midnight ruleOn July 8, 2015, CMS proposed changes to the 2016 Hospital Outpatient Prospective Payment System and the Ambulatory Surgical Center Payment System. Among the proposed changes were modifications to the controversial two-midnight rule that governs short hospital stays.

The two-midnight rule is not new. It was originally scheduled to take effect in October 2013; a moratorium delayed the enforcement of the rule until September 30, 2015. On August 13, 2015 CMS announced a partial enforcement delay of the rule through December 31, 2015. In the interim, providers and policy experts have been voicing their objection to the rule, requesting it be shelved.

The final rule, which includes the proposed modifications, is expected to be published in November 2015, and will go into effect January 1, 2016. There is still time to have an influence on the specifics of that final rule as CMS is keeping the comment period open until August 31, 2015. Hopefully, many hospitals and related organizations will relay their comments to CMS in the next few weeks. Those interested in commenting can do so online here, via mail or courier.

On the Stroke of Twelve

The core of the rule is fairly straightforward. In order for a patient to be considered an inpatient (and eligible for coverage under Medicare Part A), his hospital stay must be longer than two midnight counts. The clock starts when the beneficiary begins receiving hospital care, either as an inpatient or an outpatient. For example, a patient who begins receiving services in a hospital at 3:00 p.m. on Wednesday is automatically considered an inpatient if the patient is still hospitalized Friday morning and the services are medically necessary.

A patient released before two midnights have passed is considered an outpatient by default and therefore only eligible for benefits under Medicare Part B. The difference in outpatient coverage between Medicare Part A and Part B can have a substantial financial impact on the patient and the hospital.

However, CMS also has a rule that requires patients to be admitted as inpatients for three midnights in order for Medicare to cover the costs of care in a skilled nursing facility (SNF) following discharge from the hospital. Under these rules, an elderly patient admitted to the hospital after taking a fall and stays a day or two for observation before being transferred to a SNF will bear much of the medical costs.

Per the Kaiser Family News, without the inpatient status and coverage, seniors could pay thousands of dollars for the nursing home care their doctor ordered or try to recover on their own. Because observation care is provided on an outpatient basis, observation patients usually have co-payments for doctors’ fees and each hospital service.

The difference in cost between inpatient coverage under Medicare Part A and outpatient coverage under Medicare Part B can be considerable. Patients who do not have supplemental insurance could face a formidable financial burden. In the past week the U.S. Senate unanimously approved legislation, the NOTICE Act, requiring hospitals across the nation to tell Medicare patients when they receive observation care and are considered outpatients.

Enter Physician Judgment

At first glance, the two-midnight rule seems rather clear cut. However, implementing the rule in a healthcare setting can be more complicated.

CMS states in the background section of the existing policy (Chapter 1, Section 10 of the Medicare Benefits Policy Manual) that minor surgical procedures or treatments that require less than 24 hours in the hospital should be billed as outpatient services. However, the recent proposal stresses this policy will not override the clinical judgment of the physician, and this is where implementation of the rule becomes a bit more challenging.

CMS is ostensibly allowing physician judgment to override the time-driven rules. CMS failed, however, to provide direction on the required documentation physicians must furnish to support their clinical judgment of an inpatient admission being necessary for a short stay. A hospital can provide services to a patient based on the clinical judgment of the attending physician only to have that claim denied later in the claims adjudication process. This places an even greater financial burden on the patient and the provider.

CMS has created a list of inpatient-only procedures that are not subject to the two-midnight rule. These procedures are always covered under Medicare Part A regardless of the actual length of stay. The guidelines below, among others, indicate when a short stay could be billed and paid as Medicare Part A:

  • When the severity of the signs and symptoms of the patient warrant it.
  • There is a medical probability of something adverse happening to the patient.

In January 2014, CMS identified medically necessary, newly initiated mechanical ventilation (excluding anticipated intubations related to minor surgical procedures or other treatments) as the first rare and unusual exception to the two-midnight rule. Some circumstances may also qualify for Medicare Part A, determined on a case-by-case basis.

The ambiguous language of the rule is causing tremendous uncertainty among physicians and administrators causing them to spend time on rules instead of focusing on improving the quality and safety of care. This is another reason it is important for stakeholders to offer their comments to CMS before the rule takes effect so the impact of the rule on front-line employees is taken into account.

Latest Proposed Changes

One of the proposed changes to the two-midnight rule could, potentially, be good for providers. Effective October 1, 2015 the medical review strategy will shift from Medicare Administrative Contractors (MACs) to Quality Improvement Organizations (QIOs). Shifting case reviews from a general auditor to a professional with a clinical background should provide a better perspective on borderline cases involving clinical judgment.

QIOs are focused on improving the effectiveness, efficiency, economy, and quality of services under the Medicare program, and thus may offer more leeway than a traditional auditor. If services are deemed inappropriate for inpatient status, the QIOs refer the claim to the MACs for related payment adjustments.

The second proposed change is the “look-back” period for claim review will now be six months from the date of service in cases when the hospital submits a claim within three months from the date of service. This will give the hospital time to rebill any denied claims. Prior rules allowed a look-back period of three years and the submission of the claim within one year from date of service. Under this rule hospitals were unable to rebill denials from status reviews.

A Good First Step

There has been strong opposition to the two-midnight rule within the healthcare industry, particularly from the American Hospital Association (AHA). Senior Associate Director of Policy (Inpatient Payment) Priya Bathija, JD, MHSA states that the association opposes the two-midnight rule in part because of a 0.2 percent payment cut to hospitals imposed in order to fund the rule. The AHA believes the rule “undermines medical judgment and disregards the level of care needed to safely treat patients”, and continues to litigate the claim.

In a published report, Bathija states that modifying the two-midnight threshold was a “good first step…it opens the door to create a new exception that certain hospital inpatient services don’t need to cross two midnights in order to be considered inpatient and appropriate for payment under Part A.” She added that the real impact of the rule would depend on how it is finalized and implemented.

The Two-Midnight Rule and You

What impact will the two-midnight rule have on your organization? As the rule was supposed to take effect in 2013, most healthcare organizations are already monitoring the potential effects of this regulation. On a weekly basis, many hospitals are reviewing inpatient cases of less than two days and outpatient cases that are greater than two days.

Obtaining data to review these cases is much easier with a Late-Binding™ Enterprise Data Warehouse (EDW). An EDW pulls in information from many different source systems, from billing systems to EMRs, needed to reviews cases. By applying a simple filter the hospital can identify patterns that fall outside the parameters of the two-midnight rule (e.g., current inpatient stays of less than two days) as well as newly developing trends that could lead to claims denials.

The query shows those services currently coded as outpatient but should be coded as inpatient because these services usually involve a hospital stay of more than two midnights.

Conversely, the query can also identify certain conditions that qualify for a short stay, but are currently being coded as inpatient, alerting the organization to the risk of claims denials. Making changes in physician coding helps reduce claim denials and ensures the hospital is reimbursed properly for its services. The next step is educating physicians on the new codes and providing reports so they, and system administrators, see the adverse financial effects incorrectly coded services can have on the organization.

Let Your Voice Be Heard

Whether we like it or not, there will be a two-midnight rule in 2016. There is still time to affect the final outcome, however. Review the new rules in detail and voice your concerns to CMS (online, via mail, or courier) to ensure your organization and, most importantly, your patients will be prepared when the rule takes effect next year.


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