On August 2, 2013 the Centers for Medicare & Medicaid Services (CMS) issued

a final rule updating fiscal year 2014 Medicare payment policies and rates under

the Inpatient Prospective Payment System.

As part of this ruling the “2-Midnight Rule” as it has been called, was codified into

law. Under this rule, in addition to services designated as inpatient-only, surgical

procedures, diagnostic tests and other treatments are generally appropriate for

inpatient hospital admission and payment under Medicare Part A when the physician:     

1. Expects the beneficiary to require a stay that crosses at least two midnights

2. Admits the beneficiary to the hospital based upon that expectation

The clock starts running when the patient begins receiving services in the hospital. (This includes outpatient observation services or services in an ER, OR, or other treatment area.)

The final rule emphasizes that the time a beneficiary spends as an outpatient before the formal inpatient admission order is not inpatient time. However, the physician…and the Medicare review contractor…may include this period when determining if it is reasonable and appropriate to expect the patient to stay in the hospital at least two midnights as part of an admission decision.

Documentation in the medical record must support the reasonable prospect of the need for the patient to require a medically necessary stay lasting at least two midnights. If the inpatient admission lasts fewer than two midnights due to an unforeseen circumstance this also must be clearly documented.

Initially, during the newly extended transition period, short-term hospital admissions will still be reviewed under the new rule's guidelines, but reimbursements will not change.

Healthcare providers say Medicare is going to short-change them on patients who spend fewer than two nights in the hospital, and delaying implementation of a new payment policy until October won't change that. 2

Under the rule, which CMS issued in August 2013, hospitals that admit patients for less than two nights will receive reimbursement at Medicare B outpatient rates. The rule states that hospital admissions shorter than two midnights in length are "generally inappropriate for payment under Medicare Part A, regardless of the hours the patient came to the hospital or whether the patient used a bed."

For most services, Medicare B reimburses providers at 80 percent of the Medicare A rate.

CMS officials have said the rule is needed to “clarify admission guidelines” and “address a recent spike” in Medicare patients being admitted to hospitals for brief observation stays. Objections from hospitals and doctors have included unease over the financial impact of the rule on patients, who face higher copays, and concern that the rule will penalize efficient treatment of patients in less than two nights.

The two-midnight rule directs auditors to assume that Medicare hospital stays were not legitimate if they didn't last two nights. Exceptions include surgeries on the CMS' “inpatient-only” list and cases where a patient unexpectedly dies or leaves the hospital early against medical advice.

Hospitals contend that “short-stay inpatient care is common in the practice of medicine, and you shouldn't treat it like fraud, waste or abuse.” Despite the unclear rules, admission decisions are some of the most heavily audited aspects of Medicare hospital bills.

This new policy was to begin on October 1st, 2013. However…pressure from over 100 members of the House of Representatives and the American Hospital Association forced them to initially push the deadline forward to March 31, 2014. Then, on Friday, February 7, 2014, CMS announced a further postponement to September 30, 2014.

The concerns expressed by the lawmakers were as follows:

The rule increases out-of-pocket costs for hospitalization and post-acute skilled-nursing care because it presumes that patients expected to be in the hospital for fewer than two days should be admitted to observational care, not inpatient care.

Medicare requires a 20% per-service copayment on observational care and does not cover post-acute care in those cases. In contrast, Medicare fully covers inpatient care and post-acute care needed in those cases.

Hospitals could lose money, because they will be reimbursed for observational care under Medicare physician rates, rather than higher hospital rates that apply to inpatient care.

In addition…Medicare's administrative contractors, who process claims for payment, will still be permitted to review short inpatient stays and revoke payment if the clinical record doesn't support medical necessity. However, those reviews are intended to be “instructional” and must be limited to a sample of 10 to 25 claims per hospital.

The American Medical Association “strongly opposes” the policy for two reasons:

1. It could increase the amount of documentation that physicians will have to file

2. It will create larger financial burdens for some patients

In addition, the rule has had a direct financial impact. Because the CMS estimated that the policy would convert more observation care into expensive inpatient care, the agency reduced standard payment rates to hospitals by 0.2% to make up the difference.

Although it seems that continued public pressure is working, and challenges to the rule will be on-going, it’s probably a good idea to regard this delay as a “buffer” allowing organizations to get ready for implementation when (or if) “Two Midnights” is finally adopted as a standard.