5 reasons that the problem is not with the 2-Midnight Rule

As of June 29th, the Centers for Medicare and Medicaid Services (CMS) has released over 350 comments to the proposed 2016 inpatient prospective payment rule (IPPS).

The comments come from hospitals, health systems, state and national hospital associations, industry representatives and individuals and address many aspects of the proposed rule, including payment rates, wage index changes, value-based purchasing, readmissions, bundled payments and of course the 2-midnight rule. Of note, in the proposed rule, CMS said, "Despite these planned alterations to the Recovery Audit Program, we note that hospitals and physicians continue to voice their concern with parts of the 2-midnight rule...we are considering this feedback carefully, as well as recent MedPAC recommendations, and expect to include a further discussion of the broader set of issues related to short inpatient hospital stays, long outpatient stays with observation services, and the related -0.2 percent IPPS payment adjustment in the CY 2016 hospital outpatient prospective payment system (OPPS) proposed rule that will be published this summer."

In essence, CMS bumped their discussion of possible modifications to the 2-midnight rule (introduced in the 2014 IPPS Rule) to the 2016 OPPS proposed rule and they did not specifically ask for comments. In the past, comments not specifically addressing proposals in the rule are ignored by CMS; fortunately, they did indicate in an open door forum that they would accept and review comments in this IPPS rule. Many of the comments ask CMS to retract the 2-midnight rule but, as like MedPAC, the official advisory committee to Medicare, few provide an alternative system. The majority of the commenters note the same recurring issues when criticizing the rule. In fact, many comments are exact duplicates, suggesting they were written by a parent organization for submission. The most common issues and why they are not actually criticisms of the 2-midnight rule are...

1. Physician Judgment

Many commenters state, "the two-midnight policy is an arbitrary time-based benchmark that clouds the role of physician judgment. CMS itself professes to hold physician judgment paramount, but this arbitrary standard seems to override that longstanding policy." I disagree; the rule absolutely relies on physician judgement. It asks the physician to use their judgment to determine if the hospital stay will be less than or more than two midnights, based on the information at the time of the admission decision. There is no penalty for being wrong; if the doctor expects less than two midnights and patient ends up needing more time, that patient can be admitted at any time, even up until the time of discharge. And if the physician expects more than two midnights and the patient recovers quicker than expected and subsequently requires less time, the inpatient admission is payable. Making such a prediction does not require a crystal ball; the physician just needs to use their experience and make a reasonable estimate and document that rationale. The same judgment that is used to choose a treatment course for the patient is simply used to predict the length of the hospital stay. I am sure that if a patient asked the doctor how long he or she will be in the hospital, the doctor will provide the patient a reasonable estimate; CMS asks for nothing more.

That said, the physician's judgment is not absolute; that judgment must be rational and based on the patient's condition. In order words, physicians cannot admit a patient "because I said so." If the majority of patients admitted inpatient by a physician end up requiring less than two midnights, that physician's judgment should be called into question. Prior to the 2-midnight rule, regulations allowed the physician to admit a patient based on "risk"; but risk is just as subjective as a time-based expectation. If an admission decision is made based on the risk of complication and that complication never occurs, was the risk decision correct? And in fact that undefined risk decision is what led to over 800,000 appeals awaiting adjudication at the administrative law judge level.

What is the actual issue with the two midnight expectation that lead many to want it abolished? Most concerning is that the auditors are aware of the outcome of the admission and can easily use the retrospectoscope on a short stay to say that inpatient admission was not indicated in the first place. This is compounded by the fact that audits are performed by nurses and therapists and not physicians and these reviewers are not trained or licensed to make medical decisions.

The problem therefore is not with the 2-midnight rule but with the auditors second-guessing rational physician judgment, be it risk-based or time-based.

2. Timeline Issues

Many commenters addressed the fact that hospitals have a 1 year timely filing deadline but the audits can take place up to three years after the date of service. CMS did allow rebilling of denied claims for services prior to October 1, 2013 but once the recovery auditors resume auditing short stay admissions, many hospitals will again face denials of claims for services that were provided to beneficiaries that were medically necessary but because of the timely filing limit are ineligible for reimbursement.

The problem therefore is not with the 2-midnight rule but with the ability of hospitals to be paid for denials that take place more than one year after the date of service.

3. Reimbursement

Many, if not all, commenters addressed inadequate reimbursement for patients who require less than two midnights and are placed outpatient with observation. For 2015, the base payment for ambulatory payment classification (APC) 8009, also known as observation, is $1,234. This amount includes payment for the emergency department visit which can range from $200 to $889. This payment covers observation services for 8 to 48 hours, independent of the location in the hospital. It should be remembered that critically ill patients who are expected to require less than two midnights (expect those who are unexpectedly intubated) do not qualify for inpatient admission; that means a patient could spend almost two days in the intensive care unit and the hospital will be paid about $600 for that care.

CMS also made a 0.2% reduction in inpatient payments, expecting a decline in the number of long observation stays and an increase in the number of inpatient admissions. All cmmenters protested that reduction and now point to an increasing number of observation patients as proof that CMS' prediction was not accurate.

The problem therefore is not with the 2-midnight rule but with the reimbursement structure for observation; patients who require less than two midnights often have intensive resource utilization that is not adequately addressed with a single APC. If CMS set reimbursement for APC 8009 at, say, $6,000, I doubt one hospital would object to the 2-midnight rule.

4. Beneficiary Liability

Some commenters address the financial liability of beneficiaries as an issue with the 2-midnight rule and refer to several published studies demonstrating increased beneficiary costs when patients are placed outpatient with observation. In reality, the rule improves the financial liability of most beneficiaries. Prior to the 2-midnight rule, patients often stayed in observation status (noting that technically the patient's status is outpatient and they are provided observation services but I will call observation a status in this article) for days on end, never meeting the intensity of service to be admitted as an inpatient. These patients accumulated large bills for their care and never gained eligibility for their part A skilled nursing facility benefit.

Now with the 2-midnight rule, things are different. The inpatient deductible of $1,260 is incurred with any inpatient admission, no matter the length (unless the patient had been admitted to a hospital in the last 60 days, in which case there is no deductible) with no cost-sharing until day 60. The outpatient deductible is $147, payable once a year, and a patient in observation would be responsible for 20% of approved costs and the full costs of self-administered medications given during a hospital stay. The Office of Inspector General reported that the average approved payment for a patient in observation was $1,741, leading to an out-of-pocket cost of $348. Therefore in almost all cases the beneficiary liability is less while in observation than as an inpatient if the 2-midnight rule is followed.

Of course there are nuances; patients with supplemental plans may provide varying coverage of deductibles and copayments and patients who are unsafe to be discharged who do not require hospital care and therefore cannot be admitted as inpatient but whose stay will exceed two midnights, but these are the exceptions.

The problem therefore is not with the 2-midnight rule and if followed properly, financial liability is almost always lessened with the rule.

5. Intensity of Service and Severity of Illness

Many commenters referred to "inpatient level of care" as a factor in the determination of inpatient or observation, suggesting that inpatients and outpatients get a different level of care. Quoting one comment, "Short hospital stays should be reimbursed as inpatient stays under Part A, regardless of the length of stay, as long as the physician believes that admitting the patient best serves that patient's medical needs." This is not what is happening in a physician's mind; the doctor believes that placing the patient in the hospital is what best serves that patient's medical needs. The patient's status as inpatient or outpatient with observation has absolutely no bearing on the care they receive; it is purely a payment classification.

And CMS agrees, having stated in the past that there is only one hospital level of care with the difference between inpatient and outpatient being based on the expected time needed in the hospital. The differentiation between an inpatient and outpatient level of care within the hospital is an artificial differentiator; if patients are receiving different care based on their admission status, the hospital has a quality problem and not a payment problem. Many insurers have adopted this artificial means of paying hospitals and use commercial guidelines as their guide to payment. But CMS has made it clear that they do not endorse any separation of levels of care in the hospital beyond the 2-midnight rule.

The problem therefore is not with the 2-midnight rule differentiating inpatient and observation arbitrarily based on intensity of service; there is only one level – hospital care. Rescinding the 2-midnight rule will not stop audits. It will merely shift the decision to who needs care in the hospital and who can be cared for safely outside a hospital setting.

In summary, this is really an issue of money and not of physician judgment. Hospitals want to be paid fairly for the care they provide. CMS does not want to pay for hospital care that can be safely furnished in a non-hospital setting. Congress wants to preserve the Medicare Trust Fund and lower improper payments. Auditors, well, I'm not sure what auditors really want. If CMS decides to rescind the 2-midnight rule, the next rule is sure to have its own issues. It's easy for many to not like the 2-midnight rule but much harder to design a better system. We should find out what CMS thinks by July 3rd.

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