Moody's: Most Hospitals Will See Less Revenue Under Two-Midnight Rule

CMS' two-midnight rule will reduce revenue for most hospitals when it takes effect this October, according to a report from Moody's Investors Service.

The two-midnight rule was established by the 2014 Medicare inpatient prospective payment rule. According to the policy, inpatient admissions spanning at least two midnights qualify for Medicare Part A payments. Inpatient stays lasting fewer than two midnights must be treated and billed as outpatient services. CMS introduced the policy to better monitor Medicare reimbursement for short inpatient stays and ensure inpatient admissions are medically necessary.

Hospital leaders, physicians and healthcare groups have fiercely opposed the rule, saying it is unclear and undermines the medical judgment of physicians.

Moody's expects the rule to weaken hospital operating profitability in calendar year 2014 and beyond as it lowers Medicare reimbursement, although the regulation's impact will vary across the nonprofit hospital sector. Here are six key observations from the report on what the two-midnight rule means for hospitals.

1. The rule could decrease revenues for hospitals by $3,000 to $4,000 per case as more stays are classified as outpatient. Inpatient stays have Medicare reimbursement rates that are, on average, two or three times higher than outpatient cases, according to Moody's.

2. The two-midnight rule is expected to speed up the decline in inpatient volumes as care shifts to an outpatient setting. The rule adds to other pressures driving the rise in outpatient admissions, including Medicare reviews of medical necessities and changes in care delivery models.

3. Low-acuity community hospitals will see the biggest impact, since they tend to have a greater share of cases that involve short hospital stays, according to Moody's. These hospitals with low average lengths of stay are generally smaller, lower-rated and are therefore less capable of handling reduced revenue than other hospitals.

4. The drop in revenue will also affect all hospitals that rely on inpatient care for most of their operating profit, regardless of their size. For this reason, tertiary hospitals and academic medical centers that focus on inpatient care will see negative financial effects. Meanwhile, hospitals that perform large numbers of surgeries on an inpatient basis won't be hit as hard, since CMS classifies many inpatient surgeries as "inpatient only."

5. Moody's anticipates smaller hospitals with less integrated staffs will be at a disadvantage when it comes to adapting to the rule change. While larger hospitals probably won't have problems enacting physician documentation changes to ensure compliance with the rule, smaller hospitals with limited medical and support staffs may face challenges.

6. The two-midnight rule could have one upside for hospitals: Moody's predicts the new regulation could ease the pressure of Medicare recovery audit contractor reviews. RACs have reviewed the medical necessity of many short-stay admission claims, contributing to the shift from inpatient care to outpatient settings and reducing hospital revenue. By clearing up any ambiguity regarding short-stay admissions, the two-midnight rule could make the RAC situation less stressful for providers.

More Articles on the Two-Midnight Rule:
CMS Updates Two-Midnight Rule Guidance for Canceled Surgical Procedures
Senate Two-Midnight Rule Bill Would Require New Payment Guidelines
CMS Posts Guidance on Two-Midnight Policy, Audits 

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