On Oct. 1, 2015, barring any additional delays, the Centers for Medicare & Medicaid Services (CMS) plans to begin enforcing the “two-midnight rule.” The rule specifically identifies the minimum length of a hospital stay for Medicare beneficiaries to qualify as an inpatient stay.

CMS has provided little guidance to hospitals on this matter, instead emphasizing the physician’s role in determining a patient’s admission status. This status is important because Medicare pays for inpatient services and outpatient services differently, which can result in substantially different payments for similar patients receiving similar services. The cost-sharing implications for beneficiaries under the two systems can also vary significantly.

The rule
The two-midnight rule would be used primarily by Recovery Audit Contractors (RACs) to determine whether an inpatient stay was appropriate. Beneficiaries whom doctors expect will be in the hospital across two midnights would qualify as inpatients, and their stays would be paid for under the inpatient prospective payment system (IPPS). Beneficiaries not expected to remain in the hospital across two midnights would be treated as outpatients and their stays paid for under the outpatient prospective payment system (OPPS).

Under what CMS calls the “two-midnight presumption,” RACs would not review inpatient claims that crossed two midnights following the inpatient admission order, presuming it to be medically necessary. CMS originally planned to implement the two-midnight rule on Oct. 1, 2013, but Congress delayed enforcement through March 31, 2015. Legislation that repealed the sustainable growth rate (SGR) formula included another delay, through Sept. 30, 2015.

Background
Medicare pays for the care of a beneficiary admitted as an inpatient under the IPPS. The IPPS provides a single payment for all of the services provided to the beneficiary by the hospital during the inpatient stay, including nursing staff, room and board, use of operating or diagnostic facilities, and drugs.

CMS assigns each inpatient admission to a Medicare severity diagnosis-related group (MS-DRG), based on the diagnosis codes reported by the hospital. In determining the hospital’s payment, CMS bases the MS-DRG assignment on the average cost of caring for Medicare patients with similar diagnoses and takes into consideration complicating conditions that might make it more difficult and expensive to treat a particular patient.

The MS-DRG payment includes all care provided by the hospital during the stay, regardless of the length-of-stay, as well as any services related to the hospital stay (such as preoperative testing) provided by the hospital during the 72 hours preceding admission. It reflects the average length of time that Medicare beneficiaries with similar diagnoses and severity of condition are hospitalized for care.

Under the OPPS, however, hospitals bill Medicare for the individual services rendered to a beneficiary during an outpatient visit. Under the OPPS, each outpatient service is assigned to a group of clinically similar services called an ambulatory payment classification (APC). The APC payment is based on the average cost of providing services within that classification.

Hospitals can bill for each of the services provided to a beneficiary and can receive multiple APC payments for a single visit. In general, the more services that an outpatient receives, the higher the OPPS payment to the hospital.

Certain services, such as a hip replacement, have been identified as “inpatient only” procedures by CMS, based on the agency’s belief that they can be safely performed on a typical Medicare beneficiary only on an inpatient basis. No OPPS payments can be made for these procedures.

Outpatient services include observation, which may be used to determine whether a patient should be admitted as an inpatient or can be safely discharged from the hospital. Many patients who receive observation services are clinically similar to patients who have short inpatient stays. Both may have similar reasons for receiving hospital care and may spend at least one night in the hospital. A patient who receives outpatient observation services at one hospital could be admitted for a short inpatient stay when treated at anotherhospital.

However, Medicare pays considerably more for short inpatient stays than for observation services. For example, for patients with chest pain, Medicare paid $870 more for short inpatient stays in 2012 than it paid for observation stays. Despite broadening the definition of an appropriate inpatient stay under the two-midnight rule, CMS will continue to exclude time spent under observation from the 3-day requirement for skilled nursing facility stays.

The number of observation stays has increased considerably in recent years, and observation stays of 48 hours or longer have become more common. In 2011, 8 percent of beneficiaries received observation services for more than 48 hours, up from 3 percent in 2006.

Implications
The two-midnight rule is intended to minimize the number of improper inpatient admissions and is expected to have a significant impact on hospital payments. An estimated 400,000 claims may shift from outpatient to inpatient status while 360,000 claims shift from inpatient to outpatient status.

Although CMS estimates that the two-midnight policy will lead to more inpatient admissions, the American Hospital Association (AHA) and other groups have said it is likely to do the opposite. A 2013 study on the potential impact of the rule projected a $14.6 million per year reduction in reimbursement for a large academic medical center.

Given the substantial financial incentives favoring patient stays of two midnights or longer, more patients may be admitted, thus increasing both reimbursements and the cost of care. Although these stays would still require justification based on medical necessity, such determinations are subjective and difficult to make, particularly when a difference of only a few hours in length of stay could have substantial financial implications.

From a patient perspective, the different payment methodologies can have a considerable impact on the amount the beneficiary pays. For inpatient care, a single deductible applies ($1,260 in 2015). For outpatient care, a copayment applies, typically 20 percent of the APC payment amount, although it can be as much as 40 percent for some services.

The OPPS copayment amount is capped at the level of the inpatient deductible for each APC, which means that a beneficiary cannot pay more than $1,260 for an individual service. However, the copayment applies to each separately payable OPPS service. As a result, the total copayment for all services received on an outpatient basis may exceed the inpatient care deductible. Hospital admission status can also affect a beneficiary’s eligibility for other services.

Next steps
Hospital associations are continuing to fight the rule. The AHA, along with some state hospital associations, has filed a lawsuit challenging the two-midnight rule and the associated 0.2 percent reduction in hospital payments (implemented by CMS in 2014 to avoid potential increases in the total amount of IPPS payments).

During the 113th Congress, the AHA supported bills that would have required CMS to develop appropriate criteria for paying for short inpatient stays (HR 3698/S 2082) and that would reform the recovery audit process (S 1012). The Medicare Payment Advisory Commission (MedPAC) is already considering alternative policy options to address short inpatient stays and has emphasized the need to strike a balance between appropriate oversight of proper billing and administrative burden on Medicare providers. During testimony before the Senate Committee on Aging, Mark D. Miller, PhD, MedPAC executive director, outlined several recommendations, including that the two-midnight rule be withdrawn.

Although a final decision has yet to be made, as physicians, we must work to manage patient expectations, which includes effectively communicating the outpatient classification and what it means for patients.

Jonathan A. Godin, MD, MBA, is a member of the Resident Assembly’s Health Policy Committee.