Published 12/20/2020
Kaitlyn D’Onofrio

The Financial Impact of CMS’ Two-midnight Rule

Do hospitals lose money discharging joint arthroplasty patients after one midnight?

Editor’s note: The following content was originally scheduled for the AAOS Now Daily Edition, which publishes each year onsite at the AAOS Annual Meeting, but this year’s meeting in March was canceled due to COVID-19. Despite the cancellation, members can access virtual content from the Annual Meeting by visiting the Academy’s Annual Meeting Virtual Experience webpage.

When the Centers for Medicare & Medicaid Services (CMS) removed total knee arthroplasty (TKA) from the inpatient-only (IPO) list, institutions had to employ the two-midnight rule to short-stay (one-midnight) inpatient hospitalizations (SSIHs). It was unclear not only how this would clinically affect patients but also what the financial repercussions would be—both for patients and institutions. A new study found that it may actually cost hospitals more money to discharge a patient after a single midnight and bill them as an outpatient versus keeping the patient for two midnights and billing them as an inpatient. Adam J. Schwartz, MD, MBA, presented the study as part of the Annual Meeting Virtual Experience.

The study was inspired by a real experience, Dr. Schwartz told AAOS Now. “I had performed a TKA on a 68-year-old female who was discharged after a one-midnight stay in the hospital. We received a complaint from the patient that she was upset that our conversion of her case to bill under outpatient status would increase her out-of-pocket costs. After an in-depth analysis of the case, we explained to the patient that while outpatient billing (under Part B of Medicare) typically requires a 20 percent out-of-pocket copay by the patient, the outpatient code for TKA (comprehensive ambulatory payment classifcation [C-APC] 5115) has a status J1 indicator, meaning that all services are bundled and billed together. This indicator also implies that the patient’s out-of-pocket costs are limited to the inpatient deductible (for this year, this amount has been increased to $1,408).”

This was good news for the patient but left Dr. Schwartz questioning the consequences of the new billing rules: “When CMS removed TKA from the IPO list, this procedure became subject to the two-midnight rule. We wanted to perform this analysis in the context of this policy change and better understand the clinical and financial consequences of real-life clinical applications of these complex regulations.”

Dr. Schwartz and his colleagues examined National Inpatient Sample (NIS) data spanning 2012 through 2016 to determine length-of-stay patterns after elective total joint arthroplasty (TJA). They used public documents, median Medicare payments, and NIS hospital costs to evaluate the effect of the two-midnight rule on SSIHs. They created three hypothetical scenarios applied to all Medicare SSIHs in 2016: (1) all patients kept an extra midnight to satisfy the two-midnight rule (scenario 1), (2) all patients discharged as outpatients (scenario 2), and (3) all patients discharged as inpatients (scenario 3).

The rate of Medicare SSIHs increased drastically from 2012 to 2016 (2.7 percent versus 17.8 percent; P < 0.0001). In scenario 1, out-of-pocket costs for patients and CMS payments remained unchanged, and hospitals lost $117 million. In scenario 2, patient out-of-pocket costs still did not change, but CMS payments were reduced by $181.8 million, and hospitals lost $357.3 million. In scenario 3, there was no change in patient out-of-pocket costs or CMS payments, but the scenario resulted in about $1.71 billion in SSIH charges, creating a possible audit risk for hospitals.

“Somewhat unexpectedly, and perhaps the most interesting finding, is that on average, it is actually less financially harmful for a hospital to keep a patient an extra midnight and bill as an inpatient (assuming the patient’s clinical status justifies a two-midnight stay) as opposed to discharging the patient after one midnight and converting the patient to outpatient status,” Dr. Schwartz said. “In an effort to facilitate shorter hospital stays, CMS’ removal of TKA from the IPO list actually created a financial incentive for hospitals to keep patients longer due to the two-midnight rule (which did not apply when TKA was on the IPO list).”

Dr. Schwartz suggested that other avenues be assessed: “These could include providing more exceptions to the two-midnight rule, placing TKA and [total hip arthroplasty] back on the IPO list and creating a new C-APC code for outpatient TJA (requiring the burden of proof to be focused on the appropriateness of outpatient care for a given case), or suspending the two-midnight rule for TJA (there is a precedent for this approach with newly initiated mechanical ventilation).”

A limitation of the study is that it relied on administrative data, leaving open the possibility that cases may not have been billed correctly, although Dr. Schwartz noted that these data tend to be reliable.

Dr. Schwartz’s coauthors of “The Clinical and Financial Consequences of the Centers for Medicare and Medicaid Services’ Two Midnight Rule in Total Joint Arthroplasty” are Henry D. Clarke, MD; Adam Sassoon, MD, MS; Kevin J. Bozic, MD, MBA; Matt Neville, MS; and David A. Etzioni, MD.

Kaitlyn D’Onofrio is the associate editor for AAOS Now. She can be reached at kdonofrio@aaos.org.