On January 1st, the Centers for Medicare and Medicaid Services (CMS) released a proposal to update the Two Midnight Rule. Beginning in 2016, patients admitted to a hospital for less than two nights may be billed as inpatient or outpatient, depending on the physician’s judgement.

It’s a (somewhat) controversial response to a fierce demand from many who felt that the original rule undermined physicians’ judgement, inflated costs and deprived Medicare beneficiaries of necessary care. Here’s the backstory.

Inpatient v. outpatient billing (and why it matters)

Medicare uses different payment rates for inpatient and outpatient services, and hospitals have been getting it wrong. Through its Recovery Audit program, CMS discovered that many patients have been receiving treatment in a medically-unnecessary setting. That is, hospitals have been providing costly inpatient care to people who would be more appropriately designated as outpatient.

The error goes both ways. Patients who should have been receiving inpatient care have been getting extended outpatient “observation” services instead. These observation stays don’t count toward the three-day requirement that patients have to meet before Medicare will cover the skilled nursing facility services they need. Conservative facilities began doing this to protect themselves against audits, whenever they faced uncertainty about which designation would prove more appropriate.

For the last two years, the inpatient/outpatient designation has been guided by something called the Two Midnight Rule. But it seems the rule wasn’t doing its job.

What’s the Two Midnight Rule?

CMS instituted the Two Midnight rule in 2013 to govern how hospitals should bill patients with Medicare coverage. If the admitting physician expected a patient to stay two midnights or more, their care was to be payable under Medicare Part A (inpatient). Stays expected to run shorter did not qualify for Part A billing; they were outpatient.

But there were problems. The original rule didn’t allow enough room for physician judgement, according to overwhelming input from doctors, beneficiary advocates and other stakeholders. And due to the risk of audit, hospitals felt pressure to change their practices in a self-protective stance.

Hence the proposed update. For patients whose stays are not expected to span two midnights, the physician will now have the latitude to decide case-by-case whether they should receive inpatient or outpatient care.

To address the risk of audit, CMS is also pushing back against RAC trackers’ incentive to dispute claims. RAC trackers will no longer be first in line to review shorter patient claims. Instead, quality improvement organizations will have that role.

Controversy remains, but CMS isn’t blinking

CMS didn’t include explicit instructions on when a doctor’s judgement should override the basic rule, a fact that some stakeholders are criticizing. But the organization “disagreed that more instruction on clinical judgement was needed,” Dickson said.

The organization also denied a request for a three-month delay on the updated rule and rejected a counterproposal for a One Midnight Rule.

“Another concern was that the modified rule could create a market for independent parties to sell ‘exception’ letters to hospitals,” said Virgil Dickson at Modern Healthcare. “The agency surprisingly did not disagree.”

But CMS did acknowledge the need for continued monitoring to prevent anyone from gaming the system – a responsibility they don’t seem fazed by. One gets the sense that CMS will be watching closely for problems, and when the feedback on the updated rule comes pouring in – as it surely will – they’ll be listening.

Meanwhile, we’ll be following. Stay tuned for updates on new developments in Medicare and Medicaid. If you haven’t already done so, subscribe to the BeaconPath blog.

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