Public Policy

CMS Proposes Changes to Two-Midnight Rule


On July 1, 2015, the Centers for Medicare and Medicaid Services (CMS) announced proposed changes to its controversial two-midnight rule. The changes afford physicians more flexibility to determine patient hospitalization status and place primary patient status auditing authority with Quality Improvement Organizations (QIO), rather than the unpopular Recovery Auditor Contractors (RACs).

The original policy was implemented in October 2013 to reduce the number of long observation stays impacting Medicare beneficiaries, which are not payable under Part A and impact coverage for some types of follow-up care. Under the policy, stays under two midnights are considered outpatient while longer stays are considered inpatient. Physicians must decide at time of admission how to designate a patient and provide adequate documentation for the decision. The changes give physicians the authority to designate shorter stays for inpatients based on medical necessity.

According to CMS actuary data published in the 2016 Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System proposed payment rule, the two-midnight rule is working. Since fiscal year 2013, observation stays longer than two days are down 11%. It also says a related 0.2% reduction in payment for inpatient services is justified based on an increase in the number of inpatient admissions.

The agency has sought public comment on three separate occasions since the policy began but says no suitable alternatives to the rule—other than full repeal—have been offered. While the American Hospital Association has said the changes are a good first step, it and others contend the rule still leaves too much uncertainty.

“There’s so little objectivity, it makes it hard to understand how this is going to be implemented,” says Dr. Lauren Doctoroff, MD, a hospitalist and medical director for utilization management at Beth Israel Deaconess Medical Center in Boston.

While the two-midnight rule has helped Dr. Doctoroff's hospital better determine which stays should be considered inpatient and which observation, when it comes to review of short inpatient stays, CMS has not made clear how much influence RACs will continue to play or how QIOs will be different, she says. The RACs have been unpopular because they share in savings recovered on behalf of CMS even when their aggressive audit decisions are overturned, which studies show happens with frequency. Nor do the changes indicate what constitutes adequate documentation.

“There are so many gray areas,” says Dr. Doctoroff, particularly when physicians treat patients with complex social needs, who may not have a stable situation for discharge. “There are some potential benefits, but it’s unclear how it will work and what role the QIOs take relative to RAs, whether it will be more of the same with a different name. It’s not clear if it’s going to be better.”

Visit our website for more information on CMS' two-midnight rule.

Kelly April Tyrrell is a freelance writer in Madison, Wis.

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