CMS Proposes Updates to Controversial Two-Midnight Rule

CMS recently suggested adjustments to the current and controversial “two-midnight rule” in its proposed 2016 Outpatient Prospective Payment System rule. This is a continuation of CMS’s ongoing quest to identify who is appropriate for observation status. It continues to place responsibility for determining patients’ eligibility for inpatient care squarely on physicians’ shoulders, while adding a bit more flexibility on short-stay admissions and moving oversight from Medicare Administrative Contractors (MACs) to Quality Improvement Organizations (QIOs).

The two-midnight rule currently specifies that an inpatient admission is “generally appropriate” for hospital stays for which the admitting physician expects the patient to require care spanning at least 2 midnights. The two-midnight rule has been criticized since its inception in 2014 for its lack of clarity and clinical relevance. The rule’s murky interpretation has led to provider confusion and unhappy beneficiaries who could be stuck with a 20% copay if they don’t meet inpatient criteria and are placed in outpatient observation status. Read on for our take on some of our clients’ frequently asked questions on the proposed update.

What changes are in the new proposal?
As with most payment policy, the devil is in the details. Admitting physicians must determine patient status based on the patient’s clinical condition and expected length of stay. There is NO change in physician accountability to evaluate and DOCUMENT patient level of care status.

For stays expected to last less than 2 midnights, CMS is proposing the following:

  • An inpatient admission (less than 2 midnights) would be payable under Medicare Part A (inpatient) on a case-by-case basis, based on the judgment of the admitting physician.
  • Clinical criteria for inpatient stays that span less than 2 midnights have yet to be determined, and CMS is currently seeking comment on appropriate clinical criteria and review process.
  • Once new clinical criteria have been established, documentation in the medical record must support the inpatient admission. Medicare’s QIOs, rather than the current MAC auditors, will be responsible for conducting first-line medical reviews.
  • Hospitals that submit inpatient claims within a 3-month window will be able to re-bill for outpatient services within an extended 6-month “look-back period.”

Why is the determination of observation status such a big deal?
Since 2006, the number of observation visits in the US has grown by 96% (see chart below). With yet another potential modification to observation status determination in 2016, health care organizations must understand the proposed rule and, if implemented, forecast the potential impact on inpatient admissions and observation visits.

What impact will this have on inpatient admissions?
The full impact of the rule and the number of case-by-case exceptions will be influenced by the clinical criteria for short-stay admission selected after the rule’s comment period. However, a significant shift toward inpatient admissions for short-stay patients is unlikely. In fact, CMS expects exceptions in which a short-stay patient requires inpatient care for a minor procedure or treatment to be rare. It will prioritize these admissions for medical review.

Physicians have been challenged and confused by the requirement to justify financial status (inpatient or outpatient observation) with the nuances of a patient’s clinical condition. This folly has been ongoing since observation status was created nearly 30 years ago and is likely to continue. Organizations that come out ahead will have a good understanding of the new short-stay criteria and will partner with physicians to develop a solid process for identifying patients who may qualify as two-midnight exceptions.

How will the short-stay audit process change?
Audits continue—CMS is just using a different auditor. Starting October 1, QIOs will assume the role previously performed by MACs of monitoring short-stay admissions and determining medical appropriateness. QIOs will take a collaborative approach to reviewing denied claims and working with hospitals to improve their internal review processes. Beginning January 1, 2016, hospitals that lack compliance with the two-midnight rule (as determined by the QIO), exhibit a high rate of denials or are unable to improve performance after QIO intervention will be turned over to recovery audit contractors (RACs) for further payment audits.

What steps should we take if the proposed revisions are approved?

  1. Seek support from case management resources on appropriate clinical documentation/status determination. Having a good documentation and review process will support appropriate patient placement and reimbursement and avoid confusion.
  2. Consider developing a short-stay unit (or observation unit) if your volumes support one. Almost one-third of US hospitals now have dedicated observation units within their facilities, but there is still room for improvement. A recent study estimated $3.1 billion in cost savings could be achieved if US hospitals adopted focused units for conditions that may require short hospital stays.
  3. Increase the use of leading practice protocols and quality measurement for short-stay conditions. Clinical care for short-stay patients in the US is highly variable, but top performers have been successful in their protocol compliance. Well-established and highly utilized protocols not only deliver improved outcomes, they allow organizations to reduce cost of care.
  4. Communicate with your patients. Let observation status patients know why they have not been admitted and the potential financial cost. The recently signed NOTICE Act requires hospitals to provide notification to patients receiving observation care for more than 24 hours. Although this law is a step in the right direction, communicating to patients sooner in the process will help build positive consumer affinity.
  5. Conduct an ambulatory strategic planning session. Include the appropriate service line leads to address the needs of chronic medically complex patients who typically require short-stay acute care services. Consider asking questions such as: What health care services have patients received prior to coming into the hospital? Do chronic patients have a dedicated primary care medical home? Are we doing a good job of coordinating care for this patient population? Are case managers and/or social workers available 12 to 18 hours a day in the observation unit to facilitate coordinated discharge?

What are CMS’s next steps and where can I get more information?
CMS will accept comments on the 2-midnight portion of the proposed rule until August 31, 2015, and will respond to comments in a final rule to be issued on or around November 1, 2015.

Although the potential financial impact of the new rule is important, a bigger question remains—how can we proactively manage the needs of the growing number of chronic Medicare patients across our system? With 5% to 10% of all ED patients potentially appropriate for observation status, health systems that effectively manage short-term acute patients gain a competitive advantage by becoming the preferred high-value provider in the market.

Sg2 Senior Vice President and CNO Joan Moss contributed to this post.

Sources: Baugh CW et al. Health Aff (Millwood). 2012;31:2314–2323; CMS. Fact Sheet: Two-Midnight Rule. July 1, 2015; Sg2 Analysis, 2015.

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As of February 11, 2016, Vizient, Inc. has completed its purchase of MedAssets Sg2 and spend and clinical resource management segments from Pamplona Capital Management, LLC. MedAssets revenue cycle business will continue to operate as a wholly-owned subsidiary of Pamplona Capital Management LLP.

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