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Two-midnight rule a double-edged sword

Potential increased revenues from observation status patients will be offset by shorter inpatient stays

Tammy Worth, Contributor

The Centers for Medicare & Medicaid Services has postponed the auditing process of its new two-midnight rule, allowing hospitals 90 days to get accustomed to the change.

The new regulations by CMS are meant to outline and clarify the difference between hospital inpatient and outpatient stays. While medical necessity will still be taken into account, the rule said, if a patient’s stay is fewer than two midnights, the hospital will be paid on observation status instead of inpatient status.

[See also: Recession, reform disrupt hospital strategic planning efforts]

Hospital groups are not happy with the new rule and have spoken out against it, including the Federation of American Hospitals, which said CMS used “flawed and arbitrary assumptions.”

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“The great dismay and uproar (from) the hospital community at large suggests there is a big financial impact,” said Carol Levine, director of the Families and Health Care Project of the United Hospital Fund. “They wouldn’t be so upset about it if it didn’t have such an impact. I was very surprised that this little rule has stirred up so much controversy.”

A report released by the Office of Inspector General in July looked at Medicare data from 2012 to see how the rule might impact stays.

The agency found that Medicare beneficiaries had 1.5 million stays under observation status that year. There were an additional 1.4 million long-outpatient stays and 1.1 million short-inpatient stays. More than 600,000 hospital stays lasted at least three nights, but did not qualify for Part A (inpatient) payment. Four percent of these stays provided inpatient services for which beneficiaries did not qualify.

Initially, Robert Wachter, MD, chief of the division of hospital medicine at the University of California, San Francisco, thought the change might make progress in clarifying observation status – a “wildly arbitrary” policy, he said.

In his area, where 95 percent of patients come through the emergency department, he thought the change might increase revenues for hospitals. But when he spoke with colleagues in care coordination, he said it became clear that was not the case for hospitals on the whole.

The area where the majority of inpatient money is made in his hospital, he said, is on patients that will have a procedure and have to stay for short periods in the hospital for monitoring. Many of these patients will go from inpatient to observation status.

“The fear is that it will cost them money,” Wachter said. “The ones that used to be obs and are moving to inpatient will be far outweighed by these patients.”

Ann Sheehy, associate professor and division head of hospital medicine at the University of Wisconsin Department of Medicine, modeled the potential effects of the rule on her organization. She confirmed Wachter’s estimations in a letter published online in August for the Journal of the American Medical Association.

“We looked at obs and inpatients and counted the ones that were less than and greater or equal to two midnights,” she said. “We assumed that shorter would become obs and greater would become inpatients.”

What she found was 26.5 percent of their observation status patients stayed longer than two midnights, totaling 1,211 patients. Reimbursement for these patients would increase by $2,639, increasing revenue by $3.2 million.

For their shorter inpatient stays, 21 percent were less than two days and reimbursement would be reduced for these patients by $3,050. But this was a much larger pool of patients, at 8,231, and would decrease revenue by $25.1 million. Some surgical patients will stay for short periods, but still be able to count as inpatients. When they account for those, she said, hospitals will still lose greatly.

“We found this would create a negative margin,” Sheehy said. “We won’t recover some of those charges.”

The numbers they have for reimbursement changes fall close to what the OIG report found. CMS paid an average of $5,142 for a short inpatient stay per day, but only $1,741 per day for an observation stay in 2012, according to the report.

Not only are outpatient reimbursements lower, but the patients are required to pay a larger portion of the hospital fee. This will require hospitals to increase their collections efforts and uncompensated care costs may increase.

“There will be a dramatic difference,” said Catherine Polera, chief clinical officer of the division of emergency medicine at Sheridan Healthcare, a healthcare solutions provider based in Sunrise, Fla. “Reimbursement from Medicare won’t cover it … and it will be harder to collect that money.”

Sheehy said she expects the changes will eventually add costs to the system. If a patient is on the border after one night, she suspects hospitals will start keeping them at least two nights to receive the higher reimbursement.

“We were previously rewarded for being efficient,” Sheehy said. “But now the incentive has flipped. What happens when laws like this come out is that everyone changes their practice accordingly.”