Editor's Note: After press time, CMS released proposed modifications to the two-midnight rule which would allow hospital stays less than two midnights to be billed as inpatient on a case-by-case basis. The September 2015 issue of Hospital Case Management will have more information on the new proposal.
Executive Summary
Hospitals are still struggling with whether patients should be admitted or receive observation services despite efforts by the Centers for Medicare & Medicaid Services to clear up the confusion and conduct Probe and Educate audits.
- The two-midnight rule bases patient status on time in the hospital rather than clinical criteria, but case managers should still use decision-support software to determine if patients meet medical necessity criteria for an inpatient stay.
- Take a proactive approach and educate physicians up front about the level of detail the documentation should include to reflect the patient’s conditions and intensity of service, and give them prompts in the medical record about what they should include.
- Notify patients that they are receiving observation services and that they may get a bill for their copay and pharmacy charges.
The Centers for Medicare & Medicaid Services (CMS) issued the two-midnight rule in 2013 in an effort to clarify the difference between inpatient stays and observation services, but even after three rounds of Probe and Educate audits by the Medicare Administrative Contractors (MACs), hospitals are still struggling to get it right.
In fact, 93% of members who responded to a Society of Hospital Medicine survey rated observation policy as a critical policy issue for them and their patients. Less than half of the respondents (40.4%) expressed confidence in determining patient status on their own and only 46.3% felt more confident in making these decisions with input from other people, including case managers, clinical decision support devices, coding and compliance administrators, and external review organizations.1
“Choosing between admitting patients or providing observation services was the biggest area of confusion I found at hospitals during my four years as a consultant for the Center for Case Management,” says Peggy Rossi, BSN, MPA, CCM, now an auditor and trainer with California Health and Wellness.
Rossi adds that a check with her former clients reports that hospitals are still having difficulties with compliance, but that the problems have lessened as case managers continue to educate physicians when opportunities arise.
CMS announced the two-midnight rule to limit the use of observation status to reduce the financial burden on Medicare beneficiaries after fears of denials for short stay patients by the Recovery Auditors (RAs) prompted hospitals to significantly increase the use of observation, says Jean Maslan, BSN, MHA, CCM, ACM, managing consultant for Berkeley Research Group.
“Hospitals were concerned when they started getting denials from the Recovery Auditors and they started using observation status more aggressively,” Maslan says.
The rule was intended to clear up confusion about patient status and to cut down on the number of patients with observation stays. But instead of reducing the instances of observation, the two-midnight rule has led to more confusion and hospitals are billing for observation services for all short stays, even when patients clearly require inpatient care, she adds.
The two-midnight rule has been a subject of controversy in the healthcare arena from the moment it was issued as part of the Inpatient Prospective Payment System (IPPS) final rule for fiscal 2014. CMS delayed post-payment audits of the rule before it went into effect on Oct. 1, 2013.
The IPPS proposed rule for 2016 delayed post-payment audits of the two-midnight rule for the third time, this time until Sept. 30, 2015. In the proposed rule, CMS also announced its intention to address the rule and “the broader set of issues related to short inpatient hospital stays, long outpatient stays with observation services” in the Outpatient Prospective Payment System final rule for 2016. The OPPS final rule is expected to be issued at the end of October and goes into effect Jan. 1, 2016.
CMs also says it is considering feedback it has received from healthcare stakeholders, including the recommendation from the Medicare Payment Advisory Commission (MedPAC) that it do away with the rule entirely.
Meanwhile, hospitals continue to be confused about how to comply with the rule, says Linda Sallee, RN, MS, CMAC, ACM, IQCI, director for Huron Healthcare with headquarters in Chicago.
“If CMS makes clarification in the OPPS, it won’t go into effect until January,” she points out.
Sallee’s clients have told her that they have not found the Probe and Educate audits by the Medicare Administrative Contractors (MACs) to be as helpful as they expected.
“Hospitals get a report telling them what they did wrong, but it doesn’t tell them what they should be doing to get it right,” she says.
Physicians have been hesitant to declare how long they think patients will be in the hospital, adds Bridget Gulotta, RN, senior consultant for The Camden Group, a national healthcare consulting firm with offices in Chicago. “Determining what a patient will look like in 24 or 48 hours is very subjective and physicians may default to observation or inpatient in some cases. This is why case management reviews are important,” she adds.
“Many hospitals are fearful that any one-day stay they attempt to claim as inpatient status will be audited and the hospital will have to go through a time-consuming and expensive appeal process. Therefore, they make a claim only for observation services for one-day stays, even if the patient is in the intensive care unit. This may result in a huge loss of revenue for hospitals,” says Ann M. Sheehy, MD, MS, a hospitalist at the University of Wisconsin Hospital and Clinics and a member of the Society of Hospital Medicine’s Public Policy Committee.
Automatically putting short-stay patients in observation status rather than admitting them when they are high acuity is a disservice to the patients because they are vulnerable to higher out-of-pocket charges, including copays and hospital pharmacy charges, Sheehy says. It’s a disservice to the hospital as well because reimbursement will be much lower. At the University of Wisconsin, for encounters between July 2010 and December 2011, observation care was delivered at nearly $240 loss per patient day, Sheehy says.
In addition, an observation stay does not count toward the three-day requirement for Medicare to pay for a nursing home stay, prompting some patients to choose to go home rather than pay out of pocket to go to a nursing home. As a result, these patients may experience problems such as dehydration, falls, and other avoidable complications, leading to preventable readmissions and increased costs, she adds.
Sheehy quotes the Medicare Benefits policy manual that defines observation as “a well-defined set of specific, clinically appropriate services” that are provided so “a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”
The manual says that the decision should be made in less than 48 hours and usually less than 24 hours, and that outpatient observation services span more than 48 hours only in “rare and exceptional cases,” she says.
“The two-midnight rule has attempted to address the issue of observation stays lasting longer than 48 hours, which is a positive aspect of the rule, assuming the Recovery Auditors respect our medical decision-making regarding the need for two midnights of care, which is still a big question mark. But the two-midnight rule has led to other problems, in part because the inpatient versus observation designation has been so problematic as observation care has expanded,” Sheehy says.
“It is going to be hard for CMS to fix observation without a major overhaul, given that observation use has expanded so far beyond the original intent, combined with the reality that the Recovery Audit program charged with enforcement of observation is desperately in need of reform,” Sheehy adds.
The difference with the two-midnight rule is that inpatient status is not based on any inpatient criteria. However, case managers still need to use guidelines to help them have an educated conversation about documentation with physicians, Maslan says.
Some hospitals follow one process for Medicare patients and another process for patients with commercial insurance, Maslan points out. “However, Medicare says to treat all patients the same regardless of insurance,” she says.
“One of the main issues with the two-midnight rule is that the acuity of illness doesn’t have anything to do with patient status. Whether a patient is an inpatient or receives observation services depends on the length of stay. Under the rule, patients in the intensive care unit can be classified as outpatients if their stay is less than two midnights,” Sheehy says.
For instance, patients with diabetic ketoacidosis need intense medical care, a multitude of glucose checks and laboratory tests, an insulin infusion, and intravenous hydration, but often get better quickly and stay less than two midnights. “There’s no way this intensity of care can be delivered in a clinic but, under the two-midnight rule, this stay is outpatient. It doesn’t make sense,” Sheehy says.
CMS has asked for input on exceptions to the two-midnight rule, Sheehy says. At present, mechanical ventilation is the only exception that was not in the original rule, she says. To date, CMS has not made ICU care an exception to the rule, she adds.
Other exceptions to the rule are procedures on the Medicare Inpatient Only list, patient left against medical advice, unforeseen transfer, death, and patient chose to receive hospice care.
“There is a misconception that if a patient stays only one midnight he can’t be an inpatient, but if the physician clearly documented the expectation that a patient would stay two midnights, the hospital can bill inpatient for those patients if the documentation supports an inpatient stay and notes that the patient improved more quickly than expected,” Sallee says.
In cases when patients meet inpatient criteria when they present but stay only one day, case managers should make sure the physicians specify the intensity of services the patient needs within the medical documentation and the hospitals should fight it if they are denied, Maslan says.
However, even when hospitals take the time to appeal and are successful, the cost of the appeal could result in a net loss, she adds.
Some patients are being placed in the intensive care unit even though the physician has ordered observation services, Rossi point out.
When patients are placed in the ICU and receive observation services, their out-of-pocket costs can be substantial, Rossi points out. It’s also a problem for the hospital, which receives minimal reimbursement for costly services such as telemetry, she adds.
“If a patient is sick enough to be in the intensive care unit, the severity of illness and intensity of services needed should meet inpatient criteria. But the documentation has to be detailed enough to reflect the need for an inpatient admission,” Rossi says.
One of the biggest problems with the two-midnight rule is that it’s based more on the time the patient is in the hospital than the risks of the patient, Maslan points out.
When researchers at the University of Wisconsin retrospectively applied the two-midnight rule to a group of patient records, it found that 46.9% of the cases would have been assigned observation status instead of being admitted as inpatients, based on the time of the day they presented to the hospital.
“The results of this study are troublesome because the time of day the patient presented, and not different medical needs, would have dictated patient status under the two-midnight rule,” Sheehy says.
She gives this example: If the patient comes in at 1 a.m. on a Tuesday and stays 40 hours until 5 p.m. on Wednesday, that’s a one-midnight stay. But if the same patient comes in at 10 p.m. on Tuesday and has the same 40 hours of care, discharge would be at 2 p.m. on Thursday and would be a two-midnight stay.
“The time of day a patient gets sick, not different clinical needs, may determine a patient’s hospital status and insurance benefits,” she says.
Sheehy testified before the United States Senate Special Committee on Aging in the summer of 2014 and discussed the problems with the two-midnight rule and Medicare reimbursement for short-stay patients.
Hospitalists see firsthand how the current policies negatively impact patients and the Medicare system overall, Sheehy told the committee. “Observation care is provided physically within the hospital and the services provided are often indistinguishable from inpatient care, yet we are forced to label these hospitalized patients as outpatients,” she says.
Sheehy told the committee that she has been asked what patients typically have to pay if they are receiving observation services.
“We still can’t quantify what patients are likely to have to pay when they receive observation services because there is a copay for each service and there is no limit. Patients also are liable for certain pharmacy charges and their own skilled nursing facility care, should they need it. Cases range from simple to life-threatening. All we know is that the way Medicare Part A and Part B are set up, an observation patient has more potential liability than an inpatient,” she says.
REFERENCE
- The Society of Hospital Medicine Public Policy Committee white paper. The Observation Status Problem: Impact and Recommendations for Change. July 2014. http://bit.ly/1dglMd9.
CMS issued the two-midnight rule in 2013 but even after three rounds audits by the Medicare Administrative Contractors, hospitals still struggle to get it right.
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