A silver lining in two-midnights rule?

If Medicare’s new “two-midnights” rule takes effect in September, health systems can expect even more financial pressure, but also perhaps some relief from auditors challenging medical necessity decisions.

Enforcement of the Centers for Medicare & Medicaid Services’ new rule, covering only beneficiary stays greater than 48 hours as inpatient admissions, has been delayed twice. If the American Hospital Association and other advocates are unsuccessful in replacing or changing the rule, enforcement is set to start Sept. 30.

[See also: AHA initiates assault on 2-midnight rule.]

While most health systems should be able to adapt to the new rule over the next six months and perhaps open new units to accommodate one night stays, some, especially community providers, are going to be negatively impacted, warned Moody’s analysts Daniel Steingart, Lisa Martin and Kendra Smith in a recent research brief.

“Over the next two years, we expect hospitals to adapt by adjusting care protocols for the most frequent diagnoses impacted by the rule, and by opening dedicated units to treat these patients,” Steingart and colleagues wrote.

The costs of the new rule are still a matter of debate, though.

On average, Steingart and colleagues estimate, the new rule could lead to decreased Medicare reimbursement of $3,000 to $4,000 per case, while also accelerating the trend of inpatient admissions converting to outpatient status.

CMS estimates that the industry as a whole will see an additional $220 million in Medicare spending from more and longer hospitals stays after the two-midnights rule takes effect, and has budgeted accordingly with a 0.2% reduction in inpatient reimbursement.

Either way, the rule remains hugely controversial and overlaps with other Medicare disputes between the industry and regulators, especially the role of auditors and their power to challenge physician admission and treatment decisions.

For one thing, some hospital advocates argue, the rule “replaces clinical judgment with an arbitrary time frame," as Richard Coorsh, the Federation of American Hospitals’ communications vice president, wrote in an email to Healthcare Finance News.

For another, it may be difficult for seniors staying one night in a hospital to understand that Medicare isn’t classifying or paying for it as an inpatient admission, said David Weisman, a health policy and financial specialist at the Indiana Hospital Association.

“Although their treatment might appear to them to be an inpatient stay, i.e., in a room and in a hospital bed, their explanation of benefits and bill will reflect that they were an outpatient, which carries with it much different deductible and co-pay responsibilities,” Weisman wrote in an email to Healthcare Finance News.

But some analysts also think the two-midnights rule could bring hospitals a new benefit: more space and fewer challenges from auditors.

Fewer Recovery Audit Contractor (RAC) claims “could provide a silver lining,” Moody’s Steingart and colleagues wrote in their research brief.

With many RAC reviews focusing on short stays, hospitals have already been shifting from inpatient to outpatient care in some cases. “The two-midnight rule could provide some relief from RAC reviews by substituting a strict rule set for the ambiguity involved in borderline cases,” Steingart argued.

The hypothesis that the two-midnights rule can reduce audit burdens has limited traction among hospital advocates, though.

“I think it can in some regards,” said Priya Bathija, senior associate director of policy at the American Hospital Association.

CMS clarified several policies for RACs under the rule, Bathija said. “If a claim meets the two-midnight presumption, a RAC can’t audit that claim. Additionally CMS restated its longstanding rule that RACs can only look at the records that physicians had at the time,” Bathija said.

“Those are two helpful pieces. But it’s still unclear how the MACs and RACs are going to be interpreting the two-midnight guidance,” Bathija said.

Theresa Edelstein, vice president of post-acute care at the New Jersey Hospital Association, thinks that auditors may back off short stay admissions only to increase claims challenges in other areas.

The rule could lead to fewer audit challenges if focused on the narrow issue of setting of care, she said, but she thinks focus will shift to medical necessity reviews. “It’s a shift away from ‘Was the patient in the right setting?’ to ‘Was the care medically necessary?’”

The New Jersey Hospital Association is suing CMS to stop the two-midnight rule’s 0.2 percent reimbursement reduction, and is also among those organizations supporting legislation in Congress that would compel CMS to work with the industry in setting adequate financing for short inpatient stays.

“That is really at the heart of the matter,” Edelstein said. “Then the whole issue of observation and outpatient gets eliminated.”