Determining inpatient versus outpatient admissions—a calculation with many financial implications—may fall to emergency physicians

Update: The Centers for Medicare and Medicaid Services has delayed implementation of the two-midnight rule until after March 31, 2015.

One of the more controversial and confusing changes the Centers for Medicare and Medicaid Services (CMS) made in its Fiscal Year 2014 Inpatient Prospective Payment System (IPPS) is called the “two-midnight” rule. This rule changes the standard for determining whether patients are brought into the hospital as inpatients or kept under observation status, and of course, whether or not such decisions will impact reimbursement. The new rule states that physicians “admitting” patients into the hospital should make a determination at that time whether patients are more or less likely to spend two midnights in the hospital. If patients are likely to spend fewer than two midnights in the hospital, they will be considered outpatients (under observation status). If they are more likely to spend more than two midnights in the hospital, they will be considered inpatients. To make things a little more confusing, the clock begins when patients start receiving hospital services.

What Does All This Mean?

Just like nearly every rule in health care these days, there are significant financial considerations. Many emergency physicians, admitting physicians, and even patients are not aware of the financial implications of whether patients are brought into the hospital under inpatient or observation status. The effect on patients can be profound, with Medicare (under Part A) picking up almost all of the costs of hospital inpatient stays, but shifting the cost of co-pays for tests and medications to patients brought in under observation status (and paid by Medicare under Part B). It is important to note that outpatient stays also do not count toward the three-day inpatient requirement for skilled nursing facility (SNF) coverage. Because Medicare patients may not be able to return home after their hospitalization, the cost of a SNF can be another significant expense Medicare patients might have to bear. Therefore, patients brought into the hospital under observation status are responsible for significantly more of the costs than they would be had they been officially admitted to the hospital as inpatients.

Hospitals also are subject to significant financial implications from the two-midnight rule. Hospitals are under the watchful eyes of Medicare Administrative Contractors (MACs) and Recovery Audit Contractors (RACs), which have been denying short inpatient stays and demanding hospitals repay Medicare for those billed stays. Further, starting Jan. 1, 2014, Medicare reduced the inpatient payment rate by 0.2 percent. This doesn’t seem like much until you apply it to the Medicare price tag of delivering inpatient care. This adds up quickly.

What Is the Logic Behind the Two-midnight Rule?

The number of patients brought into the hospital under observation status staying more than 48 hours mushroomed from 3 percent of all observation cases in 2006 to 8 percent in 2011. This means that many Medicare patients were given bills they didn’t expect. Further, Medicare officials feel that many patients were brought into the hospital under inpatient status, yet were discharged prior to 48 hours. They believe these patients should have been kept in observation status. These are often referred to as “short stays,” and to add some confusion, Medicare officials acknowledge that certain short stay admissions may be warranted. A welcome change from previous ones, this new rule also allows hospitals to rebill some denials when the inappropriate status was selected.