CMS eases restrictions imposed under the Two-Midnight Rule

In October 2015, the Centers for Medicare & Medicaid Services (CMS) released the 2016 Hospital Outpatient Prospective Payment System (OPPS) final rule, which finalized changes to the Two-Midnight Rule. The Two-Midnight Rule, which took effect January 1, addresses when inpatient admissions are appropriate for Medicare Part A payment.

The OPPS rule includes a significant change that will allow Medicare Part A payment, under certain circumstances, for stays lasting less than two midnights. This deviation was prohibited under the original Two-Midnight Rule. Another modification will transition review of claims for inpatient admissions from Recovery Audit Contractors (RACs) and Medicare Administrative Contractors (MACs) to Quality Improvement Organizations (QIOs). This column provides more detail on the origins of the Two-Midnight Rule and the changes to it under the OPPS final rule.

Original Two-Midnight Rule

CMS first issued the Two-Midnight Rule in August 2013 in an attempt to bring clarity to the circumstances in which an inpatient admission is considered appropriate for Medicare Part A payment. Before the Two-Midnight Rule, CMS, via the RAC program, had identified high rates of inpatient admissions that were not medically necessary and should have instead been billed as outpatient cases.

At the same time, CMS observed a higher frequency of patients being treated as outpatients and receiving extended “observation” services. Hospitals, physicians, patient advocates, members of Congress, and others expressed concern about this trend since days spent as a hospital outpatient do not count toward the three-day inpatient hospital stay that is required before a patient is eligible for Medicare coverage of skilled nursing facility services. As such, the main purpose of the Two-Midnight Rule was to establish Medicare payment policy regarding the benchmark criteria that should be used when determining whether inpatient admission is reasonable and payable under Medicare Part A.

The original Two-Midnight Rule provided that a hospital inpatient admission was generally considered reasonable and necessary if the physician (or other qualified practitioner) ordered the admission based on her or his expectation that the patient would require at least two midnights of medically necessary hospital services, or if the patient required a procedure on the CMS inpatient-only list. Conversely, if the physician expected to keep the patient in the hospital for a period of time of fewer than two midnights, the services would generally be billable for outpatient payment only. RACs and MACs were responsible for reviewing claims for inpatient admissions.

2016 changes to the Two-Midnight Rule

CMS received much feedback from hospitals and other stakeholders regarding this controversial rule. In response, CMS has attempted to make changes that will allow more deference to the physician’s medical judgment in meeting the needs of Medicare patients. Thus, if a physician anticipates that the patient will need fewer than two midnights of hospital care (and the procedure is not on the inpatient-only list or otherwise specifically listed by CMS as an exception), an inpatient admission is now payable under Medicare Part A on a case-by-case basis. The documentation in the medical record must support that an inpatient admission is medically necessary. Previously, all cases in which the patient was expected to need less than two midnights of hospital care were presumed to be appropriate only for outpatient payment.

CMS does not make any changes to the policy for hospital stays that are expected to be two midnights or longer. That is, if the admitting physician expects the patient to require hospital care that spans at least two midnights, the services are generally appropriate for Medicare Part A payment. This policy applies to inpatient hospital admissions if the patient is reasonably expected to stay at least two midnights and the medical record supports that expectation. This includes stays in which the physician’s expectation is supported, but the length of the actual stay is less than two midnights due to unforeseen circumstances, such as patient death, transfer, clinical improvement, or departure against medical advice.

CMS will also transition the first line of medical reviews of providers who submit claims for inpatient admissions from RACs and MACs to QIOs. While RACs work on a contingency fee basis and are paid to identify and recoup overpayments, QIOs have a history of collaborating with hospitals and other stakeholders to promote high-quality care. QIO patient status reviews are intended to focus on educating physicians and hospitals about the Medicare Part A payment policy for inpatient admissions. RAC audits could later be conducted for those hospitals that have a consistently high denial rate based on QIO patient status review outcomes.

For more information regarding the changes to the Two-Midnight Rule, go to the CMS website.

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