Update on the Two Midnight Rule: New Payment Changes have been Implemented by CMS

The release of the Center for Medicare and Medicaid Services (CMS) 2 midnight rule on October 1, 2013 caused a lot of angst in the medical world. New changes to the rule for 2017 are intended to ease the economic burden on hospitals. The purpose of the rule was to help determine is inpatient admissions were appropriate for payment under Medicare Part A (inpatient); otherwise the payments would fall under Medicare Part B (outpatient).

This is what the rule says:

• Inpatient admissions will generally be payable under Part A if the admitting practitioner expected the patient to require a hospital stay that crossed two midnights and the medical record supports that reasonable expectation.
• Medicare Part A payment is generally not appropriate for hospital stays not expected to span at least two midnights.

Some new information began to then come out from Medicare’s Recovery Audit program. Their data showed increased rates of error for services rendered in a medically unnecessary setting (inpatient vs. outpatient). They also noted an increase in the number of extended “observation” services.

After receiving this feedback and feedback from other stakeholders, CMS proposed some changes for the rule in calendar year 2016. Before these changes could be implemented however, a report was published from the Office of Inspector General (OIG) on December 19, 2016.

The OIG report reviewed data from 2014 and 2015. They found a decrease in the number of inpatient stays and an increase in the number of outpatient stays. The most startling information from the report was that in fiscal year 2014, Medicare paid $2.9 billion for potentially inappropriate short inpatient stays. This cost was the result of an exception to the 2 midnight rule. On a case-by-case basis, the exception allowed inpatient stays less than 2 midnights if documentation supported the doctor’s decision that the patient required inpatient care.

When the rule was implemented in 2013, CMS expected a decrease in long observation stays and an increase in inpatient admissions. To offset this cost, CMS put in place a 0.2% reduction in inpatient payments. As a result of the feedback received and the OIG report, CMS has made a change in their final Inpatient Proposed Payment Schedule for 2017. The 0.2% payment reduction has been “permanently removed” and retrospective application of the payment reduction was deemed unreasonable.

What does this mean for the practicing physician? In practice, very little will change. We will still be required to document a status, inpatient vs. observation vs. outpatient. However, the teeth of the rule have been removed. No penalties will be levied on the hospitals or us. What changes will 2018 bring? One can only guess.

Matt Astin, MD, MPH, FACEP
Section Secretary