‘Two midnight’ rule draws lawsuit – enforcement currently delayed

August 5th, 2014 - Scott Kraft
Categories:   Billing   Claims   Coding  
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The American Hospital Association is leading the charge in a lawsuit against CMS’s controversial “two-midnight rule,” instituted last year to attempt to slow down the expanded use of observation status by hospitals by presuming that any stay intended to cover two or more midnights would be classified as an inpatient stay, rather than observation.

The rule took effect Oct. 1, 2013, but enforcement by Recovery Audit Contractors (RACs) and Medicare itself was delayed until March 2015 as part of the recently passed Medicare payment fix bill that also delayed ICD-10 implementation until 2015.

The AHA, joining with major hospitals in suing HHS, claim the two-midnight rule is arbitrary and compromises physician judgment and patient care.

The two-midnight rule does put physicians working in the hospital in an interesting position – the rule essentially presumes that a hospital stay of fewer than two midnights is an observation stay, with the claims billed as outpatient claims. A stay of longer than two midnights is presumed to be an inpatient stay.

It’s the patient’s physician, at the point of admission, that is asked to certify in the patient’s documentation that a hospital stay of two nights or more is anticipated for the patient’s case. A visit that lasts fewer than two days can still be considered an inpatient stay with physician’s certification, but these are the type of claims that CMS plans to scrutinize closely.

Fueling the hospital lawsuit is the belief that hospital profits will suffer due to the change. For starters, CMS cut hospital pay by 0.2% to fund it, an estimated $200 million annual reduction in pay. Second, observation cases pay less to the hospital, with the patient responsible for a larger portion of the cost of the care.

Observation stays had been on the rise, including instances where hospitals had pressured physicians to switch a patient from inpatient to observation due to CMS audit pressures, among other factors.

Stories have abounded of a patient being switched to observation without clear communication about the change to the physician, which resulted in denied claims that were billed as inpatient encounters to a patient who appeared to Medicare to be an observation patient.

The increase in use of observation, in turn, drew fire from Medicare patient advocacy groups, who also have sued HHS over observation policies because the observation stay costs the patient more in out-of-pocket costs and impedes patient access to other benefits, such as covered skilled nursing facility stays.

The two-midnight rule became, in effect, a CMS attempt to add clarity to an area of care that had started to confuse everyone. It appears that, at least for a little bit longer, the uncertainty will continue.

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