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Two-Midnights Rule Spells Grim Financial Forecast for Hospitals

Christopher Cheney, for HealthLeaders Media, March 17, 2014

Hospitals will take a financial hit this year as a result of the new federal rule that cuts the Medicare payment rate for most patient stays that span less than two midnights, Moody's predicts.

A gloomy Moody's Investors Service sector comment on the controversial two-midnights rule for inpatient admissions came as little surprise last week to hospital finance executives, but federal officials say the negative impact on healthcare providers is overstated.

The comment, released Wednesday, predicts the "reimbursement difference between inpatient and outpatient cases will decrease profits" at hospitals, with the average revenue reduction per affected case set at $3,000 to $4,000. "Previously, inpatient status was largely determined by medical necessity," Moody's wrote. "We expect the rule change will weaken hospital operating profitability in calendar year 2014 because it will lower Medicare reimbursement for these cases."


Two-Midnight Rule Creates Financial Hurdles, Perverse Incentives


Under the rule, which CMS issued in August 2013 but has been delayed until October, hospitals that admit patients for a period of less than two midnights will receive reimbursement at Medicare B outpatient rates. The rule states that hospital admissions shorter than two midnights in length are "generally inappropriate for payment under Medicare Part A, regardless of the hours the patient came to the hospital or whether the patient used a bed."

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1 comments on "Two-Midnights Rule Spells Grim Financial Forecast for Hospitals"


Vicky Mahn-DiNicola (3/20/2014 at 7:56 PM)
The comment from CMS that they do not agree with the assertion that the two-midnight rule will accelerate the trend of inpatient care shifting to outpatient is almost laughable. For hospitals that have had very [INVALID]nt and mature medical necessity and utilization management protocols in place, it could theoretically increase inpatient volume slightly because hospitals will feel more confident about admitting to inpatient status those patients who meet medical necessity and are also expected to stay over 2 midnights. Its just another data point to validate their decision. Before they were more likely to admit as observation status if there was any doubt at all about medical necessity just so they could avoid the administrivia associated with the denials and appeals. But face it, MOST hospitals still struggle to keep up with the complexities of ensuring medical necessity and haven't [INVALID]d strong internal physician advisors to support their efforts. For those hospitals, I think we may well see shifts towards increasing outpatient volumes; and especially in those hospitals that are building dedicated observation units. Of course they'll want to fill up these beds! But the driver for this shift isn't the two-midnight rule alone! Add in Medicare Shared Savings ACO incentives, readmission reduction penalties, quality reporting initiatives and RAC Audits and we have the perfect storm to start shifting inpatient claims to lower reimbursing outpatient claims. We need to recognize that we are all shifting from "pay for volume" to "pay for value". The only question that remains is how we define value in the new paradigm.