Skip to main content

Two-Midnight Rule Creates Financial Hurdles, Perverse Incentives

September 30, 2013

The controversial two-midnight rule has gone into effect, creating new economic challenges for hospitals and health systems. Reimbursements will drop for the same level of care, say healthcare leaders, who will be forced to choose between doing what's right and gaining revenue.

Despite heated opposition from several healthcare industry groups, the controversial two-midnight rule goes into effect tomorrow, creating new economic challenges for hospitals and health systems.

Issued by the Centers for Medicaid & Medicare on August 2, the rule states that if a patient is in the hospital for a stay that does not span at least two midnights, "the services are generally inappropriate for payment under Medicare Part A, regardless of the hour the patient came to the hospital or whether the patient used a bed."

Hospitals have been vocal in their opposition to the rule and, last week, 105 members of the House of Representatives sent a letter to CMS requesting a delay of its implementation. Although CMS is still moving forward to execute the rule as planned, it announced on Thursday that it will not allow recovery audit contractors to question the medical necessity of stays of one midnight or less from October 1 through December 31, thus giving hospitals three months to educate clinicians before the rule is enforced.

According to the new rule, providers will be reimbursed under Medicare Part B unless a patient is hospitalized for two nights or more. That's of great concern to hospital finance executives, who believe the rule will result in reduced reimbursements and unhappy patients, who will be responsible for a greater share of the bill. Medicare patients on observation status are typically responsible for a 20% co-pay and do not receive coverage for some medications administered in the hospital or for post-acute care.

To Jerry Arndt, senior vice president for business services at Gundersen Lutheran, a 325-bed integrated healthcare organization based in La Crosse, WI, the two-midnight rule feels like a punishment for running a competent, well-managed shop.

"It's just another one of those absolutely classic examples of being penalized for being efficient. If you can discharge somebody with a one-night stay, then it will get paid as an observation as opposed to discharging them at 12:05 a.m.," he says. "It's another example of having to choose between doing what is right and what maximizes revenue, and this is really, really getting to be a difficult situation."

Lower Reimbursements for Same Care
Elizabeth Carnevale, assistant vice president, revenue cycle at South Nassau Communities Hospital, a 435-bed independent hospital in Oceanside, NY, says her organization may be denied or paid less for medically necessary inpatient admissions that do not meet the two-midnight rule, even though patients are receiving the exact same level of care.

"We are still using the same amount of resources. We are using the same amount of nursing care, the same overhead, everything is the same. It will definitely affect our revenue," she says.

Additionally, providers will now have to invest greater resources to collect the co-pay, and it's possible they won't get paid at all, Carnevale says. "Those patients that are deemed as outpatients are going to have a higher amount to pay out of pocket, and that will hurt our ability to collect."

Carnevale expects the two-midnight rule to also have a negative impact on patient satisfaction, because patients will not understand the difference between inpatient and observation status. Patients will assume that because they are in a hospital bed that Medicare is covering the costs under Part A and will not be happy when they receive their bill.

"It will absolutely result in more patient complaints and lower patient satisfaction," she says. "For example, if a patient status is changed from inpatient to outpatient under Medicare regulations, the patient coverage is now under Part B. Items and services that are covered under inpatient may not be covered under outpatient. The regulations require that the hospital inform patients of this while they are still in the hospital and before discharge. This translates into confusion and frustration for the patient. Someone is going to have to educate these patients, and it is most likely going to be us."

Greater Clarity, Reduced Payments
Greg Pagliuzza, CFO at Trinity Regional Health System, a 584-bed integrated delivery system based in Rock Island, IL, that is part of the UnityPoint Health system, says that while the new rule provides greater clarity to help determine the difference between observation and inpatient status, it will likely result in lower overall Medicare payments for his organization.

"The challenge for us is the timeframe to train and permanently make changes to the documentation by the physician," he says. "[W]e are projecting a significant reduction in reimbursement."

Like Carnevale, Pagliuzza is worried about the financial fallout from patients having to pay a larger portion of the bill and what that could do to patients' perception of their experience.

"The potential for increased co-pays to the patient are a concern. This may increase our uncompensated care and cost to collect," he says. "In addition, the patients will be expected to provide their self-administered drugs. This will result in logistical challenges for many patients to either obtain them or have the hospital provide them at additional cost to the patient. This has the potential for negative impacts on reimbursement and patient satisfaction."

Determining the Impact
Kendall Johnson, CFO at Baton Rouge (LA) General Medical Center, a 527-bed hospital, says his organization is working to determine exactly how the rule will impact its reimbursements.

"We are currently modeling our patient mix for one- and two-day–stay patients to determine the net impact of the two-midnight rule," he says.

"We currently have patients who are one-day stays and are billed as inpatients. We have estimated that about 80% of these patients will become outpatients. This will have a negative impact on Baton Rouge General financially, even though we have heard that the payment for observation patients will increase," he adds.

On the flip side, Johnson notes that about 80% of patients who are in the hospital for two days and are currently billed as observation patients will become inpatients.

However the numbers shake out after Baton Rouge General completes its modeling, the hospital is taking steps now to prepare for the new rule, Johnson says. "The first [step] was to meet with our physician leadership to educate them on this change and to work collaboratively to amend our processes…[W]e will also work with our physician leadership to educate the other admitting physicians."

Additionally, the hospital is tightening up its intake processes. "We also have increased our staffing in care management to provide for 24/7 intake nurses to make sure that we correctly input the status of the patient on the front end of the process," Johnson says.

Choosing Between Right and Revenue
In the end, says Gundersen Lutheran's Arndt, healthcare leaders know they have to come down on the side of doing what is right for the patient, regardless of the potential financial implications for the organization.

"The balance is between doing what is right versus maximizing revenue, but you have to live with your conscience every single minute," he says.

Tagged Under:


Get the latest on healthcare leadership in your inbox.