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Two-Midnight Rule Will Cost Hospitals Big

 |  By Philip Betbeze  
   June 13, 2014

The simple demarcation between inpatient and outpatient status prodded by Medicare's proposed rule has the potential to turn into a big revenue problem. But good documentation can help.

The so-called "two midnight" rule has hospital and health system senior leaders extremely worried.

Although its enforcement by Medicare has been delayed a second time, hospitals and health systems still have to deal with it. In essence, the proposed rule calls on doctors, with the help of whatever decision-making staff the hospital has made available, to decide whether a patient is likely to need a stay in the hospital that extends over two midnights.

That essentially determines whether that patient, and his or her billing status, is designated as an inpatient or outpatient.

And that designation can mean a huge difference in reimbursement despite the fact that the inputs (bed occupancy, staff time) are largely the same. Some CFOs I've spoken with say reimbursement for outpatient status is as little as a third of what they would get for inpatient status.


Observation, Two-Midnight Rules Hit in Hearing


Observation status has many implications for patients' pocketbooks as well, but that is a topic for another day. There are plenty of land mines, however, for hospitals and health systems in this simple demarcation between inpatient and outpatient status.

Given that the patient mix at many, if not most hospitals is heavily dependent on Medicare beneficiaries, this has the potential to turn into a big revenue problem. Despite the fact that the rule's enforcement has been delayed, it's still in effect. No wonder hospitals and health systems are rushing to improve their clinical documentation.

That challenge is far from simple.

A patient is an inpatient only if a doctor formally admits him or her, and this blunt mechanism causes a cascade effect for inpatient revenues for hospitals. It belies the complex medical decision-making behind making that determination.

Critically, according to CMS, "An inpatient admission is generally appropriate when you're expected to need two or more midnights of medically necessary hospital care, but your doctor must order such admission and the hospital must formally admit you in order for you to become an inpatient."

Who Can Predict the Future?
That's a lot of i's to dot, and a lot of t's to cross. For many doctors, the two-midnight rule is understandably low on their list of priorities. It makes little sense to them from a medical standpoint, and they aren't necessarily highly attuned to the importance this issue carries to the hospital at which they practice, which may or may not employ them.

To boot, especially if they are salaried, whether a patient is designated as an inpatient or outpatient (both are staying in the hospital after all) doesn't affect them financially.

Besides, is the doctor supposed to be an Oracle who can predict the future?


Hospital Execs Hope for Two-Midnight Rule Repeal


Let's leave aside whether physicians or any staff the hospital hires to help them make this decision (case managers, physician educators, etc.,) can determine whether a patient will need to be in the hospital over two midnights with any great certainty.

The rule is the rule, and Medicare administrative contractors (MACs) will be paying attention to it, and, like recovery audit contractors (RACs), may dispute that decision after the fact, which can have a harrowing impact on a hospital's revenue picture.

One partial solution is through an almost ridiculously rigorous documentation program. The best way to do it is through real-time documentation on the patient electronic medical record. But assuming that part of the equation is there, it still doesn't address the physician motivation issue.

Stable, But Critical
For instance, proper documentation means a physician cannot simply state that he checked on an inpatient during rounds and that the patient was "stable." He might be stable, but he also might have any number of critical conditions that make a hospital inpatient stay necessary.

If they're not in the record, then they don't exist, at least not for reimbursement purposes. And "stable" doesn't begin to pass muster.


Two-Midnight Rule Creates Financial Hurdles, Perverse Incentives


MACs and RACs aren't physicians. They're contractors looking for key words to help identify records that show medical necessity and those that don't. Those that say "stable," simply don't.

The overriding issue with the two-midnight rule is what we spend a lot of time talking about at HealthLeaders: physician alignment.

Better Documentation Needed
Maybe that's what Medicare's going for here. The penalty for poor physician alignment is such a serious hit to your revenue, your margin, and ultimately, your balance sheet, that you can't afford not to make it matter to physicians.

Or maybe I'm giving Medicare too much credit and they're just trying to save money.

Either way, achieving the goal of much-improved physician documentation is a good thing, societally. It's too bad using such a blunt tool to achieve it makes things so difficult on those who are providing the care.

Making it matter to physicians seems much easier to do if you can find a mechanism that provides a carrot or stick for compliance. Whether privileges are dependent on documentation compliance or whether employing all your physicians or some other tool will increase that motivation is organization-dependent.

Where the magic can happen for hospital and health system leaders is in determining the right combination that will motivate physicians to improve documentation. If you can't find it, your organization's revenues will suffer accordingly.

Only you and your staff can design the right solution to this problem. At the very least, that should provide you some sense of job security. It's yet another case where leadership is needed—in spades.

Philip Betbeze is the senior leadership editor at HealthLeaders.

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