Ready or not, physicians will soon have to answer to auditors about their admissions decisions involving Medicare patients, and hospitals may face payment denials if the determinations are questioned.

After ongoing delays, enforcement of the Centers for Medicare & Medicaid Service’s two-midnight policy goes into effect April 1. While most hospitals and doctors have known about the rule for some time, they are probably not fully prepared for the burden and potential consequences of the policy, said Dr. Bradley Flansbaum , a hospitalist at Lenox Hill Hospital in New York and a member of the Society of Hospital Medicine’s public policy committee.

“It’s not like the two-midnight rule is being unveiled or it’s something new, it’s the promise of the actual penalties and chart reviews going into play,” he said in an interview. “Not that most hospitals haven’t been taking the rule seriously, but once they know the audits can begin and hospitals could lose money, everything that’s been talked about, actually has to be done. The theoretical becomes reality.”

The two-midnight policy officially went into effect on Oct. 1, 2013, but enforcement through postpayment claims audits by Recovery Audit Contractors (RACs) was delayed until March 31, 2015. Under the controversial rule, the decision to admit a Medicare patient as an inpatient comes down to two factors: whether the condition meets medical necessity requiring a patient to be in a hospital setting and the expectation that their time in the hospital will surpass two midnights. Doctors and hospitals have criticized the rule as undermining doctors’ medical judgment, generating inadequate reimbursement to hospitals for medically necessary care, and creating confusion for Medicare patients. Critics say the rule will mean needless administrative hassles for health providers and penalization of hospitals for innovations to reduce length of stay.

During the most recent delay, CMS planned to conduct prepayment reviews on samples of short-stay inpatient claims to determine hospital compliance with the new policy. The agency said it would evaluate the results of the “probe and educate” process and issue additional guidance to ensure consistency of the policy’s application.

However, some physicians have been disappointed by the so-called educational phase. Dr. Ann M. Sheehy , head of the hospital medicine division at the University of Wisconsin Hospital in Madison, said her hospital did not receive clarification on several claims that were questioned by CMS. Of nine recent inpatient cases at the University of Wisconsin, CMS said three inpatient cases did not support the need for two midnights of care, Dr. Sheehy noted. The hospital challenged the determinations and requested a meeting for more information, but did not receive further feedback. The claim denials were later overturned without explanation, she said.

“It is frustrating,” Dr. Sheehy said in an interview. “We still feel like we’re kind of in the dark as far as the application of the rule. We’re doing the best we can, but we still don’t know how it’s going to be enforced by the RACs come April 1.”

On the other hand, Dr. Sheehy noted that the hospital has seen a reduction in long observation stays under the two-midnight rule, which is positive.

“However, we are concerned, based on our probe and educate results, that if the RACs start to question the two-midnight mark, we will see these long observation stays return because of RAC pressure and denials of these inpatient claims,” she said.

At this article’s deadline, CMS had not responded to a request for comment.

Supporters of the two-midnight rule say the policy clarifies the prior confusion over when hospital patients should be designated inpatients. The rule makes physicians’ decisions easier, not more difficult, said Dr. Michael A. Ross , an emergency physician and medical director of observation medicine for Emory University Hospital’s emergency medicine department in Atlanta. He notes that his hospital is well prepared for the rule’s enforcement and has been managing patients consistent with the policy for more than a year.

“Previously, the whole definition of an inpatient was complicated, especially for emergency physicians,” Dr. Ross said in an interview. “As a friend of mine said, ‘Previously to know who an inpatient was you needed a book, now you just need one line, which is whether a patient is expected to cross two midnights.’ What could be simpler than that?”

Dr. Ross adds that myths about the two-midnight rule and its effect continue to spread through mainstream media, such as that observation outpatient status means higher out-of-pocket costs for Medicare patients than inpatient status. He pointed to a 2013 study by the U.S. Health & Human Service’s Office of Inspector General that found Medicare patients paid nearly two times more out-of-pocket expenses as observation patients than as inpatients.

“The best thing a physician can do to control a patient’s outpatient observation costs is to manage them in a protocol-driven observation unit,” said Dr. Ross, former chair of the CMS Advisory Panel on Ambulatory Payment Classification Group’s Visits and Observation Subcommittee. “These units have consistently been shown to decrease health care costs safely, which impacts a patient’s out of pocket costs.”

While the two-midnight rule is fast approaching, Dr. Flansbaum believes there is still time for CMS to change or delay the policy. He does not foresee the rule going into effect April 1.

“It’s still possible the rules will be changed or CMS will push (the enforcement date) to a later point in the calendar,” he said. “There’s too many loose ends. All the complications and difficulties that forced [CMS] to put the rule into freeze way back when – they’re not solved. How can they flip the switch?”

In a proposed rule issued in 2014, CMS raised the possibility of creating a new payment method under Medicare for short, but intensive inpatient hospital stays. But a final rule governing payment policies for general acute care hospitals and long-term care hospitals for fiscal year 2015 did not yield any new policies. The Association of American Medical Colleges has called on CMS to issue supplemental guidance that would allow hospitals to bill certain short stays as inpatient, under Medicare Part A, when the physician determines that the stay is medically necessary. A lawsuit by the American Hospital Association against CMS over the policy continues. In April 2014, the AHA filed two federal lawsuits challenging the rule and its reduction in payments to hospitals. At this article’s deadline, the U.S. District Court for the District of Columbia has not decided whether to grant the AHA’s requests for oral argument.

“With regard to the two-midnight rule, we would like to see the partial enforcement delay extended,” AHA spokeswoman Carly Moore said in an interview. “We are urging both CMS and Congress to extend. Hospitals are doing their best to comply with the two-midnight policy, but CMS has not provided any update on its probe and educate audits.”

Meanwhile, draft legislation that aims to reform Medicare’s hospital admissions policies, including the two-midnight rule, is in the works. The Hospitals Improvements for Payment (HIP) Act addresses short inpatient stays, outpatient observation stays, auditing, and appeals. The draft legislation offers reforms for a new hospital prospective payment system, a new per diem rate for short lengths of stay, repeal of the two-midnights payment reduction, and improvements to the RAC program. The House Ways and Means Committee is currently accepting public comment on the draft HIP Act. Doctors expect the bill to be introduced by March. Several other bills addressing short inpatient stays and the recovery audit process stalled during the last congressional session.

The Medicare Payment Advisory Commission (MedPAC) is also considering alternative policy options to improve short inpatient stays. The group has emphasized the need to balance oversight of proper billing with administrative burden on Medicare providers. MedPAC’s proposed options include creating new Medicare severity diagnosis-related groups (MS-DRGs) for short-stay cases, targeting RAC reviews to those hospitals with the highest rate of short-stay admissions, and revising the RAC contracts to take into consideration the percentage of denials that are overturned on appeal.

But Dr. Flansbaum stressed that the issues surrounding the two-midnight rule and admissions designations are not easy problems to solve.

“While a lot of the solutions sound good at the macro level, [they] are still difficult to implement at the micro level,” he said.

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