by Ronald Hirsch, MD, FACP, CHCQM
Published on Mar 19, 2016

After two and a half years, the two-midnight rule should not continue to be giving us as much trouble as it does. When explained properly, it really boils down to a simple two-step process.

First, the Centers for Medicare & Medicaid Services (CMS) only expects to pay for patients who require hospital care; hence, we should only expect payment for those patients who require hospital care. Second, CMS only wants hospitals to admit as inpatients those who have an expectation of a total of two midnights of care or meet one of the few exceptions. If the patient does not require hospital care, we should not expect payment from CMS (but do reserve the option to charge the patient).

The confusion starts when we try to define “require.” Also known as “medical necessity for hospital care,” CMS has noted that “the crux of the medical decision is the choice to keep the beneficiary at the hospital in order to receive services or reduce risk, or discharge the beneficiary home because they may be safely treated through intermittent outpatient visits or some other care.” In other words, the patient’s health or safety would be endangered if they were not treated in the hospital.

Lots of people in the hospital do not have medical necessity for hospital care; they cannot get a ride home, they are not safe at home (but would be safe in a nursing home or even at home with a 24-hour caregiver), they have a doctor who wants to do the outpatient workup because the patient is already at the hospital, or they have a doctor who wants to watch the patient one more day “because I’m the doctor.”

On the other hand, because of the vague definition of “medical necessity” and the misunderstanding of the use of commercial criteria sets, many hospitals end up keeping patients as observation longer than they should, fearing denials. This results in general confusion and financial uncertainty for many hospital financial executives. This uncertainly escalates when they attend a conference and hear an “expert” cite a benchmark observation rate and determine that their hospital’s rate is higher.

Unfortunately, there is no national benchmark. CMS does not publish such data and any organization claiming to have such a rate is just creating it from its own database, with no guarantees that they are following the rules or even calculating their observation rate the same for all facilities in the “benchmark group.” But rather than comparing your hospital’s rate to a rate of dubious accuracy, I prefer to recommend that hospitals look at their processes for determining admission status.  

Named Hirsch’s law, this rule dictates that if every patient a) is reviewed by case management, with the use of a secondary physician review as appropriate for proper admission status; b) is placed in the right status; c) receives observation services only when appropriate; d) goes home as soon as their need for hospital care has finished; and e) is admitted as an inpatient if medical necessity  for a second midnight exists, then the hospital’s observation rate is exactly where it should be. If all those procedures are not being done, rather than trying to fix a rate, the hospital needs to fix its processes. Unless the emergency department (ED) closes at night and on weekends, the hospital needs to have utilization review (UR) staff in the ED at night and on weekends. If doctors round on evenings, the hospital should have UR staff available to ensure that the correct status is designated. The only other way to change the rate without changing the process is to cheat.

The two-midnight rule has changed the financial outlook for hospitals. Those hospitals that had a large number of one-day inpatient stays prior to the rule are going to see a decline in revenue. Those hospitals that kept a lot of patients who required hospital care in outpatient status with observation for several days because they never met “criteria” for admission will see an increase in revenue. And hospitals that did a bit of each will have an unpredictable change to their revenue. Add onto that the effects of the new comprehensive ambulatory payment classification (APC) for observation services, which raised the payment by 84 percent but bundled all services into the APC, and the uncertainty increases.

But the answer to this uncertainty is not to demand fewer observation patients. Instead, it’s to ensure that all patients are in the correct status and then work with legislators and CMS to get the payment rates changed.

This article was previously published on RAC Monitor.  Used with permission from Dr. Hirsch.