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2-Midnight Rule Finally Final and Effective January 1, 2016

on Monday, 7 December 2015 in Health Law Advisory: Zachary J. Buxton, Editor

On November 13, 2015, CMS published as a final rule its latest iteration of the 2-midnight rule, the standard for billing inpatient services under Part A of the Medicare program.

As background, the 2-midnight rule was initially proposed by CMS in 2013, in response to two perceived issues:

  1. The Recovery Audit Contractor (RAC) program had identified high error rates for hospital services rendered on an inpatient basis as opposed to outpatient (considered medically unnecessary).
  2. Out of hospitals’ caution to avoid RAC reclassifications of inpatient admissions, there was a marked increase in observation bed services for what otherwise appeared to be inpatient services. This was problematic for Medicare beneficiaries who needed a three-day inpatient hospital stay in order to qualify for Part A skilled nursing services.

Generally, the 2013 payment guidance specified that a hospital inpatient admission would be considered reasonable and necessary if a physician ordered the admission based on the expectation that the Medicare beneficiary’s length of stay would exceed two midnights or if the beneficiary required a procedure specified by Medicare as “inpatient only.” If a hospital stay crossing two midnights was not expected by the admitting physician, the hospital services would be paid on an outpatient basis.

As finalized in the regulation codified at 42 C.F.R. section 412.3, the physician’s expectation of length of stay should be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. These factors must be documented in the medical record to support the physician’s admission decision (expecting hospital care crossing two midnights). If an unforeseen circumstance, such as patient death or transfer, occurs resulting in a stay less than the anticipated two midnights, the admission may still be considered appropriate based on the physician’s documented expectation.

Most significantly in this final rule, the 2-midnight rule now includes an exception to be allowed on a case-by-case basis, allowing the physician to admit the Medicare beneficiary to inpatient care even though he/she does not anticipate that the hospital stay will cross two midnights, if the admitting physician determines and documents that inpatient care is appropriate and medically necessary. The criteria in this analysis are as follows:

  1. The severity of the signs and symptoms exhibited by the patient;
  2. The medical predictability of something adverse happening to the patient; and
  3. The need for diagnostic studies that appropriately are outpatient services (that is, their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more).

These inpatient cases in which a hospital stay of less than two midnights is anticipated by the physician will be subject to medical review by the quality improvement organization (QIO). CMS has noted in its comments that it expects that stays under 24 hours will rarely qualify for an exception to the 2-midnight benchmark.

CMS refers to a 2-midnight “benchmark” and a 2-midnight “presumption.” The benchmark refers to the starting point of when the beneficiary begins receiving hospital care either as a registered outpatient or after inpatient admission. While a physician order is still required for admission, the measurement of time for purposes of his/her expectation of the care crossing two midnights begins at the time any hospital services commenced. The presumption refers to an inference that inpatient hospital claims with lengths of stay greater than two midnights after the formal admission (following the order) are presumed to be appropriate for Medicare Part A payment and are not the focus of medical review efforts, absent evidence of systematic gaming, abuse or delays in the provision of care in an attempt to qualify for the 2-midnight presumption.

In response to AMA concerns that the 2-midnight rule interferes with physician clinical judgment, CMS noted that the admitting physician retains clinical judgment regarding the need to keep the beneficiary at the hospital, to order specific services, or to determine appropriate levels of nursing care or physical locations in the hospital facility. Further, CMS notes that the documentation requirements supporting admission are consistent with longstanding documentation requirements which predated the 2-midnight rule.

MedPac expressed concern that hospitals could lengthen hospital stays to avoid scrutiny and in order to gain the benefit of the 2-midnight presumption (that stays in excess of 2-midnights generally are not subject to medical review). CMS promised to monitor for such patterns of systematic delays indicative of fraud or abuse. Another commenter worried that the proposed policy could create an opportunity for gaming by creating a market for independent parties to create and sell “exception” letters to hospitals that could be used to inappropriately “document” case-by-case exceptions to the 2-midnight rule.

CMS also rejected a popular proposal to reduce the 2-midnight rule to a 1-midnight rule. It took confidence from the comments it received from several major hospital associations in support of the 2-midnight presumption, because it affords hospitals and physicians some certainty that inpatient admissions spanning at least two midnights after admission will generally be considered appropriate for Medicare payment under Part A and will not be selected for medical review.

RAC review of hospitals’ adherence to the 2-midnight rule will be invoked only upon referral by the QIO, after the QIO has identified a high incidence of inappropriate admissions.

Barbara E. Person

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