12/08/2014 09:51 am ET Updated Feb 07, 2015

Midnights and Medicare

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Co-authored by Brittany La Couture, AAF's Health Care Policy Analyst

It can be dangerous to put important life decisions on a clock. Medicare has proven that it is even worse to make decisions solely by the clock.

It costs more for a hospital to admit a patient for surgery than to suture a cut finger and send the patient home, so it is intuitive that Medicare should, and does, reimburse more for inpatient stays than for outpatient care. It also makes sense to safeguard the taxpayer against improper billing of (inexpensive) outpatient care as (expensive) inpatient treatment. Medicare Recovery Audit Contractors (RACs) are firms hired to detect and correct improper Medicare claims. Hospitals that bill for an inpatient status when outpatient status would suffice are liable to be audited, and will forfeit the inpatient reimbursement.

Unfortunately, patients do not naturally divide cleanly into "inpatients" and "outpatients." Instead, they present a continuum of conditions and symptoms that evolve in complex ways. As a result, auditing admission decisions is complicated and messy. In an attempt to simplify and streamline the audit process, the Centers for Medicare and Medicaid Services (CMS) issued a proposed regulation known as the 'Two Midnight" rule: RACs should automatically consider a person an "inpatient" if the hospital stay spans two midnights; all other hospital visits billed as inpatient are subject to audits.

The well-intentioned idea was to get the right care and save Medicare dollars. The reality is exactly the opposite.

The rule distorts the incentives to provide the right care. Patients deemed inpatient may be held too long--inconveniently or inappropriately--in order for their stay to encompass two midnights. Or, patients may be designated as outpatient or on observation status despite receiving a level of care commensurate with inpatient status. This changes Medicare reimbursement from Part A to Part B, so those patients would be burdened by the full cost of their post-acute care costs because Medicare only covers these costs after an inpatient hospital stay. This would leave the patient ineligible for Medicare coverage of any skilled nursing care or maintenance drugs received from the hospital as a result of the episode. In either event, the quality of patient outcomes may suffer.

Consider short-term inpatients and observation patients. They stay at the hospital comparable amounts of time, but the former's medical needs may require inpatient status and therefore make the hospital susceptible to an audit, while the latter's do not. Based on time at the hospital, they are equivalent, but a 2013 study by the University of Wisconsin School of Medicine and Public Health found "little overlap in diagnosis codes between short-stay inpatients and observation patients," indicating a clinical justification for assigning short-stay patients as inpatients.

Furthermore, the University of Wisconsin researchers found, unsurprisingly, that time of day and day of the week played a large role in whether or not a patient achieved two midnights. This is at least in part because most hospitals have more limited capabilities at night and on the weekend, so a patient's length of stay may be determined by whether labs are open or specialists are available at the time of check-in more than the severity of the diagnosis.

The rule is simply at odds with the care needs of Medicare beneficiaries. And it's costing taxpayers more Medicare dollars. The same researchers concluded that the Two Midnight rule would likely have the effect of increasing the average length of stay, creating unintended inefficiencies, and increasing the total cost of care both for Medicare and beneficiaries.

On top of that, the rule's unworkability has stopped the RAC audits. CMS declared a grace period from audits while hospitals learn and adjust to the new regulations. This has been successively extended, delaying enforcement until March 31, 2015. Hospitals have a free pass in submitting bills for reimbursement; industry sources project that the cost of suspending the auditing program could be as high as $6 billion.

The Two Midnight rule was well intentioned--streamlining audits of the cost of providing effective care to Medicare beneficiaries. Instead, it is distorting care incentives and costing taxpayers. It is time to get rid of the rule and return to a more rational, medicine-based standard of determining when it is appropriate to assign patients inpatient, outpatient, or observation status.