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The House Ways and Means Committee hearing on Tuesday, May 21, 2014, which was intended to allow representatives from the Centers for Medicare & Medicaid Services (CMS), the U.S. Department of Health and Human Services Office of Inspector General (OIG), and invited experts to testify about the two-midnight rule, access to skilled nursing benefits, and the Medicare appeal process and to allow members of Congress the opportunity to question them, turned into a confusing mess of out-of-date and misleading statistics combined with issues that had nothing to do with the topics at hand.

After only a few weeks on the job, the deputy administrator of CMS did an excellent job in his testimony explaining the rules and the request for public comment on alternative payment structures. But once the OIG representative read her remarks, the journey into confusion began. She made three key points: short inpatient stays were often for the same purpose as observation stays, but CMS paid three times as much for the inpatient stays; beneficiaries paid more for short inpatient stays than for observation stays; and hospitals varied widely in their use of short inpatient and observation stays.

The critics of the two-midnight rule used these points to argue that the two-midnight rule did not simplify things as CMS promised but only continued the confusion and contradictions. Unfortunately for the critics, as was noted in the written testimony posted prior to the hearing, these facts all applied to data collected by the OIG prior to the use of the two-midnight rule, so they became obsolete on October 1, 2013. The OIG committed to looking at the impact of the new rule, but has not yet done so.

The qualification for the Part A Skilled Nursing Facility (SNF) was also addressed, with examples of beneficiaries who spent several days in the hospital as observation and then unexpectedly received enormous bills for their non-covered SNF stay. Once again, these cases are the result of the prior rules for admission and observation; under the two-midnight rule, a patient who needs hospital care should never spend more than one midnight in the hospital as observation. One Congressman even presented the case of an elderly beneficiary who was not able to manage at home and “the doctor knew she needed to be in a SNF but he had to admit her to the hospital to get her access to the SNF.” It is unfortunate that no one pointed out that it appeared that this beneficiary, who seemed to need long-term custodial care, did not qualify for the part A SNF benefit and admission to the hospital for the sole purpose of gaining access to that benefit is fraud. Medicare does not pay for long-term care in SNFs; if Congress wants beneficiaries to have access to that benefit, they will need to pass legislation and fund it. Fortunately, it was pointed out that there are demonstration projects through the Pioneer Accountable Care Organizations that allow qualified patients to go directly to the SNF, and that, in time, data from that project will help CMS reevaluate the process for the part A SNF.

The hearing then took a strange detour, as one Congressman started discussing the high quality of care in physician-owned hospitals and the prohibition of such hospitals under the Affordable Care Act, and another Congressman rigorously questioned the propriety of the Nantucket Cottage Hospital designation as a rural hospital, which increased reimbursements for every hospital in Massachusetts and lowered reimbursement for every other state. In these instances the deputy administrator of CMS sounded relieved to be able to explain that he was new to the job and would look into the issues, avoiding any public confrontation.

Once back on track, the questioning continued and, as noted in the May 21 RACmonitor article, the drastic differences in appeal rates and the lengthy delays in the appeal process were discussed ad nauseam, with all seeming to agree that the current delays are unacceptable and more oversight of the auditors is necessary. There was also testimony from hospital representatives, including Amy Deutschendorf, senior director of clinical resource management at Johns Hopkins Hospital in Baltimore, who testified “adding a new layer of complexity… and required our physicians to become soothsayers as they try to project” the estimated length of stay. And Ann Sheehy, MD, from University of Wisconsin Hospital, presented a case of a patient with diabetic ketoacidosis who required expensive, intensive services but improved quickly as an example of a patient who would be treated as outpatient under the new rule.

Putting aside the odd transgressions by the two Congressmen, it is abundantly clear that we are all talking apples and oranges mixed in with contradictions. The OIG presents old data and it gets used in new arguments. CMS uses appeal data based on all denials of any type, yet hospitals are mainly concerned about their high-dollar inpatient admissions and not the rounding errors found in many audits. Congressmen plead for expansion of SNF access but would never consider approving the expenditures. And famed university hospitals are clearly misinterpreting the two-midnight rule.

The two-midnight rule is not perfect, but it makes sense. The calendar changes at midnight, so it is easy to operationalize. Some one-midnight observation stays will be 47.5 hours, but some will be 24.5 hours; it will all balance out. Doctors do not need to forecast the future; they need to use their years of experience caring for patients and document better what concerns them and what they plan to do for the patient.

Studies have shown that better documentation leads to better patient care and better patient outcomes, so improving documentation should be stressed.

If the doctor’s estimated length of stay is wrong, that’s okay; CMS rewards hospitals for getting people well quicker than expected by paying the full Diagnosis Related Grouping (DRG) payment—as long as the initial physician reasoning was rational. And as mentioned previously, there should no longer be any long observation stays that do not qualify the patient for part A SNF coverage, unless the patient is being hospitalized as a convenience, in which case that portion of the stay would not be medically necessary and the patient could be held financially responsible by presenting an Advance Beneficiary Notice (ABN).

The real issue most hospitals have is not with the rule itself but with the associated reimbursement. The OIG states that pre-two-midnight reimbursement for the average observation stay was $1,741 and for a short inpatient stay it was $5,142. While the OIG paints these numbers by stating that “Medicare paid nearly three times more for a short inpatient stay than an observation stay, on average,” the reality is that Medicare drastically underpays hospitals for outpatient stays. For example, an outpatient laparoscopic cholecystectomy reimbursement is $3,600, but if the patient spends one extra night in the hospital and is properly admitted as an inpatient, the hospital is reimbursed over $10,000. The bulk of the expense of the hospitalization is incurred the first day, during surgery and recovery, yet the extra day, when the patient is in a hospital bed receiving IV fluids and pain medications, adds over $6,000 to the reimbursement. Likewise a patient with a transient ischemic attack who is placed in observation for a day and has the bulk of their diagnostic testing performed results in a payment of about $2,000, but if the doctor determines that that patient requires another midnight of monitoring with no testing and admits the patient, the hospital will get an additional $3,000. Most services occur on the first day, so payment should be “front-loaded,” as with payments for inpatient transfer DRGs.

So what CMS really should consider, rather than coming up with another rule, is leaving the two-midnight rule in place and fixing the payment scheme to cover the cost of providing the care so that hospitals will be much more fairly paid.

Next, CMS should mandate an outpatient “Important Message from Medicare” that explains the difference between being an outpatient and an inpatient, along with the rules for inpatient admission and for accessing their part A SNF benefit. In addition, CMS should task the Quality Improvement Organizations with handling appeals of observation status. We cannot have patients being told to “ask to be admitted as an inpatient” and portraying hospitals and doctors as the bad guys when they follow CMS rules.

And finally, CMS needs to provide more oversight of the performance of the Recovery Audit Contractors (RAC) and the Medicare Administrative Contractors (MACs). If the results of the Probe and Educate audits by the MACs, with their unusual interpretations of the two-midnight rule, are any indication, we are in for a real mess once the RACs resume auditing.

The appeal process is broken and needs repair, but the best way to avoid an overloaded appeal process is to get everyone using the same simple rulebook.

About the Author

Ronald Hirsch, MD, is a vice president of the Regulations and Education Group at Accretive Physician Advisory Services at Accretive Health. Dr. Hirsch’s career in medicine includes many clinical leadership roles at healthcare organizations ranging from acute care hospitals and home health agencies to long-term care facilities and group medical practices. In addition to serving as a medical director of case management and medical necessity reviewer throughout his career, Dr. Hirsch has delivered numerous peer lectures on case management best practices and is a published author on the topic.

He is a member of the American Case Management Association and a Fellow of the American College of Physicians.

Contact the Author


To comment on this article go to editor@racmonitor.com


Knicole C. Emanuel Esq.

For more than 20 years, Knicole has maintained a health care litigation practice, concentrating on Medicare and Medicaid litigation, health care regulatory compliance, administrative law and regulatory law. Knicole has tried over 2,000 administrative cases in over 30 states and has appeared before multiple states’ medical boards. She has successfully obtained federal injunctions in numerous states, which allowed health care providers to remain in business despite the state or federal laws allegations of health care fraud, abhorrent billings, and data mining. Across the country, Knicole frequently lectures on health care law, the impact of the Affordable Care Act and regulatory compliance for providers, including physicians, home health and hospice, dentists, chiropractors, hospitals and durable medical equipment providers. Knicole is partner at Practus, LLP and a member of the RACmonitor editorial board and a popular panelist on Monitor Monday.

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