Determining inpatient versus outpatient admissions—a calculation with many financial implications—may fall to emergency physicians

Update: The Centers for Medicare and Medicaid Services has delayed implementation of the two-midnight rule until after March 31, 2015.

One of the more controversial and confusing changes the Centers for Medicare and Medicaid Services (CMS) made in its Fiscal Year 2014 Inpatient Prospective Payment System (IPPS) is called the “two-midnight” rule. This rule changes the standard for determining whether patients are brought into the hospital as inpatients or kept under observation status, and of course, whether or not such decisions will impact reimbursement. The new rule states that physicians “admitting” patients into the hospital should make a determination at that time whether patients are more or less likely to spend two midnights in the hospital. If patients are likely to spend fewer than two midnights in the hospital, they will be considered outpatients (under observation status). If they are more likely to spend more than two midnights in the hospital, they will be considered inpatients. To make things a little more confusing, the clock begins when patients start receiving hospital services.

What Does All This Mean?

Just like nearly every rule in health care these days, there are significant financial considerations. Many emergency physicians, admitting physicians, and even patients are not aware of the financial implications of whether patients are brought into the hospital under inpatient or observation status. The effect on patients can be profound, with Medicare (under Part A) picking up almost all of the costs of hospital inpatient stays, but shifting the cost of co-pays for tests and medications to patients brought in under observation status (and paid by Medicare under Part B). It is important to note that outpatient stays also do not count toward the three-day inpatient requirement for skilled nursing facility (SNF) coverage. Because Medicare patients may not be able to return home after their hospitalization, the cost of a SNF can be another significant expense Medicare patients might have to bear. Therefore, patients brought into the hospital under observation status are responsible for significantly more of the costs than they would be had they been officially admitted to the hospital as inpatients.

Hospitals also are subject to significant financial implications from the two-midnight rule. Hospitals are under the watchful eyes of Medicare Administrative Contractors (MACs) and Recovery Audit Contractors (RACs), which have been denying short inpatient stays and demanding hospitals repay Medicare for those billed stays. Further, starting Jan. 1, 2014, Medicare reduced the inpatient payment rate by 0.2 percent. This doesn’t seem like much until you apply it to the Medicare price tag of delivering inpatient care. This adds up quickly.

What Is the Logic Behind the Two-midnight Rule?

The number of patients brought into the hospital under observation status staying more than 48 hours mushroomed from 3 percent of all observation cases in 2006 to 8 percent in 2011. This means that many Medicare patients were given bills they didn’t expect. Further, Medicare officials feel that many patients were brought into the hospital under inpatient status, yet were discharged prior to 48 hours. They believe these patients should have been kept in observation status. These are often referred to as “short stays,” and to add some confusion, Medicare officials acknowledge that certain short stay admissions may be warranted. A welcome change from previous ones, this new rule also allows hospitals to rebill some denials when the inappropriate status was selected.

In an effort to reduce RAC denials of short stays, CMS attempted to establish a clear rule to determine which short stays are appropriate for inpatient (Medicare Part A) payment and which should be relegated to outpatient (Medicare Part B). This rule is estimated to increase the number of patients officially admitted to the hospital under inpatient status and decrease the number placed in observation status.

Hospitals face significant financial implications from the two-midnight rule. They are under the watchful eyes of MACs and RACs, which have been denying short inpatient stays and demanding hospitals repay Medicare.

Why Might This Involve Emergency Physicians?

Hospital administrators often look to emergency physicians to guide whether patients should be admitted or kept in observation status. The CMS rule contains a provision that includes emergency physicians in the list of providers who can make admission decisions. Hospitals decide who can admit patients. ACEP has appealed to CMS with regard to emergency physicians “certifying” medical need for admission of patients for whom they do not provide inpatient care. The new rule does state that physicians making the decision should clearly indicate why patients require inpatient stays and support that decision by “medical factors,” including patient history, presence of comorbidities, signs and symptoms, current patient-care requirements, and the risk of adverse events during the hospital stay. The rule also implies that emergency physicians could write the orders and make the determination as long as admitting physicians or their designees authenticate that order prior to discharge.

CMS has specifically directed MAC auditors not to count the time spent in the emergency-department (ED) waiting room or triage area. However, care delivered in the ED will count toward determining whether patients’ stays cross the two-midnight standard.

Leading up to March 31, 2014, MAC auditors will conduct a “probe and educate” program by doing a pre-payment review of a sample of stays fewer than two midnights and educating providers having difficulties with the new rule.

However, because implications of the regulation mean potentially millions to each hospital and because a high percentage of hospital admissions come through the ED, emergency physicians will likely play a pivotal role in designating patients for inpatient versus outpatient status.

Paul Kivela, MD, MBA, FACEP, is managing partner at Napa Valley Emergency Medical Group, medical director of Medic Ambulance, and part owner of Elan Medical Corporation. He is also the secretary-treasurer of the ACEP Board of Directors.