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Medicare Payments and the Two-Midnight Rule

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Centers for Medicare & Medicaid Services (CMS) previously implemented a rule, known as the Two-Midnight rule, to address vulnerabilities in hospitals’ use of inpatient and outpatient stay designations, including: (i) improper payments for short inpatient stays; (ii) adverse consequences for beneficiaries of long outpatient stays, including that they may not have the required inpatient nights needed to qualify for skilled nursing facility (SNF) services; and (iii) inconsistent use of inpatient and outpatient stays among hospitals.

The Department of Health & Human Services, Office of Inspector General (OIG), in a report released last month, found that CMS paid an estimated $2.9 billion for short inpatient hospital stays that potentially could have been billed as outpatient stays in FY2014. For purposes of the rule, CMS defines a “short stay” as one that lasted less than two midnights and a “long stay” as one that lasted two midnights or longer. OIG, in reviewing this data, determined whether claims information met CMS’s criteria for payment under the rule (e.g. if the stay included an inpatient-only procedure).

The impetus for this review and report boiled down to one main issue: On average, CMS paid three times more for a short inpatient stay than for a short outpatient stay. Conversely, for patients, co-pays are typically higher for outpatient stays.

OIG recommended four modifications to assist CMS in determining the correct designation of stay and payment for such episodes of care: (i) conduct routine analysis of hospital billing and target for review the hospitals with high or increasing numbers of short inpatient stays that are potentially inappropriate under the rule; (ii) identify and target for review the short inpatient stays that are potentially inappropriate under the rule; (iii) analyze the potential impacts of counting time spent as an outpatient towards the required number of impatient nights for SNF services, so that beneficiaries receiving similar hospital care have similar access; and (iv) explore ways of protecting beneficiaries in outpatient stays from paying more than they would have paid as inpatients. OIG believes CMS can improve its oversight of hospital billing under the rule by implementing these recommendations, while at the same time increasing protections, both clinically and financially, for beneficiaries. CMS concurred with OIG’s recommendations.

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