The “Two-Midnight” rule is a Centers for Medicare and Medicaid Services (“CMS”) billing policy which bases the appropriateness of payments for inpatient services under Medicare Part A versus Part B on provider expectations regarding length of stay.  It  has been a source of controversy since its inception in 2013. In addition to receiving an extended enforcement delay through September 30, 2015, the rule has been debated in Congress on multiple occasions including a House Ways and Means Committee Health Subcommittee hearing on hospital issues in May 2014 and a Senate Special Committee on Aging Hearing in July 2014. Last week CMS responded via a proposed rule that seeks to improve the applicability of the policy and simultaneously demonstrates that the agency continues to stand behind it.[1]

In an effort to address the criticism that the rule is arbitrary and insufficiently flexible to different clinical care needs, CMS has set forth three main categories of change: modifying the existing “rare and unusual exceptions” policy; revising the timing and structure of the review process; and shifting review responsibility for short inpatient stays from Medicare Administrative Contractors (“MACs”) to Quality Improvement Organization contractors (“QIOs”).

Modifying the existing “rare and unusual” exceptions policy: This exception provides for payments for inpatient admissions expected to span less than two midnights under Part A. Medically necessary, newly initiated mechanical ventilation is currently the only such exception. Under the proposed rule, application of the exception would function on a case-by-case basis. Where documentation in the medical record supports an admitting physician’s determination that a patient requires formal admission to the hospital on an inpatient basis, such admission would be payable under Part A despite an expected length of stay that is less than two midnights.

Factors relevant to an analysis of the appropriateness of payment under Part A would include the severity of signs and symptoms, the predictability of an adverse event, and the nature of necessary diagnostic studies.

CMS would also examine claims data in an effort to identify patterns of case-by-case exceptions for which a uniform, national standard might be appropriate. At the same time, CMS notes the existence of certain situations in which payment under Part A is rarely appropriate, such as for a minor surgical procedure or other treatment that is expected to keep a patient in the hospital for only a few hours.

Revising the timing and structure of the review process: These changes acknowledge concerns that, due to the prolonged timing of Part A reviews, providers are unable to rebill denied claims under Part B. The proposed rule limits the recovery auditor “look-back period” for patient status reviews to six months from the date of service in cases where a hospital submits a claim within three months of that date. The proposed rule also places limits on recovery auditor additional documentation requests, encourages the completion of complex reviews within 30-days, and establishes a waiting period between the identification of an error by a recovery auditor and payment adjustments so as to allow a provider to submit a discussion period request. Shifting review responsibility for short inpatient stays from MACs to QIOs: QIOs, comprised of health quality experts, clinicians and consumers, work under the direction of CMS. CMS contends that QIOs are well suited to the new exception strategy because of their expedited appeal processes and quality of care review expertise.

QIOs will refer claim denials to the MACs for payment adjustments. Hospitals found to exhibit a pattern of practice—such as having high denial rates and consistently failing to adhere to the two-midnight rule or failing to improve performance after an educational intervention—will be referred to MACs for further payment audits.

CMS plans to implement this change no later than October of 2015.

CMS is not proposing any changes to the two-midnight presumption, which provides that inpatient claims with lengths of stay greater than two midnights after formal admission are presumed to be appropriate for payment under Part A and are not generally subject to review.

Do the proposed modifications adequately address the criticisms of the “Two-Midnight” rule? This depends, in part, on whether CMS also adopts specific criteria for entities to use in reviewing short-stay claims and, if so, what such guidance entails. Documentation, physician education and internal chart auditing would continue to be key under the proposed modifications, supporting the recognition of claims as “rare and unusual” exceptions pursuant to a case-specific analysis as well as reducing the risk of patterns of practice that could subject a provider to further payment audits.