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Two-Midnight Rule 2016This July, the Centers for Medicare and Medicaid Services (CMS) issued the 2016 Proposed Rule for the Medicare Program covering Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Short Inpatient Hospital Stays; Transition for Certain Medicare-Dependent, and Small Rural Hospitals Under the Hospital Inpatient Prospective Payment System. Though the proposed rule includes expected annual modifications to Medicare payments, a major highlight is the changes proposed to the two-midnight rule, which will significantly impact hospital medical coding in 2016.

Two-Midnight Rule and Its Impact

The Two-Midnight Rule that was adopted with effect from October 1, 2013 was not well accepted by providers and confused them so much that CMS suspended enforcement under its RAC (Recovery Audit Contractor) program. As per the rule, a patient is considered appropriate for inpatient admission under Medicare Part A if the admitting physician expects the patient’s hospital care to cross at least two midnights. Services to patients who do not require two midnights’ inpatient care must be billed as outpatient services. This involves substantial difference in payments received.

The new rule strongly affected hospital payments as many patients shifted from inpatient to observation status. Medicare reimbursement for inpatient stays is two to three times higher than that for outpatient stays on average and this caused a significant drop in revenue. The increase in observation stays has resulted in lower hospital admissions and reduced inpatient volumes. Further, patients who are under observation care will not be eligible for Medicare-covered nursing and rehabilitation services as they would require three nights stay as a hospital inpatient. The two-midnight policy is also compelling hospitals to closely evaluate their treatment for patients who require a couple of days at the hospital.

A guidance document that CMS published subsequent to the rule directs that “rare and unusual” exceptions could be made to allow payment under Part A, even in cases where the patient stayed at the hospital for less than 2 midnights.

Healthcare providers had fought for greater regard to physician decision making, and the Proposed Rule takes that into account.

Proposed Changes

Payment on a Case-by-Case Basis

The proposed rule (if finalized) will allow for Medicare Part A payment on a case-by-case basis for inpatient admissions that do not meet the requirements of the two-midnight rule, only if the documentation in the medical records supports either of the following  criteria:

  • The admitting physician reasonably expects that the concerned patient will require hospital care for at least two midnights.
  • Determination of the admitting physician based on certain factors that the patient needs formal admission to the hospital on an inpatient basis.

The following factors are also relevant to determine whether an inpatient admission where the patient stay is expected to be less than 2 midnights would be appropriate for Part A payment.

  • The severity of the signs and symptoms shown by the patient
  • The medical probability of some adverse event happening to the patient
  • The need for diagnostic studies that appropriately are outpatient services (their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more)

Elimination of Routine RAC Audits

CMS rule also proposes for the elimination of routine RAC audits to scrutinize two-midnight decisions. As per the proposed rule, the responsibility of reviewing short inpatient stays will be shifted to Quality Improvement Organization (QIO) contractors. RAC auditing is done for those providers recommended by the QIO for high denial rates, constant failure to adhere to the requirements of the two-midnight rule, and not improving performance even after QIO educational intervention.

The proposed rule does not entirely revoke the two-midnight timeframe. So, you should be very careful with your overall clinical documentation including medical billing and coding. Providers must remain well-trained in current documentation standards, methods and tools as well as ensure consistent documentation review in the light of the proposed rule. Make sure to give special focus to documenting reasonableness and medical necessity.