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Translating ‘two midnights'

Understanding the new observation status regulations

From the December ACP Hospitalist, copyright © 2013 by the American College of Physicians

By Stacey Butterfield

The Centers for Medicare and Medicaid Services (CMS) probably had good intentions in redefining the difference between inpatient and observation, but the rule that went into effect on Oct. 1 may not have the intended results, according to experts.

“I think that their genuine goal is to provide more clarity and actually make things more straightforward,” said Ralph Wuebker, MD, chief medical officer of Executive Health Resources, a provider of physician advisor services based in Newtown Square, Pa.

Image by Thinkstock.

Image by Thinkstock.

“Simplify it, and decrease the financial responsibilities of Medicare beneficiaries,” agreed Matthew P. Landler, MD, ACP Member, physician advisor, medical director of quality and utilization and a hospitalist at Northwestern Memorial Hospital in Chicago.

However, Ann M. Sheehy, MD, division head of hospital medicine at the University of Wisconsin Hospital in Madison, believes that CMS's attempt to fix the existing rule is going to create new problems. She and other hospitalists have concerns about several aspects of the new regulations.

First, there's the new “2-midnight rule,” which, explained simply, asks physicians to predict whether a patient will stay in the hospital for 2 overnights and hospitalize the patient as observation or inpatient based on this judgment (along with medical necessity). Then, for patients who are admitted as inpatients, there are new requirements for documentation and certification by physicians.

And then there are the aspects of observation status that already troubled hospitalists and have not been cleared up by the new regulations, including the meaning of medical necessity. “A lot of technicalities have not really been smoothed out, so there's still a lot of confusion surrounding the whole thing,” said Dr. Landler.

With the new regulations just implemented, even experts on the subject are confused, but they did offer ACP Hospitalist their best interpretations and predictions.

Need for change

Before the new rule was issued, the medical community almost universally agreed that the regulations regarding observation status needed revision. In July, the Office of the Inspector General (OIG) issued a report finding wide variation in the use of observation status.

The higher out-of-pocket costs associated with observation stays had also drawn media attention, raising awareness of the concept among patients. “Three years ago, no one knew any of this terminology,” said Dr. Landler.

Today, “you're seeing more and more patients who are associating observation care with financial ruin,” said Christopher Baugh, MD, MBA, medical director of the emergency department observation unit at Brigham and Women's Hospital in Boston.

“My colleagues are reporting to me that they are proposing an observation plan which is medically justifiable, and the patients are saying, ‘I'd rather go home and die than stay here and be an observation patient,’” said Dr. Baugh, noting that newspapers have described patients being charged $20,000 or more for an observation stay, typically involving subsequent skilled nursing facility care.

Although the anecdotes are scary, the very long observation stays that rack up tens of thousands in out-of-pocket costs are actually quite rare, Dr. Baugh noted. The OIG report found that beneficiaries actually paid less on average for observation stays than inpatient stays (an average of $401 per stay vs. $725 per stay).

Long observation stays, and the associated costs to patients, were one of the issues that the 2-midnight rule was designed to remedy. It seemed logical that redefining observation status as less than 2 midnights should fix the problem.

Unintended consequences

But it's not that simple, experts say. Under the new rule, some patients will still be in the hospital for 2 days or more without qualifying for inpatient status. “It doesn't seem like spending 2 midnights is both necessary and sufficient [to CMS] to be able to bill as an inpatient. You also have to have the medical necessity piece in order to justify it,” said Dr. Baugh.

The challenge of understanding when inpatient care is a medical necessity was not made resolved by the new rule. CMS continues to be “really vague,” said Dr. Baugh. “They've even gone so far as to say you don't need to explicitly follow one of the third-party criteria like Interqual and Millman. But then if you don't need to do that, what do you need?”

The rule does contain some new insight on necessity for inpatient status, though. To Ronald Hirsch, MD, FACP, a vice president at Accretive Health Physician Advisory Services in Chicago, one sentence in particular stuck out: “The crux of the medical decision is the choice to keep the beneficiary at the hospital in order to receive services or reduce risk, or discharge the beneficiary home because they may be safely treated through intermittent outpatient visits or some other care,” CMS wrote. “That is actually the most important sentence in the whole 2,200 pages,” he said.

Based on these criteria, it's certain some patients who stay in the hospital past 2 midnights won't have medical necessity. Dr. Landler offered examples. “The delays in care for the doctor's convenience or the patient's convenience do not count, when tests or procedures might not be available over the weekend,” he said. However, he said, “What to do with patients who aren't quite sick enough to be in the hospital but don't have somewhere else to go, or the patient undergoing a psych evaluation or a thorough social services evaluation?”

In addition to not eliminating the high costs for these long-staying observation patients, the new rule could have a more negative financial impact, on hospitals and other patients, than CMS predicted. Assuming that hospitals would be billing more visits as inpatient instead of observation, the agency included a 0.2% reduction in diagnosis-related group (DRG) payments.

But in an analysis of past admissions at her hospital, Dr. Sheehy found that the 2-midnight rule would actually increase the number of observation stays, because currently many patients are admitted as inpatients for less than 2 midnights. “We found that we have far more patients who are short-stay inpatients than long-stay observation. That's a major problem with the rule,” she said. “These short-stay inpatients are really going to be left behind” in the effort to reduce costs for patients, since they will end up paying more.

Perhaps even more than the patients, the hospitals will suffer financially from these changes in status. Dr. Sheehy's research, published by JAMA Internal Medicine on Aug. 26, calculated that her hospital would lose $14.6 million in reimbursement per year due to the reclassification, not even counting the 0.2% cut.

Her findings confirmed other experts' suspicions. “Most hospitals, I think, are going to see a negative impact on their observation/inpatient revenue,” said Dr. Wuebker. “There's a strong likelihood, maybe not 100%, that there could be a negative financial impact on the patient as well.”

Status changes

Regardless of whether the patients' bills are bigger, some of them will be coming later, Dr. Wuebker said. “I was sent home 6 months ago, and all of a sudden, this new bill's going to show up,” he predicted patients saying. “That is not going to make the patient happy,” he said.

From the physician perspective, that change may actually be one of the positive aspects of the new rule. The new rule allows hospitals, after consultation with the attending physician, to switch a patient's billing status from Medicare Part A (inpatient) to Part B (outpatient/observation) during a self-audit after discharge.

In the reverse situation, where a patient starts out in observation and a physician wants to admit him as an inpatient, the new rule just applies the medical necessity requirement. “Even though it's far from perfect, and no one's truly happy with it, it makes it easier to switch from observation status to inpatient than it was before, as the nights in observation status count toward the 2-midnight rule,” said Dr. Landler.

These refinements of the observation status rule will make little sense to patients, who expect that being cared for in the hospital means they're admitted to the hospital, said Judith Stein, JD, executive director of Center for Medicare Advocacy, a nonprofit organization based in Washington, D.C., that represents Medicare beneficiaries. “It's really Alice in Wonderland,” she said. “They don't get it.”

In some cases, the 2-midnight rule makes the observation/ inpatient classification even more nonsensical than it was before, the experts noted. “A patient who stays for 25 hours could qualify as an inpatient, another who stays for 47 hours may not because of when their arrival to the hospital relates to midnight—it doesn't make sense that one is treated differently than the other,” said Dr. Baugh.

Confusing things further, for patients who are near the 2-midnight cutoff, the new rule reverses hospitals' traditional incentive to reduce length of stay, because both the hospital and the patient could be financially better off if the patient attains inpatient status. “If they could go home, but maybe another night in the hospital would be OK, I'm likely to recommend that patient stay now, whereas before, I would have probably tried a little harder to have that patient go home,” Dr. Sheehy said.

Some hospitals and clinicians may change their practice to take advantage of this potential profit, said Dr. Wuebker. “The new rules may open up the system for manipulation and gaming now more than ever,” he noted.

Of course, care decisions should still be based on the patient's need for care, not financial incentives, the experts agreed. “At our hospital, we're telling people to still deliver the care exactly as they would previously and just make sure that we document everything we're doing and seeing that would justify 2 midnights,” said Dr. Sheehy.

Documentation dilemmas

Documentation requirements are another important, and not totally clear, aspect of the new rule. Under the rule, a physician must order that a patient be either admitted to inpatient status or referred for observation. If the patient is being admitted as an inpatient, the attending physician is required to document and certify the admission's medical necessity.

“That created a problem for a lot of academic institutions, where residents handle admissions,” said Dr. Wuebker.

“Our biggest stumbling block right now is this question,” confirmed Dr. Landler. “We're not sure if you can put in the chart, ‘Discussed with Dr. X and admitted to his service based on the discussion’ or does Dr. X have to go back and formally co-sign the order? Getting them to co-sign the orders would be quite challenging.” It's also uncertain how much time physicians would have to go back and sign these orders, experts said.

Guidance on this issue may be forthcoming from CMS, predicted Dr. Wuebker. “CMS will likely clarify or slightly modify some physician signature and certification requirements,” he said.

More clarification on the rule and its enforcement are generally needed, the experts agreed. “The regulations and what the auditors have targeted have not always been consistent in the past,” said Dr. Wuebker. “If Medicare says it's really imperative that you follow Rule A, and the auditors go after Rule B, hospitals will put emphasis on Rule B.”

It could be a long, potentially costly wait for this information, according to Dr. Hirsch. “The initial audits are going to be [Medicare Administrative Contractor] audits and they are going to be limited. We may be waiting 6 months or a year, until the [Recovery Audit Contractor] picks one for auditing, and then we have a whole year of past cases that are at risk,” he said.

By that point, hospitals, patients and payers will have had a chance to see the effects of the new regulation. “If the 2-midnight rule ends up not doing what CMS hopes, and you still see this big growth in long observation stays, then I think that reopens the conversation around some other fixes to limit excessive patient costs for observation care,” said Dr. Baugh. “It's a dynamic landscape. It could change again next October 1.”

But don't count on the rule going away, even if things don't work out perfectly. “CMS had a comment period,” said Dr. Wuebker. “CMS addressed most of the concerns in the final rule and essentially kept it exactly the way they initially designed it. … I don't think there's going to be any backing down or withdrawal of the new program.”

The agency did make the concession of delaying full-scale audits of short stays until April 1, 2014. “We're quite thankful for the transition period,” said Dr. Landler.

Actionable advice

However, physicians shouldn't let the delay make them complacent about changing practice to comply with the new regulation. “If you're thinking you can run away from it or avoid it, that's not the case at this point. Get it correct, for your sake, the hospital's sake, [and] especially the beneficiary's sake,” Dr. Landler said.

The specifics of how to get it right will probably vary by hospital. “Talk to your case management and utilization people to get the necessary bullet points. Follow their instructions, most importantly on how to get the proper order in, and how to get the order authenticated properly, and how to get your certification in,” said Dr. Landler.

In general, detailed documentation should help ensure reimbursement. “Audits are being done by nurses and therapists with very little physician oversight, so it's imperative that [hospitalists] put on paper exactly what's going on inside their head when they evaluate a patient—what they're worried about, what they're thinking about doing, what risks they see,” said Dr. Hirsch.

The experts also offered some advice on the continuing challenge of providing observation care.

One of the major costs to patients on observation status is medications charged at the hospital rate. “Things like eyedrops or inhalers can be as much as $80 a dose in some cases. Some patients are on 12 or 15 medications. If they're in observation status for 36 hours, and they need multiple doses, they can get a big bill for essentially just their home medications,” said Dr. Baugh.

Ideally, he'd like CMS to make those medications a covered benefit (Dr. Baugh coauthored an article in the July 25 New England Journal of Medicine suggesting this change as well as a cap on patients' observation costs equal to their inpatient coverage deductible).

In the interim, physicians could encourage patients to bring their medications from home when they come to the hospital. “That's a tricky thing, because then you have to make sure they're taking the proper pills from the proper bottles,” said Dr. Landler.

Hospitalists can also help observation patients by treating them differently than admitted patients, Dr. Baugh advised. “You should not have the same inpatient model of care for those patients as your inpatients. The temptation for the hospitalist is to prioritize by acuity of illness,” he said.

But that results in observation patients falling to the bottom of the list and often staying in the hospital longer than necessary. Hospitalists should see these patients sooner to assess their readiness for discharge and make sure that the discharge process is efficient for them, Dr. Baugh noted. “Using an inpatient discharge module that takes 2 hours to fill out for an observation patient doesn't make sense,” he said.

And while making sense is probably not a term anyone would choose to describe the current observation status system, hospitalists who aim for that goal shouldn't run into too many problems with the new rule, according to the experts. “If you practice good medicine, document well in the progress notes and sign the order, everything else is going to essentially take care of itself,” said Dr. Wuebker.



SNF coverage stays the same

While the Centers for Medicare and Medicaid Services (CMS) made major revisions to observation status, it stayed silent on one of the biggest changes desired by hospitalists—expanding skilled nursing facility (SNF) coverage.

Under the current law, patients are still required to spend 3 days as inpatients to qualify for SNF coverage after discharge. “CMS essentially left the 3-midnight problem alone,” said Ralph Wuebker, MD, chief medical officer of Executive Health Resources in Newtown Square, Pa.

Many physicians and physician groups, including ACP, have publicly supported changing this policy to provide SNF coverage for observation patients. The current rule dates back to the founding of Medicare in 1965, when hospital lengths of stay were much longer.

“It was contingent on having what was then a very short-term hospital stay. Now 3 days in the hospital is a fairly long time, especially when observation days don't count,” said Judith Stein, JD, executive director of the Center for Medicare Advocacy in Washington, D.C.

There are multiple reasons the agency may have refrained from addressing this issue, starting with the cost. “The amount of additional dollars it would cost makes the desired change pretty unattractive,” said Dr. Wuebker.

The cost would be particularly high if a rule change encouraged physicians to keep patients in the hospital just to gain SNF coverage. “[Picture] a failure-to-thrive situation, where it's time for them to move to a nursing home—the patient will come in and be classified as observation and they'll wait 3 midnights and transition to a nursing home, and Medicare will be on the hook,” said Dr. Landler.

The other obstacle to change is that CMS has said that SNF coverage is a legal issue, rather than a regulatory one. “Congress has to do the 3-day stay,” said Ann M. Sheehy, MD, division head of hospital medicine at the University of Wisconsin Hospital in Madison.

That's why she and other physicians have been lobbying their representatives in support of a bill to change SNF coverage, which currently has more than 100 co-sponsors. “It doesn't get rid of observation as a whole but counts any time that you spend in observation towards your inpatient time, which will more frequently allow transition to nursing homes,” said ACP Member Lauren Doctoroff, MD, a hospitalist at Beth Israel Deaconess Medical Center in Boston.

Despite the many sponsors, the bill's prospects are uncertain. “For the past 3 years, there's been a bill in Congress, a bill in committee, a bill somewhere,” said Dr. Wuebker. “But it always either dies…or gets pended.”

Dr. Sheehy, for one, is still hopeful about the prospects of expanding SNF coverage. “If [Congress] could work on that piece of it, Medicare works on the other piece of it, then we could get back to something that's reasonable for observation status,” she said.


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