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Two-Midnight Rule

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PREPARE FOR IMPACT: Two-Midnight Rule Enforcement Begin March 2015

The Two-Midnight Rule calls for physicians to make only “medically necessary” inpatient admissions. Under the rule, inpatient (IP) admission is generally appropriate if the admitting physician expects patient care to require a hospital stay of at least two midnights. Regardless of length of stay, IP admission is also deemed appropriate for cases involving procedures on Medicare’s inpatient-only list. In such cases, however, the necessity of service, site and level of care must also pass the audit.

CMS’s central goal with the Two-Midnight Rule is to cut back on extended observation stays in hospitals, which have grown rapidly in recent years. Under the final rule, hospital stays of less than two midnights will be reimbursed at the Observation Rate rather than the Inpatient Rate.

To comply with the Two-Midnight Rule, medical records must include progress notes and other clinical documentation to support IP admission. This includes such things as patient history, comorbidities, severity of symptoms, current medical needs and risk of an adverse event. The medical record must also include an inpatient admission order and physician certification. During an audit, if documentation is insufficient, the case will automatically become an outpatient case.

Assessing and Minimizing Risk

As enforcement of the final rule approaches, many hospitals are taking steps to assess their financial risk. But doing so isn’t necessarily easy. Because observation utilization varies greatly between hospitals, it can be difficult to estimate key factors, like how many observation cases will be admitted and how many one-day stays will revert to observation.

That said, there are currently two studies, based on retrospective review, that indicate a loss in inpatient admissions and revenue with the Two-Midnight Rule. According to a University of Wisconsin study, there will be a shift of 7.4% from Inpatient to Observation status, while a study by King and Spaulding showed a reduction of 6.7%. Based on the more conservative 6.7% estimate, G2 Works developed a Two-Midnight Rule Impact Calculator, which can be used—as a starting point—to assess the net loss a hospital might avoid with an aggressive Two-Midnight Rule preparedness plan.

The economic impact of the Two-Midnight Rule underscores a need for improved data analytics. Specifically, hospitals can use data analytics to identify specific areas to target to reduce financial risk associated with the rule. But data analytics alone are not enough. Developing sustainable strategies for minimizing risk requires a clear understanding of the rule’s complex regulations, the operational challenges they pose, and how a hospital manages its observation patients in general.

To prepare for an audit and avoid substantial penalties that may result from the Two-Midnight Rule, hospitals must act now to conduct internal reviews, identify areas of risk, and develop and implement solutions.

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