Healthcare News & Insights

AHA’s battle over two-midnight rule rages on

The Centers for Medicare & Medicaid Services’ (CMS) “two-midnight” rule hasn’t been popular with hospitals since way before it went into effect on Oct. 1, 2013. But now the American Hospital Association (AHA) is challenging the rule by filing two federal lawsuits. 

100075940Reason: While the “two-midnight” rule was intended to clarify which patients are sick enough to be admitted as inpatients, it actually reduces hospitals’ pay by driving more patients into outpatient observation care.

And outpatient observation stays:

  • pay hospitals much less under Medicare Part B than inpatient stays pay under Medicare Part A
  • require a 20% copay from beneficiaries, and
  • are often denied Medicare coverage for post-acute rehabilitation care.

Healthcare limbo

Being labeled “outpatient observation” is kind of like being suspended in a kind of healthcare limbo, noted Joe Carlson in a Modern Healthcare article.

Meaning, while these patients actually are spending the night and sleeping in a hospital, they aren’t considered “inpatients.” Instead they’re labeled “outpatient observation.”

In fact, the two-midnight rule requires doctors to certify from the get-go that they have sound reasons to believe that the patient will require at least two nights in the hospital to get better. It’s only when that’s done that Medicare will pay inpatient hospital rates for patient care.

Tough battle

In addition to the AHA, three other lawsuits challenging Medicare’s inpatient rules are pending. One was filed by the Center for Medicare Advocacy on behalf of Medicare beneficiaries. Currently, it’s on appeal.

But no matter how many lawsuits are brought against the rules, the fight will be an extremely tough one. That’s because the U.S. Supreme Court has ruled in other cases that government agencies are “entitled to wide discretion in issuing rules to implement laws.” And for a hospital to go up against HHS would require it to prove the agency violated its discretionary authority, noted Michael Clark, healthcare lawyer at Duane Morris – a difficult task to say the least.


The two-midnight policy was brought about to clear up vague inpatient and observation status rules.

It all started when Medicare’s recovery auditors started examining hospitals to find out why they weren’t using observation care more often. The hospitals responded that the rules for inpatient and observation care were vague. So the auditors, who had a much clearer vision of what observation care encompassed, started requiring paybacks from facilities across the country for submitting claims for inpatient care that they deemed observation care.

In 2012, AHA sued to get CMS to stop denying payments under these “vague” rules, and the two-midnight rule was created to end the confusion by stating that inpatient care at the outset must be expected to last two nights.

Still mayhem

The new rule, however, caused even more mayhem then previously, because hospitals were still losing money.

So thanks to administrative action and an act of Congress, Medicare’s recovery auditors are no longer allowed to audit hospitals under the two-midnight policy until March 2015, giving hospitals an adjustment period.

However, Medicare recovery auditors are still allowed to do limited “probe and educate” audits to show hospitals how to properly submit claims to meet the new requirements.

But that’s not all hospitals are riled up about. Part of the two-midnight rule cut 2014 inpatient rates by 0.2%, because CMS believed the policy would increase net payments to hospitals by decreasing long observation stays.

Of course hospitals thought this was laughable.

So now 24 hospitals have banded together and sued HHS in U.S. District Court in Washington, D.C., in hopes of overturning the part of the two-midnight rule that lowers Medicare funding.

And it’s not ending yet, other lawsuits have been file. This doesn’t mean the more lawsuits the better the AHA’s chances are of overturning the two-midnight rule, but it may lead to a settlement.

We’ll keep you posted.





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