Medicare change may cost patients: New 'two midnights' admissions rule affects hospitals, too

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For many Medicare patients at the hospital, phrases like "inpatient" and "observation status" can easily blend in undetected with all the other medical and insurance lingo echoing around the halls.

After all, either of those labels may translate to a bed in an inpatient unit, physician care, scans, medications and hospital food.

But when unexpected bills start arriving weeks later, that label could make all the difference.

While Medicare patients in observation status may have been in a hospital for several days, they were actually in a kind of limbo: They received care, but they were never technically admitted as inpatients.

This means those patients weren't covered by Medicare Part A -- which covers a complete hospital stay once a one-time deductible is met; but Part B, instead.

As a result, patients must pay part of their doctors' fees, along with co-payments for labs, scans and hospital drugs.

It also means that Medicare will not cover their subsequent rehabilitation at a skilled nursing facility -- something that it does cover for Medicare patients who are admitted to a hospital for at least three days.

The number of observation stays at hospitals has been on the rise for several years.

Hospitals complain it is because Medicare has become more strict in denying claims for short inpatient admissions, insisting those visits should have been labeled as "observation." Hospitals receive significantly less reimbursement from Medicare for observation stays than for admissions.

On Oct. 1, a new Medicare rule dubbed the "two midnights rule" went into effect, intended to define the foggy boundaries of observation and inpatient care.

Hospitals say it signals a dramatic shift in how Medicare patients are admitted to hospitals and how those hospitals are reimbursed.

But it's not necessarily for the better -- for patients, or for the hospitals, critics say.

The Connecticut-based Center for Medicare Advocacy, which has long opposed the Medicare observation policy, has said the new rule does nothing to help patients.

"Prior to this two-midnight rule, if you thought someone was sick enough to spend the night in the hospital, then the hospital got reimbursed," said Dr. Dan Fisher, a surgeon and the chief of staff at Erlanger Health System.

"Now you have to be sick enough to spend two nights in the hospital for it to count toward that. If you're not sick enough to spend two nights, then Medicare is starting to say that you're not very sick at all."


Take the example of a 68-year-old woman who shows up at the hospital with chest pains.

Before the rule, a physician would assess the woman and then decide whether she needed to be admitted immediately for treatment, or whether she should be kept in observation to run more tests.

Now, a physician will need to make that decision based on whether he believes the patient will need to be admitted to the hospital for longer than two midnights -- regardless of whether that patient showed up at 11 p.m. or 11 a.m.

If her case warrants inpatient status, the doctor will have to fill out and sign a form with medical reasons justifying her admission.

If the patient seems as if she may need one night in the hospital -- but not two -- she will stay on observation status, since that length of stay is "generally not appropriate for inpatient admission and inpatient payment under Medicare Part A," the rule states.

Hospital leaders have called the two-midnight minimum arbitrary, and especially confusing in an era where technology and advanced treatments mean that even patients admitted to the ICU may end up staying in the hospital less than two midnights.

Maryellen Howley, director of care management and clinical documentation at Erlanger Health System, called the expectation for a physician to predict a patient's trajectory at the beginning of a visit "pretty ludicrous."

"It's another interference in the care for the patient," Howley said.

Howley said she expects Erlanger will see many more observational patients under the new rule.

"I really don't see any benefit to it," she said. "If what we are projecting is accurate we're going to have more observation, and the [Medicare] beneficiary will have more co-pay."

Meaning patients need to be more vigilant about asking about their current status in a hospital, and what that means.

Memorial Health Care System has a new 30-bed section of the hospital especially designated for observation patients. But in many cases, patients and their families aren't aware there's any difference between observation and admission -- much less their own status.

Even with the new rules, Medicare can go back through the paperwork and retroactively determine that a patient shouldn't have been admitted.


Hospitals still are gauging what impact the new rules will have on their finances, but there is plenty of worry.

Erlanger and Memorial officials said they had concerns about the policy's impact on physician-patient interaction and on reimbursements. Parkridge Health System deferred its position on the matter to the Tennessee Hospital Association.

"The concern from hospital consultants is that it will just be a different way for [the Centers for Medicare and Medicaid Services] and their contractors to go after hospitals," said Gwyn Walters, vice president overseeing research and reimbursement with the Tennessee Hospital Association.

Memorial Health Care System -- 60 percent of whose patient population is on Medicare -- is especially wary of the new rule's implications.

"We have some high anxiety that it could impact the hospital negatively," said Michael Sutton, the vice president of finance at Memorial. "But until we do further analysis, we can't really project what it will really look like."

But Sutton, like other hospital leaders, says patients should see no difference in their quality of care.

The rule "is not going to change how we care, just how we're reimbursed," Fisher said.

"Maybe we're splitting hairs and maybe we're playing with words," he said. "If a patient is sick enough to stay in a hospital and really needs to stay overnight, Medicare needs to reimburse the hospital. But they're redefining what a hospital stay means."

To add to their worries, hospitals say, insurance companies will often follow where Medicare leads.

A new policy like the two midnights rule could soon become routine for far more patients than those on Medicare, Walters said.

"I think it will have far-reaching implications," she said.

Contact staff writer Kate Harrison at or 423-757-6673.