Healthcare Risks of the Two-Midnight Rule

By Colleen Hall, CPC, CPMA, CIRCC, and Brian Sanderson
| 12/2/2014

We all have had a loved one in a hospital for one reason or another, or we might even have experienced a hospital stay of our own. We like to think because we are so knowledgeable of the industry and have insight into the rules, guidelines, and regulations, hospital mistakes won’t happen to us or our families. But mistakes can and do occur.       

151546519 clock 250x225 For instance, a relative recently had to go to an emergency room (ER) because he suffered severe abdominal pain and looked ashen. He was seen in the ER, received a CT scan and blood work, and was administered fluids. The results of the CT scan indicated thickening and inflammation of his small bowel, a runaway white blood count, and an abnormal international normalized ratio. The treatment plan included broad-spectrum antibiotics Flagyl and Cipro, intravenous infusion of vitamin K, and further testing with repeated CT scans. He was “admitted” to the hospital.  

Five days later, the hospital discharged him. Three weeks after discharge, the explanation of benefits arrived, and we learned he never was classified as an inpatient but had been “observed” for five days. The hospital had committed a common error related to the two-midnight rule – failure to obtain an order for inpatient status – and suffered financially due to this mistake. Our knowledge of healthcare, the two-midnight rule, and observation could do nothing to help the hospital recover the financial losses sustained while caring for him.  

Avoid the Eight Risks

Since the two-midnight rule went into effect Oct. 1, 2013, as part of the 2014 inpatient prospective payment system final rule, hospitals and providers have struggled to make sense of the ruling, guidelines, and various interpretations of the rule. Due to its implementation and interpretation, many hospitals and health systems have lost millions of dollars in net revenue. Although it might be impossible to prevent all revenue loss, avoiding these eight errors will minimize the financial impact.  

1. Placement of every patient into observation status to start

Many organizations believe that the best way to prevent misapplication of the two-midnight rule is to default a patient’s status to observation initially and reclassify the patient as an inpatient once the second midnight has passed. By defaulting to observation every time, organizations rely on a process downstream to identify and then change the patient’s status before discharge. This process leaves room for many errors and likely would result in an observation-to-inpatient ratio much higher than the industry norm.  

Rather than selecting observation every time, hospitals should make an effort to objectively evaluate every patient encounter and choose the most appropriate status as early in the patient’s stay as possible. Many organizations find that having utilization management personnel present in the ER helps enable prompt status evaluations, allowing for more accurate status placements and fewer status changes and errors.  

2. Following InterQual or Milliman Care Guidelines instead of a physician’s order or intent

The Centers for Medicare & Medicaid Services (CMS) have mentioned during town hall conference calls that, although InterQual or Milliman Care Guidelines may be required for conditions of participation, meeting the criteria within these tools is not sufficient support for placement into inpatient status. Many organizations have not changed their processes since the two-midnight rule guidance took effect and continue to require status criteria to be met to support inpatient status. These tools can be beneficial by providing a guide to status, but a physician’s intent is the true driver of a patient’s status. If the physician believes that patient treatment will require inpatient medically necessary care spanning two midnights and that intent is documented in the patient’s record, the inpatient status would be deemed appropriate.  

3. Incomplete physician documentation

Because a physician’s intent is the primary driver of a patient’s status, there must be supporting documentation of that intention. When the two-midnight rule was published, organizations should have given significant education to providers on what needed to be included in their documentation. Physicians should document their intent about the duration of the patient’s stay as well as their medical reasoning supporting that intent. This documentation is for the benefit not only of other physicians but also of individuals who might later review the documentation. Providers need to show support for the order they have placed and the status they have determined. If education has not been given to providers about documentation requirements or if the education was given only once at the rule’s outset, it is strongly suggested that provider education be a monthly topic and that ongoing communication be given on requirements.  

4. Failure to complete the physician certification

For an inpatient stay to be deemed reasonable and necessary under CMS guidelines, a certification, which includes the inpatient order, must be signed by the provider. The physician certification is a formal requirement that includes, among other things, the authentication-of-practitioner order, reasons for inpatient services, estimated/actual required hospital time, and plans for post-hospital care. The provider basically is certifying that inpatient services are medically necessary. To receive payment for inpatient services, this statement is a required part of the inpatient record. If physicians fail to complete some criteria of the certification, the inpatient visit might not be deemed medically necessary. Without this important element in the patient’s record, reimbursement can be negatively affected.  

Effective Jan. 1, 2015, the certification requirement for most inpatients is revised. While an inpatient order will still be required, the Outpatient Prospective Payment System (OPPS) final rule for 2015 has indicated that physician certification will be required only for patients having inpatient stays of 20 days or more and for outlier cases. CMS currently requires a physician certification, including the admission order, for all inpatient admissions.  

5. Failure to validate/sign the physician order prior to discharge

According to 42 Code of Federal Regulations (CFR) Part 424 Subpart B and 42 CFR 412.3 published by CMS, “The order must be furnished by a physician or other practitioner (‘ordering practitioner’) who is: (a) licensed by the State to admit inpatients to hospitals, (b) granted privileges by the hospital to admit inpatients to that specific facility, and (c) knowledgeable about the patient’s hospital course, medical plan of care, and current condition at the time of admission. The ordering practitioner makes the determination of medical necessity for inpatient care and renders the admission decision. The ordering practitioner is not required to write the order but must sign the order reflecting that he or she has made the decision to admit the patient for inpatient services.” As simple as this action might seem, physicians frequently fail to countersign orders; if assessed upon audit, such unsigned orders would be deemed medically unnecessary, preventing payment to the organization.  

6. Failure to obtain a new order for inpatient status

Many organizations “flip” patient status from inpatient to observation or from observation to inpatient depending on the review of documentation and medical necessity for the level of care ordered. It is vitally important that a new order is obtained for the revised status. Many organizations have a process that notifies the physician when a revised order is needed. However, the physician actually must place that order. If it is not entered into the system, the revised status might not be deemed medically necessary and thus can affect reimbursement.  

Additionally, when an observation patient has been in a hospital longer than two midnights and has been receiving inpatient services requiring an inpatient stay, that patient’s order must be revised to inpatient so the correct level of care is billed. Just because a patient is classified as observation doesn’t mean he or she must stay that way.  

7. Failure to document unforeseen circumstances for short-stay inpatients

Hospitals encounter situations in which a patient is expected to require inpatient medically necessary care spanning at least two midnights, but something happens prior to the second midnight that causes an inpatient short stay.  

Physicians should be clearly documenting unforeseen circumstances that support reasons for an inpatient status with a length of stay of fewer than two midnights. Examples of unforeseen circumstances include a patient recovering, dying, electing to be placed into hospice care, transferring to a different hospital or setting, or departing against medical advice. When unforeseen circumstances arise and there is clear documentation of them in a patient’s record, CMS will deem these cases appropriate for inpatient payment. If documentation is not there, organizations can suffer financially.

8. Performance of inpatient-only procedures on observation patients

The final mistake is to submit outpatient/observation bills for patients who had procedures performed from the inpatient-only list. The inpatient-only list indicates that certain surgical procedures should be performed only on patients in an inpatient setting because of the procedures’ risks and complexities. When organizations fail to obtain an inpatient order for such a patient, not only may the stay be denied, but the procedure may be denied as well. It is important that the utilization management department or surgery department check planned procedures on the inpatient-only list against the daily schedule and verify that each scheduled patient has inpatient status. If any patient lacks inpatient status, an inpatient order should be obtained.  

Details and Documentation

As mentioned earlier, the family member’s explanation of benefits came several weeks after the hospital discharged him. A nearly $50,000 hospital stay received reimbursement of less than $4,000. Had the organization not committed one or more of the errors identified here, the reimbursement likely would have been at least $15,000 – a minimum $11,000 error committed by the hospital. The two-midnight rule already has caused organizations to lose revenue associated with inpatient admissions. It is imperative that financial errors be avoided by paying attention to the details and documentation required to support billing for the correct level of service.

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Brian B. Sanderson
Managing Principal, Healthcare Services
Colleen O. Hall