iProtean—Reasons the Two-Midnight Rule Will Negatively Affect Hospitals

We have written several newsletters on the impact of the two-midnight rule for hospitals. Now Moody’s Investors Service offers five observations that specify how and why this rule will negatively affect a hospital’s revenue. (Two-Midnight Rule Will Reduce Revenue for Most Hospitals, Sector Comment, Moody’s Investors Service, March 12, 2014)


The two-midnight rule classifies most hospital inpatient stays under 48 hours as outpatient cases, replacing medical necessity as a way to determine whether an inpatient stay was justified. When the rule goes into effect, Moody’s expects it will weaken hospital operating profitability because it will lower Medicare reimbursement for these cases. The authors of the Moody’s report noted that the impact will affect all acute care hospitals, but “the impact will not be uniform across the not-for-profit hospital sector.”


The rule will negatively affect hospitals in the following ways:


  • The reimbursement difference between inpatient and outpatient cases will decrease profits:Inpatient cases tend to be reimbursed at a higher level than outpatient cases. Moody’s estimates that hospitals could experience an average per case reduction of $3,000 to $4,000. However, the cost of treating these patients will remain the same. The patient may be treated in the same unit and may not even be aware he/she is an “outpatient.”


  • The two-midnight rule will accelerate the trend of inpatient care shifting to outpatient:The rule will result in significant growth in observation/outpatient stays, continuing the trend from inpatient to outpatient treatment. This will put additional pressure on hospital revenues.


  • Hospitals with short lengths of stay will be most affected:Smaller community hospitals tend to have lower acuity patients and lower average lengths of stay. However, Moody’s noted, patients still consume significant resources from tests, drugs and other inpatient hospital care. Under the rule, these shorter hospital stays will likely convert to observation/outpatient status—with lower reimbursement. Smaller community hospitals tend to be less flexible financially and will have difficulty absorbing reductions in revenue.


  • Reimbursement change will affect hospitals with high a proportion of inpatient care: Irrespective of size,hospitals that depend on inpatient care for the majority of operating profit will see that profit decline. “Profitability will suffer as the high fixed costs of inpatient care are spread over a smaller base of inpatients,” the authors wrote.


  • Small hospitals lack adequate staff to adapt to new rule: In order to qualify as an inpatient stay, the admitting physician must document that the admission was initially justified. Ensuring proper documentation is “unlikely to be a challenge for larger hospitals with well integrated medical staffs and additional administrative resources.” But smaller hospitals may find it difficult to implement documentation changes with fewer physicians and support personnel.


Moody’s noted, however, that the rule does have a “silver lining.” It could reduce recovery audit contractor (RAC)reviews of hospital admissions practices by substituting a strict rule set for the ambiguity involved in borderline cases. This should provide some financial relief for hospitals.


(iProtean again thanks Moody’s Investors Service for permission to share information from its reports, and permission to include the actual reports in the Resources section of our courses.)



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