IPPS 2014 Challenges: “Two-Midnight” Rule, DSH Changes, and Part B Rebilling

The Final rule (78 FR 50496, August 19, 2013) implementing changes to the inpatient hospital prospective payment system for fiscal year 2014 was the focus of a webinar sponsored by Wolters Kluwer Law & Business on September 4, 2013. The webinar focused on three significant changes in hospital reimbursement that will start October 1: (1) the “two-midnight” rule for determining inpatient admissions; (2) changes in the calculation of the disproportionate share hospital (DSH) payment; and (3) rebilling options for hospitals after a Part A claim is denied.

Two-Midnight Rule

Jeff Micklos, lead policy counsel on legal and regulatory issues with the Federation of American Hospitals, noted that CMS’ new two-midnight policy for determining inpatient admissions is “a work in progress.” He noted that the two-midnight rule is a “new formal time-based standard to justify an inpatient admission.” Medicare review contractors, he said, will be making two presumptions regarding inpatient admissions: (1) that the inpatient admission is reasonable and necessary for beneficiaries who require more than one Medicare utilization day (defined as passing two midnights) and (2) hospital services spanning less than two midnights will be presumptively paid on an outpatient basis.

The first presumption will stand, Micklos said, unless hospitals systematically delay necessary care to meet the two-midnight threshold. Micklos also said that although the second presumption makes it appear that CMS is banning payment for one-day inpatient stays, the Final rule does include exceptions, including (1) where the medical record clearly includes documentation that indicates a physician’s reasonable expectation that care will last more than two days; (2) beneficiaries are receiving services that CMS has categorized as “inpatient only”; (3) the beneficiary dies or is transferred before the second midnight passes; and (4) “rare and unusual” circumstances.

Micklos noted that the Final rule clarifies that a physician order and certification are not sufficient to show the medical necessity of inpatient treatment; the order and certification must be supported by adequate medical record documentation. Micklos believes that CMS needs to provide further guidance on the definition of “adequate medical record documentation.”

He emphasized that Medicare contractors “must view each case through the eyes of the physician at the time the patient status determination was made.” He reflected the concerns of the hospital industry that it is unfair for recovery audit contractors or other CMS contractors to “Monday morning quarterback a decision that was made three years previously in real time.” How well this policy is actually implemented remains to be seen, Micklos said.

The biggest issue, Micklos said, is that “the physician has to put into the record why they believe the patient must stay past two midnights.”

The Final rule clarifies that the starting point for determining the passing of two midnights is when the patient starts receiving services, even if the services are first received as an outpatient and then the patient is transferred as an inpatient. No time spent as an outpatient, however, counts toward the three-day inpatient stay requirement for skilled nursing facility eligibility status.

Micklos pointed out that CMS determined that under the new rules for determining inpatient status, there would be 40,000 additional inpatient admissions in FY 2014, at a cost of $220 million. CMS exercised a never-before-used waiver authority to enforce budget neutrality and reduce total PPS payments to offset the cost of additional inpatient admissions.

Micklos emphasized that the Final rule leaves a number of open issues for which more guidance is necessary, including—

  • more specificity as to what is an admission;
  • what “complex medical judgment” and “systematically delaying necessary care” mean;
  • examples of acceptable medical documentation;
  • what are “rare and unusual circumstances” for an unanticipated two-midnight stay that may be considered inpatient.

He also noted that providers are seeking more time to implement provisions in the Final rule, noting in particular the Association of American Medical Colleges’ request to CMS Administrator Marilyn Tavenner on August 22 asking for a six-month delay in implementing parts of the Final rule.

DSH Changes

Sec. 3133 of the Patient Protection and Affordable Care Act (P.L. 111-148) was intended to better reflect the actual cost of uncompensated care by hospitals. “CMS used a very intelligent approach to implement the changes under ACA sec. 3133,” said John Hellow, partner at the law firm of Hooper Lundy & Bookman. Starting October 1, 2013, 25 percent of the disproportionate share hospital (DSH) payment will be determined in the traditional manner used in previous years. The remaining 75 percent of DSH reimbursement will be put into a pool to be divided among all DSH hospitals. Payments from the pool will be made based on three factors: (1) determining a dollar amount for DSH payments that reflect 75 percent of traditional DSH; (2) reducing this pool to reflect hospitals who have seen improvements in uncompensated care because more individuals in their area have health insurance; and (3) distributing the pool based on the ratio of an individual hospital’s Medicaid and Supplemental Security Income (SSI) days and to all hospitals’ Medicaid and SSI days.

Hellow explained that under this formula, of the 75 percent of DSH funds that are set aside ($9.5 billion in fiscal year 2014), 94.3 percent (or 9 billion) will be distributed to hospitals. Hellow pointed out that in the IPPS proposed rule, CMS proposed that the pool would be 88.8 percent. He explained the higher percent in the Final rule was due in part to the fact that health insurance coverage under the new marketplaces won’t go into effect until January 1, 2014, so the uninsured/uncompensated care rate will still be higher for the first three months of FY 2014.

DSH eligible hospitals will be paid on an interim basis throughout the year, Hellow said, and reconciled in the final cost report. Hospitals that are not DSH eligible, according to prior available data, will not receive interim payments. If the final cost report indicates that the hospital is DHS eligible, it will receive a lump sum payment.

The real operational issues, Hellow said, will concern new or merged providers. Providers with a new provider number will be allowed to qualify and receive payment based on current period data–on cost report finalization–with no interim payments. Merged hospitals, however, may use only the surviving hospital’s provider number data; no merger of multiple hospital DSH data will be allowed.

Hellow also emphasized that under the Final rule most issues related to DSH and uncompensated care are not appealable; in particular there will no appeals of payment determinations or determination of SSI days.

Part A to Part B Rebilling

Robert Roth, also partner at Hooper Lundy, focused on the new regulation in the Final rule that permits billing and payment for most Part B services when, post-discharge, an inpatient admission is found not to have been reasonable and necessary by CMS or by a provider after self-audit. The rule emphasizes that all claims for Part B services must be submitted within one year from date of service. Roth noted that the regulation prohibits an adjudicator from ordering full Part B payment if the inpatient admission is denied on appeal, and prohibits providers from simultaneously submitting a Part B claim and pursuing an appeal of the Part A denial. “Hospitals will have to make an election,” Roth said, “whether to go for their Part B service claim or pursue their Part A denial and incur the cost of the appeal and also risk getting nothing at all for the service.”

Roth also noted that a beneficiary may still pursue an appeal of a Part A service denial even if the provider does not pursue an appeal. Roth said that in the Final rule CMS noted that if the beneficiary’s Part A appeal is successful the hospital will also benefit.


Hellow concluded that it is “incumbent upon hospitals to try their best to educate physicians, physician assistants, physician advisors about these rules and iron out those differences; utilization management will play a key role.” Roth added that CMS, in adopting this Final rule “has not repealed the law of unintended consequences. They say they aren’t involved in medical decisions; they are involved in medical decisions.”