On Aug. 19, CMS published a final rulemaking that may effectively eliminate DRG Part A payments for most acute care inpatient stays of one day. The final rule provides that if the patient is not expected to need hospital services for a period exceeding two midnights, he or she should be treated under observation on an outpatient basis. 42 CFR 412.3. The new rule represents Medicare’s latest position in the ongoing debate over when an inpatient is “really” an inpatient.

Except for Medicare designated “inpatient only” procedures, the regulation suggests that all other one-day stays may be presumptively ineligible for inpatient status. The regulation does not say whether the Medicare Contractors will now automatically deny inpatient claims for a stay that includes less than “two midnights.”

A physician’s order to admit a patient to the hospital now also serves as the physician’s certification that inpatient care is medically necessary. 42 CFR 412.46. That certification is required for the hospital to receive payment under Part A, but CMS is not bound by the certification. The physician’s order:

[S]hould be based on such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event. The factors that lead to a particular clinical expectation must be documented in the medical record in order to be granted consideration.

Orders must now include the physician’s decision “to admit ‘to inpatient,’ ‘as an inpatient,’ ‘for inpatient services,’ or similar language.” The authority to sign the order may not be delegated and a patient becomes an inpatient only after a physician’s order to admit is given.

CMS leaves open the possibility that an inpatient stay that was reasonably and legitimately expected to require inpatient services over a period of at least two midnights might escape the presumption of illegitimacy. Whether reliance on the physician’s “expectation” is a viable approach remains to be seen. The examples CMS uses in the regulation may not be exclusive, but they certainly suggest that CMS is setting the bar high:

(2) If an unforeseen circumstance, such as a beneficiary’s death or transfer, results in a shorter beneficiary stay than the physician’s expectation of at least 2 midnights, the patient may be considered to be appropriately treated on an inpatient basis, and hospital inpatient payment may be made under Medicare Part A.

More recently, in a CMS Open Door Forum, CMS attempted to flesh out the “expectation” notion, indicating that the clock starts running when the patient starts receiving services in the hospital and includes time that the patient spends in observation, the emergency department, operating room, or other treatment area. CMS notes that the time a beneficiary spends as an outpatient before the formal inpatient admission order is not inpatient time, but may be considered by the physician, and subsequently, the Medicare contractor, when determining if the expectation that the stay will cross two midnights is reasonable and was generally appropriate for inpatient admission. FY 2014 IPPS Rule Outreach (CMS 1599-F- 8-12-13).

It is not clear how CMS will implement the new rule. Two possibilities are introducing system edits that deny claims with less than two midnights in duration or requiring the administrative contractors to flag those claims and request additional documentation. In either case, a hospital’s transaction costs in connection with the inpatient/observation stay may dwarf the amount eventually received. A hospital whose claim is denied may file a claim for payment under Part B, but as the deadline to file the claim has not been extended from the year following the date of service, additional pressures are placed on decisions as to whether to conduct an in-depth review of the medical record prior to billing when the stay does not cross two midnights, and whether to pursue a denied Part A claim or to substitute a Part B claim in the event that the claim is submitted to Part A and denied. The new rule has a myriad of ripple effects, including:

• The interaction with the three-day window rule;
• The standardized amount that CMS uses to pay for other DRG inpatient stays;
• The copayments and deductibles that the patient may be required to pay;
• The possibility that the hospital may have to refund the patient’s portion of a denied Part A stay; and
• The interaction with secondary payers.

CMS recognizes that questions and criticisms of the rulemaking are to be expected and has encouraged  providers and associations to submit questions and concerns to IPPSadmissions@cms.hhs.gov. We encourage immediate review of this new rule to determine its practical impact on patient care and hospital operations.