It could be time to rethink the ‘Two-Midnight’ rule, study suggests

The federal policy led to more outpatient stays initially, but the rate of change has flattened. The rule carries substantial costs for hospitals.

The federal government’s “Two-Midnight” rule has created steep challenges for hospitals, and a recent study suggests it may be time for a different approach.

A study published in Health Affairs this month suggests that policy makers consider other options for the rule first adopted in 2013.

Under the rule, hospitals can be reimbursed for more costly inpatient care if they expect a patient to stay at least two nights. For patients that are expected to stay less than two nights, hospitals should choose observation stays, with more modest Medicare reimbursement.

Shortly after the rule was implemented, there were fewer potentially inappropriate short inpatient stays and a corresponding rise in short outpatient stays, the study found. But after a while, the rate of change has slowed.

The observation stays have been controversial for hospital systems, the authors note. Medicare Part A covers inpatient hospital stays, while outpatient observation hospital stays are covered by Medicare Part B.

Hospitals spend enormous amounts of time and money determining how patients should be classified, according to the study, which was produced by researchers and clinicians at Vanderbilt University Medical Center and Vanderbilt’s School of Medicine. The typical institution employs the equivalent of five full-time workers, including doctors, attorneys and other staff, to determine how patients should be classified. About 40% of nurse case manager job postings are for determining the status of care, the study found.

The study found that short inpatient stays fell immediately after the rule took effect, dropping 2 stays per 1,000 beneficiaries. Meanwhile, more appropriate outpatient says rose by 1.8 stays per 1,000 beneficiaries. But after the initial sharp improvement, the rates stabilized.

Hospitals had already begun shifting to more outpatient stays even before the Two-Midnight rule was implemented, the study found.

“The Two-Midnight rule therefore capitalized on the existing trends in hospitals admission patterns and served to accelerate them. This trend can be attributed, at least in part, to the increasing evidence base and clinical practice of the safe and cost-efficient use of observation care via dedicated observation units and pathways,” the authors wrote.

The move to observation stays was more common for those with chronic conditions. The study examined data from 2007-2018.

The authors speculate the reason the change in rate has slowed is because federal regulators have opted to encourage the shift in hospitals via education rather than punishment. “Hospitals therefore reacted to the policy immediately and changed, but then no further change occurred because of a lack of penalties,” the authors stated.

Despite requests for different payment models for hospitals, the rule remains. The authors suggest a few alternatives for policy makers to consider.

The authors suggest one option is examining the actual length of stay rather than attempting to predict observation versus inpatient status. They note it would cut administrative costs, but it could also reduce incentives to decrease how long patients stay in the hospital.

Another option would be “using a low-cost outlier policy to prevent extreme hospital profits while circumventing length-of-stay stipulations,” the authors wrote. Yet another remedy could be eliminating observation status and combining it with a low-cost outlier policy for short stays, the authors wrote.

While remedies can be debated, the study concludes, “it is time to reevaluate whether status determination required by the Two-Midnight rule remains worthwhile.”