Medical Tuesday Blog

Medicare In Wonderland

May 22

Written by: Del Meyer
05/22/2017 2:53 AM 

Mac Sterling, MD and Melvyn Sterling, MD

“The time has come,” the Walrus said,
“To talk of many things:
Of hospitals and OPOs
Of Medicare and dings
And why two midnights are the cause
Of patients selling rings.”
—with apologies to Lewis Carroll

Medicare has formulated a new rule—the two-midnight rule—to reduce the money it pays to hospitals for diagnosis-related group (DRG) billing. This Alice in Wonderland gimmick allows the Centers for Medicare & Medical Services (CMS) to shift the cost of hospitalization from Medicare Part A—where the cost of care is almost entirely covered by the federal government—to Medicare Part B, where more of the cost is paid by the patient, unless they have insurance that covers “outpatient care.” Unfortunately, even with the Affordable Care Act, many patients cannot afford such insurance.

CMS currently mandates that patients be designated as “outpatient observation” (OPO) if their anticipated hospital stay is two midnights or less. These OPO patients are admitted to the hospital because they require health care services that are not available outside a hospital. They inhabit a hospital room; sleep in a hospital bed; are usually cared for by hospitalists, hospital nurses and other hospital staff; and are treated with hospital IV fluids and medications from the hospital pharmacy.

If the admitting physician fails to designate the patient as OPO and Medicare’s recovery audit contractor (RAC) decides the patient should have been OPO, the hospital is not paid for the care, and the patient pays the bill. To avoid being “RAC’d,” hospitals are now forced to employ specially trained staff to determine whether the patient is to be admitted as OPO vs. normal hospital status, wasting money that could be spent on patient care.

This absurd situation prompted physicians in the CMA House of Delegates to pass the following resolution in October 2013: “Resolved: That the California Medical Association request that the Centers for Medicare and Medicaid Services eliminate Outpatient Observation status for all patients who require care in hospitals.”

Medicare, we must acknowledge, is terminally underfunded. By 2017, its funding is predicted to be less than its costs. To stanch this hemorrhage of red ink, politicians and bureaucrats are trying to decrease Medicare’s costs before the program fails. Their central challenge is the same as the one articulated by Machiavelli during the Renaissance: “Do the ends justify the means?”

There is near universal agreement that we must maintain Medicare’s viability; but as with achieving any goal, some means are better than others. Simply put, there are two ways of balancing Medicare’s budget: our elected representatives can either increase Medicare taxes or decrease Medicare benefits.

How often has an incumbent politician voted to raise a tax on the working public? Crickets chirp. But is the alternative of decreasing benefits any more politically palatable? Not really. Hence the contortions of Medicare’s decision to reclassify a less than two-midnight stay in the hospital as an “outpatient” benefit, thereby shifting costs to hospitals and to Medicare beneficiaries. Transparency, which begets an honest evaluation of the pros and cons of a change in Medicare policy, suffers when CMS administrators engage in doublespeak by calling nights spent and resources consumed inside a hospital an “outpatient” benefit.

Seen from one perspective, the DRG payment system—which was implemented in 1983 to limit Medicare expenses—is a victim of its own success. Under the system, Medicare pays a set amount for each diagnosis, thereby putting hospitals at risk for the cost of caring for patients whose expenses are greater than anticipated. Now CMS feels that the hospitalization process is “too efficient,” insofar as Medicare is paying a “full DRG” for stays that are shorter than anticipated. In a classic piece of bureaucratic flimflammery, Medicare came up with the idea that a stay in the hospital spanning less than two midnights is actually just “observation,” rather than the provision of efficient inpatient hospital care.

The essential misrepresentation of the two-midnight rule is that a brief stay in a hospital is less resource-intensive than a longer stay. CMS staffers argue, without blushing, that hospital expenses are less per hour when a patient spends less than two midnights in a hospital, compared to hourly costs for a stay of more than two midnights. In fact, the opposite is often true.

Case in point: In the hospital where Dr. Mac Sterling practices as a hospitalist, the administration has created efficient diagnostic and treatment workflows. Several years ago, for example, it was virtually impossible to obtain an MRI on a weekend unless epidural abscess or hemorrhage was suspected. Now the MRI department is staffed to provide services seven days a week. This expanded schedule results in more timely diagnoses for many chief complaints, meaning that the hospital can discharge many patients before two midnights have passed. Doing this, however, is not cheap: the hospital must pay to have the MRI department staffed on weekends. Moreover, under the two-midnight rule, the hospital is penalized financially for providing patients with quicker diagnosis and treatment, as outpatient services are paid at a substantially lower—often dramatically lower—rate than inpatient services.  .  .

Consider the patient admitted for a transient ischemic attack (TIA). A well-equipped and well-run hospital can expect to complete a workup for this diagnosis before two midnights have passed. According to the two-midnight rule, however, this patient should be admitted OPO. But what happens when the TIA evolves into a cerebral infarct? Now the patient may need to stay in the hospital longer and be converted to inpatient status. Unfortunately for the patient, if they do not spend three midnights in the hospital after being changed to inpatient status, they will not qualify for the Medicare skilled nursing facility (SNF) benefit. Perversely, the result could be a newly hemiplegic patient who does not qualify for SNF benefits for physical, occupational or swallowing therapy. In addition, the patient will have to pay privately for any necessary SNF stay.

The two-midnight rule constitutes an example of political expediency. No Medicare benefits are being cut overtly, but CMS is widening a small stream of “observation stays” into a major river of hospitalized “outpatients.” As noted above, the result is to decrease Medicare A benefits and shift the costs onto hospitals and Medicare beneficiaries.

CMS has a multipronged approach to trimming the ballooning cost of Medicare. The two-midnight rule is one prong. Another is not paying for hospital readmission within 30 days when the patient has the same principal diagnosis as before. When a patient shows up in the emergency department with acute congestive heart failure 29 days after being discharged for a CHF admission, for example, the hospital is incentivized to admit the patient to OPO status, which costs the patient significantly more than an inpatient stay.

The two-midnight rule is a case of the tail of unrestrained health care costs wagging the dog of appropriate Medicare benefits. We submit that CMS should first comprehensively and logically determine the purpose of inpatient hospitalization before altering the definition of inpatient and outpatient. Providing efficient diagnosis and treatment should be among Medicare’s top priorities. Do we really want to disincentivize the hospital system from developing processes for diagnosing and treating more quickly? Care in a hospital is much more expensive than true outpatient care. Making a shorter-than-expected hospital stay a criterion for decreasing a hospital’s reimbursement is a step in the wrong direction. Instead, let us, as a society, incentivize efficiency and quality of care. ::

Dr. Mac Sterling is a hospitalist at Alta Bates Hospital in Berkeley. Dr. Melvyn Sterling is an internist and palliative care physician in Orange County.
Emails: Mac Sterling:, Melvyn Sterling:

MARIN MEDICINE | Fall 2014 | Marin Medical Society

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