APR 15, 2014 5:16pm ET

Taking the Sense Out of Incentives

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I’m not really sure where the Centers for Medicare and Medicaid Services is trying to go with the two-midnight rule, but I fear it’s backwards.

The American Hospital Association and several hospitals have taken the gloves off and filed suit over the two-midnight rule, which stipulates that Medicare will not reimburse hospitals under Part A for inpatient-level services provided to Medicare beneficiaries for treatment that does not span two midnights. Instead, reimbursement will be reduced by making the services payable under Part B rates for outpatient services, along with a 0.2 percent Medicare payment reduction to offset the costs of the rule. Enactment has been postponed until March 2015 after two previous delays.  

One of the great stories in health IT has been the focus on reducing readmissions and the overall efficiency of clinical operations. CMS has been a driver in that effort via its Readmission Reduction Program, which started penalizing hospitals, to the tune of a total of $280 million this year, for having high 30-day readmission rates for heart attack, heart failure and pneumonia.

In response to those penalties, along with incentives for care coordination and quality, most hospitals have bulked up on technology such as automated ED admission alerts to caregivers, intense, IT-driven home monitoring and care management, and analytics that fine-tune clinical protocols. Those efforts dovetail with broader population health initiatives and the injection of accountability into medical decision making—incentivizing the industry to acknowledge that more—more tests, more images, more medications, more procedures—is not better, but better (care) is better.

You can sum up all these efforts into a clear mantra: Keep people out of hospitals; get people out of hospitals. The carrots and sticks were aligning to reward quality and efficiency, and punish unnecessary care. And now that the industry is starting to adhere, CMS seems bent on trying to penalize those steps forward with a rule that’s more focused on bean-counting acrobatics than incentivizing any kind of positive behavior.

The two-midnight rule at its heart seems to want to reduce the number of extended observation stays and require increased, complex documentation by physicians on why an inpatient admission will require at least a two-night hospital stay.

A report from the HHS Office of the Inspector General says that Congress and CMS have raised concerns about Medicare beneficiaries spending long periods of times in observations stays without being admitted as inpatients, and that beneficiaries may pay more as outpatients than if they were admitted as inpatients.

The OIG report goes on to say that CMS and others also have raised concerns about short inpatient stays, short in that they lasted lasted less than 2 nights. “CMS found that a significant portion of payments for these stays were improper because the services should have been provided in the outpatient setting.”

But those statements don’t seem to take into account the reality of patient care and physician decision making.

Seventy-eight percent of observation stays began in an emergency department, and another 9 percent were the result of an operating room procedure. For short inpatient stays, 67 percent began in an emergency department. In both cases, the most common reason for the stay was chest pain. Digestive disorders and fainting were the second and third most common reasons for observation stays; coronary stent insertion and irregular heartbeat were the second and third most common reasons for short inpatient stays.

I’m sensing an awful lot of clinical logic here; the majority of these patients showed up in emergency rooms with complaints that could be harbingers of serious medical problems. Physicians order tests and exams, and instead of making people in precarious health haul themselves to an outpatient setting, decide after a short period of time that most can go home, while others need to be admitted.

The CMS response to this increasingly efficient system is to penalize hospitals with lower reimbursements, while simultaneously creating a wrong-facing incentive to increase the length of inpatient stays.

Indeed, CMS is predicting that the rule will result in $220 million in additional Medicare expenses as more stays are billed as inpatient. But an organization more grounded in reality, Moody’s Investor Services, in a March report predicted the rule would reduce reimbursement for most hospitals, to the tune of $3,000 to $4,000 per case thanks to the lower outpatient rates, and smaller hospitals with less integrated staffs hit hardest, since they don’t have the resources to implement physician documentation changes to comply with more stringent requirements for establishing the medical necessity of inpatient stays.

After a nice run of aligning incentives to reward sound clinical and financial decision-making, CMS and lawmakers seem to be regressing to their whimsical oversight of the health care industry.

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Physicians, frequently perceived as a roadblock to a high-quality/low-cost paradigm, often spearhead IT advances central to the effort.

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