Medicare Payment and Reimbursement

For providers, application of the 2-midnight rule to Medicare Advantage appears to bring a revenue influx

Although a causative relationship is not universally perceived, new guidance from CMS seemingly has been a driving force behind favorable inpatient financial numbers.

June 3, 2024 10:58 am

Hospitals appear to have gained a significant, albeit likely short-term, revenue boost from CMS’s 2023 directive to Medicare Advantage (MA) health plans regarding the two-midnight rule.

The rule first was instituted in 2013 for Medicare fee-for-service (FFS), requiring the program to cover hospital stays as inpatient admissions if the admitting physician expects the stay to span at least two midnights. In the ensuing decade, MA enrollment surged from 14.4 million to 30.8 million, raising the stakes for payment-related admissions criteria in that segment.

Last year, in regulations covering the MA program for 2024, CMS clarified that “an MA plan must provide coverage, by furnishing, arranging for, or paying for an inpatient admission when, based on consideration of complex medical factors documented in the medical record, the admitting physician expects the patient to require hospital care that crosses two midnights.”

Unlike in Medicare FFS, however, MA plans can subject such claims to utilization review, including prior authorization and concurrent case-management evaluation. Plans can rely on internal coverage criteria based on up-to-date evidence in scenarios when Medicare regulations or established coverage determinations are not definitive with respect to medical necessity.

By some accounts, the guidance became needed as MA health plans increasingly sought to deny payment at inpatient rates.

“Post-pandemic, we certainly saw a deterioration in the actions by the MA payers, where [after] they were not downgrading or denying claims during the pandemic, they certainly began denying and downgrading significantly more claims, particularly in the MA book,” Kevin Hammons, president and CFO of Community Health Systems, said in February during an investor call.

A noteworthy impact

In an analysis (registration required) of Q1 hospital financial data, Strata Decision Technology highlighted the early influence of the two-midnight rule in MA.

Based on an analysis of data from 2023, the year before the two-midnight rule was incorporated, patients were held in observation status for at least two days in 22.3% of MA encounters. That share was significantly greater than in Medicare FFS (8.7%), as well as among patients covered by commercial insurance (11.3%).

Following the 2024 change, hospitals saw a 3.9% year-over-year (YOY) increase in inpatient admissions for March, while outpatient volumes dropped by 5.1%.

In conjunction, the YOY increase in inpatient revenue (3.7%) exceeded the jump in outpatient revenue (2.4%) for the first time since November 2021, when hospitals were in the thick of the COVID-19 public health emergency (PHE).

“It’s helping, from a top-line perspective, for some organizations to get reimbursed for the work [like] they should be getting,” said Steve Wasson, chief data and intelligence officer with Strata.

The Q1 results likely don’t foreshadow an interruption in the overall site-of-care shift to outpatient settings, he added, but rather are indicative of “a point-in-time event that [led to] a correction on the inpatient side.”

“My sense is you’re seeing a little bit of an artificial year-over-year growth,” Wasson said.

In a subsequent report from Strata, looking at April, the YOY rise in outpatient visits (12.9%) was higher than for inpatient admissions (9.7%). Similarly, the increase in outpatient revenue (15.3%) was higher than on the inpatient side (11.7%). Notably, however, both were robust increases.

Hospitals express enthusiasm

Among leading for-profit health systems, there has been optimism this year about the impact of the two-midnight-rule expansion, given that payers reimburse inpatient care at higher rates compared with care in other settings.

Saum Sutaria, MD, chairman and CEO of Tenet Healthcare, said during a February investor call that his organization was “very cognizant” about the prospective consequences of the new guidance.

“It should be positive for us if it’s implemented as expected. I think it will be positive for patients over time as well,” Bill Rutherford, then executive vice president and CFO for HCA Healthcare, said during a January investor call (Rutherford retired May 1).

Rutherford reiterated that perspective during an April call to provide Q1 financial results, although he noted it was still early in the year to make definitive conclusions.

“At this point, we still believe there’s going to be a modest benefit,” he said.

One challenge for providers was shaping up to be the additional attention potentially required for claims adjudication processes, given that insurers can still incorporate utilization review and may be more motivated to do so with the new guidance in effect.

“It’s a pretty big change for the payers, and so there might be some administrative differences as it gets implemented through the year,” Rutherford said in January.

On the flip side

Although broad recovery in demand following the PHE also is playing a key role in the YOY inpatient volume increase, payers are dealing with the ramifications of the 2023 MA guidance.

For example, CVS Health reported that in the MA segment of the company’s Aetna health plans, inpatient admissions in Q1 increased “in the high single digits” versus the same period in 2023.

“While a portion of this increase was anticipated because of the implementation of the two-midnight rule, this result meaningfully exceeded our expectations for the quarter as inpatient seasonality returned to patterns we have not seen since the start of the pandemic,” Thomas Cowhey, executive vice president and CFO, said during a May 1 investor call.

“Our healthcare benefits [business] and enterprise results are being materially pressured by the level of Medicare Advantage utilization that we are experiencing,” Cowhey also said. “Clearly this is a disappointing result for us.”

Karen Lynch, president and CEO, said inpatient authorizations and admissions appeared to have “moderated” in April, however.

In an April call to report Q1 results, Steve Filton, executive vice president and CFO with Universal Health Services, downplayed the impact of the two-midnight rule. For the quarter, the health system reaped YOY increases of 4.5% in inpatient admissions and 3.4% in adjusted patient days.

“Both our internal resources and our third-party consultants tell us that they’re not seeing a significant or measurable change in the behavior of our payers that’s really impacting our inpatient activity,” Filton said. “In our minds, most of the growth in acute care volumes in the quarter is exclusive of any change in payer behavior.”


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