Hospitals slap the government with lawsuits over 'two-midnight' policy to reduce observation stays

The American Hospital Association and other hospital groups have sued the federal government over the so-called “two-midnight rule,” which was designed in part to ease access to skilled nursing services.

The two-midnight regulation, finalized in August, states that hospital visits spanning two or more midnights should be classified as inpatient stays for purposes of Medicare reimbursement. This is an arbitrary timeline that undermines the judgments of physicians and other clinicians, the hospital associations stated in their complaint, filed Monday in U.S. District Court.

The groups are asking the court to invalidate the two-midnight policy and order that plaintiff hospitals be reimbursed for “reasonable and necessary care” they furnished for patients affected by this issue.

A sharp increase in hospital “observation stays” spurred the two-midnight rule. The trend toward keeping patients as outpatients in observation status — sometimes for many days — might be explained by worries over Medicare auditors sharpening their claws for inappropriate inpatient designations.

The rise in observation stays has been of great concern to long-term care providers: Because Medicare beneficiaries under observation are classified as outpatients, their time in the hospital does not count toward the three-midnight inpatient threshold to qualify for coverage of subsequent skilled care.

Hospital and physician associations have vigorously protested the two-midnight rule since its inception, and they have succeeded in slowing its enforcement. Long-term care stakeholders have been largely silent on the issue, pressing for legislative solutions to the observation stay issue. However, some observers have noted hospitals’ objections to the two-midnight rule put them at odds with long-term care interests, even as healthcare reform is pushing for greater acute and post-acute integration.

Underscoring how much hospitals see the two-midnight rule as a threat to their bottom lines, the AHA and allied organizations filed a separate lawsuit Monday. This suit asks the court to revoke a 0.2% cut to hospitals’ Medicare reimbursement rate, which the government enacted in anticipation of increased claims due to the two-midnight policy.