May 6, 2014

2015 IPPS Proposed Rule: CMS Asks for Input on Short Stay DRG


When the Centers for Medicare and Medicaid Services (CMS) released the text of the 2015 Inpatient Prospective Payment System (IPPS) Proposed Rule on April 30, hospitals and other providers could breathe a sigh of relief, because there were no radical changes such as the two-midnight rule, which rocked the hospital finance and compliance communities when the 2014 IPPS rule was proposed last year at this time.

Some are disappointed that CMS has decided to stick with the two-midnight rule for inpatient admission and that it did nothing to clarify its confusing guidance on admission orders, certification of admission, and other issues, such as exactly when an admission starts (What does “formal admission” mean?) and when the clock stops at discharge (What does the discharge order being “effectuated” mean?). While these ambiguities were not addressed in the 2015 Proposed Rule, there is still hope that further written guidance from CMS will help hospitals comply in a consistent manner.

CMS raised one new issue, however, that should get hospitals’ attention: It asked for input from the provider community on the issue of MS-DRG payment for short inpatient stays. Establishing Part A payment for short hospital stays is not a new concept. It has been proposed over the years as an alternative to the artificial distinction between inpatient and outpatient hospital care, when those familiar with hospital admissions have known, and last year, in the 2014 IPPS rule, CMS finally conceded that there is no fundamental difference in the care provided to inpatients and outpatients. Thus, in the 2014 IPPS rule, CMS abandoned the concept of “levels of care” and used the need for care in the hospital that encompasses two midnights as the key indicators for inpatient admission and payment.

While CMS stated in the 2014 rule that one of the goals was to reduce outpatient stays that exceeded two midnights in duration, the effect at many hospitals has been to increase the number of patients placed in observation, because the physician is reluctant to make a two-midnight prediction or to admit a patient prior to the second midnight when he or she plans to discharge the next day. All of this attention to length of stay and confusion about the details of the two-midnight rule would be an academic exercise if not for the fact that the distinction between outpatient care and inpatient registration has significant financial implications for both the hospital and the beneficiary.

Some observers looking at this system have realized that admission and payment would be much simpler if the need for care in the hospital was the deciding factor for inpatient admission regardless of the length of stay. But since Part A payment for inpatient care can be more than five times greater than that for observation, admitting all patients who require hospital care would increase the cost of care for the Medicare Trust Fund. In order to attain revenue neutrality, there would have to be adjustments to other Medicare DRG payments.

With this as background, CMS asked in the newly proposed rule, “Would a short inpatient hospital stay be one where the average length of stay for the MS-DRG is short or would it be atypically short or low-cost cases relative to other cases within same MS-DRG?” In the following three paragraphs, CMS discusses the challenges inherent in the second alternative—but never returns to the first option. It uses MS-DRG 313 (chest pain) as an example of a DRG with a short length of stay (approximately two days) and compares it to an MS-DRGs such as 871 (Septicemia or Severe Sepsis without Mechanical Ventilation 96+ hours with MCC) that have “longer lengths of stay.” If it were to define a short DRG as a stay that is unusually short compared to the expected length of stay for a given MS-DRG, CMS maintains that this would have a greater impact on a long-stay MS-DRG than a short one. It also questions how payment for a shorter than expected MS-DRG would be determined. It addresses the suggestion that short stays be paid on a graduated per diem using the same system as currently in place for hospital transfers.

For short stays, however, the graduated per diem would result in payment of the full MS-DRG in only one or two days, while a hospital would be more likely to receive a reduced payment for MS-DRGs with a longer average stay. CMS acknowledges that under the current system, which offers completely different payment for inpatient vs. outpatient care, “payment for the same case will be very different under the OPPS and the IPPS depending upon whether the patient has been formally admitted to the hospital as an inpatient…” This appears to be a fatal flaw in the proposal, which arises from the fact that admission is based on a physician’s prediction of length of stay, not the services that are required. CMS suggests that there may be times when payment for a short inpatient stay should be limited to that which would be associated with outpatient care and asks for suggestions on when that payment should be higher.

Now, for a proposal: This complex situation is driven by CMS maintaining the distinction between inpatient and outpatient care for short hospital stays. This conundrum could be avoided if CMS would look beyond the two-midnight rule, which continues to divide hospital care between Part B (outpatient and observation) and Part A (inpatient). CMS tried to create a bright line between the two by using a two-midnight benchmark, but there is a simpler way to do it. What if all patients who required hospital care were inpatients, regardless of length of stay? Evaluation in the ED would still be an outpatient service, as would observation, but ED care plus observation would be strictly limited to 24 hours, and any patient who required care beyond that 24-hour benchmark would be admitted as an inpatient and the stay would be payable under Part A. Medicare’s Inpatient Only List (procedures that can only be provided to inpatients) would be a thing of the past as well; a medically necessary surgical stay beyond 24 hours would be paid as inpatient. Medicare would have to watch for evidence of gaming or intentional delays—just as it does now—and there would still be a requirement that the care must be medically necessary. What about the increased costs involved in paying hospitals for so many new short inpatient stays? CMS was not reluctant to implement an across-the-board 0.2 percent reduction in MS-DRG payments when its actuaries predicted that the two-midnight rule would increase inpatient admission. The same strategy could be applied if all hospital stays were admitted. This approach would be very similar to the pre-two midnight era, except that auditors would not be allowed to reclassify short inpatient stays as outpatient and deny payment on that basis.

This is not a new idea. In February 2013, RACmonitor published a series of articles including similar proposals. On March 6, U.S. Senators Robert Menendez (D-NJ) and Deb Fisher (R-NE) introduced a bipartisan bill in the Senate, the Two-Midnight Rule Coordination and Improvement Act of 2014 (S. 2082). In a press release on his website, Senator Menendez said, “While I understand CMS’ intent in establishing the two-midnight rule, there are some fundamental issues with the rule that still need to be addressed…” Among other things, S.2082 calls on CMS to develop criteria for payment of inpatient stays of less than two midnights. To maintain revenue neutrality, the bill calls on CMS to either reduce currently mandated DRG payments or develop a new payment methodology for these short inpatient stays and publish these ideas in the 2015 IPPS Proposed Rule. The bill has been referred to the Finance Committee. The 2015 IPPS rule responded with the call for public comment on short-stay DRGs, but, lacking a legislative directive, CMS has the discretion to continue business as usual under the two-midnight rule.

So what will CMS do? It will read the hundreds of comments and suggestions it is sure to receive and hopefully will find some ideas that will move the hospital payment system toward a simpler and more rational approach to reimbursement for short admissions. Without mentioning it directly, CMS would be rescinding the two midnight rule.

The public comment period ends 60 days after the Proposed Rule is published in the Federal Register.

About the Author

Steven J. Meyerson, MD, is senior vice president of the regulations and education group at Accretive Physician Advisory Services®. He is Board Certified in Internal Medicine and Geriatrics. He has recently been the medical director of care management and a compliance leader of a large multi hospital system in Florida. He has distinguished himself by creating innovative service lines and managing education for Accretive PAS®.

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The 2015 IPPS Proposed Rule can be downloaded from:

Read Sen. Menendez’ press release at:

Senate bill S.2082 can be found at:

The RACmonitor article on Medicare regulatory reform is at:

Steven J. Meyerson, MD, CHCQM-PHYADV

Steven Meyerson, MD, CHCQM-PHYADV, is the founder of Steven Meyerson Consulting. Dr. Meyerson is a nationally recognized expert and consultant in the physician advisor role, case management, and hospital Medicare compliance. He is board certified in internal medicine and geriatrics and serves on the board of the American College of Physician Advisors (ACPA). He edits and writes for the ACPA online blog.

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