Two-midnight inpatient volume effect may be permanent

A boost in inpatient admissions earlier this year was expected to subside as payers clamped down but that volume shift increasingly looks permanent.

Earlier in 2024, both payers and health systems reported increases in inpatient admissions — primarily among Medicare Advantage (MA) patients — following Medicare’s application of long-standing two-midnight requirements to those plans. But it was unclear if the trend would sustain.

The two-midnight rule was originally implemented in 2014 for traditional Medicare, but the CMS clarified it applied to MA plans at the start of 2024. The policy requires admission of patients under inpatient status if their clinician determines they require hospital care beyond two midnights. The policy affected many patients previously treated under observation status as outpatients.

The rule was cited by a Strata report as a contributor to a strong 3.9% year-over-year (YOY) increase in hospital admissions in March 2024, and 5.1% YOY decrease in outpatient admissions. That drove a historic change where YOY growth in inpatient revenue exceeded outpatient revenue increases for the first time since late 2021.

And that change has sustained well into 2024. A benchmarking report from Strata found that, by August, inpatient admissions were 2.7% higher YOY, while observation volumes had decreased 3.6% YOY.

“I have a hard time seeing that going away,” Joyjit Saha Choudhury, a managing director for Kaufman Hall, said about the lasting effect of the rule on inpatient volumes. “So, I think that factor is here to stay.”

However, there might be movement along the edges, Choudhury said.

A sustained decrease in observation rates for patients with MA coverage also was seen through June, according to a Kodiak Solutions report. However, the data also showed that despite decreases in MA patient observation status rates in 2024, they remained at least three times larger than those in fee-for-service (FFS) Medicare.

“These data show that while MA plans seem to be following the two-midnight rule in some cases, there is still a big gap, and MA beneficiaries are not qualifying for the same level of inpatient coverage as their traditional Medicare counterparts,” the Kodiak report said.  

MA plans counter trend

Hospital executives and advocates initially expected the shift in MA volumes to be quickly countered by increased denial rates of inpatient status by MA plans. And some health systems have seen such denial rates increase among some plans.

“That’s also where we’re seeing increased denial rates from payers because they’re scrutinizing ‘Does this patient really deserve or qualify for this two-midnight stay?’” said Brian Tanquilut, an analyst for Jefferies.

In the third quarter of 2024, broad-based denials across payers doubled for Community Health Systems (CHS) compared to the same quarter in 2023 resulting in a $10 million headwind, said Kevin Hammons, president and CFO of CHS. And half of those denials came from MA plans.

“Maybe the two-midnight rule is the impetus but we’re just seeing the payers being more aggressive across many areas of denials,” Hammons said on a third quarter investor call. “And we’re seeing the majority of it is in the MA book but we’re seeing more denials in the commercial book, as well. That’s where we’re seeing the impact above the prior trends and above what we have previously anticipated.”

Adding to the challenge of the increased denials is a “slowdown in the adjudication process,” he said, which has allowed only 25% of two-midnight denials getting overturned, so far.

Tenet Health credited the two-midnight rule’s application to MA with contributing 50 to 100 basis points in the system’s increase in admissions. However, Saum Sutaria, MD, chairman and CEO with Tenet, said that increase was “certainly short of and with more work than there should be if the two-midnight rule is fully adopted” by payers.

“The process of fully adopting the guidance on the two-midnight rule in the Medicare Advantage market is what I would describe as still underway,” Sutaria said.

In contrast, Universal Health Services (UHS) has not seen much change this year in how MA plans are handling claims related to the two-midnight rule. The system credited its use — for several years — of a third-party firm to properly code admissions and handle denial appeals. Overall, the system noted more aggressive payer approaches on denials, patient status, length of stay and other areas since 2022.

“I don’t think we’ve seen a significant difference in how two midnight coding claims are being handled with our claims,” said Steve Filton, CFO of UHS.  He said the adverse MA plan actions competitor health systems have seen this year may stem from those organizations changing their approaches after the recent CMS guidance went into effect in early 2024.

Health system responses

To counter MA plan denials under the two-midnight rule, CHS is ramping up a centralized physician adviser program, among other steps.

Hammons at a September conference cited benefits of the system’s built out utilization review and physician adviser program in reducing the number of self-downgrades, as well as the expanded use of physician advisers conducting peer-to-peer reviews with payers. It’s an approach that was launched at the beginning of 2024 and continues to roll out to all of the system’s hospitals.

Tenet’s efforts to address payer denials in recent years have increased “in somewhat of an extraordinary way,” said Sutaria. “It’s certainly frustrating if you’re sitting on this side of that activity.”

He credited increased effort within Tenet’s subsidiary, Conifer, with mitigating adverse effects of increased payment denials for the system and Conifer’s other clients.

“At some point, there has to be a solution to this because it’s just wasted administrative time and cost,” Sutaria said.

Hospital responses to payers’ two-midnight policies suggested by Kodiak included:

• Reinforcing denial management practices and optimizing documentation and case reviews
• Doubling down on their documentation and case review
• Focusing on reducing observation denials in MA while leveraging stability in observation denials in traditional Medicare