Report suggests the extent to which Medicare Advantage health plans are skirting the two-midnight rule

As hospitals struggle with payer tactics involving denials, a new analysis quantifies the extent to which Medicare Advantage (MA) health plans still avoid paying for inpatient care.

The report by Kodiak Solutions examined claims data from more than 1,900 hospitals and found that MA plans categorized hospital visits as outpatient observation stays at a rate more than three times as high as traditional Medicare during a year-long period ending in June.

Observation stays among MA beneficiaries did decrease by roughly 4 percentage points between the final six months of 2023 and the first half of 2024. That shift followed CMS guidance for 2024 reiterating that the two-midnight rule and other utilization management criteria should apply to MA in the same manner as in traditional Medicare.

But the 2024 rate, ranging from 14.4% to 16.3% per month through June, was still notably higher than that of traditional Medicare, where the share was between 3.7% and 5.4% depending on the month.

“[In] Medicare and managed Medicare, we should see a similar rate,” said Matt Szaflarski, director of revenue cycle for Kodiak Solutions and author of the report. “We’re seeing a more similar rate through the first two quarters of 2024, but there’s still a significant gap between those two.”

An ongoing concern

Shawn Stack, HFMA’s director of perspectives and analysis, said misapplication of the two-midnight criteria by MA plans is nothing new.

“It has always been clear that Medicare Advantage plans absolutely, 100% need to be following the two-midnight rule,” also known in regulations as the two-midnight benchmark, Stack said during a recent episode of HFMA’s Voices in Healthcare Finance podcast.

Where MA plans have discretion is in whether to subsequently forgo inpatient medical-necessity audits for patients whose stay crosses two midnights, he explained. CMS advises that contractors in traditional Medicare waive the audits, but the recommendation does not pertain to MA plans.

“Some Medicare Advantage plans have kind of been taking advantage of this misconception about the differences between CMS’s stance on the rule and the benchmark versus the presumption [with respect to an] audit,” Stack said.

The issue predates CMS’s restatement about the application of the two-midnight rule in MA going into 2024, he noted. A key update in that guidance, he added, was an explanation that MA plans may not use proprietary utilization management tools, such as InterQual or MCG software, to override the two-midnight rule or other coverage and payment criteria that apply in traditional Medicare.

A give-and-take scenario

Even if the 2024 trend suggests payers are coming around to applying the two-midnight rule in Medicare Advantage, albeit slowly, there may be a trade-off. Kodiak’s data indicates health plans increasingly are categorizing hospital visits by commercially insured patients as observation stays. That share rose from 15% in January to 18.5% in June.

“With any piece of regulation that comes out there, you also have to be wary and be aware of any potential loopholes that may have been created,” Szaflarski said. “If there’s more scrutiny on the managed Medicare product, do we see a tightening [of payer requirements] on the managed Medicare product but a corresponding loosening on the commercial product?”

“Maybe the two-midnight rule is the impetus, but we’re just seeing the payers be more aggressive across many areas of denials,” Kevin Hammons, president and CFO of the for-profit hospital chain Community Health Systems (CHS), said during a Q3 earnings call.

When the implications of the 2023 regulatory language began to sink in, there was optimism among some providers. Early signs this year indicated a volume and revenue shift to the inpatient setting.

More recently, in Q3, the for-profit chain HCA Healthcare saw an 11% growth in MA admissions, attributing 2% to the two-midnight rule, Mike Marks, executive vice president and CFO, said during an earnings call.

However, providers also are reporting difficulty navigating the roadblocks being put up by MA plans.

“We still have way too many denials, and we have a few large Medicare Advantage payers that are significant outliers driving these denials,” Marks said.

Hammons said CHS’s Q3 denials doubled year over year, resulting in a $10 million headwind.

“The denials and really the slowdown in the adjudication process is also having an impact on our cash collections,” he said.

No end in sight

It’s possible the trend will only become more severe for providers as payers grapple with the ramifications of the CMS guidance. This month, UnitedHealthcare said it would scrutinize providers’ coding practices as it seeks to temper unexpected growth in its medical-cost ratio.

Szaflarski recalled that when he got into the healthcare business more than 15 years ago, hospitals and health systems would look to boost their payer mix by incorporating more commercial payments. More recently, the conversation has shifted.

“They’re like, ‘I just want more [traditional] Medicare because at least I know I’m going to get paid, I know when I’m going to get paid, and that makes it a lot easier to predict,’” he said.

In MA, anecdotal evidence suggests the hassles are leading some hospitals to terminate their contracts.

For those hoping to stay in the program, alignment between clinical and revenue cycle teams is key “to ensure, when that admission decision is made, that we’re clearly documenting — especially in these managed Medicare cases — how we’re leveraging the two-midnight rule in our decision-making process,” Szaflarski said.

Such coordination also can boost the likelihood of prevailing on appeal. Tim Hingtgen, CEO of CHS, said the company’s efforts to fortify its centralized physician advisory services have paid off with a “high rate of reversal” on initial denials.

Especially for smaller health systems, solutions may require engagement with advocacy groups such as their state’s hospital association, Szaflarski said: “We’re going to need to, as a community of providers, really monitor this and make sure that there’s the appropriate level of compliance.”