The Hospital Improvements for Payment Act – Unscrambling the Messy Two-Midnight Egg

Lame duck sessions are not known for innovative policy developments but a week before Thanksgiving, House Ways and Means Committee Majority staff bucked conventional wisdom and announced its release of an interesting draft bill, the Hospital Improvements for Payment Act.  After holding hearings, meeting with stakeholder organizations, and listening to the concerns expressed by Committee members and their constituents, Health Subcommittee Chairman Kevin Brady (R-TX) circulated the 146-page discussion draft “as part of the Committee’s broader effort on comprehensive Medicare reform, addressing the problems associated with Medicare’s two-midnights policy, short inpatient stays, outpatient observation stays, auditing, and appeals.”  The “two-midnight” policy was created by the Centers for Medicare and Medicaid Services (CMS) in its fiscal year (FY) 2014 Inpatient Prospective Payment System (IPPS) final regulation.  The agency took a complex and challenging situation and, unfortunately, generally made it worse.  In an attempt to “clarify” its policy on short-stays, CMS asserted that typically, if a Medicare beneficiary is treated in a hospital for two or more midnights an inpatient stay would be considered “reasonable and necessary,” but if a stay did not cross two-midnights, an inpatient admission generally would not be deemed appropriate. Yet, rather than making its short stay policy more clear for hospitals, in the words of my six-year-old twin boys – the agency “laid an egg.”

As I recently discussed with Paul Demko of Modern Healthcare, House Ways and Means Majority staff have put a lot of thought and effort into how to unscramble that “very messy [CMS payment policy] egg.” The authors of the bill have importantly recognized the complicated interrelationship between the Recovery Audit Contractor (RAC) program and audits (and denials) of short inpatient stays, the current requirement that fee-for-service Medicare beneficiaries have a three-day inpatient hospital stay before they qualify for covered skilled nursing facility (SNF) care, and the growing number of outpatient observation stays (which currently do not count toward the requirement for SNF care).

Ask virtually anyone in the hospital industry and they will tell you – in their opinion – RAC audits started a domino effect that has culminated in the introduction of this new measure. Initially created by a provision in the Medicare Modernization Act of 2003, RACs were authorized to conduct audits to identify inaccurate payments to hospitals and were to be paid a percentage of the inappropriate payments that had been made to hospitals. Hospitals experienced frequent auditing and denial of short inpatient hospital stays with RACs asserting that the care, while medically necessary and reasonable, should have been provided on an outpatient basis.  As the now well-known story goes, in response to these audits and denials by RACs who operate like “bounty hunters,” hospitals responded by treating more Medicare beneficiaries on an outpatient observation basis, and therefore more seniors were unable to access SNF care, which in turn led to unhappy beneficiaries and families, and subsequently led to more appeals by both hospitals and beneficiaries.  The volume of appeals at the third level of review – the Administrative Law Judges (ALJs) – has gotten so large that there is a three-year backlog of cases.  Current law has placed a moratorium, until March 31, 2015, on RAC audits of short inpatient stays (in essence an enforcement hiatus).  As such, Congress has until the end of Q1 2015 to take action to help hospitals and beneficiaries and improve the functioning of the RAC program. To that end, Title I of the Hospital Improvements for Payment Act:

–Creates a new hospital prospective payment system;

–Establishes a new definition of – a payment rate for – short inpatient stays;

–Extends the current moratorium on RAC audits of short inpatient stays;

–Repeals the 0.2% reduction contained in the FY 2014 CMS IPPS;

–Requires the Secretary of Health and Human Services (HHS) to report RAC data to the public and create a RAC Compare website;

–Reduces the RAC look back period from four to three fiscal years and grants providers and suppliers a 30-day period to discuss reviewed claims before a denial (partial or full) is issued;

–Offers a voluntary opportunity for providers to settle claims that are pending at the ALJ level;

–Requires hospitals (beginning October 1, 2018) to report to the HHS Secretary standardized patient assessment data, including information regarding medical conditions and functional status, comorbidities, cognitive function, and their living situation and access to family caregivers at home – any hospital that does not report the required data will have its payments reduced by two percent; and

–Mandates hospitals provide financial information with respect to what coinsurance and copayments are collected for the 50 most common Diagnosis Related Groups (DRGs).

It is important to note that Title II of the bill contains 19 individual legislative proposals, which have been introduced by Republican members of the Ways and Means Committee.  This second half of the bill really is a bunch of policy “carrots to bring members on board with the broader discussion about overhauling Medicare hospital payments”.  Title II incudes:

–A repeal of the current moratorium on physician-owned hospitals;

–The creation of a voluntary demonstration program for hospitals to study ways to improve hand sanitation and calls for reporting of a new national hand sanitation quality measure; and

–A requirement that hospitals inform Medicare beneficiaries, who are on outpatient observation status, that they are not being treated as inpatients and their time in the hospital may not qualify them for SNF care.

Given that we are less than 30 days from the end of the year and the close of the 113th Congress, no action is anticipated on the proposal but certainly it will be a topic of discussion among those concerned about hospital payments and the RAC program.  During the lame-duck period, the Committee staff is encouraging interested parties to submit comments and input on the draft bill and can do so by sending feedback to  What remains to be seen is how these important payment policy issues will be addressed in the 114th Congress with the current patch for the Sustainable Growth Rate expiring just as the moratorium on RAC audits of short-stays also runs out of time.


Ilisa Halpern Paul is President of the District Policy Group. The views expressed are the author’s own and are not an endorsement of the legislation.

Morning Consult