Shay Jacobson, RN, MA, NMG, LNCC, CNLCP

Martha Kern

By now, it’s a fairly well known scenario: An elderly Medicare recipient is hospitalized. They believe themselves to be “inpatients” and learn only upon discharge, perhaps, that they are in fact not “inpatients”, despite having spent a night or two in the hospital. They are in the hospital under “observation” only, meaning they have a 20 percent co-pay and do not qualify for post-acute coverage in a rehabilitative setting.

Patient and advocate response to this new twist in the way Medicare views hospitalization has been largely negative. A class action suit, Bagnall v. Sebelius, was filed when a group of patients were hospitalized under observation, never informed of their status, and then discharged to a skilled rehab setting without knowing they were responsible for the bill. The case was dismissed. Lacking alternative options, patients often refuse needed rehab and return home without it rather than pay for the service privately.

It’s also true that observation status has been abused. There are many anecdotal accounts of elderly patients being kept in the hospital for as many as nine days under “observation”. A senior who spends nine days in bed or only slightly ambulatory is generally weakened by the experience and very much in need of rehab before returning home. The “observation” status assures, however, that Medicare will not pay for the rehab.

Enter “The Pumpkin Rule”

Beginning in October, 2013, a new rule was implemented called “The Two Midnight Rule” (and nicknamed, “The Pumpkin Rule”). The aim of this rule is to offer a clearer standard for “observation” versus “inpatient” status, and to reduce or eliminate occasions where patients are kept in the hospital for several days under “observation”. The rule holds that any patient anticipated to be in the hospital for fewer than two midnights will automatically be tagged as “observation”. Any patient expected to be hospitalized for more than two midnights will automatically be admitted as an “inpatient”.

If a patient initially identified as an “observation” patient does, ultimately, become an inpatient and stay in the hospital for more than two midnights, any time spent in the hospital on Observation status will not count toward the three consecutive inpatient midnights needed to be eligible for post-acute coverage in a skilled rehab facility.

Confusing? Well, yes, particularly for physicians who must now attempt to predict a patient’s probable course in the hospital.

The rule intended to simplify inpatient versus outpatient designations has served to complicate the process. Physicians must prognosticate where patient care is concerned. A planned admission for a surgical procedure might offer some basis upon which to determine how long a stay is likely to be. But a patient coming in through the Emergency Department with pneumonia and multiple co-morbidities may not be so readily classified.

Doctors must document medical necessity, particularly when admitting a patient to the hospital, along with comorbidities, patient history and other risks. They must be prepared to defend the inpatient designation when Medicare recovery contractors review claims.

Medicare will not reimburse hospitals under Part A for inpatient-level services for treatment that does not span two midnights. If hospitals’ Part A claims are denied based on the fact that inpatient admission wasn’t deemed reasonable and necessary, they can rebill for medically reasonable and necessary Part B inpatient services. Hospital reimbursements are lower under Part B than they are under Part A.

Widespread confusion over “The Pumpkin Rule” has prompted Medicare to postpone enforcement twice. As of this writing, the rule will not be enforced until March 31, 2015.

The American Hospital Association vs. Kathleen Sebelius

Hospitals have been disenchanted with this rule from its inception.

They argue that the two-midnight rule is arbitrary and capricious, and that it undermines physicians’ judgment and safe care practices. Hospitals and doctors feel that the level/type of care is far more relevant to patient status than length of stay. A great amount of care can be rendered to a critically ill patient in a short amount of time.

Having exhausted lobbying efforts and administrative appeals, the American Hospital Association and four delivery systems (Banner Health, Mount Sinai in New York, Einstein Healthcare Network and Wake Forest Baptist Medical Center) filed two federal lawsuits on April 14, 2014.

The first suit alleges that the two-midnight regulation is unlawful based on its expectation that physicians certify at admission that a Medicare patient is expected to need treatment for a period spanning two midnights. It further asserts that Medicare’s policy of requiring rebilling of denied claims within one year when many claims are older than a year when audited is unlawful.

A second lawsuit contends that Medicare’s 0.2 percent reduction in the reimbursement rate is also unlawful, given that the cut was initiated on the expectation that more patients will be admitted under the two-midnight rule. This cut is expected to cost the nation’s hospitals more than $200 million this year alone.

Resolutions Pending in Congress

Also in response to largely negative backlash from the overuse of observation status are three pending House Resolutions to render this classification less meaningful. These include:


H.R. 1179, introduced in March, 2013, which proposes to count all time in the hospital, whether observation or inpatient, toward meeting the three midnight inpatient requirement.

H.R. 3144, introduced in September, 2013, which proposes to eliminate the three-midnight inpatient requirement to be eligible for Medicare-covered post-acute care.

H.R. 3531, introduced in November, 2013, which seeks to eliminate the three-midnight inpatient requirement for post-acute coverage if the patient discharges to a skilled nursing facility with an overall rating of three or a rating of four stars or higher on Quality Measures or Staffing.

We will post updates on both the AHA lawsuit and these House Resolutions as more news becomes available.{%22search%22%3A[%22H.R.+3531%22]}{%22search%22%3A[%22H.R.+1179%22]}


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