How the two-midnight rule may affect Medicare Advantage finances
By Nona Tepper / May 15, 2024
Medicare Advantage companies and healthcare providers are reckoning with the effects of an updated federal policy that governs how to pay for patients’ hospital stays.
The "two-midnight rule," newly applied to Medicare Advantage this year, lets hospitals categorize more patient visits as higher-cost, inpatient stays. In addition to threatening to disrupt carriers' already shaky finances, it could invite more scrutiny of Medicare Advantage companies' coverage policies and decision-making tools.
Providers and carriers are divided, however, as to the rule's early impacts on their bottom line.
“Everyone is watching to see how things normalize. The impact we're seeing from two-midnight right now is probably as heightened as it'll be,” said Jack Slevin, a health services equity research analyst at investment bank Jefferies.
Here’s what to know about the two-midnight rule as it applies to Medicare Advantage.
What is the two-midnight rule?
The two-midnight rule, enacted in 2013, states that traditional Medicare must pay for an inpatient stay if admitting clinicians anticipate patients will remain in the hospital for at least “two midnights.” Beginning this year, Medicare Advantage insurers must also follow the rule.
The Centers for Medicare and Medicaid Services said it wanted to align coverage guidelines between Medicare fee-for-service and private plans. Unlike traditional Medicare, however, Medicare Advantage companies do not have to automatically assume clinicians’ two-midnight guidance was appropriate and can use prior authorization, internal coverage criteria or retroactive audits of claims when deciding appropriate reimbursement.
The policy update came last year as regulators finalized several other changes regarding Medicare Advantage prior authorization and continuity-of-care requirements.
What are insurers saying about the rule's effects?
Some Medicare Advantage carriers have pointed to the two-midnight rule as a factor in driving up utilization costs, or the expenses associated with doctor's visits.
Humana, CVS Health’s Aetna and Agilon Health in recent months have all cited the two-midnight requirements as pushing the number of short inpatient stays in hospitals higher than pre-pandemic levels.
Humana, the second-largest Medicare Advantage carrier by membership, said at the Bank of America Securities Healthcare Conference this week that the rule will drive "incremental pressure" on company earnings in 2024. At the TD Cowen 44th Annual Health Care Conference in March, Humana executives said they anticipate the rule will account for 50 basis points, or 0.5%, of its medical expenses this year.
Humana officials are focusing on refining its utilization management system and training staff on how to adapt to health systems billing for more inpatient stays, Chief Financial Officer Susan Diamond said during the conference.
Humana, Aetna and Agilon declined to comment.
The insurance lobbying group AHIP declined to make an executive available for interview. It has contended in comments to regulators that the change does not expand Medicare Advantage members’ coverage, but could raise their out-of-pocket costs.
Some analysts said carriers were exaggerating the updated policy's effects.
“Two-midnight is just one excuse for why you're doing poorly, but I don't think there's real substance to it. You're just using an external excuse because you think that's more palpable to investors,” said Gary Taylor, managing director and senior equity research analyst at TD Cowen investment bank.
Are all carriers reporting impacts?
UnitedHealth Group's UnitedHealthcare, the largest Medicare Advantage carrier, has not publicly mentioned any financial impact from the two-midnight rule. On its first-quarter earnings call in April, it said Medicare Advantage members' costs this year were not higher than expected.
Last October, the company published a fact sheet regarding the two-midnight rule saying it would review inpatient admissions to determine coverage, including by using criteria from its InterQual decision support tool.
UnitedHealth did not respond to an interview request.
How could the rule affect hospitals?
The rule as applied to fee-for-service Medicare was enacted in fiscal 2014 in response to concerns hospitals were improperly billing observation stays and inpatient visits. Hospital bills for short inpatient stays dropped by almost a third the year after the rule was enacted, the Health and Human Services’ Office of Inspector General wrote in a 2017 audit. The OIG plans to release another audit of providers' bills this year and recommend hospitals pay CMS back for claims improperly categorized as inpatient stays, rather than outpatient or observational visits.
The Medicare Advantage version of the rule, however, could have a different result.
The American Hospital Association publicized a report Monday from software company Strata Decision Technology that found the two-midnight rule helped contribute to higher inpatient visits in March.
Twenty-two percent of Medicare Advantage patients’ observation stays last year would be billed as a higher, inpatient rate this year under the new version of the rule, according to Strata's survey of 456 hospitals. In March, hospitals’ inpatient revenue outpaced outpatient revenue for the first time since 2021, the report said.
What are for-profit systems reporting about the rule?
For-profit providers have reported varying degrees of impacts from the two-midnight rule applying to Medicare Advantage so far.
Former HCA Healthcare Chief Financial Officer Bill Rutherford told investor analysts on the company's first-quarter earnings call in April that the Nashville-based health system anticipates the regulatory update will provide a modest boost to the hospital chain this year. Rutherford retired May 1.
The company declined to comment.
Although executives from Universal Health Services and Community Health Systems reported a rise in inpatient and outpatient utilization and a rise in revenue generated per patient stay, they said they were seeing no benefit from the two-midnight change specifically.
“As far as the two-midnight rule and impact on inpatient acute volumes, as best as we can tell, it did not have any,” King of Prussia, Pennsylvania-headquartered Universal Health Services Chief Financial Officer Steve Filton said on the company's first-quarter earnings call in April.
Universal Health Services did not respond to an interview request. Franklin, Tennessee-based Community Health Systems declined to comment.
Tenet Healthcare Corp. has not mentioned any impact from the two-midnight changes during the Dallas-based health system's recent earnings calls.
What could the future hold?
Medicare Advantage payers generally anticipate utilization — in which the two-midnight rule plays a role — to fall in the second quarter. Some of this is simply the result of a more favorable year-over-year comparison, along with medication expense and Medicare Advantage costs trending higher in the colder months due in part to seasonal illnesses.
Regulators, meanwhile, say they will monitor how insurers adhere to the rule.
The Federation for American Hospitals and American Hospital Association wrote to CMS in November alleging UnitedHealth Group’s plan to have its software system review inpatient claims violates CMS’ two-midnight rule.
CMS in February issued guidance reiterating that insurers can use internal coverage criteria to determine the appropriateness of an inpatient stay under two-midnight. The same notice also stated that Medicare Advantage insurers are liable for individual decisions made by their software tools and coverage must adhere to federal standards.
More than 100 provider groups wrote to CMS Administrator Chiquita Brooks-LaSure in March asking her to penalize plans that do not adhere to the new coverage requirement.
AHA said it believes stronger enforcement is needed to ensure Medicare Advantage enrollees receive care equal to those enrolled in fee-for-service programs.
"The AHA routinely hears concerns from hospitals and health systems about inappropriate delays and denials of coverage for Medicare Advantage enrollees, including denials for inpatient care or downcoding of inpatient care to observation status," Molly Smith, group vice president for policy at AHA, wrote in an email.