Banner Health, others sue Medicare

A new rule designed to reduce costs and limit charges to outpatients has so irked the hospital community that many institutions – including Banner Health and the American Hospital Association – have jointly filed suit against the U.S. Department of Health and Human Services.

The “two midnights” rule, imposed by the Centers for Medicare and Medicaid Services, changes the way hospitals are paid by Medicare for patients who stay only one night in a hospital. If a patient is in the hospital for only one night, that patient will be considered outpatient, according to the rule. In order to be considered inpatient by Medicare, a patient must be in the hospital for two midnights.

The policy was finalized Aug. 2 and took effect Oct. 1, but as of April 1, hospitals are still waiting for additional guidance on the rule, according to the American Hospital Association.

Because of the short window hospitals were given to implement the rule, the lack of guidance and the potential financial impacts for hospitals, a group led by the American Hospital Association last month filed suit in U.S. District Court in Washington, D.C., to stop the rule.

The suit contends that the rule is arbitrary and misguided, and that CMS used indefensible assumptions and offered no explanation for them.

Five health-care industry association representing 5,000 hospitals have joined the suit, along with two individual hospitals and two national hospital systems, including Banner Health.

CMS has been under pressure to reduce the amount paid to hospitals nationwide, as the nation’s debt increases and Baby Boomers age into Medicare, according to Chris Tholen, vice president of financial policy at the Colorado Hospital Association. The Affordable Care Act also has had an impact on the way Medicare reimbursements are made.

But this rule could mean millions of dollars in lost revenue for hospitals, said Dennis Dahlen, chief financial officer of Banner Health. Getting to a precise estimate of losses is difficult because the way hospitals are reimbursed, he said.

For example, he said, if a patient is classified as being in “observation care,” as opposed to being an inpatient, the hospital makes about 80 percent less for the same treatments. Patients being classified as “observation patients” when they only stay one night could cost Banner Health $35 million a year systemwide.

Banner operates in seven states, with two hospitals in Northern Colorado and a third under construction in Fort Collins.

Banner Health is the most vocal hospital on the subject in the area. Others are keeping quiet and withholding opinions for now. Both University of Colorado Health and Centura Health declined to comment on this story.

Calling the rule “detrimental,” Dahlen said it also means more steps for providers to take when admitting a patient to the hospital, which disrupts their workflow.

When admitting a patient under the rule, he said, a physician must document everything about that patient’s case, from testing and diagnosis to treatment and treatment response. That information then is audited by Medicare, which can impose monetary penalties on hospitals if auditors determine that the admission did not qualify for inpatient status, according to information from the American Hospital Association.

Enforcement of the rule has been partially delayed until March 31, 2015. Parties in the lawsuit want to change the rule before enforcement can go into full effect.

In addition to the lawsuit, two bills supported by the American Hospital Association have been proposed to change the rule. The “two midnight delay act” and the “two midnight coordination and improvement act” would require CMS to implement a new payment methodology for short inpatient stays in 2015, rather than reimbursing short inpatient stays as outpatient stays, as the current rule requires.

According to CMS, the rule is meant to combat a growing problem in health care. More and more, as hospitals face uncertainty about payments, they are implementing long periods of observation care in which a patient is kept in the hospital for an extended period of time without ever being truly admitted.

Observation care often results in higher out-of-pocket costs for patients.

“This policy responds to both hospital calls for more guidance about when a beneficiary is appropriately treated – and paid by Medicare – as an inpatient, and beneficiaries’ concerns about increasingly long stays as outpatients due to hospitals’ uncertainties about payment,” CMS said in a statement.

Molly Armbrister can be reached at 970-232-3129 or Follow her on Twitter at @marmbristerBW.

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Molly Armbrister covers real estate, banking and health care for the Northern Colorado Business Report. She can be reached at 970-232-3139, or

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