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Ch. 14 - Regulatory Environment Evolution and Dangers

Benjamin Karfunkle, MD; Natalie Kirilichin, MD, MPH

Physician advocacy efforts often target elected representatives with legislative authority. We vote, support political action campaigns, meet with officials and their staff, conduct health services research, and generate educational materials to inform policy. Physicians may be less familiar with advocacy targeting federal agencies. This so-called “Fourth Branch of Government” interprets legislation passed by Congress and signed by the President into the rules and regulations we ultimately follow. Significant changes can be made between the time a bill is signed into law and rules for implementation are written and enforced at agency discretion.

Regulatory agencies represent a critical component of the government that impacts care and requires ongoing relationships and advocacy similar to elected officials.

Regulatory agencies vary in size and rule-making authority but have broad and sweeping impacts on health care. The Centers for Medicare and Medicaid Services is the federal agency within the U.S. Department of Health and Human Services tasked with administering Medicare programs, state Medicaid programs, the Children’s Health Insurance Program, and health insurance standards. Ultimately, CMS issues regulations by publishing proposed rules, allowing for a period for public comment, incorporating feedback, and then finalizing those rules. Other independent organizations like the Medicare Payment Advisory Commission (MedPAC) advise Congress on issues affecting Medicare, but do not have rulemaking authority. With thousands of agencies with overlapping programs and enforcement, the web of regulations can be daunting.

CMS and other regulatory agencies are not traditionally staffed by actively practicing health care providers. Advocacy and education efforts in the form of proposed rule commentary after bill passage are as critical as outreach to representatives in Congress during the legislative process. Organized medicine, including EMRA and ACEP, are instrumental in tracking rules that impact emergency care and advocating for positions that benefit practitioners and patients. Each year, for example, CMS releases several proposed regulations that directly affect how emergency physicians are paid under Medicare. In response, ACEP seeks member feedback and submits informed stakeholder commentary. These comments help inform and guide the agency’s rulemaking process and hopefully shape the policy.1 Without this advocacy, emergency physicians would be adversely impacted in their compensation and ability to provide care to patients.

As federal agencies often set the bar for private industry, the regulatory implications of the aforementioned policies extend beyond federal beneficiaries and have the potential to affect all Americans. While there are thousands of regulations that affect the current care of patients that could be examined, three of the largest controversies impacting emergency care today include the designation of inpatient status, the three day stay rule, and the hospital readmission program. This chapter will explore these programs as an example of
the impact that these decisions can have on health care.

Inpatient vs. Outpatient/Observation Status

In response to unclear criteria governing Medicare Recovery Audit Contractors’ (RAC) decisions to accept or deny claims from hospitals requesting payment for inpatient services, the Centers for Medicare & Medicaid Services announced the “Two Midnight Rule” in 2013.2 This stipulation stated that patient encounters anticipated to require a hospital bed through two separate midnights would be reimbursed as “inpatient” stays if they met all other criteria. All other stays, including observation admissions, would be designated “outpatient” visits. The issue with this distinction is that patient encounters for similar complaints, involving similar evaluations and even identical procedures, can result in widely disparate payments and coverage. Typically, outpatient encounters yield lower hospital reimbursements than inpatient encounters. Hence, many providers argue that enforcing this rule penalizes hospitals for innovations reducing length of stay.

Patients, conversely, often face greater cost sharing for outpatient visits. Take, for example, chest pain, the leading short-stay chief complaint.3 Medicare patients contribute an average of $1,260 in one single coinsurance payment for inpatient chest pain stays, but have separate copayments for each service consumed as outpatients. These individual outpatient payments can often exceed the inpatient fee, thus making observation stays financially undesirable for patients.

The Two Midnight Rule is of concern for emergency physicians because the classification is typically made at the point of admission, early on in a patient’s course, before his or her care needs are fully manifest. Emergency physicians are put in a position to determine an encounter’s reimbursement profile based purely on speculation. A 2018 study of this issue4 found that nearly 100,000 Medicare beneficiaries per year were observed as outpatients for greater than 48 hours. Compared to their peers who were observed for less than 48 hours for similar complaints, the long observation stay patients had a higher rate of readmission and overall mortality. The authors concluded that observation versus inpatient determinations should thus be based on actual length of stay rather than prospective prediction under the Two Midnight Rule to reduce the administrative ambiguity this policy has created.

Given Two Midnight Rule criticism, CMS announced a compromise in July 2015 allowing physicians to admit patients as inpatients for expected stays of lesser duration, so long as documentation supports specified severity of symptom criteria or risk of adverse events during hospitalization.5 The ACEP-supported modification was formally adopted in October 2015, when CMS released its 2016 Outpatient Prospective Payment System Final Rule.6

In recent reports to Congress, MedPAC criticized the Two Midnight Rule, recommending withdrawal of the rule and directing Medicare RACs to focus their reviews on short inpatient stays especially inpatient stays lasting only one day.7 Proposed changes include allowing for certain diagnoses to be considered “inpatient” even for a one-day stay, and to bring short inpatient stay payments more in line with payment for outpatient observation stay. CMS continues to collect data on short inpatient stays to inform rulemaking. The Office of the Inspector General (OIG) also issued a 2017 report urging more oversight in this sphere. As these regulatory agencies only have advisory roles, it will take ongoing advocacy with Congress to change the law or the regulator (CMS) to change the rule.

The Three-Day Stay for Skilled Nursing Facilities

Under Medicare law, beneficiaries must be admitted as hospital inpatients for three days before Medicare will cover services in skilled nursing facilities (SNFs) for rehabilitation and continued care after discharge. Medicare beneficiaries were often unclear about the differences between inpatient status and outpatient observation. Further, beneficiaries are occasionally surprised to learn that they fail to qualify for Medicare SNF coverage and are financially liable for the costs of SNF care. Organizations like MedPAC and ACEP pushed for mandated hospital disclosure surrounding classification of hospitalization. In response, Congress passed and CMS implemented the “Notice of Observation Treatment and Implication for Care Eligibility Act,” which has required transparency since fall

This three-day stay rule represents another avenue through which qualification as an outpatient for an observation stay may expose patients to financial liability. The rule also asserts pressure on admitting physicians to find a medical reason necessitating three days of inpatient care, a practice that may not reflect optimal resource utilization.

ACEP believes that all days spent receiving care in a hospital should count toward Medicare’s three-day hospital stay SNF requirement, regardless of status as inpatient or outpatient.9 This assertion is congruent with MedPAC recommendations, which suggest that up to two days of outpatient observation time should count toward the three-day requirement. Adopting this policy, however, is anticipated to increase overall Medicare program spending as more individuals become eligible for SNF care that was previously financed through beneficiary out of pocket spending. This potential downside is a political barrier to modifying the three-day stay rule as ACEP and MedPAC recommend.10

Re-examining Readmission Policies

For Medicare patients, a readmission results when a patient is admitted to a hospital within 30 days of being discharged from a previous hospitalization. Readmissions may occur at any hospital, not just the initial hospital. As a cost savings strategy and theoretical move toward value-based care, Medicare’s Hospital Readmission Reduction Program (HRRP) penalizes hospitals with relatively higher rates of Medicare readmissions by reducing reimbursement. The program is part of the Affordable Care Act and began in 2013.11

The current focus in the HRRP is on several select conditions: myocardial infarction, heart failure, pneumonia, chronic obstructive pulmonary disease, coronary artery bypass graft surgery, and elective hip and knee replacement. Since implementation, hospital readmission rates have dropped significantly for patients with these diagnoses, and to a lesser extent for admitted patients overall, while rates of short outpatient observation admissions have risen.12

MedPAC posited to Congress in its 2018 report that HRRP has lowered costs to Medicare without affecting overall risk adjusted mortality rates. Notwithstanding this claim, raw mortality rates for heart failure have increased since program implementation.

“Despite reductions in 30-day heart failure readmissions in 89% of U.S. hospitals between 2009–2016, 30-day heart failure mortality rates increased at 73% of these ‘successful’ hospitals during the same period,” said Ahmad Abdul-Aziz, MD, at the annual scientific meeting of the Heart Failure Society of America.13

Similarly, CMS Medicare data from 2008 to 2014 demonstrate that heart failure 30-day mortality rates following hospital discharge rose by 1.3%, while 30-day readmissions fell by 2.1%.14 Critics worry that CMS’s policy of punishing readmissions may disincentivize necessary readmissions.

Since more than 50% of Medicare admissions come through the emergency department, emergency physicians are the gatekeepers determining a hospital’s readmission profile. They may face pressure from hospital administration to observe or discharge patients instead of admitting them. The hospitals’ financial incentives may be in direct conflict with a patient’s medical need. ACEP urges emergency physicians to carefully weigh potential unintended consequences of payment policy changes and make patient-centric disposition decisions. Emergency physicians should continue to educate policymakers on the natural history of chronic disease processes, explaining the medical necessity of acute care for certain conditions despite the best preventive measures. Addressing perceived expensive, low-quality care will continue to be an important part of Medicare and other federal health care spending moving forward, but must be driven by patient outcomes as well as financial benefits.


Regulatory agencies represent a critical component of the government that impacts care and requires ongoing relationships and advocacy similar to elected officials. Effective advocacy includes:

  • Following, commenting, and engaging in rule-making as it occurs.
  • Asking Congress to support MedPAC’s recommendations for regulatory changes to issues such as the “Three Day Rule.”
  • Advocating for evidence-based programs which incentivize patient centric care.
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