HealthLeaders: Payers Are Playing Hardball—And Hospital CFOs Are Paying the Price

By: Marie Defreitas Published on: October 24, 2024

Hospital CFOs are in the crosshairs of aggressive Medicare Advantage (MA) payers, who are increasingly denying claims and bending the rules.

This tug-of-war between hospitals and payers isn’t just about paperwork—it’s a high-stakes battle impacting patient care, hospital revenue, and the financial sustainability of health systems. As denial rates for inpatient stays rise, CFOs must ramp up their strategies to combat rule-breaking payers and protect their bottom lines.

Now, new data from Kodiak Revenue Cycle Analytics reveals a disturbing trend: some MA payers are refusing to comply with CMS’s Two-Midnight Rule, leaving hospitals struggling to secure proper reimbursement. Kodiak examined claims data from more than 1,900 hospitals and 250,000 physicians across the country, collectively representing about $1.4 trillion in annual gross revenue.

The report examines payers who are not following the Two-Midnight Rule set by CMS to determine how to cover and pay health systems for care provided to Medicare beneficiaries.

The report reveals a wide variation in patient observation rates amongst health plans and wide variations in patient observations rates within a health plan type over time.

The Data

From this data, the report found four primary trends amongst Medicare, MA, and commercial health plans.

The observation rate for Medicare Advantage (MA) plans is significantly higher than traditional Medicare. MA plans seem to follow the Two-Midnight rule some of the time, but there is still a large gap and MA members are not getting the same inpatient coverage as traditional Medicare counterparts.

The data also shows that the observation rate for MA plans is falling, but so is the traditional Medicare observation rate. For MA plans, this decline reflects CMS’ requirement for them to follow the Two-Midnight Rule starting in January 2024. The biggest decline was in December 2023 when MA plans observation rates were at 19.0% to 15.0% in January 2024. This shows that commercial payers are beginning to adhere to the traditional Medicare guidelines for their MA members, resulting in fewer denials for inpatient stays.

For traditional Medicare, the rate is also unexpectedly falling, declining to 3.7% in June 2024, the lowest it's been in the past 18 months. Kodiak surmises that this rate could be coming from a more standardized provider approach to use the Two-Midnight rule, more accurate clinical documentation and more accurate provider coding. This low could also be coming from a higher percentage of Medicare patients that require inpatient care versus outpatient care as more care moves to ambulatory or virtual settings.

Lastly, the report found that the observation rate or commercial/managed care health plan is rising after a slight dip. The observation rate for these plans jumped from 15.0% in January 2024 to 18.5% in June 2024, marking a whopping 23.3% increase in just six months.

This jump shows a tense shift in payer claims behavior and is once again putting providers between a rock and aggressive inpatient denial tactics. This data also suggests, according to Kodiak, that payers are focused on commercial lines as a means to manage inpatient denial rates, possibly due to stricter Medicare regulations. Many of the largest commercial payers also make up the majority of the managed Medicare marketplace.

Despite the slight reduction in denials, there is still a much greater chance of MA members and their providers facing more inpatient denials for hospital stays compared to traditional Medicare members.

The CFO Playbook

A recent AHA report zoomed in on rising hospital administration costs, citing longer times and higher expenses in appealing and overturning inaccurate claims denials by MA plans as the primary cause.

Providers will need to reinforce their denial management practices and ensure their documentation and case reviews are optimized. Now is a critical time for providers to double down on this initiative to continue riding the momentum of the trending decrease in observation rate for Medicare members.

Providers have struggling with reimbursement for years now, and sticking to a sustainable strategy can be difficult. Some CFOs suggest conducting weekly payer meetings to ensure both parties have accurate up-to-date data and minimize the margin for error.

As denials rates increase year over year, CFOs and all finance executives will need to keep up with hardball payer tactics, and ensure they focus on reducing observation denials in MA while leveraging stability in observation denials in traditional Medicare.

This article was originally published on HealthLeaders.