Will CMS Kill the 3-Night Rule?

The average number of days that patients spend in the hospital are gradually declining, due to various factors, including just plain better medicine, but in some cases this works against both providers and patients. The most obvious example is the requirement that a patient have a 3-day inpatient hospital stay before CMS will pay for post-hospital extended care services, aka post-acute care – what many of us refer to as a SNF stay.

For a variety of reasons, CMS is under pressure to rework or even just eliminate this requirement. Why is CMS so reluctant to do so? Let’s consider the history of the rule, which may help explain their thinking.

Why Do We Have the 3-Night Rule?

In 1965, the Medicare extended care benefit was created, and the 3-night stay rule was developed to essentially “throttle” the use of scarce post-acute care beds, and still ensure that patients received appropriate medical care. At that time, Medicare was run by the Health Care Financing Administration (HCFA then, now CMS), and HCFA believed that it usually took 3 days for a Medicare patient to be admitted and evaluated, develop a plan of care, and finally be discharged. Today, this is certainly no longer the case, as this can all happen within a day or two. (This, despite the fact that CMS wants all that to happen ASAP, but at the same time, doesn’t want to pay inpatient rates for such care… but that’s another story, right?)

In 1982, the Tax Equity and Fiscal Responsibility Act allowed HCFA to grant waivers of the 3-night rule, but only if such a waiver did not increase Medicare costs or change the acute care nature of the Medicare program. Consequently, HCFA created demonstration projects in Oregon and Massachusetts that waived the 3-night rule. These projects later reported a mixed result: Oregon reported an estimated annual net Medicare savings of approximately $182,000; but Massachusetts reported a contrary result – an annual net cost of approximately $122,000.

By extrapolating these figures to the entire Medicare population, the estimated net effect was unimpressive – somewhere between 0.14% cost savings ($28 million) and 0.05% cost increase ($13 million cost) annually. Also, the projects could not show that the waiver of the 3-night rule had any effect on the quality of patient care. Based on all that, HCFA summarily opposed removing the 3-night rule.

Nevertheless, Congress decided to waive the rule entirely, and passed the Medicare Catastrophic Coverage Act (MCCA) of 1988. Within a year, however, it was repealed, and the 3-night rule was back to stay. What convinced Congress to repeal the waiver was probably a study done in Pennsylvania, where there was a 243% increase in Medicare payments, shown to be directly caused by more SNF care, after the MCCA and the waiver were enacted. The thinking was that with the waiver in place, nursing homes took advantage of the SNF benefit payments – higher than other payments, like state Medicaid – for patients previously managed just fine with typical nursing home services.

Such experience obviously makes CMS have reasonable concern that eliminating the 3-night rule would result in higher costs to Medicare, and possible misuse of hospitals and SNFs in general.

Other recent waivers have been granted – such as for Medicare managed care plans, special needs plans and the Program for All-Inclusive Care of the Elderly. These programs have shown modest cost savings and perhaps better care, but according to reports, these results may come from better case management and enhanced community-bases services for patients at risk for hospitalization, rather than from the waiver of the rule itself. The data is simply not available to make such a determination.

Another plan called EverCare was granted a waiver, in 1986. Both a University of Minnesota HCFA contracted study and MedPAC reported that EverCare did in fact reduce rates of hospitalization and emergency department use, at the same time improving patient and family satisfaction of care. Based upon this and other positive results seen across the country, a March 2013 MedPAC Report to Congress recommended that such plans be permanently renewed.

United Healthcare Corporation (UHC) operated EverCare in nine states, reporting a 30% decrease in costs compared to FFS plans, and a 33% reduction in hospital admissions. Nevertheless, UHC had difficulty in expanding the program, due to the special knowledge required and the larger risks associated with a large geriatric population.

Recently, according to data again from MedPAC, the demand for skilled-nursing care has soared, along with the cost to Medicare. But in 2012, the cost to Medicare was reduced by about 10%, when CMS simply lowered the rates it paid for those services.

Enter the ACA

Along comes the Affordable Care Act, offering two alternative payment and delivery initiatives – the ACO program and bundled payments. Bundled payments is an approach being used by CMS to reward the quantity of services offered by providers rather than the quality of care furnished. Research has shown that bundled payments can align incentives for providers – hospitals, post-acute care providers, physicians, and other practitioners – allowing them to work closely together across all specialties and settings.

In those programs, the participating hospitals have the option to accept the waiver, or not. Evidently, some do, some don’t. Currently, 236 providers have bundled payment contracts, and perhaps as many as 600 more were recently added to the program, according to a recent announcement by CMS.

The waiver of the rule applies to patients kept for observation in Medicare Pioneer ACOs, and to patients kept for observation and subsequently billed under Medicare’s bundled payment initiative.

Previously, Medicare Advantage plans were allowed to waive the 3-day rule, and the results of this have not yet been published.

New Programs

Currently, CMS is running four models to test bundled payment programs, under the Bundled Payments for Care Improvement Initiative (BPCI). Follow the links below to find more details and lists of participating organizations:

Model 1: Retrospective Acute Care Hospital Stay Only

Model 2: Retrospective Acute Care Hospital Stay plus Post-Acute Care

Model 3: Retrospective Post-Acute Care Only

Model 4: Acute Care Hospital Stay Only

Under BPCI, participating organizations enter into payment arrangements that include financial and performance accountability for episodes of care. The hope is that these models will lead to higher quality and more coordinated care at a lower cost to Medicare.

Bills Now Before Congress

Several recent bills may put Congress on a path to major reform of Medicare’s post-acute care payment system (PAC).

On June 26, 2014, the “Improve Medicare Post-Acute Care Transformation Act” (IMPACT)(H.R. 4994/S. 2553) was sponsored by Sens. Ron Wyden (D-OR) and Orrin Hatch (R-UT), together with Reps. Dave Camp (R-MI) and Sander Levin (D-MI). With the moniker “IMPACT” (https://beta.congress.gov/ search for S.2553) the bill is said to have a good chance of being enacted during the 113th congressional session, but includes calls for study and recommendations from CMS and MedPAC by – get this – 2022.

Perhaps a more speedy reform may be enacted beginning in 2016, via the “Bundling and Coordinating Post-Acute care Act of 2014” (BACPAC) bill (https://beta.congress.gov/ search for H.R.4673) which was introduced on May 19 by Rep. McKinley (R-WV) and Tom Price (R-GA). The interesting part of this bill calls for a “PAC Coordinator” – a hospital, a payor, or another provider, but not a government entity – would have full authority to pay, deny and coordinate all PAC services for 90 days after discharge, without any oversight or even reporting to CMS. It seems like CMS will send a payment to the PAC coordinator, who then doles it out appropriately. The bill is not expected to pass during the 113th congressional session, but will be introduced in the next.


Evidently, CMS is trying to walk a fine line between a lower or at least a revenue-neutral solution – and improving the care provided to Medicare beneficiaries. Unfortunately, there appears to be little data available to show that waiving the 3-night stay rule will improve care without raising Medicare costs. Nevertheless, there is a legitimate concern that the 3-night stay rule actually contributes to less-than desirable care and higher costs (via avoidable hospitalizations).

There is a need to address the things that cause those avoidable hospitalizations, and relying on the 3-night stay rule is not an answer, since it adds other problems at the same time.

Rather than a time-based hospital stay, CMS could instead implement criteria for skilled nursing care, perhaps including:

  • acute decline in mobility
  • impairment of daily living activities
  • presence of delirium.

This could reduce hospitalizations that keep a patient in the inpatient setting, which is more expensive, but must be done now to cover a legitimate SNF stay. Such savings could then be more effectively used to pay for more appropriate and less expensive home or SNF based care.

So, will CMS kill the 3-night Rule? Don’t hold your breath, but Congress is moving in that direction.


Useful references:

Costs for Hospital Stays in the United States, 2010

Understanding the Medicare “Extended Care Benefit” a.k.a. the 3-midnight rule.
(Cost to download the full PDF, but useful abstract is free)

MEDPAC Report to Congress: Aligning Incentives in Medicare

Dual Eligible Beneficiaries and Potentially Avoidable Hospitalizations
http://www.cms.gov/Research-Statistics-Data-and -Systems/Statistics-Trends-and-Reports/Insight-Briefs/downloads/PAHInsightBrief.pdf

Hospitalizations of Nursing Home Residents: Background and Options – HHS Report, June 2011

MEDPAC Report to Congress: Medicare Payment Policy

Subacute Care: Review of the Literature, March 1994

Hospitalizations of Nursing Home Residents: Background and Options, June 2011

Evaluation of the Evercare Demonstration Program Final Report, May/August 2002

Palliative Care Policy Center – Case Study – EverCare Program, United HealthCare Corporation

The IMPACT Bill, the BACPAC Proposal, and Why It Matters Where PAC Savings Go

Bundled Payments for Care Improvement (BPCI) Initiative: General Information

Medicare Acute Care Episode (ACE) Demonstration

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