Medicare’s "Two-Midnight Rule” – Where are we now after all of the rulemaking?


It looks like the Medicare “Two-Midnight Rule” is here to stay. After so many changes to the rule since it was first announced by the Centers for Medicare and Medicaid Services (CMS), where did we finally end up? What is the current state of Medicare policy for when a patient’s hospital services are properly billed as inpatient hospital services under Medicare Part A?

The Two-Midnight Rule was created by CMS in the 2014 Hospital Inpatient Prospective Payment Rule, effective on October 1, 2013, to, in CMS’s words, “provide greater clarity to hospital and physician stakeholders, and address the higher frequency of beneficiaries being treated as hospital outpatients.” The Two-Midnight Rule was supposed to be more black and white, but as CMS found out from both industry trade associations and hospitals, the rule was not exactly a model of clarity. Thus, since it was first announced in 2013, CMS has modified and clarified the rule a number of times, most recently in the final 2016 Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Rule issued on October 30, 2015 (the Final Rule). All of those modifications have made it difficult to know what standard hospitals should use when determining whether a patient is properly admitted as an inpatient to the hospital. This analysis sorts through all the changes and sets forth the current state of the Two-Midnight Rule that hospitals should use to determine when a patient is appropriately admitted as an inpatient under the Medicare rules effective January 1, 2016.

The original version of the Two-Midnight Rule provided that:

  • Inpatient admissions would generally be payable under Medicare Part A if the admitting practitioner ordered the admission based on the expectation that the patient required a hospital stay that crossed two midnights and the medical record supported that reasonable expectation;
  • Medicare Part A payment was generally not appropriate for hospital stays expected to last fewer than two midnights, and only cases involving an inpatient-only procedure or that were a “rare and unusual exception” or unforeseen circumstances (such as beneficiary death or transfer that resulted in a shorter than expected stay) were exceptions to the general rule and could be appropriate for Part A payment; and
  • A physician’s order for inpatient hospital services was required as a condition of payment and the inpatient stay was not considered to commence until the order to admit was given (and the order had to be authenticated prior to the patient’s discharge). In addition, a physician certification of the length of stay expectation and medical necessity for inpatient hospital services had to be completed, signed, dated and documented in the patient’s medical record prior to discharge.

Through the many iterations and clarifications of the Two-Midnight Rule that hospitals have seen in the past two-plus years, the physician certification requirement was eliminated for inpatient lengths of stay under 20 days, and other significant changes have also been implemented. Under the Final Rule, CMS is providing more flexibility in determining when a patient is appropriately admitted as an inpatient so the patient’s hospital services are appropriate for Part A payment. The Final Rule maintains the two-midnight benchmark and the requirement that a physician (or other eligible practitioner) order the inpatient admission but has granted some flexibility for determining when an inpatient admission does not meet the benchmark (i.e., not expected to stay in the hospital crossing two midnights) but should nonetheless be payable under Part A by allowing for Part A payment on a case-by-case basis based on the judgment of the admitting physician and the documentation in the medical record supporting the practitioner’s determination that the patient requires inpatient hospital care. The Final Rule provides that if the hospital stay spans fewer than two midnights, in order to be payable under Part A as an inpatient stay, the documentation in the patient’s medical record must support either: (1) the admitting physician’s reasonable expectation that the patient will require hospital care spanning at least two midnights, or (2) the physician’s determination that the patient requires formal admission to the hospital on an inpatient basis even though the patient’s stay is expected to span fewer than two midnights. CMS reiterated in the Final Rule some of the factors that are relevant to whether a physician’s determination that a patient should be admitted as an inpatient despite the expectation that the stay will not span two midnights is appropriate:

  • The severity of the signs and symptoms exhibited by the patient;
  • The medical predictability of something adverse happening to the patient; and
  • The need for diagnostic studies that appropriately are outpatient services.

To show how the Medicare regulation setting forth the Two-Midnight Rule for inpatient hospital admissions has changed from the  2014 final rule (effective October 1, 2013) to the 2016 Final Rule (effective January 1, 2016), we have provided a redline comparison of 42 CFR 412.3 to show the “before” and “after.”

In the 2016 Final Rule, CMS noted that where a beneficiary’s hospital stay does not span two midnights, hospitals should understand that the claims will be subject to medical review. CMS also reiterated that it is CMS’s expectation that a beneficiary is unlikely to require inpatient hospital admission for a minor medical procedure or other treatment in the hospital that is expected to keep the beneficiary in the hospital for only a few hours and does not span at least one midnight. CMS plans to prioritize reviews of these cases. CMS indicated in the Final Rule that the medical reviewers’ clinical judgment of whether the inpatient admission was proper will “involve the synthesis of all submitted medical record information (for example, progress notes, diagnostic findings, medications, nursing notes, and other supporting documentation) to make a medical review determination on whether the clinical requirements in the relevant policy have been met.” CMS also noted that medical reviewers are “permitted to take into account evidence-based guidelines or commercial utilization tools that may aid such a decision” but noted that such tools are not binding on the hospital, CMS, or the review contractors. CMS explained that the information from such commercial utilization tools (such as InterQual and Milliman) “may be appropriately considered by the physician as part of the complex medical judgment that guides his or her decision to keep a beneficiary in the hospital and formulation of the expected length of stay.” 

Other good news: the Recovery Contractors (RACs) and Medicare Administrative Contractors (MACs) will no longer be charged with conducting initial patient status reviews of claims for inpatient hospital services. Under the Final Rule, the Quality Improvement Organizations (QIOs) will conduct the initial patient status reviews. That’s good news since QIOs are not paid on a contingency basis like the RACs, which many believe led the RACs to be overzealous in their determinations that claims had been billed improperly as inpatient. Under the Final Rule, QIOs will begin reviewing inpatient status cases under the revised Two-Midnight Rule. According to CMS, the QIOs will focus on educating hospitals and doctors about the Part A policy for inpatient admissions and will refer to the RACs cases involving patterns of possible abuse, such as high rates of claims denials after medical review or failure to improve after QIO assistance has been provided. The QIOs will evaluate provider performance and provide written claim-specific information and denial reasons that will give the provider the opportunity to review the QIO’s decision. The written decision will include a specific phone number and/or point of contact to request or schedule a QIO education session where the provider can ask questions one-on-one to the QIO and receive feedback from a QIO clinician knowledgeable about the provider’s reviewed claims. The QIO will then give providers a final results letter, will refer any denied claims to the MAC for payment adjustment and, if appropriate, make a referral to the RACs for providers requiring further review.

Other items of note from CMS in the Final Rule:

  • No change to the requirement that there must be a signed physician order initiating the hospital admission, and the admission order must be authenticated prior to discharge.
  • CMS reiterated that there are differences between observation services furnished in the outpatient setting and services furnished to inpatients. Citing the Medicare Claims Processing Manual, Chapter 4, Section 290, CMS explained that observation services are a “well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment, that are furnished while a decision is being made, regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.” (Note: Medicare rules do not permit a hospital to bill Medicare for observation services if the patient was originally admitted as an inpatient but that admission was later determined to be improper. For more information on how to bill Medicare Part B for hospital services when a Part A hospital inpatient claim is denied because the inpatient admission was not reasonable and necessary but hospital outpatient services would have been reasonable and necessary in treating the beneficiary, see 42 CFR § 414.5.)
  • Commenters requested details on the QIO patient status reviews, such as claim sample sizes, frequency of reviews, claim lookback periods and additional document request (ADR) limits. CMS responded that it will address these questions in sub-regulatory guidance to be published on the CMS website by December 31, 2015.

CMS has also issued a Fact Sheet about the Final Rule. We will continue to issue updates as CMS refines and clarifies the Two-Midnight Rule, especially once the sub-regulatory guidance is issued by CMS.

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