Proposed Revisions to “Two-Midnight” Rule Provide Little, If Any, Relief for Medicare Beneficiaries Stuck in the Hospital in Observation Status

In the annual update to Medicare reimbursement of acute care hospitals for outpatient care (July 8, 2015)[1] the Centers for Medicare & Medicaid Services (CMS) includes proposed revisions to the “Two-Midnight Rule” and its enforcement.

If the proposed changes lead to an increased number of patients being formally admitted as inpatients (rather than, as now, placed in Observation or other outpatient status), they may help some Medicare beneficiaries.  More likely, however, the revision will not significantly change hospital practices and, accordingly, the new rule will not help most Medicare beneficiaries.  Hospitals will continue to inappropriately classify certain hospitalized Medicare patients as outpatients, making them ineligible for Medicare Part A coverage of their post-hospital skilled nursing facility care, even though their hospital care was indistinguishable from the care received by formally admitted inpatients.[2]

The Current Two-Midnight Rule

CMS promulgated the Two-Midnight Rule in 2013.[3]  CMS describes two opposite, but complementary, concerns that motivated the 2013 Rule – the “persistently large improper payment rates in short-stay hospital inpatient claims” and “increasingly long stays of Medicare beneficiaries as outpatients due to hospital uncertainties about payment.”[4]

Effective October 1, 2013, the federal Rule, for the first time, created time-based presumptions of patient status in acute care hospitals.  Under the Rule, a patient “is considered an inpatient of a hospital,…if formally admitted as an inpatient admission by a physician or other qualified individual”[5] who “expects the patient to require a stay that crosses at least 2 midnights.”[6]  Stays expected to be shorter than at least two midnights “are generally inappropriate for inpatient admission and inpatient payment under Medicare Part A,” unless the surgical procedure is “specified by Medicare as inpatient only under §419.22(n).”[7]

The Two-Midnight Rule was controversial from the beginning, its implementation was delayed by both CMS[8] and Congress,[9] and the rule has not been enforced since its promulgation.

Proposed Changes

CMS defends the Two-Midnight Rule for inpatient admission as giving “appropriate consideration to the medical judgment of physicians” while furthering “the goal of clearly identifying when an inpatient admission is appropriate for payment under Medicare Part A.”[10]  It reiterates that the Two-Midnight Rule “does not prevent the physician from ordering or providing any service at any hospital, regardless of the expected duration of the service”[11] and “does not override the clinical judgment of the physician regarding the need to keep the beneficiary at the hospital, to order specific services, or to determine appropriate levels of nursing care of physical locations within the facility.”[12]  Nevertheless, in response to stakeholder concerns about the removal of physician judgment and its own effort “to develop the most appropriate and applicable framework for determining when payment under Medicare Part A is appropriate for inpatient admissions,”[13] CMS proposes two changes to the current Rule.

The first change proposed by CMS is to modify the Two-Midnight Rule slightly by providing that, on a case-by-case basis, payment to an acute care hospital under Medicare Part A is available if a physician documents a patient’s need for inpatient care for fewer than 24 hours.[14]  Such short inpatient stays “will be prioritized for medical review.”[15]  Medical reviewers must follow CMS policies and their “clinical judgment would 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.”[16]  The Center for Medicare Advocacy is concerned that CMS requires reviewers to evaluate physicians’ decisions retrospectively, based on the record of care and treatment provided to the patient after admission.  Medical reviewers will not review physicians’ decisions based on information that is available at the time the decision to admit as an inpatient is made.

It is difficult to see how this new rule will significantly change current practice, for two reasons.  First, what the physician is required to document for a short inpatient stay of less than two midnights is exactly the same as what the physician must document for admission when the patient is expected to be in the hospital for two or more midnights.  Compare proposed §412.3(d)(1)(i) with §412.3(d)(3).  Whether the physician expects the patient to remain in the hospital for fewer than two midnights or for more than two midnights, the physician’s decision must be based on “such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event.”  The proposed rule does not distinguish the factors that are relevant for inpatient stays of two midnights and more and for inpatient stays of fewer than two midnights; the standard for both appears to be identical.  Second, short inpatient decisions will be prioritized for review by reviewers who will evaluate patients’ admissions by considering the care that was provided after admission.

Whether physicians will admit patients to inpatient stays of fewer than two midnights, and whether hospitals will support these admission determinations,[17] remains to be seen.

The second change proposed by CMS is the shifting of reviews of short-stay inpatient stays from Recovery Auditors (RAs, still popularly known by their former name, Recovery Audit Contractors, or RACs) to Quality Improvement Organizations (QIOs), by no later than October 1, 2015.[18]  “QIOs will refer claims denials to Medicare Administrative Contractors (MACs) for payment adjustments.”[19]  If a hospital (1) has high denial rates; (2) consistently fails to adhere to the 2-midnight rule; or (3) fails to improve its performance “after QIO educational intervention,” the QIO will refer the hospital to the RA for payment audit.[20]

In the last few years, reviews by RAs have led to increased use of observation and outpatient status because of the harsh consequences of a RA’s disagreeing with a hospital’s inpatient admission decision.  If an RA determines that a patient should have been treated on an outpatient basis instead of inpatient, the hospital must return the Medicare Part A reimbursement it received for the patient’s care and the hospital gets essentially no reimbursement for the patient’s stay.  The dispute between hospitals and RAs is not about whether the hospital provided medically necessary care and services to the patient; the dispute is solely about whether the hospital correctly billed Medicare.  Under the rebilling option promulgated in 2013, hospitals may rebill Part B if Part A coverage is denied, so long as the rebilling occurs within one year of the provision of service.[21]

If removing review from RAs makes hospitals less reluctant to allow their physicians to admit their patients to inpatient status, Medicare beneficiaries could benefit.  However, the specter of referral to an RA, and the consequences of RA audit, may make hospitals continue classifying patients as outpatients.

Use of Commercial Screening Tools

CMS confirms that hospitals may continue to use commercial screening tools.

In addition, Medicare review contractors must abide by CMS policies in conducting payment determinations, but are permitted to take into account evidence-based guidelines or commercial utilization tools that may aid such a decision.  While Medicare review contractors may continue to use commercial screening tools to help evaluate the inpatient admission decision for purposes of payment under Medicare Part A, such tools are not binding on the hospital.[22]

CMS suggests that physicians may also want to consider the tools.[23]

Commercial screening tools, such as InterQual, are based on diagnosis and numbers (e.g., temperature and other quantifiable data), not on a clinical assessment of the patient’s status and whether the patient needs the care and services that only an acute care hospital can provide.

Whether or not commercial screening tools are formally “binding on the hospital,” many hospitals will continue to use them as long as Medicare review contractors (MACs, QIOs, RAs, etc.) use them to evaluate hospitals’ compliance with Medicare inpatient admission decisions.

Medicare Payment Advisory Commission

In June 2015, the Medicare Payment Advisory Commission (MedPAC) recommended that CMS withdraw the Two-Midnight Rule,[24] among other recommendations related to observation status and RA review.  MedPAC described potential changes in utilization patterns resulting from the Two-Midnight Rule that might not be beneficial to either patients or CMS.

Advocates’ Position

An ad hoc coalition of national organizations, including the Center for Medicare Advocacy, supports federal legislation to count all time spent by a patient in the hospital, for purposes of satisfying the “three-midnight” requirement for Medicare Part A coverage of post-acute care in a skilled nursing facility.  The identical bipartisan bills are H.R.1571 and S.843, the Improving Access to Medicare Coverage Act of 2015.[25]

The Future

CMS says it will continue monitoring and adjusting the rule.[26]

Comments on Proposed Rule

Public comments are the proposed rule, CMS-1633-P, are due August 31, 2015.  Comments may be submitted electronically at http://www.regulations.gov, and by mail or courier.[27]


[1] 80 Fed. Reg. 39199 (July 8, 2015), http://www.gpo.gov/fdsys/pkg/FR-2015-07-08/pdf/2015-16577.pdf.  The proposed rules also discuss reimbursement of outpatient care at acute care hospitals and ambulatory surgical centers, among other issues.
[2] The Center for Medicare Advocacy has extensive materials on observation status.  See  http://www.medicareadvocacy.org/?s=observation&op.x=0&op.y=0.
[3] 78 Fed. Reg. 50495, 50906-954 (Aug. 19, 2013).  The regulations are discussed in Center for Medicare Advocacy, “Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries” (Alert, Aug. 29, 2013), http://www.medicareadvocacy.org/observation-status-new-final-rules-from-cms-do-not-help-medicare-beneficiaries/.
[4] 80 Fed.Reg. 39199, 39348.
[5] 42 C.F.R. §412.3(a).
[6] 42 C.F.R. §412.3(d)(1), originally §412.3(e)(1).
[7] Id.
[8] CMS, “ FREQUENTLY ASKED QUESTIONS 2 Midnight Inpatient Admission Guidance &Patient Status Reviews for Admissions on or after October 1, 2013,” http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medical-Review/Downloads/QAsforWebsitePosting_110413-v2-CLEAN.pdf; CMS, “ Selecting Hospital Claims for Patient Status Reviews: Admissions On or After October 1, 2013” (Last Updated: 11/04/13), http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-Programs/Medical-Review/Downloads/SelectingHospitalClaimsforAdmissionsonorafterOctober1st2013forReviewForWebPostingCLEAN.pdf.
[9] 42 U.S.C. §1395dddnote, extending moratorium through March 31, 2015 (added by §111 of the Protecting Access to Medicare Act of 2014, Pub. L. 113-93); 42 U.S.C. §1395dddnote (as amended), extending moratorium through September 30, 2015 (added by §521 of the Medicare Access and CHIP Reauthorization Act of 2015, Pub. L. 114-10).
[10] 80 Fed.Reg. 39349.
[11] Id.
[12] 80 Fed.Reg. 39350.
[13] Id.
[14] 80 Fed.Reg. 39350-39351; proposed §412.3(d)(3).
[15] 80 Fed.Reg. 39351.
[16] Id.
[17] Under Condition Code 44, hospitals review physicians’ inpatient decisions and may request that physicians change their patients’ status from inpatient to outpatient.  CMS, Medicare Claims Processing Manual, 100-04, Chapter 1, §50.3, http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c01.pdf (scroll down to page 148].   A survey by the Society for Hospital Medicine (the professional association of hospitalists) indicates that 16% of hospitalists reported that they were asked to change their patients’ status.  Society for Hospital Medicine, The Observation Status Problem: Impact and Recommendations for Change, page 11 (July 2014),
[18] 80 Fed.Reg. 39352.
[19] 80 Fed.Reg. 39353.
[20] Id.
[21] 42 C.F.R. §414.5.
[22] 80 Fed.Reg. 39351.
[23] Id.
[24] MedPAC, Report to the Congress: Medicare and the Health Care Delivery System, Chapter 7 (Hospital short-stay policy issues), pages 183-185, 194 (Recommendation 7-1) (June 2015), http://medpac.gov/documents/reports/Jun15_EntireReport.pdf.
[25] The coalition’s Fact Sheet is available at http://www.medicareadvocacy.org/wp-content/uploads/2015/06/6.30.15.Observation-Stays-Coalition-One-Pager.pdf.
[26] 80 Fed.Reg. 39353.
[27] 80 Fed.Reg. 39200.