Practice Economics

Delays, Controversy Muddle CMS’ Two-Midnight Rule for Hospital Patient Admissions


A new rule issued by the Centers for Medicare & Medicaid Services (CMS) is at the center of controversy fueled by competing interests and lack of clarity. And, for the fourth time since the two-midnight rule was introduced in the 2014 Hospital Inpatient Prospective Payment System, its implementation has been delayed. Hospitals and providers have until March 31, 2015, before auditors begin scrutinizing patient admission statuses for reimbursement determination.

The rule requires Medicare and Medicaid patients spending fewer than two midnights receiving hospital care to be classified as outpatient or under observation. Patients spending more than two midnights will be considered inpatient. Only physicians can make the determination, and the clock begins ticking the moment care begins.

The rule also cuts hospital inpatient reimbursement by 0.2%, because CMS believes the number of inpatient admissions will increase.

“The concern is that [the two-midnight rule] sets an arbitrary time threshold that dictates where a patient should be placed. The AHA opposes aspects of the rule and was involved in legislation to delay implementation.”

–Joanna Hiatt Kim, vice president of payment policy for the American Hospital Association

The rule pits private Medicare auditors (Medicare Administrative Contractors, MACs, and Recovery Audit Contractors, RACs), who have a financial stake in denying inpatient claims, against hospitals and physicians. It does little to clear confusion for patients when it comes time for them to pay their bills.

Patients generally are unaware whether they’ve been admitted or are under observation. But observation status leaves them on the hook for any skilled nursing care they receive following discharge and for the costs of routine maintenance drugs hospitals give them for chronic conditions.

Beneficiaries also are not eligible for Medicare Part A skilled nursing care coverage if they were an inpatient for fewer than 72 hours, and observation days do not count toward the three-day requirement. The two-midnight rule adds another “layer” to the equation, says Bradley Flansbaum, DO, MPH, FACP, a hospitalist and clinical assistant professor of medicine at NYU School of Medicine in New York City.

At the same time, hospitals now face penalties for patients readmitted within 30 days of discharge for a similar episode of care. Observation status offers a measure of protection in the event patients return.

The number of observation patients increased 69% between 2006 and 2011, according to federal data cited by Kaiser Health News, and the number of observation patients staying more than 48 hours increased from 3% to 8% during this same period.

“The concern is that [the two-midnight rule] sets an arbitrary time threshold that dictates where a patient should be placed,” says Joanna Hiatt Kim, vice president of payment policy for the American Hospital Association. The AHA opposes aspects of the rule and was involved in legislation to delay implementation.

“We feel time should not be the only factor taken into account,” Hiatt Kim adds. “It should be a decision a physician reaches based on a patient’s condition.”

Good Intentions

The rule states that hospital stays fewer than two midnights are generally medically inappropriate for inpatient designation. The services provided are not at issue, but CMS believes those administered during a short stay could be provided on a less expensive outpatient basis.

Dr. Flansbaum, a member of SHM’s Public Policy Committee, says the language of medical necessity that designates status is unclear, though CMS has given physicians the benefit of the doubt.

“We are looking for clear signals from providers for how we determine when someone is appropriately inpatient and when they’re observation,” he explains.

Although medical needs can be quantified, there are often other, nonmedical factors that put patients at risk and influence when and whether a patient is admitted. Physicians routinely weigh these factors on behalf of their patients.

“Risk isn’t necessarily implied by just a dangerous blood value,” Dr. Flansbaum says. “If something is not right in the transition zone or in the community, I think those [factors] need to be taken into account.”

Physicians are being given “a lot of latitude” in CMS’ new rule, he notes.


In recent clarification, CMS highlighted exceptions to the rule. If “unforeseen circumstances” shorten the anticipated stay of someone initially deemed inpatient—transfer to another hospital, death, or clinical improvement in fewer than two midnights, for example—CMS can advise auditors to approve the inpatient claim.

Additionally, CMS will maintain a list of services considered “inpatient only,” regardless of stay duration.

But creating a list of every medically necessary service is an “administrative black hole,” says Dr. Flansbaum, though he believes that with enough time and clarity, compliance with the two-midnight rule is possible.

Kelly April Tyrrell is a freelance writer in Wilmington, Del.

Two-Midnight Rule Primer

The two-midnight rule was an effort by CMS to protect patients from the hidden costs of observation stays while also reducing improper payments made to hospitals for care inappropriately delivered as inpatient. Aggressive auditing by RACs recovered over $2 billion a year from hospitals over the last two fiscal years as of June 2013, according to the AHA. Of this, $200 million has gone to the auditors.

According to an AHA survey last year, 40% of hospital RAC denials are appealed, and roughly 70% of these appeals are decided in the hospital’s favor. Several bills in Congress are seeking changes to RACs, including requiring these independent contractors to pay hospitals when audits are appealed and overturned.—KAT

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