On July 1, CMS published proposed changes to the so-called “Two-Midnight Rule,” which currently governs when inpatient hospital admissions are entitled to Medicare Part A payment. The proposed changes were announced in a display version of the 2016 Hospital Outpatient Prospective Payment system Proposed Rule and will appear in the Federal Register on July 8. The Proposed Rule contains the following changes:

  1. Proposes removal of the presumption that only under “rare or unusual circumstances” or inpatient-only services is Part A payment made for inpatient admissions of less than two midnights;
  2. Proposes permitting Part A payment for admissions of less than two midnights if documentation in the medical record supports the physician’s determination that the patient requires formal admission to the hospital on an inpatient basis; and
  3. Changes the agency responsible for medical review related to the Two-Midnight Rule from Medicare Administrative Contractors (MACs) and Recovery Audit Contractors (RACs) to Quality Improvement Organizations (QIOs).

Each of these changes is discussed in further detail below.


The Two-Midnight Rule became effective Oct. 1, 2013 and defined a new standard for when Medicare pays hospitals for inpatient admissions. The new rule created a presumption that Medicare Part A payment for inpatient admissions would be appropriate for lengths of stay greater than two midnights, while lengths of stay less than two midnights should be billed and paid as Part B outpatient services. Only in “rare and unusual” circumstances would admissions spanning fewer than two midnights be paid as inpatient services. These exceptions include services designated by CMS as “inpatient only” or where death, transfer or other case-by-case circumstances caused the patient’s inpatient admission to end before the second midnight. Absent these circumstances, if patients are hospitalized for fewer than two midnights, Medicare requires the services to be paid as outpatient.

Since October 2013, the Two-Midnight Rule has been the subject of significant debate. Health care providers have argued that the two-midnight benchmark inappropriately diminishes the physician’s professional judgment in determining whether a patient’s condition merits the enhanced monitoring and treatment that occurs in the inpatient setting. In 2014, the American Hospital Association and several hospitals filed lawsuits against CMS challenging the Two-Midnight Rule. In an effort to clarify the Rule, CMS has hosted numerous Open Door forums, conducted national provider calls and shared information and answers to FAQs on the CMS website. In addition, MACs are currently conducting “probe and educate” reviews of inpatient claims to assess providers and help them understand how to comply with the new Rule. A moratorium has also been imposed on post-payment reviews by RACs of inpatient hospital admissions until Sept. 30, 2015.


Relaxing the two-midnight threshold

Under the Proposed Rule, CMS would adjust the two-midnight threshold and remove the presumption requiring a patient to be admitted for two midnights in order for the hospital to be entitled to Part A payment (absent an exception). Rather, so long as there is sufficient documentation in the medical record supporting the medical necessity of an inpatient admission of less than two midnights, the admission will be covered under Part A. If adopted, CMS will not require a “rare or unusual circumstance” or an inpatient-only service to cover a short stay as an inpatient service. Rather than presume that admissions of less than two midnights should be covered as outpatient services, if the Rule is finalized, CMS will examine short stay admissions on a case-by-case basis and rely upon the professional judgment of the admitting physician to determine eligibility to Part A payment.

In examining admissions on a case-by-case basis, the medical reviewer will synthesize all submitted medical record information, such as progress notes, diagnostic findings, medications, nursing notes, and other supporting documentation, and make a medical review determination. The reviewer will use the following factors, among others, to determine whether an admission where the patient stay is expected to be less than two midnights is nonetheless appropriate for Part A payment:

  • 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 (that is, their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more).

Thus, under the Proposed Rule, for purposes of Medicare payment, an inpatient admission will be payable under Part A if the documentation in the medical record supports either the admitting physician’s reasonable expectation that the patient will require hospital care spanning at least two midnights, or the physician’s determination based on factors such as those identified above, that the patient requires formal admission to the hospital on an inpatient basis. As is the case for all Medicare covered services, to be entitled to Part A payment, the admission must be reasonable and necessary and supported by clear documentation in the patient’s medical record.

CMS also clarified that it is not proposing any changes for hospital stays that are expected to be greater than two midnights. In other words, if the physician expects the patient to require hospital care that spans at least two midnights and admits the patient based on that expectation, the services will generally be considered appropriate for Medicare Part A payment.

For stays that do not span at least one overnight, however, CMS still believes that it would be “rare and unusual for a beneficiary to require inpatient hospital admission.” CMS will continue to “monitor the number of these types of admissions” and “prioritize these types of cases for medical review.”

QIOs to audit inpatient admissions

With respect to auditing hospitals for compliance with the Two-Midnight Rule, CMS announced a shift in the agency responsible for enforcement from MACs and RACs to QIOs. QIOs are comprised of healthcare experts, clinicians and consumers and work under CMS’s direction on quality improvement efforts and initiatives.

In announcing the change, CMS emphasized the collaborative role they foresee QIOs playing as part of the enforcement effort, noting their “significant history of collaborating with hospitals and other stakeholders.”

This change may reflect a shift in CMS’s approach to enforcement of the Two-Midnight Rule. QIOs may employ more collaborative and educational efforts as compared to the audit functions of the MACs and RACs. However, the Proposed Rule also provides that where hospitals consistently have high denial rates throughout the QIO review process, the RACs will resume their reviews.


The Proposed Rule may well signal a significant and beneficial shift in Medicare coverage rules for hospital inpatient services. Interested parties may submit comments to CMS until Aug. 31, 2015, with the Final Rule scheduled to be issued on or around Nov. 1, 2015.