The Two-Midnight Rule, Explained

April 20, 2015

Topics: Payments and Reimbursement, Payment Reform, Medicare, Hospitals

Ed note: Story updated on April 30, 2015.

by Joshua Zeitlin, staff writer

The Basics

When a patient arrives at a hospital, he or she can be admitted or put under outpatient observation status, which is meant to determine whether a patient should be admitted or discharged. That seemingly small difference in patient status can have a big effect on both hospitals and beneficiaries when it comes to Medicare benefits and payments.

Under observation status:Obs Status / Admitted

  • Hospitals receive reimbursement through Medicare Part B, which covers physician care. That's typically lower than rates for inpatient care covered under Part A.
  • Beneficiaries can experience higher out-of-pocket costs than they would as inpatients. In addition, patient status affects whether Medicare will cover care in a skilled nursing facility after discharge. Medicare will only cover SNF care for beneficiaries who have been hospital inpatients for at least three consecutive days.

Hospital officials worried about not being reimbursed at all if they admitted beneficiaries who should have been placed put under observation status first. As a result, between 2006 and 2011, the percentage of observation cases for beneficiaries lasting longer than 48 hours more than doubled -- from 3% to 8% -- raising concern among federal officials.

In response, CMS in an August 2013 unveiled the "two-midnight" rule, which aims to clarify when Medicare will reimburse at inpatient rates.

What is the Two-Midnight Rule?

In the rule, CMS said that "for those hospital stays in which the physician expects the beneficiary to require care that crosses two midnights and admits the beneficiary based upon that expectation, Medicare Part A payment is generally appropriate."

Meanwhile, the agency said paying hospitals at inpatient rates was "generally inappropriate" when a physician expects a beneficiary to require care for fewer than two midnights.

In practice, that means Medicare auditors, "absent evidence of systematic gaming, abuse or delays in the provision of care," should not review claims for inpatient hospital stays of longer than two midnights, meaning those claims are not subject to potential rejection based on patient status.

Does First Treating a Patient at 11:59 p.m. vs. 12:01 a.m. Really Make a Difference?

Yes, in some circumstances. The rule is based on a physician's expectation of how long a beneficiary will require care. So, if a physician thinks that a beneficiary will require slightly more than 24 hours of care and the patient first receives treatment at 11:59 p.m., they are just a minute away from accruing 'one midnight' and could be admitted without added scrutiny for the claim.

However, if that beneficiary first receives treatment at 12:01 a.m., then the rule calls for them to be put under observation status. Admitting that patient could result in the claim being rejected.

How is the Rule Enforced?

The two-midnight policy has never been fully enforced.

The policy originally intended for the auditing process to be split up between Medicare Recovery Audit Contractors (RACs) and Medicare Administrative Contractors (MACs).

However, enforcement by RACs, which conduct post-payment claims audits, has been delayed several times by CMS or Congress.

RACs would be tasked with combing through medical records of all inpatient hospitals' Medicare claims under two midnights and requiring hospitals to provide certain documentation backing up such admittances. Without sound documentation, RACs could recoup payments for CMS, and providers often cannot re-bill claims under the correct patient status that are rejected by RACs.

RACs / MACsWhile RAC audits were supposed to start in October 2013, they never actually kicked in. Most recently, the law (HR 2) replacing Medicare's sustainable growth rate formula further delayed two-midnight enforcement through Sept. 30.

Meanwhile, MACs still are allowed to conduct much more limited prepayment audits as part of a "probe and educate strategy." They select a sample of 10 submitted claims for most hospitals -- 25 claims for large hospitals -- and can deny payment for claims within that sample that do not meet the two-midnight rule and provide feedback to hospitals on non-compliant admissions. They also can repeat such audits when deemed necessary. However, if MACs determine that certain patients should have been placed on observation status rather than admitted, hospitals can re-bill those claims.

What Do Stakeholders Think?

Hospital groups have been major proponents of continuing to delay RAC audits, both because they do not think CMS has offered enough guidance on implementing the two-midnight rule and because they believe the policy is fundamentally unsound.

DeutschendorfFor example, American Hospital Association President and CEO Richard Umbdenstock in a statement said that the rule "undermines medical judgment and disregards the level of care needed to safely treat patients."

Similarly, Amy Deutschendorf, Johns Hopkins Hospital's vice president of care coordination, has said, "When the patient walks in the door, you can't have a crystal ball and know how long the patient will be there."

Meanwhile, Medicare auditors have said that the enforcement moratorium on RAC audits should end, noting that they recovered only $48 million in the fourth quarter of 2014, the lowest quarterly total during the program's five-year existence.

What's Next?


The Medicare Payment Advisory Commission earlier this month voted to approve a set of recommendations that included ending the two-midnight rule. Instead, RACs would target reviews at hospitals that have the highest rates of short inpatient stays.

The recommendations, which will be placed in MedPAC's June report to Congress, also included:

  • Allowing two observation status days to count toward the three-day threshold for SNF coverage;
  • Tying RAC contingency fees -- the portion of overpayments they receive -- to the rate that their reimbursement refusals are overturned via appeals; and
  • Evaluating a potential formulaic penalty to levy on hospitals with "excess" amounts of short inpatient stays.

Meanwhile, CMS in its proposed rule for the FY 2016 Inpatient Prospective Payment released on Friday said that officials are considering MedPAC's recommendations and the continued concerns voiced by hospitals and physicians about the two-midnight rule. The agency said it "expect[s] to include a further discussion" of the issue in a proposed rule that will be released this summer.

With the proposal to scrap the policy by MedPAC, stakeholders' views and CMS' comments, the clock appears to be ticking on the two-midnight rule.