October 1, 2024, will mark 11 years since the Centers for Medicare & Medicaid Services (CMS) established the ‘two-midnight rule’ for inpatient admissions of Medicare beneficiaries.

Contentious from the outset, the rule had a halting rollout, delayed by Congressional actions and agency revisions. As the Medicare payment model has evolved, the rule has taken on new relevance, forcing providers, health plans, and policymakers to reconsider its implications.

Background

CMS adopted the two-midnight rule after the RAC program and the Office of Inspector General (OIG) repeatedly identified significant improper Medicare payments for short-stay inpatient admissions. The OIG determined that many of these stays should have been billed as outpatient services, which generally result in lower payments. CMS defines ‘improper’ as those that do not meet program requirements, though this is not synonymous with fraud or abuse. For example, a hospital admission could be deemed improper if an auditor determines that the service could have been provided on an outpatient basis.

The length of a Medicare beneficiary’s hospital stay has significant implications. CMS specifies that a three-day inpatient hospital stay is required for a beneficiary to be eligible for Medicare coverage of skilled nursing facility services. Moreover, the difference in cost-sharing between inpatient and outpatient care means that how a hospital visit is billed directly impacts a patient’s financial responsibility.

The rule

Introduced in the Fiscal Year 2014 Inpatient Prospective Payment System (IPPS) Final Rule, the two-midnight rule specifies that Medicare will pay for inpatient hospital admissions when a physician reasonably expects the patient’s care to require a stay that crosses two midnights, and the medical record supports this expectation. CMS established the rule to curtail short inpatient (Medicare Part A) billing for services that could be appropriately billed as outpatient (Medicare Part B).

Initial exceptions to the two-midnight rule included:

1. Specific circumstances where Medicare Part A payment may still be appropriate despite the stay not meeting the typical 2-midnight benchmark. For admissions involving procedures on Medicare’s Inpatient-Only list, Part A payment is generally allowed regardless of the expected or actual length of stay, as these procedures typically necessitate inpatient care.
2. Certain rare and unusual cases as exceptions to the 2-midnight rule. If a nationally identified exception is present in the medical record, such as the initiation of mechanical ventilation during the visit, the stay may qualify for Part A payment even if it is expected to last less than two midnights. CMS generally expects that beneficiaries requiring newly initiated mechanical ventilation will need two or more midnights of care. However, even if the physician anticipates a shorter stay but orders inpatient admission, Part A payment is often still considered appropriate.

CMS directed Recovery Audit Contractors (RACs) to exempt stays meeting any of the above exceptions from audit.

Reception by Providers and Hospitals

The two-midnight rule met with opposition from hospitals and healthcare providers. Many felt that it was overly rigid, reducing physician autonomy and discounting clinical judgment while forcing providers to predict the duration of a patient’s stay at the time of admission. The American Medical Association called the rule “confusing for hospital patients and onerous for physicians.” The American Hospital Association filed lawsuits to prevent its implementation, claiming that the rule undermined medical judgment and disregarded the level of care needed to safely treat patients.

Critics also argued that it led to confusion over billing and coding, which could place undue administrative burdens on hospitals.

Evolution of the Rule

These criticisms, lawsuits, and questions from Congress delayed the implementation of the rule, with CMS initially undertaking a “probe and educate” approach.

The agency has made several adjustments to the rule over the years to allow for greater flexibility.  This has included permitting case-by-case exceptions where a physician’s judgment could override the two-midnight expectation if the inpatient admission were deemed appropriate based on the patient’s clinical condition, even if the stay lasted fewer than two midnights. This effort to balance the need for oversight with the realities of clinical practice provided for the possibilities of death, transfer, or a patient leaving against medical advice.

However, CMS cautions that stays under 24 hours will rarely meet the criteria for exceptions and may be subject to further medical review.

Two-midnight in Medicare Advantage

The two-midnight rule was an effective means of shaping treatment and billing patterns when 72% of Medicare beneficiaries were enrolled in traditional fee-for-service Medicare. However, it may have had unintended consequences as enrollment shifted and the majority of beneficiaries opted for Medicare Advantage (MA) plans.

Until this year, the two-midnight rule did not apply to MA plans, and this may have contributed to differences in hospital admission practices. Evidence from Strata Decision Technology indicates that in 2023, patients enrolled in MA plans were more likely than patients in traditional Medicare to be placed in hospital observation (outpatient) status rather than to be admitted as inpatients.

These findings align with a report from the Department of Health and Human Services Office of Inspector General and Senate inquiries into concerns about MA plans using utilization management to limit beneficiary access to medically necessary care.

In response to these and other concerns, CMS published a final rule in April 2023, mandating that MA plans comply with the two-midnight rule beginning this year.

Since January, CMS has required MA plans to provide coverage for inpatient admissions when ‘the admitting physician expects the patient to require hospital care that crosses two midnights.’ Additionally, plans must furnish, arrange, or pay for an inpatient hospital admission when a physician determines that inpatient admission is appropriate based on ‘complex medical factors documented in the medical record’ or when Medicare specifies an inpatient admission for a surgical procedure.

It should be noted that, while the two-midnight rule in traditional Medicare exempts qualifying stays from RAC review, CMS has clarified that MA plans may still conduct utilization reviews of two-midnight admissions. MA medical necessity reviews can be performed at various stages—before the service is provided, during the patient’s stay, or after discharge. This possibility of makes thorough and accurate documentation essential.