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The CMS "Two Midnight" Rule

Mar 29, 2016 10:05AM ● By MED Magazine

By Melissa Grant

On November 13, 2015, the Centers for Medicare and Medicaid (CMS) published the final rule, “Short Inpatient Hospital Stays,” included in the 2016 Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System rule (80 FR 70297), (the “OPPS Final Rule for 2016”). 

The OPPS Final Rule for 2016 clarified questions and modified the original rule on inpatient stays and subsequent published guidance from CMS.  Originally published in the 2013 Federal Register as part of the 2014 Inpatient Prospective Payment System final rule (78 FR 50495) (the “IPPS Final Rule for 2014”), the “Admission and Medical Review Criteria for Hospital Inpatient Services Under Medicare Part A” clarification from CMS became known as “The Two Midnight Rule.”  

The Two Midnight Rule created a “benchmark” that inpatient hospital stays falling short of the two midnights minimum are generally classified as outpatient services unless an exception was warranted by the (1) total medically necessary services a patient received and (2) clinical documentation supported the physician expected the patient stay required two midnights.  Therefore, in addition, the rule created a “presumption” that medically necessary stays spanning two midnights are generally Medicare Part A services. 

Although seemingly simple in construction, The Two Midnight Rule has sparked complex debates over the requirements as well as the renewed risk of post-payment audits.  Reflecting back to 2013, CMS’s intent with The Two Midnight Rule is to proactively reduce the volume of beneficiary payments improperly paid as higher inpatient rates through the Medicare Part A reimbursement schedule, when the stays should have been paid as an outpatient services at the  lower Medicare Part B rates. 

CMS data studies indicated a significant amount of short term stays, extended outpatient “observation” services, and procedures performed in medically unnecessary inpatient setting were inappropriately being billed to Medicare Part A at higher rates.  The result, or consequence as CMS stresses, has been unnecessary higher costs passed on to patients or taxpayers. 

On the other side of the debate, healthcare professionals generally opposed The Two Midnight Rule as a dramatic change that interferes with a physician’s professional medical judgment.  CMS, in response and prior to the 2016 final rule, published numerous guidances such as conceding in 2014 that “rare and unusual” exceptions may exist for appropriate Medicare Part A payments notwithstanding the physician’s medical judgment concludes a hospital stay shorter than the two midnights is appropriate care for the patient. 

In addition, the following two exceptions were identified: OPPS inpatient-only procedures and some initiated mechanical ventilation.  Yet, the healthcare industry overall continued to pressure CMS for additional changes and clarifications. 

Under the OPPS Final Rule for 2016 update, CMS reaffirmed all healthcare services provided to a patient at a hospital are considered in determining whether the stay was truly an inpatient stay and property payable under Medicare Part A. 

The two midnight clock starts when services start, including services a patient received as a regular outpatient in the emergency room, observation time, and all other appropriate “pre” and “post” inpatient care.  The OPPS Final Rule for 2016 also reiterates the “benchmark” is to “ensure that all beneficiaries receive consistent application of Medicare Part A benefits to medically necessary services” and firmly states this benchmark “instruction does not override the medical judgment of the physician…” 

Beginning January 1, 2016, the “presumption” component of the medical review policy as originally provided in the 2014 final rule became effective.  The “presumption” was not modified in the 2016 update.  Unless other evidence shows indicators of fraud and abuse, reviewers will not subject claims meeting the The Two Midnight Rule benchmark to an audit.  

The 2016 final rule extended the prohibition on post-payment auditing under the “Probe and Education” time period to admissions from October 2, 2013, through December 31, 2015.  The bad news is that CMS’s “Probe and Educate” time period for Medicare Administrative Contractors (MACs) to evaluate understanding of the rule and educate expired on December 31, 2015. 


So what did change?  The updated final rule adds exception flexibility for CMS to determine 

 on a case-by-case basis if “rare and unusual” circumstances exist to support payment under Medicare Part A despite the stay not meeting The Two Midnight Rule benchmark. The OPPS Final Rule for 2016 commentary provides that the following factors must be clearly documented in the medical records in order to trigger a case-by-case analysis: “beneficiary medical history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event during hospitalization.”  The Two Midnight Rule also allows for certain “unforeseen circumstances” resulting in a shorter actual stay than the originally expected two midnights.


The medical review responsibilities are changing as indicated in the proposed rule resulting in the OPPS Final Rule for 2016.   In true health industry acronym style, it is out with the “MACs” and in with the “QIOs,” and the “RAs” get referred frequent offenders.  The Beneficiary and Family Centered Care – Quality Improvement Organizations (QIOs) will replace the Medicare Administrative Contracts (MACs) in the front line review of short term inpatient stay claims.  CMS determined QIOs are better suited with statutory duties to verify if (1) services are reasonable and necessary; (2) the quality of services meets the recognized professional standard of care; (3) whether inpatient services could be effectively furnished on an outpatient basis or in a different type of facility.  QIOs refer to RAs those providers evidencing a pattern of abuse through denials or failure to improve after QIO intervention.


In the 2015 Recovery Audit Program Enhancements, CMS also changed the “look back period” to audit claims down to six (6) months from the date of service if the claim is submitted within three (3) months from the date of service, required RAs to maintain an accuracy rate of at least 95%, and placed new additional documentation request limits.  Further modifications are targeted in new RA contracts such as completing complex review within 30 days (instead of current 60 day) or the RA loses its contingency fee, and requiring RAs to wait 30 days before sending a claim audit to a MAC for a payment adjustment.  The OPPS Final Rule for 2016 reminds readers that information on the Recovery Audit Program will be posted on CMS’s website as subregulations are updated.


So what does all this mean?  We have just begun the testing phase of the changes effective January 1, 2016.  CMS states it will continue to analyze data for improvements and welcomes comments and suggestions on additional options for payment policies.  However, for now, it appears the Two Midnight Rule is here to stay.