United States: A Closer Look At The Two Midnight Rule As CMS Delays Enforcement Again Amid Legislative And Judicial Challenges

CMS recently announced yet another delay to the full implementation of "two midnight rule," which revises its longstanding guidance to hospitals and physicians relating to when hospital inpatient admissions are deemed to be reasonable and necessary for payment under Medicare Part A. Specifically, this latest "delay" is the result of CMS's extension of the "Probe & Educate Period," a period of partial non-enforcement for the two midnight rule requirements, until September 30, 2014. This marks the third time CMS has delayed the implementation of the two midnight rule, which was initially delayed from October 31, 2013 to December 31, 2013, and then to March 31, 2014.

The delay comes in response to concerns by hospitals, admitting practitioners, and several members of the U.S. Congress that CMS has not yet provided adequate guidance to enable hospitals to comply with the two midnight rule.


On August 19, 2013, CMS published the inpatient prospective payment system (IPPS) final rule for federal fiscal year (FFY) 2014, which began on October 1, 2013. As a part of the FFY 2014 Final Rule, CMS issued the two midnight rule.

Prior to the issuance of the two midnight rule, there was limited guidance regarding what constitutes an "appropriate" inpatient admission. The lack of clear guidance on this topic is significant due to the financial risk associated with submitting a claim for an inpatient Medicare beneficiary stay that could later be denied based upon a Medicare review contractor's determination that the beneficiary should have been designated as an outpatient. In these situations, a hospital may subsequently bill for the services under Medicare Part B. The hospital, however, would receive significantly lower reimbursements because only a limited number of the services provided during the denied inpatient admission would be deemed payable under Medicare Part B. Conversely, if the hospital would have initially designated the beneficiary as an outpatient and billed for such services accordingly, Medicare would have reimbursed the hospital for all the services that were reasonable and necessary under Medicare Part B.

CMS noted that hospitals' concerns about their ability to receive payment under Part B when a Part A hospital inpatient claim is denied may have contributed to the increased provision of extended observation services under Part B. CMS believes that in some cases these services should be designated and billed as inpatient stays under Part A.

"Two Midnight Rule"

To combat this trend and reduce the uncertainty regarding the requirements for payments to hospitals under Medicare Part A, CMS decided to modify and clarify its hospital inpatient admissions policy.

In general, the two midnight rule provides that surgical procedures, diagnostic tests, and other treatments (except for services designated as "inpatient-only") are deemed appropriate for inpatient hospital admission and payment under Medicare Part A when:

  1. the physician expects the beneficiary to require a stay that spans at least two midnights, and 
  2. the physician admits the beneficiary to the hospital based upon that expectation.

Conversely, under the same reasoning, hospital stays in which the physician expects the beneficiary to require care that spans less than two midnights are generally inappropriate for payment under Medicare Part A, and should be treated and billed as outpatient services under Medicare Part B, which typically results in a lower overall reimbursement.

Specifically, however, what is collectively referred to as the "two midnight rule" is actually two distinct, though related, medical review policies issued by CMS regarding the "appropriateness" of inpatient admissions. 

  • The Two Midnight Presumption. Under the "two midnight presumption," claims for inpatient hospital stays with lengths of stay greater than two midnights generally will be presumed appropriate for Medicare Part A payment. Additionally, claims that meet the presumption criteria will not be the focus of medical review efforts absent evidence of systematic gaming, abuse or delays in the provision of care in an attempt to qualify for the presumption.

    CMS's medical review efforts will instead focus on inpatient hospital admissions with lengths of stay spanning only one midnight or less. For these claims, CMS and its medical review contractors will not presume that the inpatient hospital status was reasonable and necessary for payment purposes, but may instead evaluate the claim pursuant to the "two midnight benchmark" procedure described below.
  • The Two Midnight Benchmark. The two midnight benchmark provides guidance to admitting practitioners and Medicare review contractors regarding whether it is appropriate to admit a beneficiary on an inpatient basis. In order to determine whether payment under Part A is appropriate, CMS instructs admitting practitioners and Medicare review contractors to evaluate:
  1. the order for inpatient admission to the hospital, along with the other required elements of the physician certification,
  2. the medical documentation supporting the expectation that care would span at least two midnights, and
  3. the medical documentation supporting a decision that it was reasonable and necessary to keep the beneficiary at the hospital to receive such care. 

If a Medicare review contractor determines that it was reasonable for the physician to expect the beneficiary to require a stay spanning at least two midnights, and that expectation is documented in the medical record, inpatient admission is generally appropriate and payment may be made under Medicare Part A. CMS also clarifies that payment under Part A is appropriate under these circumstances even if the actual length of stay did not span two midnights due to unforeseen circumstances such as a beneficiary's death or transfer.

Probe and Educate Period

As a method of delaying the implementation of the two midnight rule, CMS has established a Probe and Educate Period. During this Probe and Educate Period, Medicare review contractors will not be permitted to conduct post-payment patient status reviews of inpatient hospital claims with dates of admission on or after October 1, 2013 through October 1, 2014 for compliance with the two midnight rule.

Medicare Administrative Contractors (MACs), however, will be allowed to conduct limited pre-payment patient status reviews using a "probe and educate" strategy for claims submitted for dates of admission during this period. CMS has instructed the MACs to review a small sample (10 -25 claims per hospital) of Medicare Part A inpatient hospital claims for stays spanning less than two midnights (i.e., claims subject to the two midnight benchmark) to determine the medical necessity of the inpatient status in accordance with the two midnight rule.

The goal of this probe is to determine hospitals' preliminary compliance with the two midnight rule and provide important feedback to CMS for purposes of developing further education and guidance. Because the probe reviews will be conducted on a pre-payment basis, hospitals will be allowed to rebill for medically reasonable and necessary Medicare Part B services provided during any denied the Part A inpatient hospital stays provided the denial is on the basis that the inpatient admission was not reasonable and necessary under the two midnight rule. If a MAC identifies no issues during the probe review, the MAC will cease further such reviews for that hospital for dates of admission spanning October 1, 2013 to September 30, 2014, unless there are significant changes in billing patterns for admissions.

Despite the extension of the Probe & Educate Period, CMS reminds providers that Medicare Part A inpatient hospital claims for stays spanning more than two midnights (i.e., claims subject to the two midnight presumption) may still be reviewed for issues unrelated to appropriateness of inpatient admission. For example, Medicare review contractors may continue to review such claims to ensure the services provided during the inpatient stay were reasonable and necessary in the treatment of the beneficiary, to ensure accurate coding and documentation, and may conduct other reviews as dictated by CMS and/or another governmental agency. 

Hospital Payment Reduction

CMS estimates that implementation of the two midnight rule could increase IPPS expenditures by approximately $220 million. As a result, CMS also finalized a 0.2% hospital payment reduction to offset these additional costs.

Recent Challenges

CMS lauds the two midnight rule as a method for providing hospitals with more certainty that their inpatient claims will be approved and reimbursed under Medicare Part A. Opponents of the rule, however, believe that the requirements for compliance with the two midnight rule are unclear, and that the 0.2% payment reduction, which could negatively impact their reimbursements, is "arbitrary and capricious."

On December 11, 2013, bipartisan members of the U.S. Congress introduced the Two Midnight Rule Delay Act of 2013 (H.R. 3698). This legislation would:

  1. delay the enforcement of the two midnight rule until October 1, 2014,
  2. require CMS to develop a new payment methodology under the Medicare program for hospitals for short inpatient hospital stays, and
  3. prevent Medicare review contractors from denying claims due to the length of patient stay or due to determination that services could have been provided in an outpatient setting.

The legislation has been referred to the Committee, but there has been no further activity on this legislation as of February 17, 2014.

In addition to this legislative challenge to the two midnight rule's enforcement, several hospitals, with the support of the American Hospital Association and various state hospital associations, took the first steps to mount a federal court challenge against CMS's implementation of the two midnight rule. In January, the parties filed appeals asking the Provider Reimbursement Review Board to grant expedited judicial review by a federal court. They claim that the 0.2% hospital payment reduction as an offset to the cost of implementing the two midnight rule is unlawful.

At this time, it is unclear whether the two midnight rule will ever be fully implemented in its current form and what effect such implementation would have on hospitals enrolled in the Medicare program. Waller will continue to monitor this issues and report on important developments as they are released.

For further information visit Waller blog

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