On July 8, 2015, CMS issued proposed regulations that would modify the “two-midnight rule” that governs payments by Medicare Part A for short inpatient hospital stays.  The proposed changes are contained in the CY 2016 proposed regulations for the Hospital Outpatient Prospective Payment System (OPPS).  Stakeholders may submit comments on the proposal by August 31, 2015.

Inpatient vs. Outpatient Status

The distinction between inpatient and outpatient classification is important under Medicare.  Medicare reimbursement rates for identical services differ dramatically if the care is provided in an inpatient or outpatient setting.[1]

The admission status also has important implications for the patient.  Under Medicare Part A, a beneficiary admitted as an inpatient is required to pay a one-time deductible for the first sixty days in the hospital.[2]  For outpatient services under Medicare Part B, the beneficiary must make a co-payment for every individual service rendered by the provider.[3]

Background on the Two-Midnight Rule

In 2013, CMS created the “two-midnight rule” to determine whether Medicare Part A payment for inpatient stay is appropriate.  The “two-midnight rule” is based on the physician’s expectation of the patient’s length-of-stay at the time of admission.  It included two medical review policies:

  • Under the “two-midnight benchmark,” CMS considered an inpatient admission to be appropriate when the admitting physician had a reasonable and supportable expectation that a patient would need to receive care at the hospital for a period spanning two-midnights; and
  • Under the “two-midnight presumption,” auditors were directed not to select claims for review if the inpatient stay spanned two-midnights from the time of admission, absent evidence of gaming or abuse.

In the FY 2014 Inpatient Prospective Payment System (IPPS) final rule, the agency acknowledged that certain services and procedures may be appropriate for inpatient coverage under Medicare Part A regardless of the expected length of stay.  CMS identified some services in its “inpatient only” list and encouraged stakeholders to suggest other “rare and unusual” circumstances under which Medicare Part A coverage may be appropriate even when the admission is expected to span less than two-midnights. But these exceptions were limited.

Enforcement of the “two-midnight rule” has been repeatedly suspended and delayed due to arguments that the law undermines clinical decision-making.

The Proposed Rule

In the CY 2016 OPPS rules for, published on July 8, 2015, CMS proposes to modify the “two-midnight” rule again by revising 42 C.F.R. §  412.3(d)(1) (inpatient admission standards), and changing the enforcement standards for patient status audits.

For cases where a physician expects the patient to be admitted for two-midnights or longer, the proposed rule does not change the “two-midnight rule” – CMS’s policy that such services are generally payable inpatient services under Medicare Part A.

For cases where the treating physician expects the patient to require less than two-midnights of hospital care, the proposed rule appears to greatly broaden the “rare and unusual” exception.  Under the current rule, only “rare and unusual” circumstances identified by CMS qualify as an exception to the two-midnight benchmark.  And CMS has only identified one such “rare and unusual” exception to the two-midnight policy: newly initiated mechanical ventilation.

This proposed rule reemphasizes the role of the admitting physician by modifying what can be considered a “rare and unusual” exception to the “two-midnight rule.”  Even if an expected length of stay is less than two midnights, CMS now proposes to pay for inpatient admissions on a case-by-case basis based on the judgment of the admitting physician, if the documentation in the medical record supports the determination that the patient requires inpatient hospital care.  The agency, however, emphasized that stays under 24-hours would still “rarely” qualify under the new standard.  CMS will also prioritize medical necessity reviews for inpatient admissions for minor procedures or other treatments that generally require only a few hours of hospital stay.

At the same time as this modification to the “two-midnight rule,” CMS announced that by October 1, 2015, it will modify their medical review strategy and plans to have Quality Improvement Organization (QIO) contractors conduct reviews of inpatient stays rather than Medicare Administrative Contractors.


The agency expects to finalize this proposed modification in November, 2015.

[1] See Office of Inspector General, Memorandum Report: Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries (July 29, 2013), available at https://oig.hhs.gov/oei/reports/oei-02-12-00040.pdf.

[2] 42 U.S.C. § 1395e.

[3] 42 U.S.C. § 1395cc(a)(2)(A).