Two Midnights, One New Challenge

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Perhaps the surest way to drive someone crazy is to expect them to understand the rules and regulations related to coverage and payment by Medicare for hospital inpatient services (Part A), outpatient / observation services (Part B), and skilled nursing facility (SNF) services (also Part A).

A detailed break-down of CMS’s ‘Two-Midnight Rule’ and how it will impact emergency medicine


Perhaps the surest way to drive someone crazy is to expect them to understand the rules and regulations related to coverage and payment by Medicare for hospital inpatient services (Part A), outpatient / observation services (Part B), and skilled nursing facility (SNF) services (also Part A). Medicare enrollees are faced with this challenge all the time, as are hospital financial, discharge planning, and utilization review staff and physicians providing hospital based care to these patients. The financial consequences of the decisions made in an effort to comply with these complicated and sometimes conflicting rules are significant; and emergency physicians (and our hospitalist colleagues) who practice at the nexus of the acute care continuum often find themselves buffeted by conflicting patient needs, hospital administrator expectations, RAC auditor threats, and their own financial interests.

In July of 2013, the DHHS Office of Inspector General wrote a report1, citing the concerns of CMS and members of Congress about beneficiaries spending long periods of time in observation stays without being admitted as inpatients, and the increased out of pocket co-insurance costs and bills for the uncovered skilled nursing facility (SNF) care2 they incur. There was also concern about “improper payments for short inpatient stays when the beneficiaries should have been treated as outpatients.” This report stated: “Medicare beneficiaries had 1.5 million (limited?) observation stays in 2012; an additional 1.4 million long outpatient stays, and 1.1 million short inpatient stays”. Beneficiaries had over 600,000 hospital stays that lasted 3 nights or more but did not qualify them for SNF services.”  Clearly a lot of money is on the table here. The report also noted wide variation and inconsistency in hospitals’ use of inpatient and observation/outpatient designation for similar diagnostic groupings.

According to the OIG, many beneficiaries treated with observation stays incurred huge bills from SNFs because they did not qualify for coverage of these services under Medicare. The threat of a rejected inpatient stay and the certainty of payment for an extended outpatient visit is a perverse incentive that denies these patients a chance at a ‘qualified inpatient admission’ (3 days) and Medicare coverage for subsequent SNF stays, and also increases their coinsurance costs significantly.


Although MAC and RAC auditors had been having a field day denying short inpatient stays3 and demanding millions in recoupments from hospitals, these determinations were frequently overturned by Administrative Law Judges and the Medicare Appeals Council in favor of the hospitals.  In response, CMS attempted to clarify the rules, and provided some relief for hospitals by expanding the list of services that they can bill under Part B when a Part A stay is denied.

Then CMS proposed a rule to quantify a ‘reasonable’ short stay inpatient admission as one that spans two midnights. The presumption was that this would protect hospitals from arbitrary denials by auditors.  There are two parts to this “2-midnight rule”: 1) a time benchmark intended to provide guidance to physicians as to when to admit a patient as an inpatient (the expectation that the patient will require care crossing two midnights), and 2) an audit ‘presumption’ that an inpatient stay extending across two midnights (and meeting necessity thresholds) will generally be considered to be appropriate for payment under Part A. Auditors will therefore presume that if an inpatient stay does not cross two midnights, the hospital should not be paid the (higher) inpatient reimbursement. Also, if auditors believe that a hospital is systematically prolonging inpatient care in order to exceed the two-midnight threshold, they would disregard the presumption.  In response, ACEP requested that CMS “reconcile the medical necessity criteria published in The Medicare Hospital Manual (Chapter I) with the criteria such as McKesson’s Interqual and/or Milliman’s” guides so as to minimize confusion about which patients may qualify for short stay admissions.

The rules also allow the time spent in outpatient/ER/observation care prior to inpatient admission to be counted towards meeting the admitting physician’s expectation of a two-midnight stay, but not towards qualifying for the two-midnight threshold for audit purposes, or towards meeting the three day admission SNF coverage rule. In addition, since CMS calculated that the two-midnight rule would increase hospital payments by allowing more outpatient stays to become eligible for higher inpatient rates, they reduced hospital payments by $200 million in 2014 to remain budget neutral.

Many hospitals and advocates were less than thrilled with these rules; anticipating losses as auditors more aggressively scrutinized short hospital inpatient stays that previously might be considered justifiable. As one hospital administrator put it5: “It’s just another one of those absolutely classic examples of being penalized for being efficient. If you can discharge somebody with a one-night stay, then it will get paid as an observation, as opposed to discharging him at 12:05 a.m. (and getting an inpatient DRG payment). It’s another example of having to choose between doing what is right and what maximizes revenue, and this is really, really getting to be a difficult situation.” Even more disturbing was the possibility that commercial payers would adopt these rules in Medicare’s footsteps.


The uproar that followed (and a letter signed by 105 members of congress) pushed CMS to temporarily suspend the application of the rules6 by MAC and RAC auditors until 1/1/2014, though hospitals and physicians must still comply with them, and educational sampling audits will continue.7  Even the OIG1 expressed some concerns about the new rules: 1) that “the number of observation and long outpatient stays may not be reduced if outpatient nights are not counted towards the two-night presumption”, 2) that some hospitals “given strong financial incentives and few barriers—would likely not follow the provisions and would admit beneficiaries as inpatients as soon as possible to meet the two-night presumption”, and 3) CMS should consider “allowing nights spent as an outpatient to count toward the three nights needed to qualify for SNF services…..which may require additional statutory authority”. ACEP is concerned that “hospitals that do not have observation units could keep patients in the ED for longer periods, exacerbating crowding conditions.”  The AHA’s President said, “too many aspects [of the rule]are fundamentally flawed” and that “unfortunately, the agency’s guidance only raises new questions and lacks clarity.” The AHA has suggested8, as an example, that CMS “limit a review by a Medicare contractor to only the information available to the admitting practitioner at the time of admission” to curtail unreasonable post-hoc determinations by the auditor.

How are these new rules likely to impact emergency physicians (and hospitalists), and how should they respond?  In a Health Law blog9, the law firm Hall Render suggested that: 1) physicians should be aware that while outpatient time may be considered in application of the two-midnight benchmark, it may not be retroactively included as inpatient care for skilled nursing care eligibility or other benefit purposes, and that 2) physicians must be careful to provide clear documentation in the medical record supporting the physician’s order and expectation that the beneficiary requires care spanning at least two midnights. Review contractors will take this documentation into account and may decide favorably on the appropriateness of an inpatient admission, even if, for whatever reason (e.g., death, transfer, unexpected rapid improvement), the patient was discharged early.

CMS has issued a clarification on ‘Hospital Inpatient Admission Order and Certification’10 requirements that specify that the admitting physician must certify “that hospital inpatient services are reasonable and necessary.… and in the case of services not specified as inpatient‐only under 42 CFR 419.22(n), that they are appropriately provided as inpatient services in accordance with the two‐midnight benchmark.” The physician must also identify the reason for inpatient services, the estimated time required in the hospital, and the plans for post-hospital care, if appropriate. All of this must be completed, signed and dated in the medical record prior to discharge “by the physician responsible for the case, or by another physician who has knowledge of the case and who is authorized to do so by the responsible physician or by the hospital’s medical staff.“

This document also suggests that emergency physicians could write an order to admit a patient to an admitting physician as long as the admitting physician or his designee authenticates (countersigns) the order prior to discharge. PAs, NPs, and residents can also arrange for admission if this is within their scope of practice and hospital policy, provided the admitting physician subsequently authenticates the order. Admission orders can also be conveyed verbally and documented by staff and countersigned. In any case, admission does not technically begin until this order is documented in the record (and should be dated and timed). In order to meet the specificity requirements of these rules, the EP’s admission order should include language such as ‘admit as inpatient to (unit or service) to Dr. _______, per his recommendation’.  Orders such as ‘Admit to Medicine’ or ‘Admit to 4 West to Dr. ______’ may be accepted if inpatient status on admission to the unit or service is clearly distinguishable from admissions for observation, short stay surgery, or other non-inpatient care per hospital policy.

Since the admitting physician (or designee) must ultimately authenticate the admission order, the implication of these rules is that the admission was discussed with this physician (and the presumption of a two-midnight or greater course of care made) prior to an inpatient admission order being written by the EP or ancillary provider. Some hospitals may look to EPs to make these two-midnight prognostications if only to select out those patients who would likely require short stay care in observation, like those with facial cellulitis that need a few doses of IV Antibiotics; mild GI bleeders that need serial hematocrits and outpatient colonoscopy; or angioedema. However, EPs who do not routinely provide such short-stay care may not be in the best position to make this decision, and in any case should probably not be authenticating inpatient admissions. A team approach, written and pre-approved hospital guidelines and policies, and transparency is probably the best way to manage the new two-midnight rule, and should give patients at least some reassurance that the inpatient vs. outpatient11 decision was given careful consideration.


    1. Stuart Wright, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries , OEI-02-12-0004, July 29, 2013
    2. Skilled Nursing Facility (SNF) Care,
    3. Kelsey Brimmer, Healthcare Finance News, Latest RACTrac survey shows soaring denials, Sept 4, 2012
    4. ACEP, Comments on the FY 2014 IPPS draft rule
    5. Rene Letourneau, HealthLeaders Media, Sept 30, 2013, Two-Midnight Rule Creates Financial Hurdles, Perverse Incentives
    6. Evan Albright,, Feds Refuse To Shut Down Controversial ‘Two-Midnight’ Rule For Hospitals
    7. Evan Albright,, CMS Eases Enforcement of Two-Midnight Rule for Three Months
    8. Linda E. Fishman, AHA to CMS: Comments and scenarios regarding two-midnights policy
    9. 2014 IPPS Final Rule – CMS Clarifies Inpatient Admission Criteria to Reduce Payment Uncertainty
    10. CMS, Hospital Inpatient Admission Order and Certification, Sept 5, 2013
    11. CMS, Are You a Hospital Inpatient or Outpatient?  If You Have Medicare – Ask!

    Myles Riner, MD is a health care consultant and expert witness focused on fair payment, managed care contracting, problem payer management, and regulatory compliance.  He is a Past president of CAL/ACEP,  recipient of national ACEP’s Colin Rorrie Award for Excellence in Health Policy and an active member of ACEP’s Reimbursement Committee, and regularly blogs at 


    1 Comment

    1. Hi-

      Great article. Do you have any updates on this topic? I’m in the process of communicating this topic to all of our physicians and I want to be sure I have the most up-to-date information.

      Thank you,

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