Cardiovascular Rounds

The 'two-midnight' rule: What you need to know

Eric Fontana, Practice Manager

While CMS has provided a "probe-and-educate period" until Sept. 30, 2014, "deny-and-educate" may be an appropriate description. Recovery Audit Contractors (RACs) may not be conducting post payment audits of your admissions to check two-midnight compliance, but Medicare Administrative Contractors (MACs) definitely are. You need to get prepared. Below are some takeaways from the new regulations that you may want to consider, including some recommendations for responding to the rule.

Question 1: What are the changes that CMS has finalized?

CMS wants to limit the use of observation status to reduce its financial burden on Medicare beneficiaries. Observation stays result in greater out-of-pocket expenses for beneficiaries and do not count toward the three-day eligibility requirement for Medicare skilled nursing facility (SNF) coverage. CMS is particularly concerned about the growth in long-stay observation cases (those greater than 48 hours) which have increased from 3% of all observation cases in 2006 to 8% in 2011.

The final rule addresses this problem on two fronts. First, CMS revised its guidance on inpatient admissions by stating that an admission is appropriate if the stay requires duration of at least two midnights.

Secondly, CMS removed some of the previous financial disincentive for inpatient admission (such as a potential short-stay payment denial) by allowing hospitals to rebill a retrospectively determined inappropriate admission as an outpatient visit under Part B. Hospitals can do so for up to one year from the point of service.

However the IPPS final rule leaves many questions unanswered, particularly regarding how the two-midnight rule will be interpreted and applied. CMS has held multiple open door forums to date and transcripts for the Aug. 15, 2013Sept. 26, 2013, and other Special Open Door sessions are available online. Yet it wouldn’t be surprising to see more discussion on this topic in the future. Based on the final rule and the discussion during the forums to date, here are some key takeaways on the new regulations.

1. The decision to admit a patient should be based on an expectation that the patient will require at least a two-midnight stay.

Long-stay observation cases increased from 3% of all cases in 2006 to 8% in 2011.CMS contractors will operate under the presumption that stays of at least two midnights are medically necessary, with the “clock” beginning when the patient starts receiving hospital services (including observation services). During the September 26 open-door forum, CMS clarified that if a patient stays one midnight in observation and the physician expects that the patient will require at least another midnight in the hospital, the patient can be appropriately admitted despite the fact that it is a one-day inpatient stay. If a patient is admitted but ultimately doesn’t stay two midnights, clear physician documentation supporting the order and expectation of two midnights will be required.

  • The Cardiovascular Roundtable has identified six steps to optimize observation care at your hospital. Get started with step one.

In fact, CMS says that the expectation of a two-midnight stay is sufficient justification for admission, even though there may be unforeseen circumstances such as transfers or self-discharge that result in the eventual length of stay not meeting the physician’s initial expectation. Note that any procedure designated as “inpatient only” will not be subject to the two-midnight requirement.

2. Documentation (as always) is important.

During the open-door forum, CMS explained that RAC auditors will review cases with stays less than two midnights. If a facility is audited, the reviewers will look for a codified physician order and certification, plus supportive documentation.

CMS specifically states that the medical record should clearly indicate why a physician deemed an inpatient stay necessary, supported by medical factors including patient history, the presence of comorbidities, signs and symptoms, current patient care requirements, and the risk of an adverse event during the hospital stay.

3. Time spent in observation will not count toward a patient’s three-day inpatient stay requirement for SNF coverage.

Despite broadening the definition of an appropriate inpatient stay under the two-midnight rule, CMS will continue to exclude time spent under observation from the three-day requirement for SNF stays. 

Inpatient stays do not begin until a physician writes an order for patient admission; thus any time spent in observation preceding an admission will not count toward the length of stay requirement. This controversial policy, along with observation status generally, has been the subject of recent media scrutiny and is likely to see further discussion.

  • Where are your at-risk cases? Use our tool to find out.

    The Two Midnight Impact Assessment highlights specific areas at your facility with the greatest exposure to the rule at the service line, sub-service line and MS-DRG level using customized Medicare data. Use the tool.

4. Commercially available patient assessment tools will be trumped by the new time-based recommendation.

Questions arose during the second open-door forum regarding the role commercially available admission criteria should have in admission decisions for Medicare patients. Panel experts emphasized that a physician’s judgment, based on medical reasons and the expectation that a two-midnight stay will be required, is sufficient justification for admission.

5. You should conduct your own patient admission reviews—don’t wait for auditors to do it for you.

Under the new Part B rebilling rules, hospitals will need to have processes in place to self-identify cases that were inappropriately admitted so that they can rebill before the one-year filing requirement expires. RAC audits may occur up to three years after a patient service, resulting in a payment denial with no recourse if a stay is determined medically unjustified.

It’s important to note that the new Part B rebilling rule does not impact the application of condition code 44. Per current policy, if a patient admission is determined to be inappropriate while the patient is still in the hospital, physicians can apply condition code 44 to convert the patient’s status to outpatient.

During the probe-and-educate period, MACs (not RACs) will audit and deny claims.

If you haven't already commenced assessing your compliance with these new regulations, you need to begin. RACs will not review cases during the probe-and-educate period, and MACs will only review cases with a length of stay less than two midnights. However, this doesn't mean that denials won't take place. If MACs detect cases that do not meet the standard, they may deny payment and offer feedback to providers where an admission was not compliant.

CMS has provided a direct email to address any specific questions that arise as a result of this rule. You can submit questions and concerns to

Question 2: How will the two-midnight rule affect my hospital’s payments?

We’ve received several inquiries regarding how to determine the financial impact of this regulation in FY 2014. From the national viewpoint, CMS has proactively reduced the inpatient payment rate update by 0.2%. For individual facilities, however, the answer is less straightforward.

Observation utilization is tricky to forecast, as use varies from organization to organization. While you could in theory predict the financial impact by assuming a fixed percentage of your observation cases will be admitted and some of your one-day stays will revert to observation, there are significant operational challenges that may affect this analysis. For example:

  • Do you have sufficient support to ensure that patients are appropriately classified as inpatient or observation cases?
  • Do you have sufficient visibility of your observation patients, whether in a dedicated unit or comingled with inpatients, to ensure that subsequent care and patient-status decisions are made as soon as clinically appropriate?
  • Do you have tight observation-management protocols to ensure that unnecessarily long observation stays are avoided?
  • Have you educated the relevant stakeholders on the new guidelines and how to implement them?
  • Do you have steps in place to ensure the comprehensive documentation needed to support patient status and reimbursement?

In short, any financial estimate must not only consider how your organization will respond to the operational challenges posed by the new requirements but also how your observation patients are managed in general.

From a volumes perspective, CMS actuarial analysis presented in the final rule highlights that the clarified admission guidelines are expected to result in a net increase of around 40,000 admissions nationally, with a substantial uptick in two-day cases.

Please note that we are currently in the process of updating our national-level forecasts to accommodate the expected shift in volumes resulting from the two-midnight rule. We’ll announce more details in the near future.

Three recommendations for responding to the rule

Unless observation status is completely overhauled or eliminated, the two-midnight rule provides an opportunity to tackle some of the operational challenges associated with “Obs.”

1. Review processes that will help your physicians make the right call on admission.

First, make sure each physician has the support needed to make the right call on admission as early as possible. Second, implement effective triggers to prompt reassessment of observation patients in a timely fashion, especially when the admission decision was initially equivocal.

It must be noted that several health systems and hospital associations are presently contesting the premise of the two midnight policy, disagreeing that all stays shorter than this benchmark are inappropriate, while expressing that physician judgment should be the only factor considered for an inpatient admission. And while CMS specifically stated during its open door forums that medical factors and physician judgment remain core components in the decision to use observation status or admission, the time requirement adds another layer of complexity to decision making.

2. Proactively educate your physicians on the new regulations.

Many CMOs have expressed that their physicians use observation status inconsistently, a perspective that we’ve also found in recent academic literature. The new rules provide an opportunity to review the appropriate uses of observation status with your frontline physicians. CMS is expected to issue more educational materials and guidance on the two-midnight rule after the evaluation period ends, which may help you have these conversations with staff.

3. Don’t just educate your physicians—educate your patients, too.

Low patient satisfaction scores may contribute to reduced Medicare reimbursement under the Value-Based Purchasing Program. Therefore, it will be important to “play on the front foot” and  make sure your communications about observation status and the associated financial implications are clear to patients.

Note: This post was updated on March 21 to reflect the latest on the rule.

Next: Learn How to Optimize Observation Units

Members of the Cardiovascular Roundtable, we've identified six steps you need to take to optimize observation care. Get started with step one.

Members of the Physician Executive Council, check out our related study chapter, "Strategizing Observation Patient Management," to learn tactics for optimizing use of observation units.

Join the discussion

Please log in to comment.

Forgot your password?

Not an Advisory Board Member? Click here to register


Members please Log In


Forgot your password?

Not an Advisory Board Member? Click here to register