Cheat Sheet: Two-Midnight Rule

Educational Briefing for Suppliers and Service Providers

Executive Summary

The controversial two-midnight rule—included in Medicare's inpatient final rule for 2014—assumes a hospital admission to be appropriate for payment if a physician expects a beneficiary's treatment to require a two-night hospital stay and admits the patient under that assumption. According to the rule, shorter inpatient stays should be billed as outpatient under Medicare Part B.

The rule aims to limit the use of inpatient payment for short stays that could have been outpatient and limit the growth in extended observation stays at hospitals, which have skyrocketed in recent years. The rule has received significant pushback from hospitals since its inception and has never been fully enforced.

In the proposed 2015 inpatient rule, CMS requested input on alternative payment methodologies for short inpatient stays that would have significantly altered, or totally eliminated, the two-midnight rule. However, CMS ignored calls to abandon the two-midnight rule in its outpatient payment final rule for 2016, and Quality Improvement Organizations (QIOs) have resumed reviews, indicating that Recovery Audit Contractor (RAC) audits will likely reemerge in the near future.

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