The Two-Midnight Rule: When Is It Appropriate to Admit Someone as an Inpatient?

A nurse checks the charts of a patient.

Medicare pays for inpatient and outpatient services under different payment systems, which can produce very different payments for similar services.


What’s the issue?

Hospitals can provide services on either an inpatient or outpatient basis. Medicare pays for inpatient services and outpatient services under separate and very different payment systems, which can produce substantially different payment amounts for similar patients receiving similar services. The cost-sharing implications for beneficiaries under the two systems can also vary significantly.

Until recently, the Centers for Medicare and Medicaid Services (CMS) had provided little guidance to hospitals on how to determine whether a particular patient should be treated on an inpatient or outpatient basis. In the absence of guidance--and in response to other CMS efforts to ensure proper payments, including creation of the Recovery Audit Program--hospitals’ shifting of services between inpatient and outpatient settings has had significant implications for the beneficiaries receiving such services and for the Medicare program as a whole.

In 2013 CMS announced the so-called two-midnight rule to clarify when it expected a patient to be designated to inpatient status. Under this rule, only patients that the doctor expects will need to spend two nights in the hospital would be considered as hospital inpatients.

This brief describes the perceived need by CMS for the two-midnight rule, how it would work, and the implications for Medicare payment. It also reviews the heated response to the rule and its current status.

What’s next?

Under current law and absent additional action by Congress or CMS, Medicare contractors will begin applying the two-midnight rule in making payment determinations and reviewing claims as of April 1, 2015. Prior to that date, CMS has said it will evaluate the results of the “probe and educate” process and may issue additional guidance to ensure consistency in application of the two-midnight policy.

In the meantime, hospital associations are continuing to fight the rule. The AHA along with some state hospital associations have filed a lawsuit challenging the two-midnight rule in general and the 0.2 percent reduction in hospital payments in particular. The AHA also supported bills introduced during the last congressional session that would have required CMS to develop appropriate criteria for paying for short inpatient stays (HR 3698/S 2082) and that would reform the recovery audit process (S 1012).

MedPAC is already considering alternative policy options to address short inpatient stays and has emphasized the need to strike a balance between appropriate oversight of proper billing and administrative burden on Medicare providers. Options described at the November 2014 MedPAC meeting included creating new MS-DRGs for short-stay cases,targeting RAC reviews to those hospitals with the highest rate of short-stay admissions, and revising the RAC contracts to take into consideration the percentage of denials that are overturned on appeal.

Media Contacts

Melissa Blair

Robert Wood Johnson Foundation (609) 627-5937

Additional Media Contact: Sue Ducat

Health Affairs (301) 841-9962