Press Release

Embargoed Until Contact

January 22, 2015

Sue Ducat
Director of Communications
(301) 841-9962


The Two-Midnight Rule


A new policy brief from Health Affairs and the Robert Wood Johnson Foundation examines the so-called "two-midnight rule," which takes effect on April 1 of this year for new Medicare hospital claims. The rule, announced in 2013, is an effort by the Centers for Medicare and Medicaid Services (CMS) to clarify when a patient will be considered by Medicare as an inpatient for hospital billing purposes. Under this rule, only patients that a doctor expects to need two nights in the hospital would be considered inpatients for the purpose of Medicare claims. In the past, CMS provided little guidance to hospitals on this matter. This is important because the Medicare payment structures are very different for inpatients versus outpatients: Hospitals are reimbursed with a single comprehensive payment for all care provided to an inpatient during his or her time at the hospital, but they are paid standard fees for each unique service they provide to outpatients. This brief describes the perceived need by CMS for the two-midnight rule, how it would work, the implications for Medicare payment, and the heated response to the rule by the hospital industry.


Topics covered in this brief include:


      • What's the background and the rule? The brief explains the rationale for CMS's 2013 guidance. With the number of longer observation admissions increasing, there was considerable confusion whether hospital stays of forty-eight hours or longer should be considered inpatient or outpatient stays. As the brief explains, the rule was intended to minimize the number of improper inpatient admissions by stating that an inpatient admission should be made when a physician expects the patient to be in the hospital for two nights or longer. This new standard is expected to have a significant impact on hospital payments, shifting an estimated 400,000 claims from outpatient to inpatient and some 360,000 claims from inpatient to outpatient.  

      • What's the debate? Not surprisingly, the main criticism of the rule comes from hospitals that feel that the rule penalizes them for innovations that reduce the length of stays. The brief also points to the role of Medicare Recovery Audit Contractors (RACs) that review claims to determine if inpatient stays were medically necessary. Since these contractors receive a portion of any improper claims they identify, hospital stakeholders felt that too many short-term inpatient stays were being questioned for nonmedical reasons. Providers subsequently increased the use of observation status to avoid such scrutiny. As the brief details, many of these claim denials were appealed, flooding the Office of Medicare Hearings and Appeals, which was motivated to offer partial payments of 68 percent to any hospital willing to withdraw its appeal cases to break the logjam.

      • What's next? With the two-midnight rule taking effect on April 1, hospital associations are continuing to fight it. While the rule is expected to reduce some of the ambiguity over the classification of some short-term hospital stays, not all policy makers are convinced it will succeed. The brief outlines other options being considered to strike a better balance between appropriate oversight of proper billing and administrative burden on Medicare providers.
About Health Affairs

Health Affairs is the leading journal at the intersection of health, health care, and policy. Published by Project HOPE, the peer-reviewed journal appears each month in print, with additional Web First papers published periodically and health policy briefs published twice monthly at Read daily perspectives on Health Affairs Blog. Download weekly Narrative Matters podcasts on iTunes.