CMS Finalizes Two Midnight Rule Changes

Some Details Still Missing

Appeal Academy | Two Midnight Rule

Despite 42 tries to fill in the details, LOTS of details are still missing…

The Centers for Medicare & Medicaid Services (CMS) released the 2016 Outpatient Prospective Payment System Final Rule (2016 OPPS Final Rule), finalizing proposed changes to the Two Midnight Rule first proposed this past July. Beginning January 1, 2016, CMS will allow Part A coverage of one-day stays in limited, so-called “rare and unusual” circumstances, not that much different that the previous standards for evaluating patient status. What this means in practice is not clear at this time, but CMS notes that it would “continue to expect that stays under 24 hours would rarely qualify for an exception” to the Two Midnight Benchmark.

CMS also now formally presents the recent transition of patient status reviews to two Quality Improvement Organizations (QIOs). Nevertheless, CMS does not provide any significant detail on how these reviews by the QIOs will be conducted.

How the Two Midnight Rule Came to Be

CMS analyses of denials of short-stay inpatient admissions and stays led CMS to attempt to provide clarity to its standard and answer the question, “what is an inpatient admission?” That attempt by CMS produced the now infamous Two Midnight Rule, which, as explained below, was originally designed as a standard focused on a time-based inquiry.

CMS issued CMS-1599-F on August 2, 2013, containing the Fiscal Year 2014 Inpatient Prospective Payment System (2014 IPPS Final Rule), in which CMS implemented what has become commonly known as the Two Midnight Rule. The Two Midnight Rule was immediately seen as a significant, sudden departure from past practice. In many ways, CMS flatly abandoned longstanding policies on determining patient status.

The inpatient admission standard that stood for years before CMS-1599-F relied upon the physician’s complex medical judgment and left substantial room for differences in opinion. After CMS-1599-F however, contractor reviews of short-stay inpatient admissions exploded as Recovery Auditor Contractors (RACs) routinely and with great abandon questioned the admitting physician’s clinical judgment. That is, their opinion differed, despite the fact that RAC auditors never saw the patient, much less paid attention to CMS rules that were meant to restrict them from using hindsight, garnered from the completed medical records.

By 2014, providers learned that they could win appeals of such denials at the 3rd Level of appeal – the Office of Medicare Hearings & Appeals (OMHA), aka the ALJs or Administrative Law Judges. As more and more providers filed such appeals, OMHA was overwhelmed with a backlog of over 800,000 appeals on their desks. OMHA stopped assigning hearings to their judges after amassing 10 years worth of appeals. In a hastily designed attempt to resolve the backlog, CMS offered a one-time Global Settlement Offer, paying a flat 68 percent of the paid amount for appeals of short-stay inpatient admissions already sitting in line at OMHA. The backlog remains large, although numbers are hard to come by, via CMS, and the backlog is not delineated and only barely hinted at in their annual report to Congress.

Where’s the Beef? An Overview of the Two Midnight Rule

As originally promulgated, the Two Midnight Rule provides that a hospital inpatient admission was generally considered necessary and reasonable if the attending physician (or other qualified practitioner) ordered the admission based on his or her documented expectation that the patient would require at least two midnights of medically necessary hospital services, or if the beneficiary required a procedure on the CMS “inpatient only” list. On the other hand, if the attending physician expected to keep the patient in the hospital for a time period that did not span two midnights, the services would generally be suitable for and only payable as an outpatient or Part B payment.

CMS coined two significant yet confusing principles for the Two Midnight Rule: the Benchmark and the Presumption. The Two Midnight Benchmark is as close as CMS gets to what attorneys call a “bright line” – basically, a point no one can dispute. The Benchmark is two midnights after a complete and appropriate inpatient admission order is done. The Presumption refers to the length of stay, dependent upon how it spans the Benchmark. Any case spanning less than two midnights, fails the Benchmark and is presumed NOT appropriate for Part A inpatient payment. Any case spanning more than two midnights – of course with the appropriate inpatient order – is “presumed” to be “generally appropriate for payment under Part A.” CMS contractors are instructed to “presume” that claims spanning two midnights are therefore beyond review for inpatient status. (Note, however, that the claims are still subject to every other kind of review; e.g., medical necessity, DRG validation, coding validation, etc.)

The Two Midnight Rule as originally promulgated also contained significant technical documentation requirements. Specifically, inpatient admission orders and physician certifications were required for all inpatient admissions. However, effective January 1, 2015, CMS rescinded the certification requirement in response to provider concern regarding the utility of the certification requirement in light of the administrative burden imposed on providers. Whence, a physician certification is currently only required for long-stay cases – defined as 20 days or longer – or outlier cases.

CMS published additional guidance regarding the Two Midnight Rule in January 2014. This guidance acknowledged that there may be “rare and unusual” exceptions to the Two Midnight Rule in which an inpatient admission may be appropriate and payable under Part A even though a physician does not expect the patient to require hospital services for the Benchmark’s minimum two midnights, but nevertheless concludes that inpatient admission is necessary. One example CMS identified was for patients who require newly initiated mechanical ventilation. CMS also stated that the “rare and unusual” exception does not relate to patients receiving telemetry or patients admitted to an Intensive Care Unit (ICU). The hospital community was invited to bring the agency’s attention to other possible “rare and unusual ” exceptions. Until the publication of the 2016 OPPS Final Rule, CMS had not expanded upon the one “rare and unusual” exception identified above and had seemed to indicate that the “rare and unusual” exception applied only in specified cases, as opposed to being determined on a case-by-case basis.

CMS has issued sub-regulatory guidance on the Two Midnight Rule at least 42 times since its inception. These have only been in forms such as Frequently Asked Question (FAQ) documents and provider Open Door Forums. As yet, CMS has failed to issue any manual guidance for the provider community.

Changes Proposed Are Now Finalized

Effective January 1, 2016, CMS will allow exceptions to the Two-Midnight Benchmark to be determined on a case-by-case basis by the physician responsible for the care of the beneficiary, subject to review. (Of course.) CMS has indicated that this change to the Two Midnight Rule is in response to stakeholder concern and CMS’s continued efforts to develop the most appropriate standard for determining Medicare Part A payment.

As noted above, that exception was previously limited to categorical announcements by CMS and, to date, CMS has only identified one such “category” (newly initiated mechanical ventilation). CMS has also failed to define “rare and unusual” and the phrase remains unclear. No one can say how often CMS expects the case-by-case exception to be applied.

Also, the new case-by-case exception appears to be inherently subjective, which is not really a surprise. CMS states that the following factors (along with others) would be relevant to determining whether a patient requires inpatient admission under the newly expanded policy:

  • The severity of the signs and symptoms displayed by the patient;
  • The medical predictability of something adverse happening to the patient; and
  • The need for diagnostic studies that suitably are outpatient services (that is, their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more).

CMS further notes that an inpatient admission (and Part A payment) should be “rare and unusual” for minor surgical procedures or other care that is expected to keep the patient in the hospital “for only a few hours” or for a period of time that “does not span overnight.” Therefore, there appears to be a subset of stays not meeting the Two Midnight Benchmark.

Menacingly, CMS indicates that such cases will regardless be focused on for medical review.

Despite provider concern regarding the technical inpatient admission order authentication requirements, CMS did not specifically comment on the inpatient order requirements in the 2016 OPPS Final Rule. In a now oft-heard refrain, CMS also indicated that its actuaries approximate all that these changes will not “significantly” impact overall IPPS expenditures. So, accordingly, CMS is not changing the -0.2 % payment adjustment that the agency enacted when the Two Midnight Rule first went into effect.

CMS again acknowledged that several commenters, including the Medicare Payment Advisory Commission (MedPAC) and the American Medical Association (AMA), recommend that CMS rescind the Two Midnight Rule. CMS also acknowledged that it will continue to evaluate short-stay payment policy proposals but, given that there is no consensus among commenters, is not making any such changes right now.

CMS has indicated that this change to the Two Midnight Rule is in response to stakeholder concern and CMS’s continued efforts to develop the most appropriate standard for determining Medicare Part A payment.

As noted above, that exception was previously limited to “categorical”l announcements by CMS but, to date, CMS has only identified one such category (newly initiated mechanical ventilation). CMS does not define “rare and unusual” so it remains unclear how often CMS expects the case-by-case exception to be applied.

What Do the Changes Mean?

While the changes completed in the 2016 OPPS Final Rule appear strikingly similar to the pre-Two Midnight Rule standard, CMS maintains that the modifications are “not a return to the policy prior to the adoption of [the Two Midnight Rule].” When attempting to implement the change, many providers may struggle with the lack of clarity regarding the new case-by-case exception.

In response to commenters suggestions that this “case-by-case” analysis could produce a return of the second-guessing of physician judgment that caused the appeals backlog, CMS responded by pointing out the new medical review strategy (see below) and the improvements to the RAC program announced in December 2014. It is notable that the RAC changes are not yet in effect, and it remains to be seen what will survive the bidding process, which is the cause of the current contract award delays. Nevertheless, CMS suggests that the case-by-case exception “continues” CMS’s policy of recognizing and accepting “the important role of physician judgment and individual patient needs.”

The New Patient Status Review Strategy

The 2016 OPPS Final Rule also summarizes recent changes to CMS’s medical review strategy for patient status determinations. As mentioned above, on October 1, 2015, QIOs assumed responsibility for conducting reviews of short inpatient stays, thereby shifting this role away from Medicare Administrative Contractors (MACs). Under the new medical review short-stay inpatient review process, QIOs are requesting and reviewing a sample of post-payment claims (selected by CMS, not the QIO) to make a determination of the medical appropriateness of the admission as an inpatient. QIOs will then provide education to hospitals relating to claims denied under the Two Midnight Rule.

CMS implemented this change despite complimenting the “Probe & Educate” reviews conducted by the MACs as producing “positive effects and improved provider understanding.” Some may question, then, the value of switching patient status reviews to the QIOs, once one considers the significant cost and effort to do so and possible efficacy. Also, given the complexity and perplexity of the Two Midnight Rule, it is likely that the QIOs will experience the same steep learning curve already experienced by the MACs.

Hospitals that QIOs identify as exhibiting a “pattern of practices” (including having high denial rates, consistently failing to be faithful to the Two Midnight Rule, or failing to improve their performance after QIO educational interventions) will be referred to the RACs for further medical reviews. The exact trigger for this referral to the RACs has not yet been made public, if it is even defined, as yet.

At this time, nowhere does CMS elaborate on the details of the QIO reviews (little things, like sample sizes, claim look-back periods, Additional Document Request limits, and error rates triggering referrals to RACs). Instead, CMS indicated that it will address such technical medical reviews questions in sub-regulatory guidance issued no later than December 31, 2015.


The questions from July are now settled, as CMS has now finalized proposed revisions to the Two Midnight Rule. The changes take effect on January 1, 2016 and will allow for “case-by-case” determinations of whether short-stay cases may be appropriate for Part A payment based on the intensity of care and physician judgment. This change, however, should be taken with a large dose of caution – such cases will absolutely, positively be reviewed by auditors looking for “rare and unusual” circumstances. Their definition of rare and unusual will no doubt differ from the typical physician’s definition.

The Two Midnight Rule is evidently here to stay, but it is long from being truly finalized – if by finalized we mean working, workable and effective. CMS will undoubtedly continue to observe, tinker, may still make major payment modifications in the future. Providers should with great care consider how to incorporate the case-by-case exception into their education efforts and/or appeal strategies. The lack of clarity may continue for some time, if not for the entire life of the Two Midnight Rule.

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