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OIG Report Reveals Two-Midnight Rule Vulnerabilities

January 25, 2017

A study by the Office of Inspector General (OIG) has revealed “vulnerabilities” under the Two-Midnight hospital policy that initially went into effect on October 1, 2013.  In response to the findings, OIG has recommended that the Centers for Medicare and Medicaid Services (CMS) improve oversight of hospital billing under the policy and take steps to increase protections for beneficiaries.  As a result, hospitals are likely to see closer scrutiny to determine whether they are appropriately characterizing inpatient and outpatient stays.

According to the study report, released in December 2016, “Hospitals are billing for many short inpatient stays that are potentially inappropriate under the Two-Midnight policy and some of them indicate that Medicare—and beneficiaries—may be paying differently for similar care.”  The study also found that “An increased number of beneficiaries in outpatient stays pay more and have limited access to [skilled nursing facility] services than they would as inpatients.”

Based on a comparison of Medicare hospital claims for FY 2013 and FY 2014, the study identified inpatient stays using Medicare Part A hospital claims and outpatient stays using Part B claims.  A “short stay” was defined as a stay lasting fewer than two midnights and a “long stay” as one lasting two or more midnights.  Claims for short inpatient stays were evaluated to determine whether they adhered to CMS’s criteria for payment under the Two-Midnight policy. 

Cost Savings and Patient Benefits

The Two-Midnight rule was initially created as a strategy for controlling healthcare costs and protecting beneficiaries by reducing the number of long outpatient hospital stays.  The rule requires that patients who stay in the hospital longer than 24 hours be admitted as inpatients for medically necessary reasons.  (For additional background, also see CMS Proposes Eliminating Payback Reduction Under Two-Midnight Rule and New Patient Notification of Observation Status Law and the Extension of Two-Midnight Rule, the Enforcement Delay.)

The policy was designed to address three vulnerabilities in the ways hospitals use inpatient and outpatient stays:  1) improper payments for short inpatient stays; 2) adverse consequences for patients with long outpatient stays, including the inability to meet the requirement of three nights as an inpatient in order to qualify for care in a skilled nursing facility; and 3) inconsistencies across hospitals in the designation of admissions as inpatient or outpatient.

CMS expected that the Two-Midnight policy would accomplish three outcomes:  1) decrease the use of short inpatient stays; 2) decrease the use of long outpatient stays; and 3) promote more appropriate and consistent use of inpatient and outpatient stays among hospitals.

Under the rule, the treating physician is responsible for making the decision to admit a beneficiary to the hospital based on such factors as medical history, symptom severity and anticipated care.

Inpatient stays are generally covered if physicians reasonably expect that the beneficiary’s care will last at least two midnights.  Stays expected to last fewer than two midnights are generally paid on an outpatient basis.  Hospitals are paid for inpatient stays under the Inpatient Prospective Payment System (IPPS), in which each stay is classified according to Medicare Severity Diagnosis and Related Group (MS-DRG).  Outpatient stays are paid for under the Outpatient Prospective Payment System (OPPS).  In 2015, CMS began implementing “comprehensive ambulatory payment classifications,” which provide a single payment rate for a primary service and any related secondary services.  Beneficiaries in these circumstances are responsible for 20 percent of a single amount rather than for 20 percent of the amount for each service.

Under the rule, inpatient stays lasting at least two midnights from the date of admission are presumed appropriate for payment; however, those lasting fewer than two midnights are considered open to review for compliance.  The rule also delineates circumstances under which a short inpatient stay can be considered compliant, including stays with:

  • Inpatient-only procedures
  • Mechanical ventilation initiated during the visit
  • An unforeseen circumstance, such as the beneficiary’s death, transfer to another hospital or leaving against medical advice
  • Two or more midnights in the hospital in which outpatient time prior to admission is added to inpatient time.

CMS made two changes in 2016 that loosened requirements under the rule.  It began to allow case-by-case exceptions for inpatient stays that were shorter than at least two midnights.  It also changed enforcement procedures to consist of small sample reviews of medical records by CMS’s Quality Improvement Organizations, rather than reviews by CMS’s Medicare Administrative Contractors.  Previously, compliance issues were addressed with education and follow-up reviews.  Currently, deficiencies are addressed with education, followed by referral to Recovery Auditors for further review if deficiencies persist.

Major Findings

The study report presents three key findings:

Hospital inpatient stays decreased and outpatient stays increased since the implementation of the Two-Midnight policy.

Hospital inpatient stays decreased by about three percent and outpatient stays increased by about eight percent since the policy’s implementation.  Despite these improvements, the findings continue to raise concerns about the cost of these hospitalizations to Medicare and beneficiaries. 

More specifically, short inpatient stays decreased more than long outpatient stays from 2013 to 2014 (by about 10 percent and three percent, respectively).  In addition, long inpatient stays decreased by about two percent and short outpatient stays by 11.6 percent.

Despite the changes in hospital billing, vulnerabilities still exist.

  • Hospitals are billing for many potentially inappropriate short inpatient stays under the Two-Midnight policy.  Of the total of approximately 1,000,075,000 short inpatient stays in 2014, 39 percent were potentially inappropriate for payment because the claims did not appear to meet the criteria for an appropriate short inpatient stay.  Although short inpatient stays decreased by almost a third from 2013, there were more than 420,000 of them in 2014, and Medicare paid nearly $2.9 billion for potentially inappropriate short inpatient stays. 
  • Medicare pays more for some short inpatient stays than for short outpatient stays, although the stays are for similar reasons.  There was significant overlap between the reasons for short inpatient stays and short outpatient stays, although they all lasted fewer than two midnights.  The average paid for short inpatient stays and short outpatient stays related to digestive disorders, for example, was approximately $4,500 and $790, respectively.  The large gaps raise concerns that Medicare is paying differently for similar care.
  • Hospitals continue to bill for a large number of long outpatient stays. Many of these stays likely would have met criteria for inpatient admission.  Because providers have a financial incentive to admit patients as inpatients, the large number of outpatient stays suggests other factors at work.  These factors could include difficulty with safe discharges, confusion about the Two-Midnight rule or delays in care.
  • An increased number of beneficiaries in outpatient stays pay more and have limited access to SNF services following hospitalization than they would as inpatients. 2014 saw an increase of almost 16 percent (50,000 cases) from 2013 in outpatient stays that paid more than the inpatient deductible.  Coronary stent insertion accounted for more than one-quarter of these cases.  In addition, an increased number of these patients did not qualify for SNF services in 2014 compared with 2013. 

Hospitals continue to vary in how they use inpatient and outpatient stays.

The Two-Midnight rule’s goal of fostering consistent, appropriate use of inpatient and outpatient stays remains a work in progress.  Although about three percent of all hospital stays were short inpatient stays, the range among hospitals was from about one percent to more than five percent (compared with two and eight percent in 2013).  The variation decreased, but inconsistencies among hospitals persisted.  At six percent of all stays in 2014 (a range of two to almost 11 percent), long outpatient stays remained virtually unchanged from the previous year.

In a departure from the goals of the Two-Midnight policy, some hospitals actually increased their use of short inpatient and long outpatient stays between 2013 and 2014.  In some areas, the gap between the policy’s stated goals and the reality in hospitals was even more stark.  For chest pain, for example, the use of short inpatient stays decreased substantially in 2014 and even dropped to zero at some institutions.  At the same time, 29 percent of hospitals increased their use of short inpatient stays for chest pain.

Next Steps

OIG made the following specific recommendations to CMS, with which the agency agreed: 

  • As part of routine analysis of hospital billing, target for review the hospitals with high or increasing numbers of potentially inappropriate short inpatient stays.  “We found that hospitals billed for a large number of potentially inappropriate short inpatient stays; for these stays, Medicare paid a total of almost $2.9 billion.  We also found that hospitals may have financial incentives to use short inpatient stays, and that some hospitals increased their use of these stays, which is inconsistent with the stated goals of the Two-Midnight policy,” the report states.
  • Identify and target for review the short inpatient stays that are potentially inappropriate.  Based on recommendations from OIG, CMS will develop tools to effectively identify these short inpatient stays for review.  “In addition, CMS should encourage and expand hospitals use of an existing code that allows them to indicate on Medicare claims a beneficiary’s time spent as an outpatient prior to inpatient admission.  CMS should use this code to add together the beneficiary’s time as an outpatient and time as an inpatient to determine whether the beneficiary spent at least two midnights in hospital in total,” according to the report.  This code, along with the inpatient-only procedure codes and discharge codes on claims will enable CMS to distinguish potentially inappropriate and appropriate stays.
  • Analyze the potential impacts of counting time spent as an outpatient toward the three-night requirement for SNF services so that beneficiaries receiving similar hospital care have similar access to these services.  CMS will review the impact of counting time spent as an outpatient toward the three-night requirement to qualify for SNF services in order to give beneficiaries access to SNF services whether they are inpatients or outpatients.
  • Explore ways of protecting beneficiaries in outpatient stays from paying more than they would have paid as inpatients.  CMS will assess the extent to which beneficiaries in outpatient stays pay more than they would as inpatients and explore methods and policy changes to ensure more equitable cost-sharing with beneficiaries with similar care needs regardless of whether they are inpatients or outpatients.  


The Two-Midnight rule is here to stay, and the work of hospitals to comply with the policy continues.  It’s not too soon to give some critical thought to where your organization might fit in relation to some of these new findings, identify trouble spots and start taking corrective action.

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