The Two-Midnight Rule was introduced by CMS in August 2013. After almost three years, hospitals, case managers, and physicians still struggle with how to implement it while remaining compliant and fiscally sound.

The final rule, under the Inpatient Prospective Payment System (IPPS), was introduced as the new Medicare inpatient payment standard. In part, it stated that surgical procedures, diagnostic tests, and other treatments are generally appropriate for inpatient hospital payment under Medicare Part A only when the physician expects the patient to require a stay that crosses at least two midnights, and the physician admits the patient to the hospital based on that expectation. The rule applies to Medicare only in acute care hospitals, critical access hospitals, long-term care hospitals, and inpatient psychiatric hospitals.

Sounds simple, right? While it sounds simple, it has been extremely difficult to implement, leaving physicians and others confused about levels of care, admission status, and medical necessity. This month, we will talk about the fundamentals of the rule as well as how you, as a case manager, can best support this process in your hospital.

What is an Admitted Patient?

Prior to the Two-Midnight Rule, the Medicare program defined an inpatient as a patient who is formally admitted to the hospital with the expectation that he or she will remain at least overnight and occupy a bed. The physician was responsible for deciding whether the patient needed to be admitted to the hospital. The Two-Midnight Rule changed this expectation from clinical to time-based. An inpatient admission is now defined as a patient requiring a hospitalization that spans at least two midnights. The two-midnight timeframe starts at midnight of the first calendar day the patient is in the hospital bed and continues to the second midnight. An admission no longer relates only to a physician’s clinical judgement but also to timeframes. The two-midnight presumption starts with the inpatient order and formal admission. In addition, the order must be written by a qualified physician or practitioner with “sufficient knowledge” of the patient’s condition. Qualified practitioners include those with admitting privileges including medical residents, physician assistants, or nurse practitioners. In the case of emergency department physicians, if your ED physicians do not have admitting privileges, the order must be counter-signed by an admitting physician prior to the patient’s discharge.

An admitting physician order cannot admit the patient to a location such as “2 West” or “telemetry,” as this is no longer acceptable. Rather, the physician order must say “admit as an inpatient,” “admit for inpatient services,” or similar language.

Certification of the Admission

The physician is also expected to certify that the services were reasonable and necessary, including a medical reason for the inpatient admission. The physician must include an expected length of stay, a plan of care, and a plan for post-hospital care. CMS also noted that, in general, “good medical record documentation may fulfill components required for certification.” Certification begins with the inpatient admission order that must be completed, signed, dated, and documented prior to the patient’s discharge. CMS does not provide nor expect any specific format or procedure for certification, but that the components can be found in the medical record.

CMS’s No-Nonsense Approach

Under the Two-Midnight Rule, CMS assumes that a hospital stay of at least two midnights qualifies as an inpatient stay; however, it has also made some other factors clear. CMS quite openly stated that Medicare auditors are to “watch out” for hospitals and physicians who are gaming the system to generate inpatient stays. This was in response to some talk about hospitals that thought they might just admit most patients for two midnights, as CMS might overlook these. Not true! Conversely, some hospitals went in the other direction, placing all potential admissions into observation status and then upgrading them later, also thinking that this might fly under the CMS radar. Also not true.

The best way to deal with CMS and the Two-Midnight Rule is to follow the rule and do the right thing on behalf of the patient. This means placing the patient into the level of care that is clinically appropriate to them, period.

Role of Medical Necessity Criteria

CMS has never dictated which set of level-of-care criteria a hospital should use; rather, it has always left it up to the individual hospital to use whatever set of criteria — purchased or homegrown — that it prefers. At the time the new rule came out, CMS explained the use of criteria in the following way: It expected that most hospitals would no longer use established criteria such as InterQual or Milliman, but would look to the physician’s expectation of a two midnight or longer hospital stay to guide their level-of-care determination. CMS explained that the expected length of stay and the patient’s underlying medical necessity for hospital care must be supported in the medical record by such factors as history and comorbidities, severity of signs and symptoms, current medical needs, and risk of adverse events.

This language left substantial differences in interpretation among hospitals, physicians, and auditors.

Basic Guide for Case Managers Using the Two-Midnight Rule

The following will give you and your admitting physicians some guidance in your decision-making process around the Two-Midnight Rule:

  • 1 emergency department midnight + 1 inpatient midnight = inpatient admission
  • 1 observation midnight + 1 inpatient midnight = inpatient admission
  • 2 inpatient midnights = inpatient admission
  • 2 observation midnights = observation service

Exceptions to the Rule

As with any rule, the Two-Midnight Rule has some exceptions. CMS describes these as “unforeseen circumstances” and allow some wiggle room for hospitals as far as the rule is concerned. The exceptions are as follows:

  • a shorter length of stay than the physician’s original expectation that the patient would require a two-midnight stay (unforeseen recovery);
  • death;
  • transfer;
  • departure against medical advice;
  • election of hospice care.

In the case of any of the above, the claim may be considered appropriate for hospital inpatient payment. This, however, is not a guarantee and may be subject to audit. The physician’s expectation and any unforeseen interruptions in care must be documented in the medical record.

Inpatient-only surgeries are another exception to the rule. If the patient’s surgical procedure is on the CMS “inpatient only” list, then these admissions do not require two midnights in the hospital. In fact, there are no time expectations for inpatient-only surgeries.

Things that Haven’t Changed

The misguided rule about three inpatient midnights to qualify for a skilled nursing placement has not changed. Patients who are expected to be placed in a skilled nursing facility still require a three-night stay in the hospital. Emergency department or observation midnights do not count toward meeting the CMS skilled nursing facility inpatient stay regulation.

Are You Obligated to Self-Audit?

Hospitals have an obligation to self-audit inpatient claims as part of the Patient Protection and Affordable Care Act. Any “overpayment, defined as any funds that a person receives or retains under the Medicare or Medicaid programs is not entitled to receive.” It is particularly important that hospitals self-audit short-stay admissions to ensure that they adhere to the rules discussed above. A sample of 10 to 20 records a month is advised, as well as a plan of correction should patterns be discovered.

Condition Code 44

Despite the longevity of Condition Code 44, confusion still remains around this billing status. Hospitals may only use Code 44 if the following requirements are met. Your utilization review committee should have a policy and a process for adhering to these requirements:

Criteria for Changing Patient Status:

• The utilization review committee determines that a patient was admitted erroneously.

• The patient status change is made prior to the patient’s discharge.

• The hospital has not submitted a claim to Medicare for the inpatient admission.

• A physician responsible for the care of the patient occurs with the utilization review committee’s decision.

• The patient must be notified in writing of the change in status.

One physician member of the utilization review committee may make the determination for the committee that the inpatient admission was not medically necessary if that physician is different from the “concurring” physician. This physician member of the utilization review committee must be different from the physician responsible for the care of the patient. If the hospital changes the patient’s status, then the treating physician should make a similar change to make the hospital and physician claim submission consistent.

The hospital may not change the patient’s status without the involvement of the utilization review committee and the concurrence of the physician of record. This means that they cannot change the patient from inpatient to outpatient unless the above process is followed.

If Condition Code 44 is Not Used

Should the patient be discharged prior to the use of the Condition Code 44 process, or should the physician of record not agree with the decision to revert the inpatient admission to observation, then the hospital can bill under Part B for some of the services that were provided. This process is sometimes known as “Provider Liable” or “Part B Billing.” Because billing is more limited under Part B, it is always better to place the patient in the right status from the beginning, or if that fails, to use Condition Code 44. Billing Part B should always be used as a last resort. CMS will allow Part B payment of all hospital services that were furnished and would have been reasonable and necessary if the beneficiary had been treated as an outpatient rather than admitted as an inpatient.

Scope of Part B Inpatient Billing:

  • services paid under Outpatient Prospective Payment System (OPPS) that do not require outpatient status;
  • PT/OT speech language pathology services;
  • ambulance services;
  • non-implantable DME, prosthetics, and orthotics;
  • clinical diagnostic laboratory services;
  • screening and diagnostic mammography services;
  • annual wellness visit.

2016 OPPS Rules

In the 2016 rules, the Two-Midnight Rule remained essentially the same. Some flexibility was added related to “acceptable” inpatient admissions that did not span two midnights. CMS expects these to be rare and will monitor and review them, if necessary.

Acceptable One-Day Stays:

  • depends on judgment of physician;
  • depends on documentation to justify the stay.

CMS will consider the following:

  • severity of the signs and symptoms exhibited by the patient, and
  • medical predictability of adverse events.


Another change in 2016 is the move from the Recovery Audit Contractor review of two-midnight stay compliance to the Quality Improvement Officers (QIOs). Seen by CMS as a positive change, it is even more important that you remain as compliant as possible. In order to ensure compliance, you need to educate physicians and case management staff as to what the Two-Midnight Rule means and your process to ensure compliance.

Claims to be reviewed will be submitted to the QIO on a monthly basis by CMS. No inpatient-only procedures will be reviewed. In addition, 10 claims will be reviewed biannually for smaller hospitals. For larger hospitals, 25 claims will be reviewed biannually. Hospitals have 45 days to submit their records for the biannual review.

For determination of medical necessity, the QIO will use one of the commercial screening tools such as InterQual and will use physician reviewers when a review fails to meet the initial screen. Physician reviewers will use their best medical judgment to determine the medical necessity of the admission. They will specifically look at the application of the Two-Midnight Rule benchmarks. If they deem it necessary, they will perform quality of care and coding validation reviews as well.

If your hospital has a lower than 10% error rate and no pattern of errors, this is considered of minor concern. Moderate concern is defined as an error rate of 10-20%. Major concern is defined as an error rate of greater than 20%.

Case Managers are Patient Advocates

One of our guiding principles as case managers is that of patient advocate. This advocacy applies to clinical issues as well as financial ones. There has been a lot of concern raised by organizations representing the Medicare population because of the increased financial liability to Medicare patients as it relates to the Two-Midnight Rule. In general, many Medicare patients are particularly confused about billing and rebilling for Part A versus Part B. For this reason, case managers must work to ensure that their patients are in the correct level of care at all times.

The issue of greatest concern is the increased liability for the 20% Part B copay and 100% of the cost for self-administered drugs. Even patients receiving ICU services are not considered appropriate for inpatient admission unless the physician expects the patient to stay at least two midnights. This can potentially lead to very large copays for patients.

Another area of confusion surrounds the three-midnight qualifying stay for skilled nursing home placement. The time spent in the hospital receiving outpatient services counts toward the Two-Midnight Rule benchmark for admission purposes, but does not count toward the required three-day inpatient stay for skilled nursing placement.

When patients are billed for Part B only, any coinsurance or deductible collected regarding the Part A claim must be refunded to the patient. Per CMS, hospitals cannot offset the patient’s Part B liability against their Part A deductible, nor can they waive the Part B beneficiary liability for copayments and non-covered items and services.

Two-Midnight Rule Compliance Strategies

1. The first thing to do in order to ensure compliance in your organization is to re-educate the hospital staff. The following list of employees is recommended:

  • physicians;
  • high volume admitters;
  • ED physicians;
  • hospitalists;
  • intensivists;
  • chief medical officer;
  • physician advisors;
  • case managers;
  • nursing supervisors;
  • bed board nurses;
  • key nursing staff;
  • utilization review committee members;
  • clinical documentation improvement staff;
  • transfer center nursing staff.

Your key collaborators in maintaining compliance are the physicians, case management staff, and appropriate nursing staff.

2. In terms of compliance, it is also about timing. After the patient has passed the first midnight, a decision should be made as to whether to admit or discharge the patient. Your process needs to be very tight, and patients cannot be missed in this process.

3. Be sure to develop and/or review written procedures for implementation of the Two-Midnight Rule and Condition Code 44.

4. Place hard stops in computerized physician order entry systems to ensure that the admission order and discussion of expected length of stay are included.

5. If your computerized physician order entry system is not completely in place, encourage your physicians to use terms such as “admit to inpatient,” “admit as inpatient,” or “admit for inpatient services.”

6. Implement a case management process to assist physicians in managing patient status to effectively transition patients to either inpatient status or discharge when placed in observation.

7. Review all inpatient admissions with average length of stay of less than two midnights to understand trends in short stays.

8. Ensure that all hospital and medical staff policies on admitting privileges and verbal orders match the requirements of the Two-Midnight Rule.

9. Ensure optimal use of physician advisors.

10. Monitor changes in Medicare regarding inpatient status and medical necessity.


While the Two-Midnight Rule can be confusing to staff and patients alike, if you implement and hardwire your processes you will be more likely to maintain compliance going forward.