By Toni Cesta, PhD, RN, FAAN


In the last three issues of Case Management Insider, we covered a variety of case management compliance issues related to utilization review and discharge planning. In this, our fourth part in the series, we will discuss additional compliance issues important to you in your case manager role.

Compliance: A Shared Responsibility

Although we are discussing compliance from the case management point of view, compliance is a shared responsibility among all members of the interdisciplinary care team. Virtually every member has some piece of the compliance pie. In today’s healthcare environment, compliance starts at the hospital’s entry points and continues until the patient is safely transferred to another level of care or is discharged to his or her home. While the majority of your patients probably will gain entry to your hospital via the ED, others may be direct or urgent admissions, transfers, or even observation patients. Let’s start our discussion this month with a review of the compliance issues related to observation status.

Compliance and Observation Status

When discussing observation status, we should begin with a review of the Two-Midnight Rule and how your compliance with the rule will have a negative impact on reimbursement and potential audits if not managed properly. Observation is defined as follows by the Centers for Medicare & Medicaid Services (CMS):

“Observation care is a well-defined set of specific, clinically appropriate services, which include ongoing short-term treatment, assessment, and reassessment, that are furnished while a decision is being made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.” (Internet-Only Manual [IOM], Publication 100-04, Chapter 4, Section 290).

This simply means that observation status can be used in the event that the physician needs more time to evaluate whether a patient can be discharged or needs more time in the acute care setting. While reimbursement for observation typically is less than that for an inpatient stay, the care provided usually is the same.

In reality, these are patients in hospitals who receive medical, physician, and nursing care, as well as tests, medications, overnight lodging, and food, but who nevertheless are called outpatients. The Center for Medicare Advocacy calls this issue “outpatient observation status” because there are no hospital services that are distinctly “observation,” and because these outpatients receive care and treatment that are identical to the care and treatment received by inpatients.

The Two-Midnight Rule

This rule was put into effect to provide a framework for determining when a patient might need observation vs. inpatient admission and contains a variety of compliance touchpoints. These touchpoints have a direct relationship to the role of the case manager, particularly in the ED. When a patient arrives in the ED, the physician will have one of three options: treat and release the patient, admit the patient to the acute care setting, or place the patient in observation status until a decision can be made as to whether the patient should be admitted.

The question answered by the Two-Midnight Rule provides a decision-making process for the physician to follow with the guidance of the case manager. It requires the case manager to review the patient’s case using the hospital’s standardized criteria and discuss the case with the physician.

If all of these assessments result in an indication that the patient’s stay will likely be greater than one midnight, the physician must document this expectation along with the order to admit. The documentation must support the medical necessity and necessary care needed. This process is concurrent and active, and requires close collaboration between the physician and the case manager.

For this reason, and in order to maintain compliance with the Two-Midnight Rule, many hospitals have begun staffing the ED with case managers 24/7.

The following are exceptions to the Two-Midnight Rule:

• death;

• transfer;

• departure against medical advice;

• unforeseen recovery (faster than expected);

• election of hospice care.


One of the newer compliance requirements is the Medicare Outpatient Observation Notice, known as the MOON. The MOON is part of the NOTICE Act, which went into effect Aug. 6, 2016. The NOTICE (Notice of Observation Treatment and Implication for Care Eligibility) Act requires that hospitals provide written and oral notice within 36 hours to patients who are in observation or other outpatient status for more than 24 hours.

The NOTICE Act is a requirement of acute care hospitals and critical access hospitals. The notice must explain the reason that the patient is an outpatient and describe the implications of that status both for cost-sharing (deductibles and copays) in the hospital and for subsequent eligibility for coverage in a skilled nursing facility. In fact, observation status cannot be used to qualify a patient for admittance to a skilled nursing facility.

The MOON is not required for all outpatients. CMS requires hospitals to give the MOON only to patients entitled to Medicare for whom they are billing Medicare for observation hours. However, patients who do not have Medicare Part B also should receive the MOON, even though their observation status stay or other outpatient stay in the hospital will not be covered by Medicare Part B because they do not have Part B.

As an RN case manager or social worker, your hospital may require that you provide the MOON to your patients. If so, there are several things that you should know. First, your hospital should use a standard form that is written in plain language and made available in all appropriate languages. The form must be signed by the patient or by an individual acting on behalf of the patient in order to acknowledge receipt of the notification. If the patient or their representative refuses to sign, you must sign it if you are the person who presented it.

Below is a sample MOON form that has been provided by CMS for use by hospitals.

Sample MOON Form

Department of Health & Human Services Centers for Medicare & Medicaid Services

OMB Approval No. xxxx-xxxx

Medicare Outpatient Observation Notice (MOON)

Patient Name:

Patient ID:




On <date> at <time>, you began receiving observation services at <hospital name>. You are a hospital outpatient receiving observation services, also called an observation stay. You are not an inpatient.

Observation services:

• are given to help your doctor decide if you need to be admitted as an inpatient or discharged;

• are given in the ED or another area of the hospital; and

• usually last 48 hours or less.

How being an outpatient affects what you may have to pay: Being a hospital outpatient affects the amount you may have to pay for your time in the hospital and may affect coverage of services after you leave the hospital.

Medicare Part B covers outpatient hospital services, including observation services when they are medically necessary. Generally, if you have Medicare Part B, you may pay:

• a copayment for each individual outpatient hospital service that you receive; and

• 20% of Medicare-approved amount for most doctor services, after the Part B deductible.

Part B copayments may vary by type of service. In most cases, your copayment for a single outpatient hospital service won’t be more than your inpatient hospital deductible. However, your total copayment for all outpatient services may be more than the inpatient hospital deductible.

If you’re enrolled in a Medicare Advantage plan (like an HMO or PPO) or other Medicare health plan (Part C), your costs and coverage are determined by your plan. Check with your plan about coverage for outpatient observation services.

If you are a Qualified Medicare Beneficiary through your state Medicaid program, you cannot be billed for Part A or Part B deductibles, coinsurances, and copayments.

Your costs for medications: Generally, prescription and over-the-counter drugs, including “self-administered drugs” given to you by the hospital in an outpatient setting (like an emergency department), aren’t covered by Part B. “Self-administered drugs” are drugs you’d normally take on your own. For safety reasons, many hospitals don’t allow patients to take medications brought from home.

If you have a Medicare prescription drug plan (Part D), your plan may help you pay for these drugs in certain circumstances. You’ll likely need to pay out of pocket for these drugs and submit a claim to your drug plan for a refund. Contact your drug plan for more information.

NOTE: Medicare Part A generally doesn’t cover outpatient hospital services, like an observation stay. However, if inpatient hospital services become necessary for you and the hospital admits you as an inpatient based on a doctor’s order, generally Medicare Part A will cover inpatient services. Generally, you’ll pay a one-time deductible for all of your inpatient hospital services for the first 60 days you’re in a hospital. Medicare Part B covers most of your doctor services when you’re an inpatient. You may have to pay 20% of the Medicare-approved amount for doctor services after paying the Part B deductible.

How observation services may affect coverage and payment of your care after you leave the hospital: If you need skilled nursing facility (SNF) care after you leave the hospital, Medicare Part A will only cover SNF care if you have a prior qualifying inpatient hospital stay. A qualifying inpatient hospital stay means you’ve been a hospital inpatient (you’re admitted to the hospital as an inpatient after your doctor writes an inpatient admission order) for a medically necessary stay of at least three days in a row (not counting your discharge day) within a short time before you enter a SNF. If you have Medicaid, Medicare Advantage, or other health plan, Medicaid or the plan may have different rules about qualifying for SNF services after you leave the hospital. Check with Medicaid or your plan.

Additional information: If you have any questions about your observation services, please ask the hospital staff member providing this notice or the doctor providing your hospital care. You also can ask to speak with someone from the hospital’s utilization or discharge planning department. In addition, you can call 1-800-MEDICARE (1-800-633-4227), or TTY: 1-877-486-2048.

If you have a complaint about the quality of care you are receiving during your outpatient stay, you may contact the Quality Improvement Organization (QIO) for this hospital. If you have a Medicare Advantage or other health plan, you can make your complaint about quality of care by filing a grievance with your plan. Review your plan materials or contact your plan for information on how to file a grievance. You also can make a complaint about quality of care to the QIO listed above. Please sign and date here to show you received this notice and understand what it says. Signature of Patient of Representative: Date/Time:

The Important Message from Medicare

Hospitals are required to deliver the Important Message from Medicare (IM) to all traditional Medicare beneficiaries and Medicare Advantage plan enrollees who are hospital inpatients. The IM informs inpatients of their hospital discharge appeal rights. Beneficiaries who choose to appeal a discharge decision must receive the Detailed Notice of Discharge (DND) from the hospital or Medicare Advantage plan, if applicable.

In many hospitals, the first IM is given by the admitting or access department when the patient goes through the admissions process. In some rare cases the case management department gives the first IM, but this is not considered best practice.

The second message must be given within two days of the patient’s discharge from the hospital. The second message can be given by a clerical support person from the case management department, or even by the admitting or access department depending on your hospital’s resources and processes.

In most cases the second message is given by the RN case manager, as he or she is best qualified to explain the IM as well as the patient’s rights and the process for appeal. If the patient chooses to appeal the discharge, then the Detailed Notice of Discharge follows. Ultimately, a Hospital-Issued Notice of Non-Coverage (HINN) may also need to be given if any of the criteria for a HINN are met. In no case does the IM replace the HINN.

We will conclude our four-part series on case management compliance with a gap analysis process that you may wish to use in your hospital or in your personal case management practice. Please review the following lists and add or delete as you see necessary.

Sample Case Management Compliance Gap Analysis Form


• Two-Midnight Rule process in place and successful;

• Two-Midnight Rule audit process in place and reported to UM Committee;

• utilization management committee in place and following Condition of Participation requirements;

• ED case management in place during appropriate hours;

• access case management in place, if appropriate;

• physician advisor process in place and effective;

• all case managers understand role of medical necessity and Two-Midnight Rule expectations;

• all records have orders with correct order to admit;

• effective self denial process in place;

• Important Message delivered appropriately with accurate appeal process in place with QIO;

• HINN delivery process mirrors CMS requirements;

• preparation for proposed discharge planning rules;

• discharge planning process follows Condition of Participation requirements;

• discharge plan re-evaluated at appropriate intervals (for example, after a surgical procedure, discharge plan reassessed);

• policies in place to support compliance rules and regulations;

• RN case manager and social worker documentation support CMS requirements;

• annual IRR of medical necessity criteria RN case managers;

• feedback to department and individual staff from dashboard;

• annual education of staff and physicians;

• collaboration in place for new compliance requirements, such as NOTICE Act and proposed discharge planning rules;

• preparation for NOTICE Act with clear understanding of case management department’s role in compliance to act.


It is critical that each and every case management department be as compliant as they can be. In the past four CMI issues, we reviewed the key compliance matters that are of importance to case managers and case management departments. By remaining compliant, you can better ensure that you are working at the top of your license and that your patients receive the very best case management services possible.