The Two-Midnight Rule has benefited hospitals in the past few years, but some facilities continue to have problems with implementing the rule.

The Centers for Medicare & Medicaid Services (CMS) finalized the rule in 2016 to provide a way for physicians to convert an observation patient into an inpatient. If the doctor expects the patient to stay through two midnights, then the patient can be admitted.

Some hospitals have struggled with receiving denials after recovery audit contractors (RACs) found problems with physician orders and documentation. This is a problem that hospital case managers can help resolve through better communication and education with patients and physicians.

Case management and utilization review are important to the process of following the rule’s documentation and other requirements, says J. Suzanne Wilson, RN, MBA, ACM, assistant vice president of post-acute services/continuing care at AnMed Health in Anderson, SC. Wilson also is the chair of the national public policy committee of the American Case Management Association.

“The Two-Midnight Rule has been a journey for most health systems, along with a host of denials — RACs looking at every level of care. It isn’t easy,” Wilson says.

The Two-Midnight Rule change was intended to benefit patients financially, says Linda Corley, CPC, vice president of Xtend Healthcare in Nashville, TN.

CMS intended to fix a common problem in which patients were entering the hospital in outpatient observation for several days and doctors were unable to upgrade the patient to inpatient status due to existing clinical criteria, Corley explains.

“Outpatients are less acute; the medical conditions are not as complex as inpatient, so a person in the hospital as an outpatient owes a coinsurance amount for each day that the person is on outpatient observation,” Corley says. “Outpatient observation patients also are charged individually for services they receive, like drug administration, imaging, diagnostic tests.”

This results in patients who are in a hospital for four days as outpatients owing considerably more for their stay than a patient would have owed if part of that stay was inpatient, she adds.

Based on the Two-Midnight Rule, when a physician deems that an observation patient has been in the hospital for 24 hours and cannot be safely discharged, he or she can be upgraded to an inpatient stay, which Medicare would pay as if it were one entire inpatient stay.

As with most new rules, there are implementation pains. The Two-Midnight Rule is no exception, which is why CMS clarified the rule within a Medicare program final rule on the Hospital Inpatient Prospective Payment Systems for acute care hospitals in August 2018. (

During its first year, many hospitals received denials from Medicare. Often, the problem related to a documentation issue or technicality, Wilson says.

Some auditors would deny coverage even when the patient’s acuity level met criteria for inpatient care. “If you didn’t have that inpatient order, it was a technicality and you would not get paid,” she says.

For example, a patient in observation for chest pain may go into cardiac arrest and die while in surgery. The physician who saw the patient in the ED might not have written an inpatient order, and then the RAC denies that case, Wilson explains.

Clarification from CMS explained that cases like the example are not supposed to be denied because clearly the acuity is there for an inpatient stay, whether or not the order was written, she says.

Case managers are important to hospitals’ strategies in staying compliant with the rule:

• Leverage tools. Case managers can use tools such as the electronic medical record (EMR) to help physicians document accurately and concisely. They also can check the EMR each day to ensure inpatients have the appropriate care order, Wilson says.

“We try to catch that concurrently,” she says. “We look at reports and use reports and tools to help us with compliance.”

For instance, case managers look at the wording of orders: “You place a patient in outpatient observation, so you don’t use the word ‘admit’ for observation,” Wilson explains. “You only use the word ‘admit’ for inpatient.”

• Explain the Medicare Outpatient Observation Notice (MOON). Case managers make sure patients understand that they are in the hospital as an outpatient observation status, which is a Medicare-created term, Wilson says.

“These patients are less sick and have lower acuity, but we need more time with them than assessing them in the emergency room,” she says. “A physician might choose observation status to better understand or evaluate the patient’s illness, or maybe it’s for a quick tune-up, administering medication or for fluid hydration.”

Patients need to understand that their observation stay will be billed differently than if they were admitted to the hospital as an inpatient.

In CMS frequently asked questions, the agency makes suggestions for explaining the outpatient status to patients:

- “The physician has ordered outpatient observation services in order to evaluate your symptoms and diagnosis,” and

- “Your condition and symptoms will continue to be evaluated to assess whether you will need to be admitted as an inpatient of the hospital or whether you may be transferred or discharged from the hospital.” (

• Identify trends. Case managers can assist with identifying trends in how the Two-Midnight Rule is used.

For example, when the rule first was issued, hospitals’ observation rates shot up nationally — an unintended consequence from CMS’ perspective. This spike was partially due to RACs scrutinizing documentation and finding it falling short, Wilson says.

“It was, perhaps, an overuse of the observation status, and that was a national issue,” she says. “At AnMed, our rate of observation was going down, but nationally it was a challenge for CMS.”

Case managers can check for trends on the hospital level, specialty level, and even physician level by using their hospital-based reporting tools. Hospitals can find data about short stays through compliance tools, such as the Program for Evaluating Payment Patterns Electronic Report (PEPPER) that CMS provides, Wilson suggests. (For more information, visit:

“The report helps us understand whether we’re managing the Two-Midnight Rule in a compliant, appropriate way,” she says. “We look at our observation rate, length of stay, and our PEPPER report for short stays.”

There are seasonal fluctuations in the observation rate. In the winter months, it can be higher because of people in the hospital with flu or pneumonia. But if there is an unusual and sudden spike in the observation rate, then this suggests the need to dig deeper.

• Educate physicians and staff. “We educate staff and keep them updated on the Two-Midnight Rule, and we update them with Federal Register updates,” Wilson says.

Case managers also educate physicians on patients’ change in status, patterns, and trends.

“If we had a physician whose observation rate was 40%, we’d want to have a conversation to understand that,” she says.

• Find alternatives to skilled nursing facilities (SNFs) as needed. One challenge with the Two-Midnight Rule is that if a patient has outpatient observation status of one day and inpatient for two days, there cannot be a transition to a SNF under Medicare rules. Patients must have a qualified three-day inpatient stay in order to access SNF benefits, and the time spent in observation does not count, per CMS guidance, Wilson explains.

This obstacle can be problematic in cases where the patient should be discharged but is not medically capable of being discharged home. Case managers can help in these situations by finding alternative discharge plans.

“The alternative might not be the patient’s first choice, but we have to make sure we have the best discharge plan or optimal discharge plan for patients,” Wilson says. “There are obstacles and barriers in that patient’s funding source.”