Practice Management

Medicare’s two-midnight rule

What hospitalists must know


Most hospitalists’ training likely included caring for patients in the ambulatory clinic, urgent care, and ED settings. One of the most important aspects of medical training is deciding which of the patients seen in these settings need to “be admitted” to a hospital because of risk, severity of illness, and/or need for certain medical services. In this context, “admit” is a synonym for “hospitalize.”

Dr. Charles Locke, senior physician adviser at Johns Hopkins Hospital in Baltimore

Dr. Charles Locke

However, in today’s health care system, in which hospitalization costs are usually borne by a third-party payer, “admit” can have a very different meaning. For most payers, “admit” means “hospitalize as inpatient.” This is distinct from “hospitalize as an outpatient.” (“Observation” or “obs” is the most common example of a hospitalization as an outpatient.) In the medical payer world, inpatient and outpatient are often referred to as “statuses.” The distinction between inpatient versus outpatient status can affect payment and is based on rules that a hospital and payer have agreed upon. (Inpatient hospital care is generally paid at a higher rate than outpatient hospital care.) It is important for hospitalists to have a basic understanding of these rules because it can affect hospital billing, the hospitalist’s professional fees, beneficiary liability, and payer denials of inpatient care.

For years, Medicare’s definition of an inpatient hospitalization was primarily based on an expectation of a hospitalization of at least 24 hours and a physician’s judgment of the beneficiary’s need for inpatient hospital services. This judgment was to be based on the physician’s assessment of the patient’s severity of illness, the risk of an adverse outcome, and the hospital services required. (The exact definition by Centers for Medicare & Medicaid Services is much longer and can be found in the Medicare Benefits Policy Manual.1) Under Medicare, defining a hospitalization as inpatient versus outpatient is especially important because they are billed to different Medicare programs (Part A for inpatient, Part B for outpatient), and both hospital reimbursement and the patient liability can vary significantly.

Not surprisingly, CMS found that how physicians were making status decisions for medically similar hospitalized patients varied greatly. CMS noted two major concerns: an overuse of inpatient for patients hospitalized overnight leading to increased charges to CMS and multiday observation hospitalizations for lower-acuity patients leading to excessive liability for Medicare beneficiaries. (Observation stays are billed under Part B, under which the beneficiary generally has a 20% copay.)

To address these concerns, in October 2013, CMS adjusted the definition of inpatient to include “the two-midnight rule.” Basically, CMS said that, in order to qualify for inpatient, the admitting physician should expect the beneficiary to require hospital care spanning at least two midnights, rather than the previous 24-hour benchmark, regardless of the severity of illness or risk of adverse outcome. (There are exceptions and exemptions to the two-midnight rule, which are discussed later in this article.)

The idea of the two-midnight rule was to address the two concerns noted above. Under this rule, most expected overnight hospitalizations should be outpatients, even if they are more than 24 hours in length, and any medically necessary outpatient hospitalization should be “converted” to inpatient if and when it is clear that a second midnight of hospitalization is medically necessary.

Dr. Edward Hu, executive director, physician adviser services of University of North Carolina Health Care System, Chapel Hill

Dr. Edward Hu

In January 2016, CMS amended the two-midnight rule to recognize, as it had done prior to October 2013, that some hospitalizations, based on physician judgment, would be appropriate for inpatient without an expectation of a hospitalization that spans at least two midnights. Unfortunately, CMS has not been forthcoming with guidance of examples of which hospitalizations would fall into this new category, other than to say they expect the use of this new provision would generally not be appropriate for a hospital stay of less than 24 hours.

As of today, physicians should order inpatient services under the following three situations:


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