2-Midnight Rule To Be, Or Not To Be?

on Tuesday, 21 April 2015. All News Items | Patient Status | Case Management | Outpatient Services | Billing

A Review of the April 2nd MedPAC Committee Discussion of Hospital Short Stay Policy Issues

As I am about to have another birthday my high school years are getting further and further away. However, that does not mean that I have forgotten the wonderful teachers that I had or those special assignments that have stuck with me over the years. For example, standing up in class and reciting Shakespeare’s famous “To be, or not to be…” dialogue from Hamlet. For those who love the classics forgive me as I open with my own version of this dialogue.

To continue with the 2-Midnight Rule, or not to continue: that is the question:
Whether tis better to allow RACs to audit with current guidance as it is,
Or, to arm them with a focus on hospitals with high rates of inpatient stays and bring the 2-Midnight Rule to an end…

To be an Outpatient, not qualifying for a SNF stay, no more; by counting two outpatient days towards meeting SNF eligibility requirements…

For a beneficiary to know their patient status: perchance to dream; ay, there’s the rub;
For as it currently stands most do not know when we have changed a status once more,
Notifying the beneficiary should give hospitals pause, as we respect that a change in status can cause financial stress for the beneficiary…

Hear you now! Hospitals, be put on notice and all regulation changes remember’d.

Now, back to the present, let’s take a detailed look at the hospital short stay policy issues, recommendations and anticipated outcomes from the April 2nd Medicare Payment Advisory Commission (MedPAC) Committee meeting.

Changes to the RAC Program


“As inpatient stays have shortened and some inpatient services have migrated to the outpatient setting in recent years, the issue of whether a patient requires inpatient care or could be treated successfully as an outpatient has received increasing attention. The high profitability of one-day stays under Medicare’s inpatient payment system and difference in payment rates between similar inpatient and outpatient stays has heightened concern about the appropriateness of one-day inpatient stays.”


The Secretary should:

  • Reduce administrative burden by directing Recovery Audit Contractors to focus reviews on short inpatient stays on hospitals with high rates of this type of stay;
  • Increase accountability by modifying a RAC’s contingency fees to be based, in part, on its claim denial overturn rate;
  • Align look-back period with rebilling window by ensuring that the RAC look-back period is shorter than the Medicare rebilling for short inpatient stays; and
  • Withdraw CMS’ two-midnight policy

MedPAC Anticipated Outcomes from these Recommendations

  • The expectation that this will increase program spending as “it will cause RACs to take a more cautious approach to auditing, resulting in fewer claim denials and a lower level of recoveries.”
  • There will be an increase in rebilling opportunities allowing hospitals to gain partial reimbursement for services otherwise denied.
  • Beneficiary cost sharing may be mixed as stays shift between inpatient and outpatient settings.
  • Hospitals with a high rate of short inpatient stays, this will increase RAC scrutiny for short stays and administrative burden. However, for all other hospitals this would “reduce or eliminate RAC scrutiny and the associated administrative burden.

Evaluate Hospital Short Stay Payment Penalty Concept


The evaluation of the RAC program prompted consideration of a formula-based payment penalty for hospitals with excessive levels of short inpatient stays to replace RAC reviews of these stays. “Interest in this concept is derived from concern that the RAC program is administratively burdensome for hospitals and CMS, and oversight of hospitals could be made more efficient.”


“The Secretary should evaluate establishing a penalty for hospitals with excess rates of short inpatient stays to substitute, in whole or in part, for RAC review of short inpatient stays.”

MedPAC Anticipated Outcomes from this Recommendation

  • This has the potential to reduce administrative burden on hospitals and CMS and make oversight more efficient.
  • As this recommendation is to evaluate rather than implement at this point, this will not increase Medicare spending or adversely affect beneficiaries or providers.
  • “The Secretary will need to address several design elements in evaluating this concept, such as how to define short stays, identifying an appropriate penalty threshold and penalty amount, and risk-adjusting the measure to make it equitable for all hospitals. While the Secretary is evaluating the concept, MedPAC indicates that they will perform their own evaluation.

Modify SNF 3-Day Rule


Time spent as an Outpatient receiving Observation Services does not count toward a three day qualifying stay for Skilled Nursing Facility (SNF) coverage. “A small group of beneficiaries incur high out-of-pocket costs because their 3-day hospital stay did not include three full inpatient days, leaving them without SNF coverage. “


“The Congress should revise the skilled nursing facility three inpatient day hospital eligibility requirement to allow for up to two outpatient observation days to count towards meeting the criterion.”

MedPAC Anticipated Outcomes from this Recommendation

  • This policy would increase program spending for beneficiaries now qualifying for Skilled Nursing Facility (SNF) care,
  • Have a positive impact on beneficiaries discharged to a SNF who currently would not have SNF coverage; and
  • Increase payments to freestanding and hospital-based SNFs.

Require Beneficiary Notification of Observation Status


“Medicare currently does not require hospitals to notify beneficiaries of their outpatient observation status regardless of the time these beneficiaries spend in the hospital. Medicare beneficiaries and beneficiary advocates cite this lack of notification as a source of confusion for beneficiary SNF eligibility and cost-sharing liability.”


“The Congress should require acute care hospitals to notify beneficiaries placed in outpatient observation status that their observation status my affect their financial liability for skilled nursing facility care. The notice should be provided to patients in observation status for more than 24 hours and who are expected toned skilled nursing services. The notice should be timely, allowing patients to consult with their physicians and other health care professionals before discharge planning is complete.”

Laws and Pending Legislation Pertaining to this Issue

Several states already have laws or are considering legislation that would require a hospital to inform patients they are an Outpatient receiving Observation Services.

H.R. 876 is the Notice of Observation Treatment and Implication for Care Eligibility Act or the NOTICE Act. This bill was first introduced in the House of Representatives on February 11, 2015. This Act passed the House with a unanimous vote of 395 ‘yeas’ to zero ‘nays’ on March 16, 2015. The following day, on March 17th, this bill was received in the Senate, read twice and referred to the Committee on Finance.

For beneficiaries entitled to benefits under Medicare Part A, the Notice Act would require hospitals to notify beneficiaries in an Outpatient Status receiving observation services for more than 24 hours of their status within 36 hours of the classification. Adequate oral or written notification should be provided and include the following:

  • When providing oral notification include the name and title of the hospital staff who gave the notification and its date and time.
  • When providing a written notification it should:
    • Explain the beneficiary’s status as an outpatient under observation (or any similar status) and not as an inpatient.
    • Explain the reason for the Outpatient status.
    • Explain the implications of that outpatient status on services furnished by the hospital or critical access hospital, such as cost-sharing requirements and eligibility coverage for services furnished by a SNF.
    • Be signed by the beneficiary, if the notification is written, to acknowledge its receipt, or if such individual refuses to sign, the written notification is signed by the staff of the hospital who presented it.

MedPAC Anticipated Outcomes from this Recommendation

  • The CBO evaluated the NOTICE Act and determined that it would not have significant budgetary effects over the 2015 through 2025 period. The MedPAC does anticipate that hospitals will have to make administrative adjustments to accommodate the change which would mean hospitals would likely incur an administrative cost to implement this policy.

Expand Coverage to Self-Administered Drugs (SADS) in Outpatient Observation Care


“Oral drugs and certain drugs that are considered usually self-administered are not covered by Medicare for hospital outpatients. The extent to which beneficiaries are affected by this issue varies by hospital. Some hospitals reportedly do not charge beneficiaries for self-administered drugs. Other hospitals content that they must charge beneficiaries for self-administered drugs because of laws prohibiting beneficiary inducements. These facilities may bill the beneficiary at full charges, which equals approximately $200, on average, which is substantially higher than the cost of providing the drug, which equals about $40, on average.”


“The Congress should package payment for self-administered drugs provided during outpatient observation on a budget neutral basis within the hospital outpatient prospective payment system. Under this approach, the Secretary would increase outpatient payment rates for all beneficiaries receiving observation care to reflect coverage of self-administered drugs, while payment rates for other outpatient services under the OPPS would decrease slightly to offset it, resulting in no additional Medicare spending.”

MedPAC Anticipated Outcomes from this Recommendation

  • Overall, this would reduce beneficiary liability for SADS.
  • Beneficiaries receiving observation services would no longer be liable for non-covered SADs at full charges.
  • This option would also make cost sharing for SADS uniform across beneficiaries and hospitals paid through the OPPS.
  • The MedPAC expects that hospitals would experience a small decrease in revenues due to no longer receiving full charges. However, it has the potential to reduce hospital administrative burden associated with cost sharing collections and beneficiary complaints concerning SADS.

At this end of the hospital short stay policy discussion the Committee voted unanimously on all Recommendations. For those interested in reading the entire transcript of the meeting a link has been provided below. As for my vote on continuing with the 2-Midnight Rule, it would also be a “Not to be.”


Link to April 2, 2015 MedPAC Hospital short stay policy issues presentation:


Link to April 2, 2015 MedPAC meeting transcript: http://www.medpac.gov/documents/april-2015-medpac_transcript.pdf?sfvrsn=0

Article by Beth Cobb

Beth Cobb, RN, BSN, ACM, CCDS, is the Manager of Clinical Services at Medical Management Plus, Inc. Beth has over twenty-four years of experience in healthcare including eleven years in Case Management at a large multi-facility health system. In her current position, Beth monitors, interprets and communicates current and upcoming Case Management / Clinical Documentation issues as they relate to specific entities concerning Medicare. You may contact Beth at This email address is being protected from spambots. You need JavaScript enabled to view it..

This material was compiled to share information. MMP, Inc. is not offering legal advice. Every reasonable effort has been taken to ensure the information is accurate and useful.

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