Medical Necessity Still a Standard

on Tuesday, 27 May 2014. All News Items | Patient Status | MAC Reviews

Two-Midnight Rule and Medical Necessity

Some things change…, some things don’t… Although a lot changed last year with the Medicare standard for inpatient admission, the fact that all Medicare services must be reasonable and necessary did not change. In fact, this is part of the law upon which the Medicare program is founded.

A recent Palmetto GBA article emphasizes that inpatient services must still be medically necessary for Medicare coverage in addition to meeting the two-midnight expectation. As the article points out, this is a standard from the original Social Security Act that created Medicare, which in section 1862 states:

"…no payment may be made under part A or part B for any expenses incurred for items or services - which, are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member…"

The article goes on to quote numerous other references concerning the continuing requirement for medical necessity in regards to the new admission standard from Rule 1599-F itself and the ensuing CMS guidance. So let’s look at the issue of medical necessity as it relates to the determination of patient status and the need for services to be provided in a hospital setting.

The medical necessity of the services (for the diagnosis or treatment of an illness or injury) should be considered first and foremost for every patient encounter without regard initially to the patient’s status. Does the patient need these services to diagnosis or treat a medical condition? Are the services being provided in the appropriate setting? If the services are reasonable and necessary for the patient’s medical condition and being provided at the correct location for those services, then you can move on to determining the appropriate patient status.

Diagnostic services or short-term treatments that a patient may receive and then return home are generally outpatient services – this includes lab, radiology, and other diagnostic testing; clinic visits; short-term emergency services; and same day surgery services. These services include routine preparation and recovery times. Occasionally, routine recovery for some surgeries and procedures may last overnight, but if this is expected and routine for all patients and the patient is expected to go home after recovery, an outpatient status is still appropriate.

Some patients need extended medically necessary services in a hospital setting. This may include diagnostic testing, observation of the patient’s condition, or procedures or treatments that can only be rendered in a hospital setting. If the care the patient is receiving is custodial in nature, rendered for social purposes, or for reasons of convenience, then the care does not meet Medicare’s definition of medically necessary and is not covered by Medicare. Examples of this would be patients waiting on a ride home after an outpatient encounter or patients in the hospital to receive prep for a diagnostic test because they are unable to do the prep at home. Commercial criteria for patient care (inpatient and observation services), such as InterQual and Milliman, may assist in determining if the care is appropriate to be provided in a hospital setting. Note that this is still not a determination of patient status – that is the next step after determining that the care is medically necessary.

Once it has been established that the patient is receiving medically necessary care in the appropriate hospital setting, then it is time to determine the appropriate status using the new two-midnight expectation.

  • If the physician does not think the patient will require treatment beyond two midnights or is not sure, then it is likely that observation services are appropriate. In order to bill for observation hours, there must be a physician’s order for observation. This observation care meets the longstanding Medicare definition of observation services as those “services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital.”
  • If the physician expects the patient to require hospital care beyond two midnights, then inpatient status is appropriate. The documentation in the record needs to clearly support the physician’s expectation for care beyond two midnights. If for some reason, the care does not actually last beyond the second midnight, inpatient status is still appropriate as long as the original expectation was reasonable, based on the patient’s condition and the plan of care. However, the record should clearly document what happened that resulted in a “shorter-than-expected” stay whether it was a transfer to another hospital, a patient that left AMA, or an unexpectedly rapid recovery.

Under the new admission guidelines, observation care should not continue past a second midnight. If hospital care beyond the second midnight is not medically necessary, then observation care is not appropriate either. If the care is being provided for convenience or social purposes, it is not a covered Medicare service. The patient needs to be in an outpatient status and only services that are medically necessary should be charged. If hospital care beyond a second midnight is medically necessary, then the patient meets the criteria for inpatient admission and an inpatient order should be written prior to the second midnight.

Novitas, the MAC for Jurisdictions H and L, presented a teleconference last week on the Two-Midnight Rule and the Probe and Educate program. They reviewed the two-midnight rule and provided scenarios of some common reasons for denials they are seeing under the Probe and Educate reviews. Examples included:

  • Documentation did not support that there was an expectation of a two-midnight stay;
  • There was not a physician’s order for an inpatient admission and the record did not indicate that a two-midnight stay was expected;
  • Two-midnight stay expected but the patient discharged prior to the second midnight and the record failed to indicate the reason for the early discharge.

For more information, please see the Novitas handout and Resources for the teleconference.

Determining coverage of services and patient status is a two-step process: first, determine if the services are medically necessary and then second, apply the two-midnight expectation to determine the correct patient status.

Article by Debbie Rubio

Debbie Rubio, BS, MT (ASCP), is the Manager of Regulatory Affairs and Compliance at Medical Management Plus, Inc. Debbie has over twenty-seven years of experience in healthcare including nine years as the Clinical Compliance Coordinator at a large multi-facility health system. In her current position, Debbie monitors, interprets and communicates current and upcoming regulatory and compliance issues as they relate to specific entities concerning Medicare and other payers. You may contact Debbie 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.

green-iconWe are an environmentally conscious company, dedicated to living “green” both at work and as individuals.


1900 Twentieth Avenue South
Suite 220
Birmingham, AL 35209


This email address is being protected from spambots. You need JavaScript enabled to view it.