Clarification of the Two-Midnight Rule: A Win for Physician Advisory

Featuring: Dr. Khiet Trinh | Chief Clinical Officer + Chief Physician Advisor

What you need to know: The CMS 2024 Medicare Advantage and Part D Final Rule (known as CMS-4201-F) clarifies, among other elements, that Medicare Advantage (MA) plans must follow the Two-Midnight Rule set in 2013. This original rule established standard time-based criteria for MA programs to help determine a patient’s inpatient or outpatient status.

CMS-4201-F also makes it so that shorter-stay, case-by-case exceptions to the Two-Midnight Rule (first implemented for other programs in 2016) as well as the Inpatient Only List (IPOL) also now apply to MA plans. In addition, if a patient would qualify for SNF coverage under fee-for-service Medicare, MA plans will now also have to qualify.

These changes make physicians’ lives easier, and could improve the patient experience, as well, in the sense that there may be fewer status changes with simpler rules.


History of the Two-Midnight Rule

Medicare Advantage (MA) programs have exploded in market share over the past decade or so. These programs implemented coverage criteria that were often different — more stringent — than traditional fee-for-service Medicare. A noticeable effect was the rise in the percentage of patients in a hospital that were hospitalized as observation. As this trend continued, operating margins of health systems started to dwindle.

In 2013, Medicare attempted to simplify for clinicians whether to hospitalize a patient as inpatient or outpatient (with observation services). This resulted from legal actions from beneficiaries who were concerned they were being kept for observation when they should have been inpatient. This is important because those who are inpatient have certain rights, such as appeal rights and Skilled Nursing Facility (SNF) coverage rights. There were also greater financial liabilities as an outpatient versus being inpatient. Therefore, CMS implemented the Two-Midnight Rule.

For the first time, a patient’s status was no longer just about intensity of service or severity of illness – it is actually based on time, and more specifically the number of midnights a patient was expected to spend in the hospital for hospital care.

Ostensibly, this was a welcome change because it made it much easier for physicians. They could look at their watch and say that a patient had stayed two midnights for hospital services, or that they were expected to stay two midnights, and therefore make them inpatient.

Clarification of the Two-Midnight Rule within the 2024 Final Rule

MA programs never went fully adopted time-based criteria, however. They instead looked to their contracts with CMS, which allowed them to create their own criteria for inpatient versus observation (OBS).

Those in Physician Advisory roles have been urging CMS by writing commentaries or speaking to leaders about the unfairness of some of the criteria used by MA.

Finally, on April 5, 2023, after a comment period, CMS came out and clarified that MA plans must follow the Two-Midnight Rule in addition to other important changes:

  • Case-by-case exceptions: In 2016, a big rule came along that said a patient actually don’t have to stay two midnights — it’s called the “case-by-case exception” through which, if a doctor thinks a patient needs to be inpatient because they’re at such a high risk, but doesn’t expect them to stay two midnights, it’s still okay to admit that patient as an inpatient. That also now applies to MA plans.
  • Inpatient Only List (IPOL): IPOL also now applies to MA plans. This was one example where CMS actually made things easier and said that if the procedure you have is on this IPOL, then you will get inpatient payment regardless of how long the patient stays, provided there is an inpatient order. Again, previously MA plans had their own criteria for surgical statusing and none of them really followed the IPOL. But now, CMS is clarifying that MA plans also have to follow IPOL.
  • SNF coverage: If a patient would qualify for SNF coverage under fee-for-service Medicare, now MA plans would also have to qualify.

These are seismic changes, and it’s great to have this clarity. Whether from a hospital standpoint, a patient standpoint or as a physician, it’s not only clarifying, but it’s simplifying criteria, at least on the surface.

Real world changes for real-life impacts

The clarifications made within CMS-4201-F have wide-ranging impacts, from administration to patients to providers.

Impact: Easing administrative burdens

It’s an enormous administrative burden on hospitals to have different standards between fee-for-service Medicare and MA plans. Hospitals are left to navigate the different criteria that may exist between different MA plans.

All the peer-to-peers and appeals to argue medical necessity when they deny are very resource-intensive. Add to this the different notices, submissions and other nuances required just to get paid for care provided for their member, and the burden becomes overwhelming and expensive. Of course, any slip-up will result in the dreadful “technical denial.”

To be clear, even with this new rule, most of these processes will remain, but standard inpatient criteria are most welcome for those in Physician Advisory.

Impact: Hospitals and patients

An increase in inpatient status at discharge is likely. The average length of stay for a hospitalization in America is about 4.5 days. This naturally crosses two midnights. Before CMS-4201-F, OBS patients could be languishing many days in OBS because they didn’t “meet” MCG or they didn’t “meet” InterQual.

Now, if a patient is receiving medically necessary hospital services after two midnights, they should be upgraded to inpatient — an important distinction.

Impact: Financial

From a financial standpoint, there may be an opportunity to classify more patients as inpatients than before. To hospitals, this is a positive, as an inpatient designation generally pays more than observation.

There is also a financial impact to patients. For example, if you are hospitalized as observation, you must pay coinsurance each time. Additionally, certain medications that you take in the hospital may not be covered.

Essentially if a patient comes in for observation/outpatient, they are at more financial risk because their coinsurance applies each time they go to the hospital, and because their medications given during the stay may not be covered. Whereas if they are considered inpatient, Medicare will pay for the stay, including medications, for the first 60 days after the deductible has been met.

Importantly, if an inpatient disagrees with discharge, they’re able to appeal to the Quality Improvement Organization (QIO). Those are rights that are only afforded to inpatients. So, by ostensibly making inpatient easier, these rights are now restored to patients who previously would have been OBS.

Impact: Physicians

All of these changes better align with clinicians’ decision-making, enabling them to go with what they know is right for each patient versus fighting with insurance companies that don’t have clear criteria set for why or why not they are reimbursing in a certain way. CMS has always deferred — and they remind readers in this latest regulation — that the decision to admit is a complex medical judgment to be made by the physician.

This is really important because, before the Two-Midnight Rule, admittance decisions were based on commercial criteria. Criteria may say if a patient gets a certain rate of IVF, a certain number of packed Red Blood Cells, a certain liter of oxygen, etc., they can now be inpatient.

But for the doctor at the bedside, they should be able to look at the entirety of the patient, including the presenting symptoms, labs, x-rays, physical exam, risk of adverse events and say, “In my judgment this should be inpatient.” Not only that, but seeing somebody spend days and days in OBS just because they didn’t “meet criteria” can be very frustrating.

Now, a doctor can say, “I expect, in my clinical judgment, this patient to stay two midnights or two midnights have passed for hospital level services. I now can confidently make this patient inpatient.” So, it does bring simplicity, when the vast majority of bedside physicians have no idea how to work commercial criteria tools. The Two-Midnight Rule should make more sense to these same physicians.

Impact: Denials

MA plan denials are not an infrequent occurrence. The OIG looked at denials from 2014 to 2016 and found that only 11% of these denials were ever appealed. However, the MA plan themselves overturned 75% of these appeals. This seems to indicate there are too many inappropriately denied services to begin with. Once there was pushback, the vast majority got overturned.

It was never really intended that MA plans would wield this kind of latitude to deny, and in fact the language being used is that MA plans cannot be more restrictive in covering traditional Medicare benefits than Medicare FFS. The language was always there and CMS-4201-F clarifies, enforces and codifies this key point.

What’s the next big change?

After many Physician Advisors wrote letters during the comment period to CMS supporting the Two-Midnight Rule, many of those same experts then wrote a second letter about the need to reform the prior authorization process.

Different payers have different prior auth processes and algorithms, which causes tremendous administrative burdens for all involved. Even more alarming, there may be direct patient harm due to delays in starting treatment plans as physicians wait for approval. Simplifying prior authorizations is the right next goal.


Dr. Khiet Trinh is the Chief Physician Advisor for Ensemble Health Partners. He is clinically active as a board-certified Family Physician and is also board-certified in Physician Advisory.