The Centers for Medicare and Medicaid Services (CMS) has revised the two-midnight rule to create an exception that will allow payment under Medicare Part A for certain medically necessary hospital stays that do not extend across two midnights. The new rule is effective for admissions after January 1, 2016, and permits payment on a case-by-case basis, supported by the admitting physician’s clinical judgment as documented in the medical record.

CMS enacted the two-midnight benchmark in 2013 in an attempt to clarify when services should be considered inpatient rather than outpatient. The guidance was in response to concerns with disallowances by Medicare recovery audit contractors of short inpatient stays and a trend of increasingly lengthy hospital observation placement, reimbursed as outpatient services. The rule was criticized by hospitals and physicians as failing to consider the complex factors related to an inpatient admission determination and creating confusion for beneficiaries.

The update, published as part of the 2016 Medicare outpatient prospective payment system rule, includes the following guidance:

  • The medical review of short inpatient stays under the rule was assigned to the Quality Improvement Organizations (QIOs).
  • Case-by-case medical review to determine whether the inpatient admission was reasonable and necessary will be based on an evaluation of physician documentation in the medical record, specifically:
    • The severity of the signs and symptoms exhibited by the patient;
    • The medical predictability of something adverse happening to the patient; and
    • The need for diagnostic studies that appropriately are outpatient services (that is, their performance does not ordinarily require the patient to remain at the hospital for 24 hours or more).
  • Hospital inpatient stays where the patient is reasonably expected to stay at least two midnights, documented in the medical record, will continue to have a presumption of medically necessary inpatient stay.
  • QIOs will refer providers to Recovery Auditor Contractors based on patterns of practice, such as high rates of claims denial.


If you have any questions about this blog post or Medicare guidelines for inpatient stays, please contact the authors.