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TWO-MIDNIGHT RULE ENFORCEMENT: Understanding and Preparing for the Changes

Mical DeBrow, PhD RN
Director of Health Analytics and Business Intelligence
G2 Works

There’s been a lot of confusion, as well as controversy, surrounding the Two-Midnight Rule. Before enforcement kicks in on April 1, 2015, I thought I’d offer this summary to bring you up-to-speed.

Let’s start with the rule itself.

Translated into plain English, the Two-Midnight Rule says that if a patient’s stay spans less than two midnights, the hospital, in the majority of cases, will be paid on Observation (outpatient) status, rather than Inpatient status.

Now let’s get to the controversy.

One common complaint is that the rule is arbitrary, especially in light of the fact that the Decision-to-Admit is complex, with numerous factors to consider.

Another criticism, supported by Moody’s Investor Service, 2014 Hospital Report, is that the new regulation will likely accelerate the shift from inpatient to outpatient, while doing little to stem the growth in observation cases. And that’s bad news for hospitals. Indeed, according to Moody, “The Two-Midnight Rule could end up reducing average reimbursement per case by $3,000 to $4,000.”

Many healthcare professionals feel that the rule undermines the role of the physician and adds administrative and financial burdens to hospitals. Greg Pagliuzza, Trinity Regional Health System CFO, provides a clear example of the hardship. He says, “The challenge for us is the timeframe to educate and permanently make changes to the documentation. We are projecting a significant reduction in reimbursement.”

Some opponents of the rule say that it penalizes hospitals that make efficient use of resources, overhead and costs. “The Two-Midnight Rule feels like punishment for running a competent, well-managed shop,” argues Jerry Arndt, Senior Vice President for Business Services at Gunderson Lutheran in Wisconsin. “It’s just another one of those absolutely classic examples of being penalized for being efficient. If you can discharge somebody with a one-night stay, then it will get paid as an observation as opposed to discharging them at 12:05 AM.”

Regardless of the controversy, a few things are certain: The Two-Midnight Rule will impact your hospital; it will not be taken care of by your EMR; and despite its April 1 enforcement date, the regulation is not an April Fool’s Day prank.

Here are two big ways the rule will impact hospitals:


CMS’s overall intention with the rule is to help cut spending by reducing improper Medicare payments. Indeed, shifting more patients from Inpatient to Outpatient status will do just that. Consider this eye-opening fact from Boston Scientific:

The average inpatient reimbursement for Percutaneous Coronary Intervention (PCI) is $10,581, while the average outpatient reimbursement for the same procedure i”s just $6,364.

Think about it: That translates to a 39% decrease in payment for the same use of time and resources!


The out-of-pocket amount (co-pay or deductible) that a Medicare Beneficiary pays is higher for outpatient services than for inpatient services. By increasing the shift from Inpatient status to Observation status, the Two-Midnight rule has the potential to negatively impact patient satisfaction (including HCAHPS scores) and collection issues for hospitals.

Finally, let me offer some suggestions for preparation.

Two keys to securing Inpatient reimbursements are: 1) proof of physician order to admit and 2) proof of medical necessity. Although some EMR vendors have indicated that the order alone is sufficient, it certainly is not.

To qualify for Inpatient reimbursements, hospitals will be required to provide documentation from the clinical record (e.g., EMR, diagnostics, physician’s progress notes, nurse’s notes) that supports the medical necessity of an inpatient stay. Here, it is important to note that although commercial utilization review (UR) tools may be used, they are not binding on hospitals, CMS, or RAC Auditors.

Optimizing Inpatient reimbursements under the Two-Midnight will require expert planning. You’ll need to educate physicians, patients and case managers; conduct proactive internal reviews and process realignment exercises; continuously monitor and analyze your data and intervene; plan for the financial implications; and ensure necessary EMR documentation measures are in place.

The enforcement date is approaching fast. If you haven’t done so already, you must act now to get a real-time handle on your data and what it means and to ensure you understand requirements of the physician order to admit and certification of medical necessity requirements. Because the Two-Midnight Rule is a clinical, operational and revenue cycle issue, you would do well to develop cross-functional work groups and even create an action committee to analyze and take action on all short-stay admissions.

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