The two-midnight rule was supposed to draw a clear line between inpatient and outpatient hospital billing. But the implementation of this defined time frame was not so clear. I believe the two-midnight rule should be replaced. Here’s why and how:

Under the rule, the requirement for inpatient admission and Part A billing is medically necessary hospital care that includes two consecutive midnights of service. That seems very simple, but the denial is in the details.

What’s wrong with the two-midnight rule?

Well for one thing, admission requires a physician’s expectation that the stay will require two midnights, but since Medicare doesn’t accept objective criteria such as InterQual and MCG Guidelines, there is no standard for the physician to use. The decision is often based on local factors (such as the availability of diagnostics and consultants), the presence of multiple comorbidities, and subjective factors apparent only to the physician, who is face-to-face with the patient. Non-physicians working for review contractors may have their own ideas about whether such an expectation is reasonable.

How well are physicians doing in making the right call, in the eyes of the auditors? Based on reports of some high failure rates in the Medicare Administrative Contractor (MAC) “probe-and-educate” audits, this appears to be a skill physicians haven’t mastered. And once they’re in full swing again, the Recovery Audit Contractors (RACs) will know where to look when they start searching for admissions to deny. With the validity of the “expectation of a two-midnight stay” in dispute, we can expect the appeal system to be hopelessly overburdened again.

The two-midnight rule makes an arbitrary distinction between inpatients and outpatients based solely on length of time spent in the hospital. With a physician’s order, an outpatient becomes a legitimate inpatient by the second midnight, but there is no difference between the care provided when an outpatient becomes an inpatient. Nothing has changed except the calendar and the billing.

Physician confusion over the word “admit”

There is also a linguistic and cultural challenge. Doctors often incorrectly order “admit to observation” when “admission” is for inpatients and “observation” is for outpatients. The order is an oxymoron, but “we’re going to admit you” is a phrase that is imbedded in physician DNA. For observation patients, physicians have to be thinking, “we’re not really admitting you because you’ll be in observation” – and then they have to write the proper order using the correct terminology.

They’re focusing on treating patients. It’s no wonder physicians are confused about admission orders.

Is there a better way?

With the exception of patients having outpatient procedures performed who stay overnight for routine recovery, I propose that Medicare pay for all care provided to a patient in a hospital bed under Part A. Instead of billing for observation services, new ED payment codes could take into account the cost of extended preadmission outpatient care and cover a brief time on a floor, as they do now for observation. Not counting the ED evaluation, if overnight care is medically necessary, you’re an inpatient. If you’re going to sleep at home (again, with the exception of routine recovery), you’re an outpatient. This would create that clear distinction between inpatient and outpatient status. Call it “the one-midnight rule” if you wish.

If this sounds like the pre-two-midnight rule, when 24 hours was the benchmark for admission, the difference is that there would be no need to debate whether the patient needed a more intensive level of care. All overnight care in the hospital (except for routine recovery following an outpatient procedure) would be inpatient.

What about covering the cost of these new inpatient admissions? Centers for Medicare & Medicaid Services (CMS) statisticians could adjust DRG payments to ensure budget neutrality. They’ve done this before. Reducing the deductible for short inpatient stays would protect beneficiaries.

Wouldn’t it be a lot easier for physicians to decide when to admit if the only criterion was the need for overnight care in a hospital bed? Wouldn’t there be less confusion if inpatient status meant “in the hospital” and outpatient meant just that?

A Society of Hospital Medicine (SHM) white paper called on CMS to eliminate observation and to create either “a low-acuity modifier for most DRGs, a list of short-stay/low-acuity inpatient DRGs, or (the elimination of) observation status entirely.” The goal was to simplify the payment system so that “all patients admitted to the hospital would be considered inpatients.” (As you may have guessed by now, I happen to agree with the latter suggestion.) The American Hospital Association (AHA) has complained that the two-midnight rule results in underpayment to hospitals for short stays that require intensive treatment. Both the AHA and the Medicare Payment Advisory Commission (MedPAC) have recommended ending the two-midnight rule.

It’s time to get beyond the two-midnight rule and really clarify and simplify hospital billing once and for all.

About the Author

Dr. Steven Meyerson is a geriatrician and consultant in Medicare compliance and case management. He has served as physician advisor and Medicare compliance educator. Dr. Meyerson received the 2014 Distinguished Achievement Award from the American College of Physician Advisors and is a member of the Board of Directors that group. 

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Read the MedPAC report online at:

Read the AHA letter to CMS at:

The SHM white paper is available online at:



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