Healthcare Revenue Cycle Management, ICD-10, Claims Reimbursement, Medicare, Medicaid

Policy & Regulation News

CMS Plans to Reverse Two-Midnight Rule for Medicare Payments

A new CMS proposal would eliminate the controversial two-midnight rule that governs inpatient and outpatient Medicare payments for hospitals.

By Catherine Sampson

- On April 18, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that addresses the problematic two-midnight rule that produced 0.2 percent payment reductions for certain hospital inpatient services. The new rule would replace the previous payment reduction framework with a 0.6 percent increase on inpatient prospective payment rates in 2017.

Payment policies and rates under the Inpatient Prospective Payment System and the Long-Term Care Hospital Prospective Payment System would be impacted by the proposed rule. CMS plans to modify the two-midnight rule to allow Medicare Part A payment on a case-by-case basis, even if a patient’s stay does not cover two midnights.

CMS also plans to eliminate the 0.2 percent payment reduction altogether. The proposed rule would apply to 3,330 acute care hospitals and 430 long-term care hospitals.

Additionally, CMS also proposed to increase 2017 payments by 0.8 percent as a way of offsetting the two-midnight rule payment reductions that hospitals dealt with from 2014 to 2016.

CMS expects that the rate increase and other proposed changes to Inpatient Prospective Payment System payment policies will increase the system’s payments by about 0.7 percent. Changes in uncompensated care payments are projected to lower Inpatient Prospective Payment System operating payments by 0.3 percent. CMS is under the impression that these factors will lead total Medicare spending on inpatient hospital services to increase by about $539 million in 2017.

The two-midnight rule was created two years ago as an attempt fix billing issues in the Medicare system. It stated that providers who admit patients to the hospital for observation for fewer than two consecutive midnights would not be reimbursed by Medicare according to inpatient rates. If a patient’s stay was expected to be less than two midnights, then their care would usually be billed as outpatient services. 

CMS thought this rule would be a solution to problems with coding that was causing patients eligibility for medical care post discharge. However, patients, advocates and healthcare providers have shown strong opposition to it.

In 2014, The American Hospital Association, four other hospital associations, and a number of individual hospitals challenged the two-midnight rule in federal courts. They claimed the rule burdened hospitals with arbitrary standards and deprive them of Medicare reimbursement that they were entitled to. 

Additionally, In January 2016, 55 hospitals filed a lawsuit against the Department of Health and Human Services (HHS) regarding the two-midnight rule’s 0.2 percent inpatient compensation cuts and increased revenue concerns. Hospitals also reported being confused by the rule.

“The Two-Midnight Rule was not a solution to the observation crisis for hundreds of thousands of Medicare patients across the nation,” said Congressman Joe Courtney in a press release.

“The arbitrary coding of observation status is plunging families into a Medicare black hole financially and medically. While I am pleased they have ditched the two-midnight rule, it is time for the Centers for Medicare and Medicaid Services to join the 56 other organizations and 118 bipartisan cosponsors in supporting passage of my bill, the Improving Access to Medicare Coverage Act of 2015.” Courtney said.


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