Observation Medicine

Update on the 2 MN Rule: RACs, BFCC QIO’s, the OIG and the MOON

Robert J. Wagner, MD, FACEP

In August 2013, the Centers for Medicare and Medicaid Service (CMS) first issued the Two-Midnight rule, ostensibly to clarify for the practitioner and the facility when inpatient hospital admissions are generally appropriate for Medicare Part A payment. In addition, the rule was intended to address concerns regarding Medicare beneficiaries having long stays in the hospital as outpatients, as well as to improve overall program integrity.

Originally, the Two-Midnight rule stated that a hospital inpatient admission was generally considered reasonable and necessary if the physician (or other qualified practitioner) ordered the admission based on the expectation that the patient would require at least two midnights of medically necessary hospital services. There were a few exceptions including inpatient only procedures, transfer, AMA, or death. CMS later added intubation as an exception. Patients expected to require less than two medically necessary midnights in the hospital were generally considered outpatients.

CMS had stated that the crux of the medical decision is the choice to keep the patient at the hospital in order to receive services or reduce risk or to discharge the patient home because they may be safely treated through intermittent outpatient visits or some other care.

In response to feedback, CMS in the OPPS 2016 final rule stated that certain stays that are less than two midnights would be payable under Medicare Part A. This is to be on a case-by-case basis, based on the judgment of the admitting physician. Of course, documentation in a patient's medical record must support that an inpatient admission is necessary.

Since the OPPS 2016 final rule, nothing much has changed regarding the interpretation or manner in which facilities should implement the rule.

There is good financial news regarding the rule. CMS had anticipated an increase in inpatient admissions as a result of moving long outpatient observation stays to inpatient. Accordingly in 2014, CMS imposed a -0.2% payment adjustment. In response to multiple lawsuits, under the final legislation for 2017, CMS is permanently removing the -0.2% adjustment of compensation for inpatient services related to the Two-Midnight rule. For FY 2017, hospitals will realize a 0.8% increase in Medicare payments.

There will be a reset in auditing of short stay inpatients. Since May 2016, CMS had temporarily paused the BFCC-QIO performance of the initial status reviews, due to concerns of inappropriate denials and lack of consistency. Effective September 12, 2016, BFCC-QIOs will resume initial patient status reviews of short stays in acute care inpatient hospitals, long-term care hospitals, and inpatient psychiatric facilities. The BFCC-QIOs will continue to follow the guidance entitled, “Reviewing Short Stay Hospital Claims for Patient Status: Admissions On or After January 1, 2016,” which can be found at:

With over 900,000 short stay appeals still pending, CMS will again allow eligible providers to settle their claims. In August 2016, CMS executed settlements at 68% of the value of the claims with 2,022 hospitals, representing approximately 346,000 claims. CMS paid approximately $1.47 billion to providers. There were a significant number of providers who decided not to pursue settlement. Many of these providers continued to find their claims held up in the appeals process. CMS has decided to once again allow eligible providers to settle their inpatient status claims currently under appeal using the Hospital Appeals Settlement process at 66% of the net allowable amount. Specific details of the settlement will be released in the near future. Please continue to monitor CMS’ website for additional information:

How about the MOON? As of March 8, 2017, all hospitals and CAHs are required to provide the MOON, per CMS guidance. New CMS manual instructions for the MOON “CR9935 MOON Instructions,” are available at

So what about the RACs? They are alive and well. The FFS contracts were awarded on October 31, 2016, and the new statements of work are out. They are available at

Of note, on December 16, 2017, the Office of the Inspector General (OIG) issued a report on the issues following CMS’s implementation of the Two-Midnight rule policy. The data compared 2013 to 2014. The report noted that as many as 40% of short inpatient stays may be inappropriate. In addition, the report found that Medicare continues to pay more for short inpatient stays than short outpatient stays. Hospitals also continued to bill for a larger number of long outpatient stays. Finally, the OIG noted that Medicare patients pay more for the outpatient stays and have limited access to skilled nursing facilities. At the end of the day, hospitals continue to vary in how they use inpatient and outpatient stays.

The OIG had a number of recommendations, including that CMS conduct routine analysis of hospital billing, targeting for review those hospitals with high numbers of possible inappropriate short inpatient stays. According to the OIG, “such oversight is even more important given the change made in 2016 to allow for case-by-case exceptions to the two-midnight policy. This policy change has the potential for abuse and should be monitored closely.” The report also suggests that CMS examine the impact of counting time spent as an outpatient to the three-night requirement for skilled nursing services. Lastly, CMS should investigate approaches that do not result in Medicare patients incurring higher costs for short outpatient stays than they would as inpatients.

CMS and commercial providers will continue to look for ways to manage short inpatient stays and move them to the outpatient setting. Robust clinical guidelines, efficient policies and procedures, and thorough documentation will allow providers to continue to provide the best care for their patients in the most appropriate setting.

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