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The controversial issue of Observation Status continues.[1]  The latest news is that the Centers for Medicare & Medicaid Services (CMS) told Quality Improvement Organizations (QIOs) on May 4 that they should temporarily pause their reviews of hospitals’ compliance with the two-midnight rule.  The pause was reported by Livanta, one of the two QIOs nationwide (the other is KEPRO), that are responsible for conducting these reviews.[2]

In 2013, CMS promulgated the “Two-Midnight Rule,” the first time CMS has ever used time (as opposed to a patient’s actual medical condition) to determine whether a patient should be classified as an inpatient or an outpatient (and, accordingly, whether the hospital should bill Medicare Part A or Part B, respectively, for the patient’s hospital stay).[3]  Under the time-based Two-Midnight Rule, a physician is expected to admit a patient to inpatient status only if the physician believes the patient will need to remain in the hospital for at least two midnights.  All other patients, regardless of their condition or the type of care, treatment, tests, and services they need, are to be classified as outpatients.

Although the physician can order whatever care, treatment, tests, and services the patient needs regardless of whether the patient is an inpatient or an outpatient,[4] the financial consequences of a patient’s status are significant.  Medicare pays for post-hospital care in a skilled nursing facility only if the beneficiary has first been an inpatient in an acute care hospital for at least three consecutive days, not counting the day of discharge[5] (in shorthand, the patient needs a three- midnight hospital stay).  Patients classified as outpatients or Observation Status patients do not qualify for Medicare Part A coverage of the stay at a skilled nursing facility.

May 25, 2016 – T. Edelman

[1] See the Center for Medicare Advocacy’s materials on observation status,
[3] 78 Fed. Reg. 50495, 50906-50954 (Aug. 12, 2013); 42 C.F.R. §412.3(a).
[4] In a proposed revision to the two-midnight rule, authorizing physicians to order inpatient status, on a case-by-case basis, CMS repeated that the two-midnight rule “does not prevent the physician from ordering or providing any service at any hospital, regardless of the expected duration of the service” and “does not override the clinical judgment of the physician regarding the need to keep the beneficiary at the hospital, to order specific services, or to determine appropriate levels of nursing care or physical locations within the facility.”  80 Fed. Reg. 39199, 39349, 39350, respectively (July 8, 2015).
[5] 42 U.S.C. §1395x(i).




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