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CMS-1633-P, Medicare Program: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Short Inpatient Hospital Stays; Transition for Certain Medicare-Dependent, Small Rural Hospitals Under the Hospital Inpatient Prospective Payment System

Andy Slavitt
Acting Administrator
Centers for Medicare & Medicaid Services
Department of Health and Human Services
Room 445-G, Hubert H. Humphrey Building
200 Independence Ave., S.W.
Washington, D.C.  20201

Submitted electronically:


August 28, 2015

Dear Mr. Slavitt and CMS Colleagues:

The Center for Medicare Advocacy (Center) is a national, private, non-profit law organization, founded in 1986, that provides education, analysis, advocacy, and legal assistance to assist people nationwide, primarily the elderly and people with disabilities, to obtain necessary health care, therapy, and Medicare.  The Center focuses on the needs of Medicare beneficiaries, people with chronic conditions, and those in need of long-term care and provides training regarding Medicare and health care rights throughout the country.  It advocates on behalf of beneficiaries in administrative and legislative forums, and serves as legal counsel in litigation of importance to Medicare beneficiaries and others seeking health coverage.  These comments are based on our experiences talking with and representing hundreds of Medicare beneficiaries and their families who have been caught in observation status.

In the annual update to Medicare reimbursement of acute care hospitals for outpatient care, the Centers for Medicare & Medicaid Services (CMS) includes proposed revisions to the “two-midnight rule” and its enforcement.  While the Center recognizes that CMS is proposing to allow, on a case-by-case basis, some inpatient stays of fewer than two midnights, we believe that the very modest revision to the “two-midnight” rule will provide little, if any, actual relief for Medicare beneficiaries who are stuck in the hospital in observation status or other outpatient status.  Instead of this modest revision, the Center proposes that CMS withdraw the two-midnight rule entirely (as the Medicare Payment Advisory Commission (MedPAC) recommends) and promulgate regulations to count all time spent by a patient in the hospital, for purposes of satisfying the three-day hospital stay requirement (which is a prerequisite for Medicare Part A coverage of care in a skilled nursing facility (SNF)).  As we explain in detail below, CMS has authority under existing law to count all of a patient’s time in the hospital.

Observation Status

Observation status expanded into the problem that it is today chiefly as a response to the Recovery Auditor program (still popularly known by its former name, Recovery Audit Contractors, or RACs).  In the last several years, reviews by RACs have led to hospitals’ increased use of observation and outpatient status because of the harsh consequences of a RAC’s disagreeing with a hospital’s inpatient admission decision.  If a RAC determines that a hospital improperly classified a patient as an inpatient, instead of as an outpatient, the hospital is required to return virtually all of the Medicare reimbursement that it received for the patient’s care.[1]  The dispute between hospitals and RACs is solely about whether the patient was correctly labeled; the dispute is not about whether the hospital provided medically necessary care and services to the patient. 

As a consequence of RAC reviews, hospitals have increasingly, and not surprisingly, chosen not to admit patients to inpatient status, but, instead, to provide them with identical care, on an “outpatient” basis.[2]  If the hospital bills Medicare for “observation” hours, the patient is classified as an outpatient in observation status.

The financial consequences for beneficiaries of hospital decisions to call patients outpatients are enormous.  If a patient has a three-day stay in an acute-care hospital and otherwise qualifies for Part A coverage in the SNF, Medicare Part A pays the patient’s first 20 days at the SNF in full and the patient’s co-payments begin on day 21.  Without an inpatient stay of at least three consecutive days (crossing three midnights), however, a Medicare beneficiary does not qualify for any Part A coverage of his or her subsequent care in a SNF and must pay for the stay entirely out-of-pocket.  Often patients have to pay the SNF for weeks or a month in advance, an amount that is many thousands of dollars.

Beneficiaries are troubled and angered when they find out that their multi-day stay in the hospital does not qualify them for SNF care and that they must pay for their SNF stay entirely out-of-pocket.  The Center has spoken to, and represented, hundreds of beneficiaries and their families in this situation.  For example, one call was from the daughter of a 90-year old man who had been living at home with his wife.  Following a fall, he went to the Urgent Care center.  The physician there advised him to go immediately to the hospital emergency department for care of the hematoma on his leg, which was increasing in size.  As the man was being wheeled into the operating room, the hematoma burst.  The man had emergency surgery to evacuate the hematoma and remained in the hospital for four days, all called outpatient.  From the hospital, he went to a SNF for skilled nursing care and rehabilitation, care that would have been covered in full by Medicare Part A if he had been formally admitted to the hospital as an inpatient.  However, because the hospital classified him as an outpatient for all four days of his hospitalization, Medicare Part A paid nothing for his 18-day SNF stay.  The bill for his SNF stay was $4573, which he paid out-of-pocket.  An Administrative Law Judge (ALJ) found that the man’s primary care physician supported an inpatient admission.  She also found, as had a CMS investigation, that the patient was not informed of his outpatient status until he was discharged from the hospital.  Nevertheless, the ALJ upheld denial of Medicare coverage of his SNF stay solely because the patient was “hospitalized . . . as an outpatient,” not admitted as an inpatient.

As CMS recognizes in the proposed rules, observation status is a billing issue, not a health care issue.  CMS stresses in the proposed rules that physicians can order whatever care their patients need, regardless of the patient’s status as a formally-admitted inpatient, an observation status patient, or other outpatient.[3]  CMS’s admission that hospital care for patients in observation status and other outpatients is indistinguishable from the care received by formally admitted inpatients illustrates how arbitrary this manufactured distinction between inpatient and outpatient status is and how important it is to change CMS’s rules and policy.

The Two-Midnight Rule

CMS promulgated the “two-midnight rule” in 2013.[4]  CMS describes two opposite, but complementary, concerns that motivated the 2013 rule – the “persistently large improper payment rates in short-stay hospital inpatient claims” and “increasingly long stays of Medicare beneficiaries as outpatients due to hospital uncertainties about payment.”[5] 

Effective October 1, 2013, the federal rule, for the first time, created time-based presumptions of patient status in acute care hospitals.  Under the rule, a patient “is considered an inpatient of a hospital, . . . if formally admitted as an inpatient admission by a physician or other qualified individual”[6] who “expects the patient to require a stay that crosses at least 2 midnights.”[7]  Stays expected to be shorter than at least two midnights “are generally inappropriate for inpatient admission and inpatient payment under Medicare Part A,” unless the surgical procedure is “specified by Medicare as inpatient only under §419.22(n).”[8]

The two-midnight rule was controversial from the beginning, its implementation was delayed by both CMS[9] and Congress,[10] and the rule has not been enforced since its promulgation.  In our experience, the rule has not changed hospital practice.  The Center continues to hear from beneficiaries’ families that patients are kept in observation status for three and more days, crossing at least than three midnights.

Proposed Changes 

CMS defends the two-midnight rule for inpatient admission as giving “appropriate consideration to the medical judgment of physicians” while furthering “the goal of clearly identifying when an inpatient admission is appropriate for payment under Medicare Part A.”[11]  CMS reiterates 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”[12] 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.”[13]  Nevertheless, in response to stakeholder concerns about the removal of physician judgment and its own effort “to develop the most appropriate and applicable framework for determining when payment under Medicare Part A is appropriate for inpatient admissions,”[14] CMS is proposing two changes to the current Rule.

The first change proposed by CMS is modifying the two-midnight rule by providing that, on a case-by-case basis, payment to an acute care hospital under Medicare Part A is available if a physician documents a patient’s need for inpatient care for fewer than 24 hours.[15]  However, such short inpatient stays “will be prioritized for medical review.”[16]  In addition, medical reviewers must follow CMS policies and their “clinical judgment would involve the synthesis of all submitted medical record information (for example, progress notes, diagnostic findings, medications, nursing notes, and other supporting documentation) to make a medical review determination on whether the clinical requirements in the relevant policy have been met.”[17] 

The second proposed change is shifting reviews of short-stay inpatient stays from RACs to Quality Improvement Organizations (QIOs), by no later than October 1, 2015.[18]  Despite this change in initial review, RACs remain in their review process in two ways.  First, “QIOs will refer claims denials to Medicare Administrative Contractors (MACs) for payment adjustments.”[19]  Second, if a hospital (1) has high denial rates; (2) consistently fails to adhere to the 2-midnight rule; or (3) fails to improve its performance “after QIO educational intervention,” the QIO will refer the hospital to the RAC for payment audit.[20]

The new rule is unlikely to change current practice significantly, for multiple reasons. 

First, CMS does not provide any meaningful guidance on when an inpatient stay of fewer than two midnights would be appropriate.  What the physician is required to document for a short inpatient stay of less than two midnights is exactly the same as what the physician must document for admission when the patient is expected to be in the hospital for two or more midnights.  Compare proposed §412.3(d)(1)(i) with §412.3(d)(3).  Whether the physician expects the patient to remain in the hospital for fewer than two midnights or for more than two midnights, the physician’s decision must be based on “such complex medical factors as patient history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event.”  The proposed rules do not distinguish the factors that are relevant for inpatient stays of two midnights and more and for inpatient stays of fewer than two midnights; the standard for both is identical.  With no different standards for physicians to apply, the proposed rules will have little, if any, impact on physician decision-making.

Second, physician decisions about patient status will continue to be reviewed by hospitals under the same standards as before.  Under Condition Code 44, hospitals review physicians’ inpatient decisions and may request that physicians change their patients’ status from inpatient to outpatient.  CMS, Medicare Claims Processing Manual, 100-04, Chapter 1, §50.3, (scroll down to page 148).   A survey by the Society for Hospital Medicine (the professional association of hospitalists) indicates that 16% of hospitalists reported that they were asked to change their patients’ status.  Society for Hospital Medicine, The Observation Status Problem: Impact and Recommendations for Change, page 11 (July 2014).  Physician practice is unlikely to change when hospitals will continue to review physicians’ decisions and continue to use existing standards in their reviews.

Third, CMS confirms that hospitals may continue to use commercial screening tools and that physicians may also want to consider using the tools.[21]  Commercial screening tools, such as InterQual, are based on diagnosis and numbers (e.g., temperature, lab results, and other quantifiable data), not on a clinical assessment of the patient’s status and whether the patient needs the care and services that only a hospital can provide.  Whether or not commercial screening tools are formally “binding on the hospital,” many hospitals will continue to use them as long as Medicare review contractors (MACs, QIOs, RACs, etc.) use them to evaluate hospitals’ compliance with Medicare inpatient admission guidelines. 

Fourth, short inpatient decisions will be prioritized for review by QIO reviewers, sending a clear and strong signal that something is wrong, or at least questionable, with physicians’ and hospitals’ classifying stays of fewer than two midnights as inpatient.

Fifth, QIO reviewers will evaluate patients’ admissions by considering the care that was provided after admission.  Reviewers should evaluate physicians’ decisions using only information that is available to the physician at the time the decision to admit a patient as an inpatient is made.  Retrospective reviews, based on the record of care and treatment provided to a patient after admission, are inappropriate to determine whether the physician made the right decision at the time he or she actually made it.  The standard we propose here is the standard recognized by courts and CMS.[22]

Sixth, the specter of RAC audit, with its harsh financial consequences, remains.  The possibility of QIOs’ referring hospitals to a RAC for payment audits and adjustments, and the financial consequences to hospitals of these RAC reviews, will encourage hospitals to continue classifying patients as outpatients.  The message remains that two-midnights should be the rule for inpatient admissions and that one-midnight inpatient stays are the rare, and reviewable, exception.

With no different standards for physicians to apply, ongoing review of physician decisions by hospitals and CMS reviewers using commercial screening tools, and the continued expectation that inpatient admissions are appropriate only if patients are expected to remain hospitalized for at least two midnights, the proposed rules will result in little, if any, change in physicians’ and hospitals’ decision-making about patient status.

Medicare Payment Advisory Commission

In June 2015, MedPAC recommended that CMS withdraw the two-midnight rule,[23] among other recommendations related to observation status and RAC review.  The Center supports MedPAC’s recommendation.

Counting All Time in the Hospital

In addition, the Center urges CMS to revise its definition of inpatient care, for purposes of qualifying for Part A SNF coverage, to count all time spent by a patient in the hospital.

The Center is part of a coalition of 26 national organizations representing physicians, nurses, other health care professionals, and advocates that supports federal legislation to count all time spent by a patient in the hospital.  The identical bipartisan bills are H.R.1571 and S.843, the Improving Access to Medicare Coverage Act of 2015.[24]

CMS Has Authority under Existing Law to Define Inpatient Care and to Count All Time in the Hospital

While fully supporting the legislation, the Center also notes that CMS has authority under existing law to count all time spent by a patient in the hospital for purposes of qualifying for Part A coverage in a SNF.  CMS policy created observation status and CMS action could adjust or rescind it.

Under a 2008 decision of the Second Circuit Court of Appeals, the Secretary of HHS has authority under the Medicare statute to include a hospital patient’s time in observation as part of inpatient time in the hospital for purposes of determining whether the patient qualifies for Part A coverage of a subsequent stay in a SNF.  Estate of Landers v. Leavitt, 545 F.3d 98 (2nd Cir. 2008).  The Court recognized that neither the statute nor regulations define the word “inpatient” and that the Secretary defined inpatient in the Medicare Benefit Policy Manual as occurring after a formal physician order for admission.  Although the Court upheld the Secretary’s position in litigation – that only time in formal inpatient status may be counted toward satisfying the qualifying three-day inpatient requirement – it acknowledged that the Secretary had authority to change his interpretation of inpatient to include time spent in observation.  The Court wrote:

[W]e note that the Medicare statute does not unambiguously require the construction we have adopted.  If CMS were to promulgate a different definition of inpatient in the exercise of its authority to make rules carrying the force of law, that definition would be eligible for Chevron deference notwithstanding our holding today.

545 F.3d at 112. 

In fact, CMS has recognized its authority to change the definition of inpatient.  In May 2005, CMS asked for public comment on whether time in observation should be counted towards satisfying the three-day inpatient requirement for Medicare Part A SNF coverage.[25]  In August 2005, CMS acknowledged that most commenters “expressed support for the idea that hospital time spent in observation status immediately preceding a formal inpatient admission should count toward satisfying the SNF benefit’s statutory qualifying three-day hospital stay requirement.”[26]    CMS reported that “some advocated eliminating the statutory requirement altogether.”[27] 

CMS analyzed the two recommendations separately.  With respect to repealing the three-day requirement entirely, CMS wrote, “we note that such an action would require legislation by the Congress to amend the law itself and, thus, is beyond the scope of this final rule.”[28]  Id.   With respect to counting time in observation towards the qualifying inpatient stay, CMS wrote, “we note that we are continuing to review this issue, but are not yet ready to make a final determination at this time.”[29] 

CMS correctly understood that it could not repeal the three-day statutory requirement by regulation but that it could count the time in outpatient status, if it chose.  Its only stated reason for not counting observation time, despite widespread support of such a change from commenters, was that it wanted to continue reviewing the issue.  That review has now continued for eight additional years.

Finally, CMS allows certain hospital stays to count in qualifying a patient for Part A-covered SNF care even when the hospital care is different from Part A-covered hospital care.

In the context of hospice services, CMS has recognized that “general inpatient care” in a hospital, although “not equivalent to a hospital level of care under the Medicare hospital benefit,” nevertheless qualifies a hospice beneficiary for Part A-covered SNF services.[30]

Similarly, a three-day stay in a foreign hospital may qualify a beneficiary for Part A SNF coverage if the foreign hospital is qualified as an “emergency hospital.”[31] 

The argument for counting observation or outpatient time for purposes of calculating eligibility for the Part A SNF benefit is, of course, far stronger than either of the prior examples since, as CMS acknowledges in the proposed rules, care in the hospital is indistinguishable whether the patient is formally admitted as an inpatient or called an outpatient.

Recently, in describing why a beneficiary continues to be eligible for Part A SNF coverage after the hospital withdraws its Part A claim and submits Part B claims for the patient’s care instead (the hospital rebilling option), CMS wrote, “the 3-day inpatient hospital stay which qualifies a beneficiary for ‘posthospital’ SNF benefits need not actually be Medicare-covered, as long as it is medically necessary.”[32]  CMS confirmed that a hospital’s decision to withdraw its claim for Part A reimbursement and to seek Part B reimbursement instead for a patient’s hospital stay does not negate the fact that the patient received medically necessary inpatient care, for purposes of Part A SNF coverage.  CMS continued:

            In addition, the status of the beneficiaries themselves does not change from inpatient to outpatient under the Part B inpatient billing policy.  Therefore, even if the admission itself is determined to be not medically necessary under this policy, the beneficiary would still be considered a hospital inpatient for the duration of the stay – which, if it occurs for the appropriate duration, would comprise a “qualifying” hospital stay for SNF benefit purposes so long as the care provided during the stay meets the broad definition of medical necessity described above.[33]

A patient’s actually receiving “medically necessary” care in the hospital, not the classification of the care as “inpatient,” is the key factor for determining the patient’s eligibility for subsequent Part A SNF coverage.

As the Court in Landers held and CMS itself recognized in 2005, CMS has authority under the Medicare statute to redefine inpatient status to count all time in the hospital.  In Manual provisions, CMS recognizes that care in a hospital that is not covered by Medicare can nevertheless count for purposes of Part A SNF coverage.  In its hospital rebilling option, CMS recognizes that receiving medically necessary care in the hospital is the key factor in determining Part A SNF coverage.  CMS should confirm that time spent in observation or outpatient status qualifies a patient for Medicare Part A SNF coverage so long as the care in the hospital was medically necessary.

Thank you for the opportunity to comment on the proposed revision to the two-midnight rule.


Toby S. Edelman
Senior Policy Attorney
Center for Medicare Advocacy
1025 Connecticut Avenue, NW, Suite 709
Washington, DC  20036
(202) 293-5760

Judith Stein
Executive Director
Center for Medicare Advocacy


[1] Under the rebilling option, also promulgated in 2013, hospitals may rebill Part B if Part A coverage is denied, so long as the rebilling occurs within one year of the provision of service.  42 C.F.R. §414.5.
[2] The other hospital response is appealing denials of inpatient admission decisions.  The result of these appeals is that approximately half of the 800,000 appeals awaiting hearings and decisions before Administrative Law Judges are attributable to observation status.
[3] 80 Fed. Reg., 39349-39350.
[4] 78 Fed. Reg. 50495, 50906-954 (Aug. 19, 2013).
[5] 80 Fed.Reg. 39199, 39348.
[6] 42 C.F.R. §412.3(a).
[7] 42 C.F.R. §412.3(d)(1), originally §412.3(e)(1).
[8] Id.
[9] CMS, “ FREQUENTLY ASKED QUESTIONS 2 Midnight Inpatient Admission Guidance &Patient Status Reviews for Admissions on or after October 1, 2013,”; CMS, “ Selecting Hospital Claims for Patient Status Reviews: Admissions On or After October 1, 2013” (Last Updated: 11/04/13),  
[10] 42 U.S.C. §1395dddnote, extending moratorium through March 31, 2015 (added by §111 of the Protecting Access to Medicare Act of 2014, Pub. L. 113-93); 42 U.S.C. §1395dddnote (as amended), extending moratorium through September 30, 2015 (added by §521 of the Medicare Access and CHIP Reauthorization Act of 2015, Pub. L. 114-10).
[11] 80 Fed.Reg. 39349.
[12] Id.
[13] 80 Fed.Reg. 39350.
[14] Id.
[15] 80 Fed.Reg. 39350-39351; proposed §412.3(d)(3).
[16] 80 Fed.Reg. 39351.
[17] Id.
[18] 80 Fed.Reg. 39352.
[19] 80 Fed.Reg. 39353.
[20] Id.
[21] Id.
[22] See Anderson v. Sebelius, No. 5:09-v-16 (D. Vt. Oct. 25, 2010, 2010 WL 4273238 (“The touchstone for determining whether skilled services are “reasonable and necessary” is from the forward-looking vantage point of the physician: ‘The determination of whether the services are reasonable and necessary should be made in consideration that a physician has determined that the services are reasonable and necessary. The services must, therefore, be viewed from the perspective of the condition of the patient when the services were ordered and what was, at that time, reasonably expected to be appropriate treatment for the illness or injury throughout the certification period.’” [quoting Medicare Benefit Policy Manual, CMS Pub. 100–02, Chapter 7, §].  See also Colton v. Sec’y of Health & Human Servs., 1991 WL 350050, at *5 (D. Vt. Jan. 30, 1992) (“ALJ was incorrect in applying a retrospective analysis to the question of [beneficiary’s] stability”); Folland ex rel. Smith v. Sullivan, 1992 WL 295230 (D. Vt. Sept. 1, 1992) (rejecting a denial of services based on a “retrospective review of [the beneficiary’s] vital signs” and holding, “[t]he ALJ’s interpretation of [the beneficiary’s] condition is…flawed because it impermissibly relies on the benefit of hindsight, which of course is always 20-20.” Id. at *7).
[23] MedPAC, Report to the Congress: Medicare and the Health Care Delivery System, Chapter 7 (Hospital short-stay policy issues), pages 183-185, 194 (Recommendation 7-1) (June 2015),
[24] The coalition’s Fact Sheet is available at
[25] 70 Fed. Reg. 29069, 29098-29100 (May 19, 2005).
[26] 70 Fed. Reg. 45025, 45050 (Aug. 4, 2005).
[27] Id.
[28] Id.
[29] Id.
[30] Medicare Benefit Policy Manual, Chapter 9, §40.1.5,
[31] Medicare Benefit Policy Manual, Chapter 8, §20.1.1,
[32] 78 Fed. Reg. 50495, 50921 (Aug. 19, 2013). 
[33] Id.




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