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Hospitals often classify hospitalized Medicare patients as outpatients, even though their hospital care may be indistinguishable from the care they would receive if they were formally admitted as inpatients.  This issue – called Observation Status – has been a serious problem for Medicare beneficiaries for many years,[1] chiefly because patients who do not have at least three consecutive inpatient days in the hospital (not counting the day of discharge) do not qualify for Medicare Part A coverage of their post-hospital care in a skilled nursing facility (SNF).  The Centers for Medicare & Medicaid Services (CMS), while mostly concerned about large Part A payments for short inpatient hospital stays, has also sought to soften the impact of Observation Status on beneficiaries. 

Delaying Implementation of the Two-Midnight Rule

CMS’s most recent effort to limit the impact of Observation Status is the “Two-Midnight Rule.”  This Rule, promulgated in 2013,[2] created, for the first time, 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”[3] who “expects the patient to require a stay that crosses at least 2 midnights.”[4]  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).”[5]

The Two-Midnight Rule has been controversial from the beginning.  Its implementation was delayed by both CMS[6] and Congress,[7] and the Rule has not been enforced by CMS since its promulgation.  Proposed revisions to the Two-Midnight Rule, published by CMS on July 8, 2015 as part of the annual update to Medicare reimbursement of acute care hospitals for outpatient care (Outpatient Prospective Payment System, or OPPS), allow physicians to order inpatient admissions for some patients who are expected to remain in the hospital for only one midnight.[8]  The comment period for these proposed rules ends August 31, 2015.[9]

On August 12, 2015, CMS announced that it will again delay implementation of the Two-Midnight Rule, prohibiting Recovery Auditors from reviewing patient status for dates of admission between October 1, 2015 and December 31, 2015.[10]

Shifting Review of Hospital Patient Status from Recovery Auditors to Quality Improvement Organizations

In addition to proposing revisions to the “Two-Midnight Rule,” CMS’s proposed rules announced that the contractor that enforces the Two-Midnight Rule would change on October 1, 2015.[11]  CMS’s latest announcement, which again delayed enforcement of the Two-Midnight Rule, also provides information about the new reviewers. 

Effective October 1, 2015, Quality Improvement Organizations (QIOs) “will assume responsibility for conducting initial patient status reviews of providers to determine the appropriateness of Part A payment for short stay inpatient hospital claims.”  These reviews were previously conducted by Recovery Auditors.  QIOs will use current Medicare payment policies for these reviews until December 31, 2015. 

Between now and September 30, 2015, Recovery Auditors will continue to conduct “the third round of “Inpatient Probe and Educate” reviews about the Two-Midnight Rule.  They will also conduct claim reviews that are not related to patient status.  Beginning in January 2016, Recovery Auditors

may conduct patient status reviews only for those providers that have been referred by the QIO as exhibiting persistent noncompliance with Medicare payment policies, including but not limited to: having high denial rates and consistently failing to adhere to the two Midnight rule (including repeatedly submitting inappropriate inpatient claims for stays that do not span one midnight).

Beginning January 2016, both QIOs and Recovery Auditors “will conduct patient status reviews in accordance with any policy changes finalized in the OPPS rule and effective in calendar year 2016.”


CMS’s efforts to address concerns about outpatient Observation Status, including the Two-Midnight Rule, have not been sufficient to protect Medicare beneficiaries.  The most effective way to address the problem of Observation Status for beneficiaries is to count all time spent by a patient in the hospital for purposes of satisfying the three-day requirement for Part A coverage of care in a SNF.  The Improving Access to Medicare Coverage Act of 2015, pending in both the House (H.R. 1571) and the Senate (S.843), would accomplish that goal.

August, 2015 – T. Edelman

[1] The Center for Medicare Advocacy has extensive materials on observation status.  See
[2] 78 Fed. Reg. 50495, 50906-954 (Aug. 19, 2013).  The regulations are discussed in Center for Medicare Advocacy, “Observation Status: New Final Rules from CMS Do Not Help Medicare Beneficiaries” (Alert, Aug. 29, 2013),
[3] 42 C.F.R. §412.3(a).
[4] 42 C.F.R. §412.3(d)(1), originally §412.3(e)(1).
[5] Id.
[6] 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),
[7] 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).
[8] 80 Fed. Reg. 39199 (July 8, 2015),  The proposed rules also discuss reimbursement of outpatient care at acute care hospitals and ambulatory surgical centers, among other issues.  See Center for Medicare Advocacy, “Proposed Revisions to “Two-Midnight” Rule Provide Little If Any, Relief for Medicare Beneficiaries Stuck in the Hospital in Observation Status,” (Alert, July 9, 2015),
[9] Comments on CMS-1633-P may be submitted electronically at, and by mail or courier.  80 Fed.Reg. 39199, 39200 (July 8, 2015).
[10] CMS, Inpatient Hospital Reviews (Aug. 12, 2015 update),
[11] 80 Fed. Reg. 39199 (July 8, 2015),  The proposed rules also discuss reimbursement of outpatient care at acute care hospitals and ambulatory surgical centers, among other issues.


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