Corporate Compliance

Note from the instructor: CMS issues proposed Outpatient Prospective Payment System (OPPS) and Ambulatory Surgical Center (ASC) rule for calendar year (CY) 2016, Part II

Medicare Insider, July 21, 2015

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This week’s note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.

On July 1, 2015, CMS released proposed CY 2016 changes to payment policies, rates, and quality initiatives for the majority of Medicare outpatient facility services, including services provided in hospital outpatient departments (HOPD), generally payable under the OPPS, and those provided in ASCs, generally payable under the ASC Payment System. In last week’s note, we focused on key proposed changes to the OPPS. The proposed rule also recommended changes to the so-called “2-Midnight Rule,” the primary criteria for determining coverage under Part A for inpatient hospital discharges on and after October 1, 2013. In this week’s note, we will discuss the proposed changes to the 2-Midnight Rule.

Background on Part A reimbursement and coverage policy, in general

In contrast to reimbursement under Part B, which continues to permit multiple separate payments for individual HOPD covered services payable under the OPPS (and other fee schedules), payment for most inpatient hospital services covered under Part A is made in the form of a single payment under the inpatient prospective payment system (IPPS).

Payment for a particular Part A covered inpatient stay is based upon the payment group (referred to as the “Medicare Severity Diagnosis-Related Group” or “MS-DRG”) to which the stay is assigned. MS-DRG assignment is based primarily upon the patient’s diagnoses (principal and secondary), procedures performed, and certain demographic factors (e.g., age, sex). Like the OPPS, the IPPS is a prospective payment system, which provides for a predetermined MS-DRG-based average payment amount for each inpatient stay.

Prior to CMS’ implementation of the 2-Midnight Rule, hospitals and other stakeholders made repeated requests for additional clarification of inpatient coverage criteria under Part A. This became an even greater concern following the introduction of the permanent Recovery Audit (RA) Program in January 2009. Prior to the implementation of the RA Program, certain contractors (referred to as “Quality Improvement Organizations” or “QIOs”) had primary review responsibility to determine whether inpatient stays were medically necessary, and, therefore, met Medicare’s Part A coverage criteria. In doing so, the QIOs integrated peer review into the process, applying relatively specific criteria (e.g., Interqual, Milliman) to each case. They also took a collaborative approach, providing significant guidance in the form of related education and training to healthcare providers.

As part of the RA Program, contractors referred to as “Recovery Auditors” replaced the QIOs as the primary contractors responsible for post-payment reviews. As part of their authority, Recovery Auditors were given broad discretion to determine whether prior paid inpatient hospital stays met applicable Part A coverage criteria. Moreover, they were also given the latitude to apply different coverage criteria from those originally used to adjudicate the claim for that stay. In addition, the Recovery Auditors were reimbursed on a contingency basis; the higher the amount of overpayments identified, the higher their reimbursement, incentivizing them to focus on higher cost services (e.g., inpatient stays) and to apply stringent coverage criteria when performing related post-payment reviews.

This resulted in a much higher percentage of post-payment inpatient hospital denials under Part A, which led to significant increases in the number of related appeals, overwhelming the Medicare appeals process. Hospitals were able to recover some of their costs by rebilling under Part B, but it was often too late for them to do so. In any event, these denials also led to significant adverse consequences to beneficiaries, including the following:

  • Additional cost sharing responsibility in the form of Part B deductible and coinsurance amounts when services were rebilled under Part B; and/or
  • Denial of Medicare coverage under Part A for subsequent inpatient skilled nursing facility (SNF) admissions based on failure to meet the three-day qualifying inpatient hospital stay requirement.

To address all of the above-noted concerns and repeated stakeholder requests for clarification of Part A inpatient coverage criteria, CMS created and implemented the 2-Midnight Rule.

Coverage under the 2-Midnight Rule, as initially implemented

As part of the fiscal year (FY) 2014 IPPS Final Rule, CMS established the following Part A coverage criteria for inpatient hospital discharges on and after October 1, 2013:

  1. An inpatient order signed or authenticated by the ordering physician or other authorized practitioner; and
  2. An expectation that the patient will require hospital care for at least two midnights; and
  3. A physician certification for cases that either
a. Qualify as long stays (20 days or longer); or
b. Reach the cost outlier point.

The most significant requirement is the 2-Midnight Rule, which actually encompasses two different standards, depending upon when the rule is applied. At the time that the physician makes the decision to admit the patient, he or she should apply the 2-Midnight Benchmark. Under the benchmark, the physician must determine whether he or she reasonably expects the patient to require medically necessary hospital care for at least two midnights.


In determining whether the patient is expected to receive hospital care for two midnights, the practitioner may consider not only care anticipated after inpatient admission, but also hospital care received prior to admission, either at a transferring hospital before transfer or in the HOPD (e.g., the emergency department, observation). In determining whether the patient reasonably requires medically necessary care for two midnights, the physician must exercise his or her independent medical judgment, based on relevant complex medical factors (e.g., patient history and comorbidities, severity of signs and symptoms), all of which should be carefully documented in the medical record to support the reasonableness of the admission decision. At the time of the rule’s implementation, CMS also acknowledged certain exceptions to the requirement of a two-midnight stay (e.g., inpatient-only procedure, initiation of mechanical ventilation).


Under the 2-Midnight Rule, once the patient has remained for at least two midnights after the inpatient order, Medicare will apply a different standard, referred to as the 2-Midnight Presumption. That is, absent evidence of gaming or a record of prior inappropriate status determinations, contractors should assume that the inpatient stay was medically necessary and, therefore, covered.

For hospital discharges from October 1, 2013, through September 30, 2015, Recovery Auditors are prohibited permanently from conducting post-payment status reviews. During this period, MACs have been directed to conduct initial (and, if issues are identified, subsequent) prepayment “probe and educate” audits for each hospital with stays of fewer than two midnights. If results are negative and the stay is denied, hospitals may rebill under the AB rebilling rules. In addition, any such denials give rise to appeal rights under the regular Medicare appeals process.

Proposed changes to the 2-Midnight Rule

Not surprisingly, despite CMS’ efforts to ease the transition to the new inpatient coverage rules, hospitals and other stakeholders continue to have concerns, most of which focus on requests for more specific guidance on the factors physicians need to document in order to support the reasonableness of their length-of-stay expectations.

In an attempt to address some of these concerns, CMS is recommending several changes to the 2-Midnight Rule, which would become effective for discharges on and after January 1, 2016. Most of the recommendations focus on process, rather than substance, with renewed emphasis on the importance of physicians in making the initial status decisions, and the role and approach of contractors in reviewing those decisions.


To emphasize the importance of the physician’s role in the status decision, CMS is proposing the following clarifications:

  • For stays expected to last fewer than two midnights (in circumstances not listed as a national exception), an inpatient admission would be payable under Medicare Part A on a case-by-case basis, based on the judgment of the admitting physician, as supported by documentation in the medical record, and subject to medical review.
    • CMS believes it would be rare for a beneficiary to require inpatient hospital admission for a minor surgical procedure or other treatment in the hospital expected to keep him or her in the hospital for less than 24 hours; CMS will monitor the number of these types of admissions and plans to prioritize these cases for medical review.
  • For hospital stays that are expected to last two midnights or longer, CMS’ policy is unchanged; if the admitting physician expects the patient to require hospital care that spans at least two midnights, the services are generally appropriate for Medicare Part A payment, as long as the record supports that expectation. This includes stays in which the physician’s expectation is supported, but the length of the actual stay was less than two midnights due to unforeseen circumstances such as unexpected death, transfer, clinical improvement, or departure against medical advice.

CMS is also recommending the following changes in its approach to educating providers and enforcing the 2-Midnight Rule:

  • The QIOs will conduct first line medical reviews of providers who submit claims for inpatient admissions, rather than MACs or Recovery Auditors. QIO patient status reviews will focus on educating physicians and hospitals about the Part A payment policy for inpatient admissions.
  • The Recovery Auditors will conduct patient status reviews only for those hospitals that have consistently high denial rates, based on QIO patient status review outcomes.

CMS’ proposed changes in enforcement policy are encouraging and likely to be viewed positively by the healthcare community, based on providers’ prior experience with the QIOs. In the past, both hospitals and physicians appreciated the QIOs’ integration of peer review into the review process, as well as their collaborative approach. The relationships between providers and the QIOs were generally collegial, rather than adversarial. In particular, the QIOs past focus has been to provide significant guidance in the form of related education and training on accepted standards of medical practice and identification of factors supporting the appropriateness of inpatient admission, from a medical perspective. This is exactly the kind of guidance providers have been requesting for years.

Opportunity for public comment

For additional information on the proposed changes or to provide comments to CMS, please refer to the following websites:

View CMS-1633-P.

View the fact sheet.

View the fact sheet on the 2-Midnight Rule.

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