The Two-Midnight Rule: All About the Expectation

Despite the Two-Midnight Rule passing its 11-year mark, there’s still confusion about when to place an inpatient order for patients initially placed in outpatient status with observation.

I see the same case reviewed by multiple physician advisors, with different outcomes. The American College of Physician Advisors (ACPA) publishes an observation case in its monthly newsletter. There is always nuance in how the Two-Midnight Rule should be applied, which can result in differing opinions. This year, much of the conversation revolves around how Medicare Advantage (MA) plans should respect the rule, but from what I’ve seen, compliance is still inconsistent.

However, I’d like to refocus on the basics – and possibly provide a different perspective. While the differing opinions can be academic, hospitals have real cases, real audits, and real revenue, so it is kind of a big deal. This has major implications for both original Medicare and Medicare Advantage, especially as we work to hold MA plans accountable.

Regardless of the payer, all Medicare beneficiaries should be managed consistently, so our rationale and perspective from which we make decisions must remain uniform.

Let’s consider the same patient presenting to three hospitals with chest pain. Initial and repeat troponins are negative, but due to risk factors, the ED physician calls the hospitalist, who places an order for observation.

1. At Hospital A, the patient is monitored on telemetry, has a stress test, and is discharged the next day after negative results.
2. At Hospital B, a cardiology consult is ordered, and on hospital day 2, a note indicates that the patient is awaiting the consult, with no mention of discharge.
3. At Hospital C, the physician orders an echo on day 2, and the note implies that the patient won’t be discharged until the echo is completed.

Should an inpatient order be placed for any of these patients? Two of the three are suspected to have passed a second midnight in the hospital.

Let’s review the relevant regulation found at 42 CFR 412.3, starting in paragraph (D)(1):

“Except as specified in paragraphs (d)(2) and (3) of this section, an inpatient admission is generally appropriate for payment under Medicare Part A when the admitting physician expects the patient to require hospital care that crosses two midnights.

• The expectation of the physician should 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 factors that lead to a particular clinical expectation must be documented in the medical record in order to be granted consideration.”

I frequently hear that American Medical Association (AMA) definitions of discharge, death, or rapid improvement are referred to as exceptions. As the chair of the ACPA Certification Committee and Exam, I have received complaints regarding a question that addresses this issue (hint: this is on the exam). This is a misunderstanding of the Two-Midnight Rule.

Unforeseen circumstances are not exceptions. The rule is about expectation. Patients with unforeseen circumstances still must have a two-midnight expectation when the order is placed, and the documentation must support that expectation. This same principle is vital in deciding who should be upgraded to inpatient status. The rule hinges on the expectation of a two-midnight stay, which must be documented. Conversely, an observation order identifies that the physician does not expect the patient to require greater than two midnights of hospital care. This is absolutely critical.

Another helpful quote can be found in the Two-Midnight Rule itself, Rule 1599-F. It states:

“The crux of the medical decision is the choice to keep the beneficiary at the hospital in order to receive services or reduce risk or discharge the beneficiary home because they may be safely treated through intermittent outpatient visits or some other care.”

Let’s apply this to our scenarios, recognizing that the “admitting” physician did not expect the patient to require hospital care that crossed two midnights when he/she placed an order for observation:

1. At Hospital A, there was no expectation of a two-midnight stay, and the patient was discharged the next day – this is a classic observation case.
2. At Hospital B, the patient is waiting for a cardiology consult. Despite the extra day, no documentation supported a change in the initial expectation of fewer than two midnights. It just took the hospital more than that long to perform the evaluation. Therefore, inpatient status is not appropriate.
3. At Hospital C, the physician orders an echo on day 2, but inpatient status wouldn’t be appropriate without a documented clinical change to justify a longer stay. Counting midnights without documentation supporting a change in expectation is not compliant with the regulation, and will lead to significant denials with managed plans.

So, what does this all mean, and how can it be applied to reviewing cases and educating physicians on documentation? First, when reviewing observation cases, focus on clinical changes. Observation is intended to extend the workup time and determine if the patient needs ongoing hospital care or can be safely treated with intermittent visits or other care.

A lack of clinical changes or specific documentation to alter the expectation of a stay of fewer than two midnights likely means inpatient status is not warranted.

Physicians must be educated on the importance of documentation on hospital day 2. It is not enough to continue the initial plan, as that plan expected fewer than two midnights. When an inpatient order is placed, that day’s progress note becomes the admission note, and needs to support the expectation of a stay beyond two midnights. The regulation states, “The factors that lead to a particular clinical expectation must be documented in the medical record in order to be granted consideration.”

I recommend physicians specifically document why the patient requires hospital care, including why the same care could not be safely provided via intermittent outpatient visits or some other care. When done correctly, denials are reduced, and peer-to-peer overturn rates improve.

Above all, you will be confident that your facility is compliant – and receiving the revenue it rightfully deserves.