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Office of Inspector General Issues Report on Medicare’s ‘2-Midnight Hospital Rule’

On December 19, 2016, the US Department of Health and Human Services Office of Inspector General (OIG) posted a report examining the Centers for Medicare & Medicaid Services’ (CMS’s) “2-Midnight Rule.” The OIG concluded that although the number of inpatient stays decreased and the number of outpatient stays increased under the 2-Midnight Rule, Medicare paid nearly $2.9 billion in fiscal year 2014 for potentially inappropriate short inpatient stays. The OIG recommended that CMS improve oversight of hospital billing.


CMS developed the 2-Midnight Rule in 2013 as a basis for determining when payment under Medicare Part A was appropriate for inpatient stays. The 2-Midnight Rule generally treats inpatient payment as appropriate if the stay is expected to last at least two midnights. The 2-Midnight Rule provides for an exception that permits Part A reimbursement on a case-by-case basis for inpatient admissions expected to span less than two midnights if the documentation in the medical record supports the admitting physician’s determination that the patient requires inpatient hospital care. Further discussion of the 2-Midnight Rule is available in the following articles:

  • “CMS Finalizes Controversial Changes to ‘2-Midnight Rule’ for Inpatient Stays”

  • “CMS Proposal Broadens Medicare Inpatient Reimbursement Eligibility under the ‘2-Midnight Rule’”

  • “CMS Again Delays Implementation of Controversial ‘2-Midnight Rule’”

The OIG Report

The OIG analyzed paid Medicare hospital claims from FY 2013 and FY 2014, identifying inpatient stays using Part A hospital claims and outpatient stays using Part B hospital claims.  The OIG defined a “short stay” as a stay that lasted less than two midnights while a “long stay” was a stay that lasted two midnights or longer. The OIG also assessed whether claims information for short inpatient stays met CMS criteria for payment under the 2-Midnight Rule.  The OIG considered claims that met CMS criteria to be “appropriate” and claims that did not meet the criteria for payment under the 2-Midnight Rule as “potentially inappropriate.&rdquo

The OIG found that, consistent with CMS’s goals in enacting the 2-Midnight Rule, from FY 2013 to 2014, the number of short outpatient stays increased (11.6 percent) while the number of short inpatient stays decreased (9.9 percent). 

In addition, the OIG found the following

  • Hospitals are billing for a large number of short inpatient stays that are potentially inappropriate (i.e., the claim does not appear to meet any of CMS’s criteria for an appropriate inpatient stay) under the 2-Midnight Rule.

  • Hospitals are continuing to bill for a substantial number of long outpatient stays.

  • Hospitals do not take a consistent approach to the use of inpatient and outpatient states with use varying by institution.

  • Despite certain inpatient stays and outpatient stays for similar services, Medicare pays more (on average, three times as much) for such short inpatient stays than it does for equivalent short outpatient stays. For instance, reimbursement for a coronary stent insertion short outpatient stay is $8,364 versus $13,269 for a coronary stent insertion short inpatient stay. Similarly, reimbursement for irregular heartbeat (medium severity) is $1,905 for a short outpatient stay versus $4,801 for a short inpatient stay.

  • Increasingly, beneficiaries in outpatient stays are paying more than they would have as inpatients. For instance, for coronary stent insertions, the average inpatient beneficiary payment from was $1,022 while the average beneficiary payment for outpatient stays was $1,667.

  • With outpatient stays increasing, beneficiaries may have limited access to SNF services because Medicare covers SNF services only if a beneficiary had a hospital stay that included at least three nights as an inpatient.

The OIG also looked at common reasons for potentially inappropriate short inpatient stays, which include irregular heartbeat, chest pain, digestive disorders and loss of blood flow to the brain, among others.

OIG Recommendations and CMS Response

Increased Analysis of Hospital Billing with Focus on Hospitals with High/Increasing Numbers of Short Inpatient Stays

The OIG recommended that CMS conduct routine analysis of hospital billing to identify hospitals with high or increasing numbers of short inpatient stays that are potentially inappropriate under the 2-Midnight Rule. The OIG instructed that CMS should then use this analysis to better target its auditing and enforcement efforts. The OIG is also providing to CMS the list of hospitals that the OIG identified in this study that have high or increasing numbers of short inpatient stays. 

In a letter from October 27, 2016, CMS concurred with this recommendation, stating that it will instruct its Quality Improvement Organizations (QIOs) to conduct routine analysis of hospital billing for inpatient stays and target for review hospitals with high or increasing numbers of short inpatient stays.

Identify and Target for Review Short Inpatient Stays

The OIG also recommended that CMS routinely use claims information to identify potentially inappropriate short inpatient stays and then use medical review to determine appropriateness.  CMS concurred with the recommendations, stating that its QIOs are currently conducting initial status reviews of short stays in hospitals to determine the appropriateness of Part A payment for short stay hospital claims.

Study Effects of Adding Outpatient Time to Inpatient to Help Beneficiaries Qualify for SNF Services

The OIG recommended that CMS analyze the effects of counting time spent as an outpatient toward the three-night requirement that a beneficiary needs to qualify for SNF services because currently beneficiaries with similar post-hospital care needs have different access to and cost sharing for SNF services depending on whether they were hospital outpatients or inpatients.  CMS concurred with this recommendation but stated that it lacks the statutory authority to make such a policy change.

Assess Ways of Protecting Beneficiaries in Outpatient Stays from Paying Disproportionate Amounts

The OIG found that because beneficiaries generally pay for each Part B service they receive, beneficiaries in outpatient stays may pay more than they would as inpatients, even if they receive similar services. The OIG recommended that CMS explore statutory and policy changes to ensure more equitable cost sharing for beneficiaries with similar care needs. CMS concurred with the recommendation and stated that it believes that the current statutory requirements are fairly prescriptive surrounding beneficiary cost-sharing liability under the inpatient prospective payment system (IPPS) and outpatient prospective payment system (OPPS). 


Hospitals should review the appropriateness of short inpatient stays and their use of inpatient and outpatient stays to ensure that they are adhering to the 2-Midnight Rule and that CMS’s QIOs will not flag the hospitals’ claims.

© 2020 McDermott Will & Emery


About this Author

Emily J. Cook, McDermott Will Emery Law Firm, Health Care Attorney

Emily J. Cook is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Los Angeles office.  She focuses her practice on Medicare provider certification, reimbursement and regulatory compliance.

Sandra DiVarco, Hospitals Attorney, Health Systems Lawyer, McDermott Will Emery, Chicago Law Firm

Sandra DiVarco is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Sandy focuses her practice on the representation of hospitals and health systems. She has counseled health care facility and system clients regarding all aspects of health law transactions and health system restructurings. As a registered nurse, Sandy regularly advises clients on the legal aspects of clinical issues and policy/procedure matters. Sandy also has significant experience in assisting clients with regulatory, licensure and accreditation issues, including state-level and CMS survey responses, formulation of successful Plans of Correction, Joint Commission complaint responses and EMTALA/regulatory investigations. Sandy is a member of the Firm’s Catholic Organizations Practice Group, and has experience working with Catholic organizations within health care and other business areas. She is also co-leader of the Firm’s General Institutional Provider affinity group. 

Christine Parkins Johnson, McDermott Law Firm, Transaction Counseling Attorney

Christine Parkins Johnson focuses her practice on complex regulatory and transactional counseling to health care organizations, such as health systems, hospitals, physician groups, long-term care facilities, pharmacies and other health care providers. Christine's regulatory practice focuses on health facility licensure and permits; Medicare and Medicaid enrollment; reimbursement and billing; survey/certification and accreditation; hospital governance and medical staff issues; and licensure under California's Knox Keene Act. Christine also has particular experience with...