Early returns on MA plans’ two-midnight rule interpretations: A compliance nightmare

Observation services and the two-midnight rule

Based on various examples of inappropriate inpatient hospital claim denials, it has become evident that MA plans are misinterpreting the interplay between hospital services, including observation services, and the benchmark component of the two-midnight rule.

Examples of this issue include MA plans’ denial of inpatient status for reasons that contradict and, in some cases, subvert the two-midnight rule’s requirements and intentions. For instance, MA plans have denied inpatient admissions based on the patient not meeting some set of inpatient-level criteria, even after crossing two midnights of hospital care. Claims have been erroneously denied because “the patient could have continued treatment in observation” or the patient must exceed two midnights of hospital services before an inpatient admission can be considered. We have reviewed numerous instances post-January 1, 2024, in which MA plans have refused to authorize an inpatient admission after a patient has received hospital services for four and five days. This results in a continued situation of long outpatient observation stays for some MA plan enrollees.

To provide context, the two-midnight rule’s purpose was to clarify the inpatient hospital admission decision-making process and reduce the instances of excessively long observation stays. The two-midnight rule commentary stated that beneficiaries in medically necessary hospitalizations should not pass a second midnight prior to the admission order being written and that compliance with the two-midnight rule was expected to virtually eliminate the use of extended observation, i.e., observation services exceeding two midnights.

Compliance professionals are particularly interested in the definition of observation services and their relation to the two-midnight Rule. According to Medicare guidance, observation services are “a well-defined set of specific, clinically appropriate services, which include ongoing short term treatment, assessment, and reassessment before a decision can be made regarding whether patients will require further treatment as hospital inpatients or if they are able to be discharged from the hospital. Observation services are commonly ordered for patients who present to the emergency department and who then require a significant period of treatment or monitoring in order to make a decision concerning their admission or discharge.”[3]

Therefore, compliance professionals should be aware that observation services are one of the few hospital services that can only be provided in a hospital setting. If a patient receives observation services, the patient receives a set of specific services comprising treatment, assessment, and reassessment which can only be provided in a hospital. This has significant implications for the two-midnight rule in that if a patient is expected to, about to, or has crossed two midnights receiving observation services, the patient has also fulfilled the regulatory requirements for an inpatient admission, which was the intent of the two-midnight rule since its implementation and which MA plans are now required to follow.

Benchmark versus presumption

Another area of significant confusion is the role of the two-midnight presumption as it applies to MA plans. CMS 4201–F specifically exempts MA plans from the presumption utilized by traditional Medicare review contractors that an inpatient stay of two or more midnights following the inpatient order is presumed appropriate for payment, absent evidence of gaming or unreasonable delays in care. The presumption is only a guide for determining cases for inpatient medical necessity audit; it is irrelevant for the benchmark and inpatient status purposes. Stated simply, MA plans are free to review inpatient claims for patient status regardless of the length of stay, or how many midnights have passed after formal admission.

Despite CMS 4201–F discussing the presumption in the correct context of choosing claims for review for traditional Medicare and its nonapplicability to MA, we have learned that MA plans are confusing the presumption with the two-midnight benchmark and applying an erroneous interpretation of the presumption. For example, a plan’s medical director denied inpatient status on a peer-to-peer appeal on the grounds that the patient had not crossed two midnights following the inpatient order. Another plan’s medical director refused to consider the duration of any outpatient services, including observation services, prior to placing the inpatient order. A third example of this confusion of benchmark and presumption is the assertion that there must be a reasonable expectation of two additional midnights of hospital services at the time of placing the inpatient order rather than considering the total time of hospital services under the two-midnight benchmark including time spent receiving services in the emergency department, operating room or surgical recovery, or other treatment areas. These interpretations are unsupportable given traditional Medicare guidance regarding start-of-service, the two-midnight benchmark, and the two-midnight presumption.

Expected length of stay denials

Another somewhat novel stated reason for denial of an inpatient hospital admission was on the grounds of a lack of documentation of the expected length of stay; specifically, a lack of a formal statement in the medical record by the attending physician that the expected length of stay was to exceed two midnights. In 2013, the two-midnight rule (CMS 1599–F) included a formal certification requirement regarding expected length of stay; however, the 2015 Outpatient Prospective Payment System (OPPS) rule (CMS 1613–FC) removed this requirement except for long-stay and outlier cases. The 2015 OPPS states, “In most cases, the admission order, along with the medical record and progress notes, may also provide sufficient information to support the medical necessity of an inpatient admission without the separate requirement of an additional, formal, physician certification.”[4] Clinical factors such as acuity, risks, history, and comorbidities must support the physician’s complex medical judgment that a patient will require two or more midnights of hospital services; however, formal certification of expected length of stay has not been a traditional Medicare requirement for over nine years.

Conclusion

As hospital providers and MA plans continue to engage with CMS 4201–F, it is essential to consider that many questions remain unanswered. CMS has already issued subregulatory guidance (February 2024) to include internal coverage criteria, accessibility of those criteria, use of artificial intelligence, and post-acute-care coverage. Many of the unanswered or incompletely answered remaining questions could be addressed in upcoming additional guidance. For example, if using additional criteria for inpatient admissions, an MA plan’s UM process results in denials of admissions that would have been reimbursed following review by a traditional Medicare contractor, such as Livanta LLC in its BFCC–QIO role, is that an acceptable process under CMS 4201–F? Must MA plans reimburse hospitals for outpatient observation services when an inpatient admission is denied? Are traditional Medicare inpatient status coverage criteria fully established, and if not, what is the role of the traditional Medicare reviewers and appeals process in defining inpatient status for MA plans?

The ethics and compliance officers (ECOs) for both hospitals and MA plans are critically important to ensuring that the twomidnight rule is interpreted correctly. We recommend that ECOs:

• Educate themselves on the requirements associated with CMS 4201–F, including subregulatory guidance.

• Convene internal educational sessions with MA plan medical directors and hospital UM personnel that focus on the implementation of the two-midnight rule.

• Monitor for compliant interpretations of the two-midnight rule through sampling of claims.

• Present findings of internal claims monitoring to the compliance committee for review.

We look forward to additional clarification of the unanswered questions posed and aligning an MA plan and hospital UM processes.

Takeaways

• There is significant confusion surrounding the applicability and interpretation of the two-midnight rule by Medicare Advantage (MA) plans.

• The two-midnight rule applies to MA plans.

• When a patient is expected to, about to, or has crossed two midnights receiving “observation services,” the patient has also fulfilled the regulatory requirements for inpatient admission.

• The Center for Medicare & Medicaid Services’ (CMS) exclusion of the application of the two-midnight presumption by MA plans affords MA plans the opportunity to audit the medical necessity of an entire patient stay in the hospital.

• Ethics and compliance officers should educate themselves on the two-midnight rule, including CMS’s subregulatory guidance and interpretations to ensure compliance.

*David R. Hoffman is a Practice Professor of Law at the Kline School of Law at Drexel University and President of David Hoffman & Associates in Philadelphia, PA., and Kurt Hopfensperger is a Senior Medical Director, Clinical Decision Support at Optum Insight, Inc.

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1 The Final Rule, CMS-4201-F, (4201) was published in 88 Fed. Reg. 22,120, Medicare Program; Contract Year 2024 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly (April 12, 2023), (https://www.federalregister.gov/documents/2023/04/12/2023-07115/medicare-program-contract-year-2024-policy-and-technical-changes-to-the-medicare-advantage-program), with subsequent corrections in Medicare Program; Contract Year 2024 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly; Correcting Amendment, 88 Fed. Reg. 50,043 (August 1, 2023), (https://www.govinfo.gov/content/pkg/FR-2023-08-01/pdf/2023-16307.pdf. As of the time of writing this article, the Centers for Medicare & Medicaid Services issued one subregulatory guidance document related to the 4201 requirements—a frequently asked questions communication dated February 6, 2024.

2 Medicare Program; Contract Year 2024 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly; the Utilization Management section of CMS 4201–F contains new requirements for prior authorization processes and duration of approvals; requirements for adhering to national coverage determinations and jurisdictionally applicable local coverage determinations; requirements for coverage criteria development when existing guidance is not fully established, and Utilization Management Committee requirements.

3 Centers for Medicare & Medicaid Service, “Chapter 6 – Hospital Services Covered Under Part B,” § 20.6, Medicare Benefit Policy Manual, December 12, 2023, https://www.cms.gov/regulations-and-guidance/guidance/manuals/downloads/bp102c06.pdf.

4 Medicare and Medicaid Programs: Hospital Outpatient Prospective Payment and Ambulatory Surgical Center Payment Systems and Quality Reporting Programs; Physician-Owned Hospitals: Data Sources for Expansion Exception; Physician Certification of Inpatient Hospital Services; Medicare Advantage Organizations and Part D Sponsors: CMS-Identified Overpayments Associated with Submitted Payment Data, 79 Fed. Reg. 66,770, 66,998 (Nov, 10, 2014), https://www.federalregister.gov/documents/2014/11/10/2014-26146/medicare-and-medicaid-programs-hospital-outpatient-prospective-payment-and-ambulatory-surgical.