Why is the Medicare Two-Midnight Rule Still Misunderstood a Decade Later?

Traditional Medicare’s Two-Midnight Rule is a guideline used in the U.S. healthcare system specifically for Medicare billing. It helps determine whether a patient’s hospital stay should be billed as inpatient or outpatient care. This rule was designed to clarify hospital admissions criteria and plays a critical role in healthcare reimbursement, impacting institutions’ operational and financial dynamics nationwide. 

According to this rule, if doctors expect a patient to need hospital care that spans across two midnights, the patient should be admitted as an inpatient. If the stay is shorter and does not cross two midnights, it should be re-assessed to determine if the stay was a two-midnight benchmark—one outpatient midnight with another clinically appropriate in-hospital care midnight needed and thus is eligible to become an inpatient. Or determine if the expected two-midnight stay resulted in an unexpected early discharge and thus remains an inpatient. Or determine if the expected two-midnight plan was in error and the patient should have been billed as outpatient observation. This rule is important for accurate in-patient billing for Traditional Medicare, also known as “Original Medicare.”  With the expansion of the two-midnight rule to include Medicare Advantage plans, (which are insurance companies administering the Part C benefit with contracts with Medicare and the individual patient) effective Jan 1, 2024, provider understanding of the implementation of the law is critical for financial stability.  

As of mid-2024, several large healthcare systems have initiated class-action lawsuits against Medicare Advantage payers for their denial rates, specifically challenging the arbitrary classification of treatments as ‘experimental’ to deny coverage. This litigation is setting a precedent for more rigorous accountability of payers in fulfilling their contractual obligations. Additionally, Medicare recently announced plans to review the effectiveness of the Two-Midnight Rule, focusing on its impact on healthcare providers’ ability to deliver timely care. This review may lead to further adjustments or clarifications in the rule, particularly for Medicare Advantage plans, to ensure a more balanced system between payers and providers.

Making Sense of Two-Midnight Rule Challenges 

To learn more about the intricacies of the Two-Midnight Rule, and how to overcome common hurdles healthcare providers face, we chatted with healthcare financial management expert, Day Egusquiza, who has over four decades of experience in hospital business office operations, contracting, and compliance implementation, and directorship at a physician medical management billing service. 

Egusquiza believes the Two-Midnight Rule—despite its impact on reimbursement systems—remains misunderstood by many in the industry. She believes healthcare providers must strive to better understand and more closely adhere to the Two-Midnight Rule to ensure proper Medicare billing–both for the Traditional Medicare patient and the new Medicare Advantage patient—and avoid potential financial penalties. 

Below, Egusquiza offers her perspective on the challenges and solutions in contemporary healthcare reimbursement practices, emphasizing the need for a deep understanding of policies like the two-midnight rule to navigate both Traditional Medicare and the two-midnight rule for the Medicare Advantage plans effectively. 

Egusquiza’s 5 Things to Know About the Two-Midnight Rule And the 1-1-24 Medicare Advantage Requirements 

• Often misunderstood, the rule impacts billing compliance and financial outcomes 
• Contracts are typically win-lose, favoring payers and complicating provider reimbursement 
• Practices under these plans lead to unfair power shifts and high denial rates 
• Operational contract addendums can address silent issues, ensuring fair treatment for providers 
• A proper understanding of the rule is crucial for avoiding penalties/compliance concerns with Traditional Medicare and new denials from the Medicare Advantage plans. 

Q&A: How to Overcome the Two-Midnight Rule’s Ongoing Challenges 

Q: Can you describe the current state of contracts with Medicare Advantage payers? 

Egusquiza: Contracts with payers are fundamentally win-lose and always have been. However, the antagonistic nature of these relationships has become more pronounced. 

In my teaching and surveys, I consistently hear about the challenges posed by Medicare Advantage, which has grown significantly worse over the past five to eight years. This has led to a power shift that disadvantages providers, creating a substantial gap between payers and providers that is larger than ever before. The primary pain point: The denial of services during the Medicare Advantage’s prior authorization process, which is based on the MA’s own internal determinations. 

The result is a pronounced win-lose situation in these relationships, necessitating a significant change in how contracts are approached. 

Q: What has been the impact of Medicare Advantage and payer practices on providers? 

Egusquiza: The impact is staggering. Providers are facing massive challenges, including denial rates as high as 26% for inpatient and surgical approvals. Payers are declaring standard care drugs for chemotherapy as experimental to deny coverage.  

This practice affects the provider’s ability to deliver care and signifies a tragic power imbalance where insurance companies direct care instead of physicians.  

The reliance on phrases like “medically necessary care” allows payers to arbitrarily deny coverage, exacerbating the power gap between payers and providers. 

Q: How can the provider community address these challenges? 

Egusquiza: The solution lies in strategic operational contract addendums. While most payers are unwilling to change their contracts, introducing addendums can address “silent” issues that significantly impact providers.  

These include operational issues like timely notifications and approval timelines that are not explicitly covered in contracts but have a profound effect on care delivery and reimbursement. The aim is to bridge the power gap, ensuring rapid and appropriate patient care through more balanced and fair contract terms. 

Blueprint for Change 

The following addendum items, emphasizes Egusquiza, are essential for tackling the operational challenges faced by healthcare providers in their contracts with payers.  

By addressing these issues, providers can work towards more equitable agreements that prioritize patient care and fair reimbursement practices with a decrease in rework and denials from the Medicare Advantage insurance plans. 

Operational Contract Addendum Highlights 

• Approval Timelines: The Medicare Advantage/MA contract includes strict timelines for provider notification of a) surgical procedures, b) placement in an outpatient bed/Observation, c) acute care for inpatient, and d) for all other invasive procedures. The lack of specified timelines for payers to respond to authorization requests creates unnecessary delays in patient care. Contract addendums should address this by establishing clear deadlines for payer responses to ensure timely patient treatment and authorization for care.

• Electronic Records and Security: With the shift towards electronic records, contracts should outline the use of secure portals for submitting and reviewing patient information. This will facilitate faster decision-making and enhance the security of patient data. Additionally, the provider can ensure the record is complete and present the case of a two-midnight plan for care.  Direct access to the provider records does not allow the site to prepare the case–why an inpatient–that directly addresses the two-midnight criteria. 

• Prior Authorization for Treatment: Addressing the issue of prior authorization, especially for critical treatments like chemotherapy, is crucial. Contracts should prevent payers from substituting prescribed treatments without consultation with the treating oncologist, ensuring that patient care is based on medical expertise rather than cost considerations. 

More Resources from SAI360  

Click here to read 7 Things to Know About the Two-Midnight Rule 

Click here to watch our webinar with Day Egusquiza: Two-Midnight Rule Nightmares 

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