Documenting Medical Necessity is Critical for Two-Midnight Rule Compliance


Get clarity on how the two-midnight rule is applied and enforced, and discover how to improve compliance as the observation-to-inpatient decision approaches.

It’s hard to believe, but CMS’s controversial ‘Two-Midnight’ rule (2MN rule) has been in effect for more than five years. The rule was initially intended to provide a clear, time-based method to help determine whether patients should be placed in observation or inpatient status.

Although CMS has issued updates and clarifications, especially regarding monitoring and enforcement, the underlying rationale for the rule hasn’t changed since it was first included in the 2014 Inpatient Prospective Payment System Final Rule. After a few modifications, the rule now appears to be stable in its application and enforcement.

Despite occasional claims to the contrary, establishing and documenting medical necessity remains a prerequisite for applying the 2MN rule. When CMS first introduced the rule, some organizations mistakenly believed that the shift to a time-based metric meant that medical necessity was no longer important.

In fact, documented medical necessity is even more critical now, as the expected length of stay and the justification for the patient’s hospitalization must be articulated and supported by the medical record.

A Summary of the 2MN Rule

The 2MN rule states that a hospital inpatient admission is generally considered reasonable and necessary if the physician (or other qualified practitioner) orders an inpatient admission based on the expectation that the patient will require at least two midnights of medically necessary hospital care.

CMS contractors operate under the presumption that inpatient admission is appropriate for patients with a medically necessary hospital stay of two or more midnights after an inpatient admission order. Inpatient admissions are also required if the beneficiary requires a procedure on the CMS Inpatient-Only (IPO) list.

Hospitals classify patients who are not initially expected to require a stay of two or more midnights as outpatients receiving observation services (OBS). Medically-necessary care for outpatients in ‘OBS status’ is billed to Medicare Part B if the patient’s stay does not in fact extend for two or more midnights.

If patients in OBS status continue to require medically-necessary care as they approach the second midnight, they should be formally admitted as inpatients. The 2MN benchmark clock for all services received begins when treatment is initiated, typically in the emergency department.

Of course, there are exceptions to the 2MN rule, including unforeseen events such as patient death, transfer, unexpected improvement, departure against medical advice (AMA), admission to hospice, and new-onset mechanical ventilation.

When determining the reasonableness of the physician’s original judgment, Medicare contractors do take unexpected circumstances into account.

Rule Enforcement for Short-Stay Inpatient Claims

Enforcement of the 2MN rule continues to be delegated to the two national Beneficiary and Family Centered Care-Quality Improvement Organizations (BFCC-QIOs), Livanta and KEPRO. These auditing organizations are charged with evaluating the appropriateness of inpatient claims for hospital stays of less than 2MNs.

Their reviewers evaluate samples of one-day inpatient claims, generally from hospitals whose percentage of short stay admissions is higher than the national average. If the sampled claims indicate that a hospital’s short-stay admissions are not appropriate, the BFCC-QIO meets with the hospital to share its concerns. If the issue persists after a six-month review period, the hospital is identified as a repeat offender and may be referred to Medicare Administrative Contractors (MACs) for further review.

Both BFCC-QIOs continue to license InterQual® as a decision support tool. To assess whether the clinical documentation supports reasonable and medically necessary care, nurses evaluate the initial screening. Nurses typically review the patient’s medical record, the application of 2MR benchmarks, as well as qualifying data—which may or may not include InterQual criteria. For cases in which the data isn’t clear, the review is passed to the medical director, who uses clinical judgment to make an independent determination on the medical necessity of the admission.

Documenting Medical Necessity and Evaluating Levels of Care

Accurate clinical documentation remains vitally important to the application of the 2MN rule. By requiring hospitals to explicitly establish and document medical necessity for each patient placed in a hospital bed, CMS is attempting to ensure that payment is made only for medically necessary care.

InterQual criteria can help care and utilization managers better understand the sort of documentation required to substantiate medical necessity. Using InterQual to help document and confirm the presence of medical necessity can help hospitals avoid referrals from the BFCC-QIOs to MACs, and eventually to recovery audit contractors (RACs).

InterQual-assisted evaluation of the medical record is particularly important for 2nd midnight admissions. In these cases, the patient is initially classified as an outpatient with observation services. The patient is converted to inpatient status at the 2nd MN, with discharge on the following day. These 1MN inpatient stays are a major focus for 2MN rule enforcement efforts.

Auditors want to make sure that these admissions are not based on a reluctance to write discharge orders or a lack of resources on the weekend; they are looking for confirmation that the 2nd MN of the hospital stay was indeed medically necessary. By using InterQual to ensure that these patients meet the criteria for continued stay, clinicians provide auditors with the evidence they need that medical necessity was established.

Enabling Medical Record Review with Transparent Criteria

As InterQual criteria can’t cover every patient scenario, there are some patients who don’t meet InterQual criteria, but for whom inpatient care is nevertheless appropriate. It is important to remember that the failure to meet the initial criteria for admission is not the end of the medical necessity discussion, but rather the starting point.

In these instances, the clinician can quickly assess the specific reasons the criteria were not met. Without full criteria transparency, this review would be impossible.

Hospitals that use “black box” algorithms to classify patients as inpatient or outpatient have no access to the data behind the scenes, and therefore cannot fully understand, adjust, or interpret the results. When these hospitals need to appeal a denial, they can have difficulty substantiating why a patient was admitted as an inpatient—because they were not actually documenting medical necessity, just attempting to validate payment status.

By contrast, InterQual’s transparent criteria enable a complete understanding of how and why a patient has been admitted.

Improving 2MN Rule Adherence with InterQual

Using InterQual to support optimal adherence to the 2MN rule is now even easier. In mid-2018, Change Healthcare streamlined the InterQual review process and implemented content changes that build on the solution’s solid alignment with the 2MN rule requirements.

These changes better support the patient’s initial status determination at the time of hospitalization, as well as the hospital’s pivotal observation-to-inpatient decision as the 2nd midnight approaches.

  • Criteria Application for the Most Relevant Condition
  • For patients in OBS status whose diagnosis remains the same, clinicians no longer need to return to the initial Episode Day to apply criteria. Instead, users can apply criteria from the patient’s current day—whether it be Episode Day 1, Day 2, or Day 3—to determine placement. If the patient’s diagnosis has changed, the reviewer will need to return to Episode Day 1 criteria.
  • Updated Observation Criteria for Patients Who Do Not Meet the 2MN Presumption
  • In recognition of the decreasing lengths of stay for some common conditions, Change Healthcare has also made changes to InterQual Observation criteria. These changes are part of an ongoing project to more closely align the tool’s Acute Level of Care criteria with inpatient admission status.
  • Observation Level of Care criteria have been added to several conditions. For others, a trial of observation treatment has been added as a prerequisite to inpatient admission. These changes will help to decrease the incidence of this uncommon but vexing problem: patients who meet criteria at the Acute Level of Care but who do not meet the 2MN presumption at the time of hospitalization.

These observation/inpatient enhancements make the tool easier than ever to use for patients who are subject to the 2MN rule. As more payers adopt CMS’s full or slightly modified 2MN rule, knowledge of its clinical and operational requirements will become increasingly important.

InterQual provides key evidence-based decision support to help physicians screen for medically appropriate care.

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