In the three months since the publication of the final Inpatient Prospective Payment System rule for fiscal year 2014 (the “Final IPPS Rule”),1 which contains CMS’s latest official guidance on observation and short stays, we’ve seen animated responses by the provider community as well as intensive efforts by CMS to provide further clarification on the intricacies of these two inpatient billing issues. In September alone, CMS issued written guidance in the form of a memo entitled “Hospital Inpatient Admission Order and Certification” (the “September 5 Memo”)2 and a frequently asked questions document (“Inpatient FAQ Document”).3 CMS has also hosted at least three Open Door Forums specifically on this topic – one in August, one in September, and one in November.4 In addition, CMS updated the Inpatient FAQ Document as recently as November 5, 2013. Despite these efforts, however, it is clear that many questions and uncertainties remain in the provider community.5

I. Background – Why So Much Concern About Observation and Short Stays?

On July 29, 2013, HHS’s Office of Inspector General (“OIG”) released a memorandum report entitled Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries.6 This memorandum provides a good summary of the concerns raised by CMS, Congress, and others about observation and inpatient stays. The concerns about observation include beneficiaries spending extended periods of time in observation without being admitted as inpatients, beneficiaries possibly paying more as outpatients7 than as admitted inpatients, and beneficiaries in observation failing to qualify for skilled nursing facility (“SNF”) services following discharge from the hospital and then being held responsible for the SNF charges. At the same time, however, criticism also has targeted short inpatient stays, which last fewer than two nights, as generating improper payments for inpatient hospital services that could have been appropriately provided in an outpatient setting.

The Department of Justice (“DOJ”) and CMS have shown no signs of decreasing investigations of hospitals for potential improper billing in the observation or inpatient short stay areas. In fact, on the same day that the OIG released the memorandum report described above, the United States Attorney’s Office for the District of Massachusetts and the OIG announced that Boston-based teaching hospital Beth Israel Deaconess Medical Center (“Beth Israel Deaconess”) had agreed to pay $5.315 million to settle allegations that it violated the False Claims Act for this exact conduct.8

Recovery Audit Contractors (“RACs”) are targeting such short inpatient stays as an area ripe for recoupment. These recoupment efforts and the resources required for the appeals process have contributed to hospitals’ increased reluctance to admit beneficiaries as inpatients and a corresponding increase in extended observation stays.9

II. Final Rule on Inpatient Hospital Admissions and Part B Inpatient Billing

The Final IPPS Rule, which became effective October 1, 2013, contains two standards meant to clarify the ability of hospitals to bill short stays as inpatient hospital admissions. The first is the so-called two-midnight presumption, under which Medicare contractors will presume that inpatient stays that last longer than two midnights after the admission order are medically reasonable and necessary.10 Medical review of patient status (i.e., whether the patient should be properly classified as inpatient vs. outpatient) in cases that meet this two-midnight presumption will be limited to determining if there is any systematic “gaming” occurring or any abuse or delays in the provision of care in order to qualify for the two-night presumption.11

The second standard is the so-called two-midnight benchmark, which stipulates that, in order for an inpatient admission to be considered medically necessary, the admitting physician must reasonably expect a patient’s surgery, testing or care to require a hospital stay extending over at least two midnights.12 Inpatient admissions that meet the two-midnight benchmark, but which last fewer than two midnights, are not insulated from medical review by Medicare contractors, but, as long as they meet the two-midnight benchmark and are appropriately documented, the admission should be deemed appropriate upon review and entitled to Part A compensation.

The Final IPPS Rule emphasizes the need for a formal order of admission to initiate inpatient status, but allows physicians to consider time that the patient has already spent in the hospital as an outpatient to guide their two-midnight expectation (note that such observation or ER or other outpatient time does not, however, count toward a qualifying inpatient stay for SNF benefits).13 The order of admission is one component of physician certification of an inpatient stay, which is now required for all inpatient admissions, not just extended stays.14

Finally, despite more than 300 commenters’ objections, the Final IPPS Rule also finalizes a section of the proposed rule introduced in March 2013 that limits the time period for rebilling of denied (on medical necessity grounds) Part A services under inpatient Part B to one year after the date of service.15 This provision is seen as particularly onerous by the industry because RAC review and the appeals process will likely take longer than one year, thus effectively preventing rebilling under Part B.

III. The Aftermath of the Final IPPS Rule and Continuing Questions

In August, September and November, CMS hosted a series of Open Door Forums, allowing hospitals, practitioners and other interested parties to weigh in on the provisions of the Final IPPS Rule, which became effective on October 1, 2013.16 CMS also released the September 5 Memo and the Inpatient FAQ Document.17 Set forth below is a summary of some of the important topics addressed in the Final IPPS Rule and in those open door sessions and written guidance documents.

Content and Timing of Physician Certifications

Physician certifications for inpatient hospital services must comply with the requirements of 42 CFR 424 subpart B and 42 CFR 412.3. Pursuant to these regulations, all physician certifications must include: (a) authentication of the practitioner order; (b) the reason inpatient services are required; (c) the estimated time the beneficiary requires in the hospital; and (d) plans for post-hospital care, if appropriate.18

Physician certifications must be completed, signed, dated and documented in the medical record prior to discharge, except in certain outlier cases. The certification may only be signed by: (a) a physician who is a doctor of medicine or osteopathy, (b) a dentist in the circumstances specified in 42 CFR 424.13(d), or (c) a doctor of podiatric medicine whose certification is consistent with the functions he or she is authorized to perform under state law.19 Furthermore, all certifications must be signed by the physician responsible for the case, or by another physician who has knowledge of the case and who is authorized to do so by the responsible physician or by the hospital’s medical staff.20

Content and Timing of Inpatient Admission Orders

Inpatient admission orders may be written or verbal21 and must specify the admitting practitioner’s recommendation for “inpatient” care.22 In other words, the order must specify the admitting practitioner’s recommendation to admit “to inpatient,” “as an inpatient,” “for inpatient services,” or similar language.

The inpatient admission order may only be given by a physician or other practitioner who is: (a) licensed by the state to admit inpatients to hospitals, (b) granted privileges by the hospital to admit inpatients, and (c) knowledgeable about the patient’s hospital course, medical plan of care, and current condition at the time of admission.23 Notably, the ordering practitioner is not required to be the physician who signs the certification.

Two-Midnight Benchmark – Time Spent in Observation or ER Prior to Admission

CMS clarified that patient time spent in observation, the emergency department, or other outpatient treatment areas can count toward the two-midnight benchmark, i.e., the time taken into account by a physician when he or she makes a determination as to whether an inpatient order should be written.24 CMS has stated that it is exploring means by which any such outpatient time may be recorded on the Part A inpatient claims to identify Part A claims that meet the two-night benchmark.25

Note that triaging activities (such as vital signs) and wait times that occur prior to the actual initiation of care at the hospital will not count for purposes of this determination. In the November 12 Open Door Forum, CMS stated that care initiated in an ambulance that is on its way to the hospital will not start the two-midnight clock running, even if such care is given pursuant to telephone instructions from the hospital to the ambulance staff. CMS also stated, however, that once the patient is at the hospital and is past the “vital signs” part of the triaging process to the point where care is actually initiated pursuant to an order from a nurse practitioner, physician, or physician assistant, the clock will start running. CMS has said that it will take under advisement whether care initiated pursuant to standing orders can count as the initiation of care for this purpose.

Implementing the Two-Midnight Presumption – The “Probe and Educate” Period

In the Open Door Forum held on September 26, 2013,26 CMS stated that, as the first step in implementing the two-midnight presumption, CMS would launch a “probe and educate” period, lasting from October 1, 2013 through December 31, 2013, which has now been extended through March 31, 2014.27 According to CMS, the RACs will be doing no inpatient vs. outpatient status reviews of any claims for admissions that begin during this period (although they may review the claims for purposes other than patient status).28 In addition, during this period, the Medicare Administrative Contractors (“MACs”) will select a small sampling from individual hospitals of 10 to 25 one-midnight stays for purposes of prepayment patient status (i.e., inpatient vs. outpatient) reviews. If hospitals are found to have only one or no erroneous claims as a result of such prepayment review, then they will experience no more patient status reviews until April 1, 2014. If hospitals are found to have more than one erroneous claim, they can be subject to further prepayment review after education from the MAC. At the expiration of the “probe and educate” period, hospitals that are identified as having continuing problems may be subject to larger samplings of up to 100 to 250 claims for additional prepayment reviews.

CMS expects to analyze the results from the “probe and educate” period and then devise further implementation strategies in 2014. Presumably, any such further implementation strategies will not alter the fundamental nature of the two-midnight presumption or two-midnight benchmark. CMS has advised that it will instruct the MACs and RACs that they are not to review claims spanning more than two midnights after admission to determine whether the inpatient admission, i.e., the patient status of inpatient vs. outpatient, was appropriate.29

Distinguishing the Two-Midnight Benchmark from the Two-Midnight Presumption

CMS again distinguished the two-midnight benchmark, which involves the physician’s expectations for length of stay, from the two-midnight presumption under which Medicare contractors will presume that inpatient stays that are longer than two midnights after the admission order are medically reasonable and necessary. CMS anticipates that the number of inpatient hospital stays will increase as a result of the two-midnight benchmark and presumption of medical necessity.

Documenting the Two-Midnight Benchmark

Physician certification statements must document that the hospital inpatient services are reasonable and necessary and that they are being appropriately provided in accordance with the two-midnight benchmark. Services that are “inpatient only” services, or services that are provided in “rare and unusual” circumstances, such as unforeseen beneficiary improvement or the beneficiary being transferred or leaving against medical advice, are exempt from the two-midnight benchmark.

For purposes of medical review, CMS has indicated its intent to focus on the “reasonableness” of the documented expectation that the patient’s care would extend past two midnights, not on whether the actual length of stay ends up being two midnights or more (the actual length of stay is relevant only for the two-midnight presumption and does not apply to claims that are picked for medical review). CMS does not anticipate that physicians will include a separate attestation of the expected length of stay, but rather that “this information may be inferred from the physician’s standard medical documentation, such as his or her plan or care, treatment orders, and physician’s notes.”30

Timing Issues

Providers expressed concern that the exact timing of patient’s admission and discharge could be problematic. For example, providers fear that a claim could be denied for a patient who is admitted as an inpatient to the hospital slightly after midnight one night and then stays almost forty-eight hours but is discharged just short of two midnights. However, the Final IPPS Rule states that a physician’s reasonable expectation of an inpatient stay crossing two midnights, “which is based on complex medical factors and is documented in the medical record,” will support medical necessity of the inpatient admission whether or not the length of inpatient care ultimately crosses two midnights.31 CMS acknowledges that unforeseen circumstances, such as death or patient transfer, could lead to a discharge earlier than anticipated.32

How Long Should Observation Stays Last?

CMS indicated that it does not believe that observation periods should last more than two midnights.33 In response to a caller question at the November 12 Open Door Forum, CMS indicated that, if a patient is still in observation after one midnight, and is still receiving medically necessary care from the hospital that a physician expects to extend beyond a second midnight, the patient should be admitted as an inpatient.

As CMS reiterated during the September 26, Open Door Forum, a motivating factor behind the new rule is an increase in the number and length of observation stays, which has led to extremely high medical bills for beneficiaries in certain instances through copayments and failure to qualify for subsequent SNF coverage.34 The nature of the rule and CMS’s guidance through open door forums indicates that observation stays should last for the shortest period necessary. CMS stated that observation status is used to determine whether the patient can be admitted or discharged from the hospital. CMS sympathized that hospitals are in a difficult position when a patient does not meet inpatient admission criteria and no longer needs hospital care, but for some reason cannot be discharged from the hospital due to social reasons, such as a lack of a place for the patient to go. When asked about a situation in which an older patient’s medical work-up is negative but the patient continues to complain of symptoms, CMS emphasized that hospitals may not bill Medicare for patients who are kept in the hospital for social or convenience reasons.

Part B Inpatient Re-Billing Timely Filing Limit

CMS has provided temporary instructions, most recently updated on October 23, 2013, for implementation of the final rule governing Part A to Part B billing of denied inpatient hospital claims.35 If a hospital determines under its Medicare utilization review process that services should have been provided on an outpatient as opposed to inpatient basis, but the beneficiary has already been discharged and the claim has already been submitted under Part A, the hospital must cancel its Part A claim prior to submitting a Part B claim. CMS emphasized that any coinsurance or deductible collected by the hospital for the Part A claim must be refunded to the beneficiary. Regardless of whether a hospital has already submitted a Part A claim, the hospital is required, as a prerequisite in order to rebill, to submit a Part A claim indicating that the provider is liable under section 1879 of the Social Security Act. The hospital may then bill under inpatient Part B for inpatient services that would have been medically reasonable and necessary if the beneficiary had been treated as an outpatient.

CMS also addressed the Part B inpatient re-billing timely filing limit of one year after the date of service, which has been the target of much criticism. CMS reminded providers that claims for stays with inpatient admissions before October 1, 2013 can be re-billed under inpatient Part B after a denial regardless of the length of time that has passed since the date of service, provided the original Part A inpatient claim was timely filed.36 Part A claims that were denied prior to October 1, 2013, but have an appeal pending may be rebilled under inpatient Part B even if more than one calendar year has passed since the date of service. The one-year Part B re-billing limit is applicable to claims for dates of service after October 1, 2013. In response to many questions regarding changes to the focus of review by RACs, CMS stated that RACs will continue to look at short stays and one-day minor surgeries and that it expects RAC inpatient review will decline over time.

Conclusion and Continuing Issues

CMS has stated that it will continue to update its guidance on the two-midnight rules and has encouraged providers to submit questions to the inpatient admissions mailbox at One important issue to watch is the intersection of the two-midnight rules with the inpatient admission criteria of non-Medicare payers. A caller during the November 12 Open Door Forum stated that, while inpatient admissions used to be “payer agnostic,” the two-midnight rules may differ from the inpatient admission criteria of other payers, potentially causing administrative complications and burdens for hospitals.


1 The rule was released on August 2, 2013, and appeared in the Federal Register on August 19, 2013. The final rule is available at
4 The transcript of the August 15 Open Door Forum can be found here:
. The transcript of the September 26 Open Door Forum can be found here: As of the publication date of this article, the transcript of the November 12 Open Door Forum is not yet available.
5 See, e.g., the November 8, 2013 letter sent jointly by the American Medical Association and the American Hospital Association. See also, e.g., the American Hospital Association’s statement on September 26, 2013:
6 HHS/OIG, OEI-02-12-00040, Hospitals’ Use of Observation Stays and Short Inpatient Stays for Medicare Beneficiaries (2013).
7 An observation stay is a type of outpatient stay reimbursed under Medicare Part B.
8 In its press release regarding the settlement, the DOJ explains that from June 1, 2004, through March 31, 2008, Beth Israel Deaconess allegedly submitted improper claims to Medicare for inpatient admissions for one-day or zero-day stay patients. According to the government, these claims should not have been submitted as inpatient stays, but rather should have been billed as observation or outpatient services because the patients were only briefly admitted for the limited purpose of observation and were then discharged shortly thereafter. Beth Israel Deaconess, however, did not admit any guilt or wrongdoing as part of the settlement. See
9 See, e.g., American Hospital Association, letter to CMS regarding extended observation services, October 27, 2010, available at
10 See 78 Fed. Reg. 50496, 50506 (August 19, 2013).
11 78 Fed. Reg. at 50925.
12 These “midnight” standards do not apply to so-called “inpatient-only” procedures or to inpatient rehabilitation facilities. See 78 Fed. Reg. at 50949. Note, however, that inpatient-only procedures still require the physician certification under the rules.
13 See 78 Fed. Reg. at 50950.
14 78 Fed. Reg. at 50941; See also 42 C.F.R. § 424.13.
15 See id. at 50923.
16 The transcript of the August 15 Open Door Forum can be found here:
. The transcript of the September 26 Open Door Forum can be found here: As of the publication date of this article, the transcript of the November 12 Open Door Forum is not yet available.
17 See and
18 42 CFR § 424.13. Special rules apply for critical access hospitals and inpatient psychiatric facilities.
19 42 CFR § 424.11(e).
20 42 CFR § 424.13(d).
21 42 CFR § 482.24(c).
22 78 Fed. Reg. at 50492.
23 42 CFR § 412.3.
24 However, as indicated earlier, time spent in such areas will not count towards inpatient time for purposes of qualifying for skilled nursing facility coverage as inpatient status begins with the physician’s order to admit.
25 Inpatient FAQ Document, Question 15.
26 The transcript of the September 26 Open Door Forum can be found here:
27 See
28 According to CMS, there will neither be prepayment or post-payment reviews of these claims, except pursuant to certain demonstration projects, and except that the CERT and ZPIC contractors, as well as the OIG, may always review claims.
29 Inpatient FAQ Document, Question 1.
30 Inpatient FAQ Document, Question 6.
31 78 Fed. Reg. at 50944.
32 See id.
33 See the transcript of the September 26 Open Door Forum, which can be found here:
34 See Bagnall v. Sebelius, No. 3:11-cv-01703 (D. Conn, September 23, 2013), available at
36 See the transcript of the August 15 Open Door Forum, which can be found here: