Published on:

Moody’s Report: Two-Midnight Rule to Weaken Hospital Profitability

On Wednesday, March 12, Moody’s Investor Services released a report predicting that Medicare’s new inpatient admissions policy, the “Two-Midnight rule”, will negatively affect hospitals’ bottom lines. The Two-Midnight rule instructs physicians and hospitals to use a two-midnight benchmark and order admission for patients expected to require hospital care crossing at least two midnights.

The Moody’s report stated that “on average, the [Two-Midnight] rule could cause revenue reduction averaging $3,000 to $4,000 per case.” The report suggests that these reduced reimbursement rates will be especially devastating since the cost of treating patients will remain the same. The report also suggests that the Two-Midnight rule will expedite the already increasing trend of more outpatient observation stays, which will put more pressure on hospital revenues. The impetus for this increasing trend of outpatient care observation stays has been the frequent challenges by RACs to the medical necessity requirement of short-stay admissions.

The report also concludes that under the Two-Midnight rule, hospitals with shorter lengths of stay will be most affected. The hospitals that are expected to be most affected are classified as ‘low acuity’ community hospitals. While these types of hospitals tend to have a larger number of cases resulting in shorter hospital stays, these stays typically still consume a large of amount of resources, such as diagnostic testing.

The report also concludes that smaller hospitals with less integrated medical staffs and less resources can expect to struggle in adapting to the new rule. The decision to hospitalize a beneficiary is a complex medical decision made by the physician in consideration of various risk factors, including the beneficiary’s age, disease processes, comorbidities, and the potential impact of sending the beneficiary home. It is up to the physician to make the complex medical decision of whether length of stay for medically necessary hospitalization is expected to surpass two-midnights and the physician should explain in detail in a beneficiary’s medical records why the expectation of the need for care spanning at least two-midnights was appropriate in the context of that beneficiary’s acute condition. Patients that are expected to be in the hospital for more than two-midnights, but are subsequently discharged early will qualify for inpatient reimbursement so long as the admitting physician properly documents that the admission was initially warranted. Smaller hospitals that are already stretched thin on physicians and support staff may find it much more difficult to satisfy these documentation requirements.

CMS, however, does not agree with the conclusions of the Moody’s report. In its 2014 Hospital Inpatient Prospective Payment System (IPPS) Final Rule, CMS estimated that there will be about $220 million in additional expenditures from the net increase in hospital inpatient encounters.

Wachler & Associates will continue to monitor any further developments regarding CMS’s new inpatient admission rule. If you have any questions pertaining to the two-midnight rule or certification and order requirements, please contact an experienced health care attorney at Wachler & Associates via phone at 248-544-0888 or via email at

Contact Information