Hospitals Manipulate the Medicare Two-Midnight Rule to Avoid Fines

Effects of The Hospital Readmissions Reduction Program

Since the Affordable Care Act was enacted in 2010, Medicare has undergone changes to rein in costs. These changes may have had unintended consequences. While the care you receive in the hospital may be improved, you may be paying disproportionately more for the same services when you are placed under observation.

Doctor talking to a hospital patient
Ariel Skelley / Blend Images / Getty Images

How the Hospital Readmissions Reductions Program Works

Being admitted to the hospital is bad enough. Being admitted a second time for the same medical condition in the same month is even worse. When people return for readmission in such a short time frame it suggests their care had not been optimized or that they had been discharged from the hospital prematurely. To incentivize hospitals to improve patient care, the federal government established the Readmissions Reductions Program.

In October 2012, the Centers for Medicare and Medicaid began to penalize hospitals that had a high number of patients returning for admission within 30 days. The Hospital Readmissions Reductions Program, created under the Affordable Care Act, specifically looks at admissions for heart attack, heart failure, and pneumonia. Hip/knee replacement and chronic obstructive pulmonary disease (COPD) were added to the monitored conditions in 2015 and coronary artery bypass grafting (CABG), an inpatient only procedure, was included starting in 2017. Readmissions for targeted conditions fell from 21.5% in 2007 to 17.8% in 2015. 

With Medicare reducing payments to hospitals by as much as 3% for high rates of readmissions, these penalties could significantly impact a hospital's financial viability. In 2018 alone, 2,573 hospitals faced penalties for Medicare inpatient readmissions between October 2017 and September 2018. Those penalties added up to a $564 million, a $36 increase from 2017.

How the 2-Midnight Rule Works

In October 2013, the Affordable Care Act changed how Medicare covered your hospital stays. Instead of basing its coverage on how sick you are, it bases it on how long you are in the hospital. Unless you have surgery that is on the Inpatient Only List, Part A only takes effect if your stay crosses two midnights. This is known as the 2-Midnight Rule. When you do not meet these criteria, you are put "under observation."

Observation stays have been on the rise since the ruling took effect. According to MedPac, "The number of observation hours (both packaged and separately paid) has increased substantially, from about 23 million in 2006 to 53 million in 2013."

How This Affects What You Pay

When you are admitted to the hospital as an inpatient, your Medicare Part A benefits take effect. You pay a flat deductible for your stay that covers up to 60 days. This tends to cost you less than you would pay if your Medicare Part B (medical insurance) paid the bill for an observation stay. That said, Part A tends to cost the government more.

Part A pays for inpatient hospital stays and Part B pays for observation stays.

Logistically, you pay different amounts for the same care depending on how your hospital stay is labeled. Would you prefer to pay the $1,340 Part A deductible or 20% of all hospital costs for Part B coverage?

How This Affects Your Hospital Stay

Hospitals aim to avoid readmissions and costly penalties. With the 2-Midnight Rule and increases in observation stays, this could put them at an advantage. Observation stays do not count towards the readmission metric. Some question whether hospitals are gaming the system by placing patients under observation status to subvert fines.

However, hospitals also want to be reimbursed for their services. The truth is that hospitals are more likely to receive payment from Medicare than from some low-income beneficiaries who are unable to afford it. Hospitals could profit more from inpatient admissions over observation stays.

A Word From Verywell

The Hospital Readmissions Reductions Program has its pros and cons. Readmissions are decreasing and this implies that people are receiving better inpatient hospital care. However, hospitals may be manipulating the 2-Midnight Rule to avoid labeling a person's hospital stay as a readmission. The question should not be what benefits the hospital more but that you receive appropriate, affordable care based on your medical needs. If you have one of the medical conditions that the Hospital Readmissions Reductions Program reviews, you may want to speak with your healthcare providers to make sure your admission orders are appropriate.

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  1. Zuckerman RB, Sheingold SH, Orav EJ, Ruhter J, Epstein AM. Readmissions, Observation, and the Hospital Readmissions Reduction ProgramNew England Journal of Medicine. 2016;374(16):1543-1551. doi:10.1056/nejmsa1513024.

  2. McIlvennan CK, Eapen ZJ, Allen LA. Hospital readmissions reduction programCirculation. 2015;131(20):1796–1803. doi:10.1161/CIRCULATIONAHA.114.010270

  3. Advisory Board. 2,573 hospitals will face readmission penalties this year. Is yours one of them? Published August 7, 2017.

  4. The Medicare Payment Advisory Committee. Health Care Spending and the Medicare Program. Published June 2017.