CMS estimates that between 2017 and 2021, Medicare Part A improperly paid $23.9 billion for inpatient hospital stays, with $7.8 billion attributable to short stays that did not qualify for Medicare Part A. On June 13, 2024, OIG published a report identifying weaknesses in Medicare billing practices that contribute to these overpayments. The report identified three primary factors contributing to overpayments: (1) CMS lacks enough information to identify when exceptions to the two-midnight rule apply; (2) CMS does not have an effective prepayment edits process; and (3) CMS lacks adequate policies for reviewing claims and collecting overpayments.

The Two-Midnight Rule

The two-midnight rule is CMS’s method for distinguishing inpatient hospital stays from outpatient hospital stays. Under the two-midnight rule, if an admitting physician reasonably expects that a particular patient’s stay will last for at least the next two midnights, Medicare Part A will reimburse that hospital for providing inpatient hospital services. However, if a particular patient’s admitting physician reasonably expects a shorter stay, instead Medicare Part B will reimburse that hospital for outpatient hospital services.

Because Medicare pays rates for services that are set prospectively, and because inpatient visits tend to be longer and costlier than outpatient visits, CMS’s method for enforcing the two-midnight rule has substantial implications for hospital reimbursement.

Finding 1 – Improving Information Gathering

OIG’s first explanation for why Medicare is overpaying for inpatient hospital services is that there is ineffective information gathering.

Some inpatient hospital stays lasting less than two-midnights might still qualify for Medicare Part A reimbursement when patients received services that are on the inpatient only (IPO) procedures list. When hospitals treat patients, hospitals report each procedure using procedure codes from the International Classification of Diseases, 10th revision (ICD-10). However, the IPO list uses HCPCS codes, not ICD-10 codes, so short inpatient hospital stays that are eligible for reimbursement under Medicare Part A are not easily distinguishable from inpatient hospital stays that are ineligible for Medicare Part A reimbursement.

Additionally, even if a patient is discharged in less than two-midnights, that visit may still be eligible for Medicare Part A inpatient reimbursement so long as the admitting doctor’s original assessment was reasonable, and the shorter-than-expected visit was due to some unforeseen circumstance. Without an unforeseen circumstance occurring that resulted in a shorter stay, it is not straightforward to distinguish whether the admitting doctor’s original assessment was reasonable.

Finding 2 – Implementing a Prepayment Edits Process

OIG’s second explanation for why Medicare is overpaying for inpatient hospital services is the lack of an effective prepayment edits process.

CMS contracts with Beneficiary and Family Centered Care–Quality Improvement Organizations (BFCC-QIOs) to help enforce compliance with the two-midnight rule and maintain the Medicare program’s economy. The report identified four different “risk factors” for when inpatient hospital stays might not comply with the two-midnight rule: (1) stays spanning one week or more, (2) stays with canceled procedures, (3) stays billed with diagnosis codes that CMS flags as being “high risk” for noncompliance, and (4) stays billed with diagnosis codes that BFCC-QIOs identify as high risk for noncompliance.

Rather than wait to review and correct suspect entries during the post-payment process, OIG posits that reviewing such claims before CMS makes payments could have saved as much as $11 billion.

Finding 3 – Strengthening Claims Review

OIG’s third explanation for why Medicare is overpaying for inpatient hospital services is the lack of a sufficient claims review process.

The report found that, despite identifying providers with compliance concerns, and despite assisting providers with compliance concerns, BFCC-QIOs did not refer any of these providers to Recovery Audit Contractors (RACs) for additional reviews and recovery of overpayments, resulting in what the OIG estimates is billions in unrecovered overpayments.

OIG’s Recommendations

To address OIG’s three primary concerns with the current payment system, OIG made four recommendations to strengthen enforcement of the two midnight rule: (1) add information to inpatient claims indicating when unforeseen circumstances occur, (2) develop a list of inpatient procedure codes associated with the inpatient-only procedures list, (3) implement prepayment edits for claims for short inpatient stays, and (4) update policies and procedures for post-payment reviews to focus on claims for short inpatient stays.

Though it is unclear whether HHS will implement OIG’s recommendations, strengthening or loosening enforcement of the two-midnight rule would be expected to have a significant impact on Medicare reimbursement.

OIG’s complete report can be found here.