Medicare Advantage &
the Two-Midnight Rule

Medicare Advantage and the Two-Midnight Rule: 2024 Findings

Two months into the 2024 CMS Rule

A data and historical review by AppriseMD

Early 2024 data suggests Medicare Advantage Organizations (MAOs) are not complying with the Centers for Medicare and Medicaid Services’ (CMS) 2024 final rule 4201-F. These organizations continue to resist traditional Medicare guidelines when it comes to the Two-Midnight rule and medical necessity. The MAOs pose a significant challenge to a hospital’s ability to collect reimbursement for medical services rendered, which is why ensuring compliance requires provider vigilance. Hospitals continue to struggle with MAO claim denials and delayed payments, and with the MAO market share expected to reach 60% by 2030¹, any non-compliance by the MAOs needs to be addressed now. AppriseMD looked at data from our partner hospitals and health systems in the first two months of 2024 to examine how the new rule is being implemented.

Continue reading to see what we found.

THE IMPETUS BEHIND THE 2024 CMS FINAL RULE

Arising from concerns that the MAOs were delaying and denying services and reimbursement, CMS implemented 4201-F at the beginning of 2024. This rule was initiated after the publication of a report in April 2022 by the Office of the Inspector General (OIG), a division of the United States Department of Health and Human Services (HHS). The OIG’s specific findings pertained to the “circumstances under which MAOs denied requests that met Medicare coverage rules and the MAO billing rules provide an opportunity for improvement to ensure that Medicare Advantage (MA) beneficiaries have timely access to all necessary health care services, and that providers are paid appropriately.”²

CMS concurred with the report’s three recommendations and issued CMS-4201-F in April 2023. The 2024 CMS final rule intends to provide much-needed relief to hospitals and health systems by requiring MA plans to follow certain rules that previously only applied to Traditional Medicare patients for inpatient admissions. Specifically, the final rule set the expectation that MA plans must follow the Two-Midnight rule, the CMS inpatient-only list, and the caseby-case exceptions. The rule’s objective aims for MA inpatient coverage decisions to be treated the same as Traditional Medicare inpatient coverage decisions.
Two months into 2024 though, our data suggests that the MAOs are not yet complying.

PAYER CLAIM DENIALS & MAOs MARKET SHARE

Claim denials in healthcare are not surprising and were recently addressed in a paper titled “The Use
of AI in Claim Denials” published by AppriseMD.³ Three recent class-action lawsuits filed against insurance companies – which the paper outlines – demonstrate the need for rigorous provider oversight to ensure payers are denying claims appropriately.³ 

One of the class-action lawsuits alleges that two MAOs utilize an artificial intelligence tool to inappropriately deny MA plan enrollees’ medical claims. This directs a more intense spotlight on MA non-compliance with CMS-4201-F, which is further illuminated by the 2023 MA plan enrollment data published by the Kaiser Family Foundation.⁴ According to this data, MA enrollment exceeded 30 million people, which underscores just how broad the MAO market reach extends.

MA plans traditionally implement more restrictive medical necessity requirements than Traditional
Medicare. They also produce a higher denial rate than all other payer categories combined, according to
Crowe.⁵ This leaves hospitals investing more time and resources into ensuring appropriate reimbursement. MA plans already account for a generous portion of Medicare plans in the US, and projections show that by the end of 2024 they will hold a 54% majority.⁶

REWIND: THE TWO-MIDNIGHT RULE

CMS implemented the Two-Midnight rule in 2013 for several reasons. To understand where we are today
requires insight as to why the Two-Midnight rule was adopted. First, CMS recognized that medical necessity education was needed after high rates of error for inpatient level of care (LOC) services were identified through the Recovery Audit program. CMS also observed a higher regularity of Traditional
Medicare patients receiving extended observation services, which prohibited patients from receiving skilled nursing services under their Medicare benefit, again pointing to a need for guidance around LOC.
Additionally, CMS published the Two-Midnight rule to reduce inpatient admission errors after the OIG identified overpayments for inpatient claims with short lengths of stay (LOS).

Determining appropriate LOC is essential

The April 2022 OIG report states “denying requests that meet Medicare coverage rules may prevent or delay beneficiaries from receiving medically necessary care and can burden providers.”² Therefore, determining the appropriate level of care is essential. Assigning the appropriate care status has many variables, and it is not always clear-cut. These medical necessity determinations also directly impact
reimbursement while indirectly impacting patient satisfaction, LOS, readmissions and staffing expenses. AppriseMD addressed these topics in its paper published in February 2024 regarding the impact
of utilization review on reimbursement.⁸

OCTOBER 2013: CMS ADOPTS THE TWO-MIDNIGHT RULE

The Two-Midnight rule maintains that inpatient LOC service is considered appropriate if the
physician expects the patient to require medically necessary, hospital-level care across two
midnights. This expectation needs to be supported in the patient’s medical record, a key factor for
reimbursement. Hospital stays anticipated to require less than two midnights are not appropriate for
inpatient LOC, according to the rule. Equally, the Two-Midnight rule further stipulates that inpatient services are appropriate if the services provided to the patient are listed on Medicare’s inpatient only list, and that all treatment decisions are based on the medical judgment of physicians and other qualified practitioners.

CMS-4201-F: THE KEY FACTORS

CMS finalized 4201-F in April 2023, binding MAOs to the Two-Midnight rule and its inpatient-only list for inpatient admission determinations. The rule includes exceptions if the admitting physician feels that inpatient LOC is necessary based on documented medical findings, even if the patient is not expected to cross two midnights. CMS-4201-F, however, does not include the two-midnight presumption, which says care over two midnightsis not presumed appropriate for inpatient LOC for MA as it is under Traditional Medicare. As such, the MAOs are free to “audit claims in accordance with their contracts with providers, meaning that the two-midnight rule may not be as helpful to hospitals under Medicare Advantage as it is under traditional Medicare.”⁹ So, the MAOs maintain the right to audit claims for inpatient LOCs that exceed two midnights, as is determined by the contract executed between the hospital and the MA plan.
While the MA plans must follow the Two-Midnight rule, the inpatient-only list, and the case-by-case
exceptions, the Final Rule clarified that the use of commercial tools (MCG or InterQual for examples) cannot be used to change payment or coverage criteria established under Traditional Medicare rules. Therefore, the MOAs can use these medical necessity tools to help when Medicare coverage is not fully established. CMS clarified that MAOs “may create publicly accessible internal coverage criteria that are based on current evidence in widely used treatment guidelines or clinical literature,” according to HHS.¹⁰

CROSSING THE LINE: MAO STATUS DETERMINATION DATA

The CMS-4201-F effective date began June 5, 2023, with an applicability date of January 1, 2024. The rules were given. The line was drawn. The criteria for establishing an inpatient admission under CMS-4201-F was very clear in many scenarios, although we expected the MAOs to toe the line out of confusion in other medical necessity determinations as they adapted to new rules. We did not, however, expect the level of non-compliance seen in our clients’ claims data in the first two months of 2024. The frequency with which some MAOs continue to deny services and reimbursement more than toes the line; it crosses the line.

In their own words: AHA concerns

We are deeply concerned that these practices will result in maintenance of the status quo
where MAOs apply their own coverage criteria that is more restrictive than Traditional
Medicare proliferating the very behavior that CMS sought to address in the final rule,
resulting in inappropriate denials of medically necessary care and disparities in coverage
between beneficiaries in MA and those in the Traditional Medicare program.⁷

Providers welcomed the CMS-4201-F changes; however, AppriseMD data from the first two months of 2024 suggest MAOs are not following the CMS final rule. This finding aligns with the American Hospital Association (AHA) alert issued on November 20, 2023, urging CMS to address MA plan noncompliance with CMS 4201-F. CMS made it abundantly clear that MA plans must adopt the Two-Midnight rule when determining LOC placement for inpatient services when it released the 2024 final rule. As a result, MA plans issued their own guidance in late 2023 outlining how they would apply the final rule in admission
determinations. However, AppriseMD data suggests that the MA plan medical directors are ignoring their own guidance.

AppriseMD physician advisors see non-compliance with CMS-4201-F occurring at both the initial level and during the appeal process when a hospital challenges an inpatient admission denial made
by an MA plan. Equally alarming data shows MA plans appear to be overutilizing commercial criteria to deny claims when the patient exceeds a twomidnight stay for inpatient LOC services. In this scenario, the MAO’s ability to audit inpatient admissions that exceed two midnights is an opportunity for them to challenge the authenticity of the medical necessity claim. While the MAOs must provide the clinical criteria used to determine inpatient LOC, AppriseMD data suggests that the MAOs are not complying with CMS-4201-F when it comes to patient claims that exceed two midnights of hospital-level care.\

OVERALL FINDING OF MAO NON-COMPLIANCE TO THE TWO-MIDNIGHT RULE

Hospital utilization review data that AppriseMD collected in the first two months of 2024 shows that MAOs are denying claims that would have been approved under Traditional Medicare. According to the data, the MAOs appear to be misapplying criteria and citing arbitrary findings to reach the conclusion that claims lack medical necessity. Data analysis of peer-to-peer (P2P) cases with MAOs covering the first two months of 2024 showed a 4201-F compliance rate of only 20%. The rest (80%) of the P2P cases that met 4201-F remain denied by the MAOs, highlighting just how severe the problem is. One hospital CEO even blames the MA plans as the reason for having to cut staff. “The Medicare Advantage abuse is outrageous,” Kurth Barwis, CEO of Bristol Health in Connecticut, stated in a Becker’s Healthcare
article.¹¹ Barwis shared that 63% of his Medicare patients are covered by MA plans, and MAOs have been
“denying claims more frequently, and delaying payments for the claims they do approve.”¹¹

CALLS TO ACTION

AHA Urges Swift Correction to MA Plan Policies⁷

On November 20, 2023, the AHA pressed CMS to act quickly to correct non-compliance, suggesting sanctions be applied to the MA plan policies where appropriate. The AHA requested CMS take the following actions:

1. Clarify that inpatient admission coverage criteria are fully established under Traditional Medicare.
2. Confirm that MA plan policies cannot supplement Traditional Medicare rules with added internal coverage criteria when validating medical necessity reviews for inpatient admissions. For example,
   some MA plans use language to circumvent Traditional Medical rules and are using language in their denial letters to replace level of care reviews. This language includes terminology such as “payment review” or “billing validation audit.”
3. Emphasize MAOs’ expectations and validate compliance with public accessibility and evidentiary standards for internal coverage criteria.

Hold Payers Accountable¹²

There are various ways to tackle noncompliance by the MAOs. PayerWatch suggested taking some of the actions below, and AppriseMD concurs with these recommendations:

1. Appeal all denials. If you cannot appeal all the denials, triage the denials by the MA plans that
   contradict CMS 4201-F and make these your main priority.
2. File a grievance with the MAO.
3. Contact the CMS regional office to file your concern by visiting https://www.cms.gov/aboutcms/where-we-are/regional-offices
4. Monitor the denials and track these cases with the MA plan’s medical director.
5. Encourage MA enrollees to call 1-800-MEDICARE.

SOURCES
1. Neuman, Tricia; Freed, Meredith; and Biniek, Jennie Fuglesten, “10 Reasons Why Medicare Advantage Enrollment is Growing and Why It Matters,” Kaiser Family Foundation. January 20, 2024.

2. Grimm, Christi A., Inspector General, U.S. Department of Health and Human Services Office of Inspector General, “Some Medicare Advantage Organization Denials of Prior Authorization Requests Raise Concerns about Beneficiary Access to Medically Necessary Care,” OIG. April 2022, OEI-09-18-00260.

3. AppriseMD, “The Use of AI in Claim Denials,” apprisemd.com. March 2024.

4. Ochieng, Nancy; Biniek, Jeannie Fulgesten; Freed, Meredith; Damico, Anthony; and Neuman, Tricia, “Medicare Advantage in 2023: Enrollment Update and Key Trends,” Kaiser Family Foundation. August 9, 2023.

5. “Who’s Picking up the Check? Payors increasingly are forcing providers to defend the level of care that they assign to patients,” Crowe. February 2023.

6. Emerson, Jakob, “Former CMS Administrator: ‘I would like to see the Medicare Advantage slowed or stopped,’” Becker’s Payer Issues. February 8, 2024.

7. Thompson, Ashley, Senior Vice President Public Policy Analysis and Development, “AHA Urges CMS to Swiftly Correct Medicare Advantage Plan Policies That Appear to Violate CY 2024 Rule,” American Hospital Association. November 20, 2023.

8. “Is your hospital losing money over the weekend? The impact of weekend utilization review on reimbursement,” AppriseMD. February 2024.

9. “Medicare Advantage Plans Must Follow the Two-Midnight Rule,” Hall Render. November 2023.

10. “Frequently Asked Questions related to Coverage Criteria and Utilization Management Requirements in CMS Final Rule (CMS-4201-F),” Department of Health & Human Services, Centers for Medicare & Medicate Services. February 6, 2024.

11. Wilson, Rylee, “Hospital CEO blames Medicare Advantage for layoffs,” Becker’s Payer Issues. March 15, 2024.

12. “Medicare Advantage and the 2 Midnight Rule in 2024,” PayerWatch. December 4, 2023.

REFERENCES VIEWED BUT NOT CITED
1. Lagasse, Jeff, “Medicare Advantage plans denying more inpatient claims,” Healthcare Finance. February 21, 2023.

2. Dunphy, Brian P. and Henry, Nicole E., “EnforceMintz- Government Scrutiny of Medicare Advantage Organizations Expected to Continue in 2024,” The National Law Review. February 9, 2024.

3. “Fact Sheet: Two-Midnight Rule,” CMS.gov. October 30, 2015.

4. Hirsch, Ronald, MD, FACP, ACPA-C, CHCQM, CHRI, “Breaking News: Medicare Advantage Must Follow Two-Midnight Rule,” RAC Monitor. April 6, 2023.