After spending two nights in the hospital, Jane was happy to be home in her own bed, away from beeping machines and nurses checking her vitals every hour.
A few days later though, the relief of being home faded when she got a letter from her Medicare Advantage (MA) plan, detailing what they were covering for her hospital stay.
The pile of paperwork, full of technical insurance definitions, didn’t seem to line up with the care she received. Neither did the amount she was being asked to pay; it was more than she expected.
Jane experienced the confusion and frustration that many patients face when the definitions and policies health insurers use to determine coverage don’t match the level of care doctors and nurses provide.
This misalignment between coverage and care in MA plans has existed for years, but its legality is now being challenged in federal court.
The Two-Midnight rule
Patients like Jane who spend two or more nights in the hospital should receive higher levels of coverage under a federal policy known as the “Two-Midnight” rule.
This rule states that if a physician expects a patient to stay in the hospital over the span of two midnights, the patient should be admitted as inpatient, the most resource-intensive level of hospital care. If a patient’s stay is shorter, they’re typically classified as outpatient observation status, which is less staff and resource intensive and therefore, less costly than inpatient care.
Traditional Medicare adheres to this standard and the coverage provided to patients aligns with their admission status.
With MA plans, the coverage provided does not always align with the Two-Midnight standard. After care has been provided, MA plans use their own admission criteria, reimbursement methodologies, artificial intelligence algorithms, and manual reviews to determine a patient’s status and the level of care the insurer will pay for, regardless of the actual care provided.
The effects
In 2023, the Centers for Medicare and Medicaid Services clarified that MA plans must follow the Two-Midnight rule. However, a recent study found MA plans continued categorizing hospital visits as lower-severity outpatient observation stays at a rate three times higher than patients on traditional Medicare.
In a case just filed in April 2026 that the Center will be monitoring, a Pennsylvania-based health system sued a major insurer claiming the insurer’s Medicare Advantage inpatient admissions policy violates the “Two-Midnight” law.
The burdens created when this federal policy is not followed fall on patients, physicians and hospitals in different ways:
- Delayed care or denied coverage – Patients may face delays in getting needed care due to complex documentation rules like prior authorization, concurrent reviews or payor downgrades. Patients may even have their care denied altogether.
- Higher out-of-pocket patient costs. While MA plan cost-sharing requirements vary by plan, outpatient observation stays often result in higher bills for patients.
- Financial strain for hospitals. Hospitals are reimbursed at lower rates for observation stays, even when patients require full inpatient care services.
- Administrative burden. Appealing denials and documenting stays to satisfy insurer requirements takes up a significant amount of physician and hospital staff’s time. That’s time that would be better spent focusing on patient care.
Dozens of health systems have cited these struggles as reasons for cutting ties with MA plans in recent years. Those separations are extremely consequential considering MA plans now cover more than half of all Medicare-eligible American seniors.
The solution
This problem calls for well-defined public policy that ensures existing law such as the Two-Midnight rule is adhered to. A clear solution can strengthen protections for patients and bring consistency to MA coverage that supports greater access to care.
Policymakers can solidify policies and their application in partnership with CMS by:
- Clarifying that all MA plans are required to comply with the two-midnight rule presumption, eliminating private coverage criteria.
- Simplifying the appeals process for patients and hospitals when inpatient care is denied by an MA plan.
- Holding MA plans accountable through greater federal oversight and transparency around denials and authorizations.
