Silly little rules in healthcare

The industry is chock full of ‘em, here's 3

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New Discussion Post

Today I have a new post and discussion topic. To reiterate the rules:

I’ll pose a question and give my thoughts. In a future newsletter, I’ll include ~3 of my favorite replies. I’ll possibly even make a meme related to your answer.

Good answers are ones with a novel viewpoint, data to back up their claim, personal stories, and avoid clearly shilling something.

Please reply with your thoughts and let me know if you want to have your name included or be anonymous. You have to actually be on the newsletter to submit a reply to it, obviously.

Try to keep answers to two paragraphs or less please. This obviously doesn’t apply to me because it’s my newsletter and these are house rules.

Healthcare Rules - The Silly And Unintended Consequences

One thing I’ve learned about healthcare is that there are lots of rules created with good intentions with very unpredictable second-order effects.

On top of that, because healthcare is such an old industry, there are lots of rules that made sense with the technology at the time but seem strange today.

Since a lot of the people on this newsletter are deep in the bowels of healthcare, you probably encounter rules all the time that you think are silly or you see strange unintended consequences of those rules. And I want to learn more about them so I can arbitrage your knowledge to grow my content empire! Sorry I mean so I can tell them as fun facts at cocktail parties.

So this week’s discussion questions: what’s a silly rule in healthcare or a rule with unintended consequences?

I’ll do a few that I’ve found interesting over the years.

  • The Sunshine Act
  • The Birthday Rule
  • 2 Midnights Rule

The Sunshine Act

The Sunshine Act basically says that if a pharma or medical device manufacturer pays a doctor money, then it has to be publicly viewable in this Open Payments database. I mean really no payment is too small, people are out here getting the saddest Auntie Anne’s pretzel in JFK on the way to a pharma sponsored conference and it’s getting logged in that bih.

I’m about to use this database to figure out the median price a doc spends on a meal.

The principle behind it is pretty straightforward - by shining a light on how doctors were being paid by pharma and medical device manufacturers, patients would then know how their doctor is being influenced and doctors would think twice about taking money from manufacturers

However…it doesn’t seem like much has really changed? The total amount in payment from manufacturers has actually increased over time (sans COVID). 

This analysis in 2020 found that many of the small payments decreased. At the same time, the number of docs taking more than $50K a year stayed the same or actually increased slightly. So it’s possible that docs who weren’t getting many payments anyway decided to stop just so they wouldn’t show up in this database. It’s simply not worth the hassle and potential misinterpretation.

For the docs who were already getting paid, it totally was worth it to them. In fact, someone once told me that thanks to the Sunshine Act doctors could see if they were being UNDERPAID by manufacturers relative to their peers. I can’t really confirm this is what happened at a large scale, but if I was getting paid by a med device or pharma manufacturer you can bet I would do that, too.

Some docs are getting beaucoup bucks; some of the top docs are getting $20M+ a year from royalty/licensing fees.

Because this dataset is now easy to access, we also saw some research papers come out analyzing things like conflict of interest disclosure. This paper found unsurprisingly that many doctors are not 100% factual in disclosing all their conflicts of interest. But to be honest, I’ve filled one of those conflict of interest forms out and it took me literally 30 minutes and I had to recall everything from memory so I’m not shocked at these results.

So the question then becomes whether the Sunshine Act actually managed to do what it set out to do. On one hand, I think transparency is great and you can look up a doctor to see if they might be influenced in some way. And having the data available means you can use it in different analyses to understand things like the association between prescribing certain drugs and getting payments from a manufacturer. 

But it’s also possible that it might have been ineffective or even slightly backfired? By making the data public, conflicts of interest are more easily normalized + doctors that receive manufacturer dollars are actually getting more dollars. In fact, I know anecdotally that companies use this database to find doctors that are willing to take industry payments.

A well-intentioned rule, but it’s led to quite a few unexpected second order effects.

The Birthday Rule

This is a particularly weird one. Let’s say you’re a couple with a child, who we’ll call Young Krishnan. Each parent has their own health insurance plan through their job, which is one step before sleeping in separate beds. Both of their plans list their child as a dependent. So when Young Krishnan goes to the pediatrician, which health insurance covers it?

You might think that the parents would get to choose the plan, but that’s not quite how it works. Instead the primary care coverage is decided by…wait for it… which parent’s birthday is earlier in the calendar year. No I did not make this up, I couldn’t possibly think to be this random.

The general idea is that insurance companies didn’t want people to game the system by having a child on both plans. Because the insurance companies think people have oodles of free time in the world and use it menacingly to consume slightly more healthcare services. 

So insurance companies needed some easy rule that doctor’s offices and patients could understand and also theoretically free from bias. Yes, choosing by first letter of the name might bias towards an ethnic group but choosing by birthday doesn’t. And that’s because all demographics and cultures in the US are united around one thing…smashing during that weird week between Christmas and New Year.

Source - something about the winter air hitting the nads

The birthday rule exists specifically if you have a dependent signed up on multiple plans to determine which insurance is considered the primary insurance. One area this gets particularly tricky with is newborns. When a kid is born, they weirdly don’t know yet how to fill out insurance paperwork. So a hospital usually puts the birth and visit under the Mom’s insurance while they’re figuring it out, which is covered as one case rate. However, this assumes that the pregnancy is normal and healthy. 

This can create some weird situations if a child ends up in an emergency situation that’s outside the normal pregnancy case rate and both parents have different insurance plans.

"Four days in the neonatal intensive care unit cost them $80,000. Before getting admitted, Ying was told the first 30 days of a baby's life are covered under the mom's policy so she increased her insurance benefits in case of an emergency…Then two months later, the couple started getting medical bills amounting to more than $10,000…Ying found out her insurance company denied coverage and was going after her husband's plan because of the little-known "birthday rule."...
"So if my birthday is in January and my wife's in February, then the children get assigned to my policy in January because my birthday comes up first in the year. There's this hidden trap that can end up costing them thousands if not tens of thousands of dollars," Melnick said.
In Tinio and Ying's case, it was a difference of about $7,000. Melnick said new parents with dual coverage need to do their homework.” - Source, ABC7

Mm yes I forgot to do my insurance loophole problem set. It was right after my “should there be a facility fee?” final. 

Another complication is if the parents have the same birthday. Then it’s whichever parent has had their insurance for longer. For some reason, the Covered California site thought this was important enough to use a stock photo to highlight this??

Source, imagine you posed in this stock photo only for it to get licensed for “birthday rule outlier case” 

The Birthday Rule is a good example of the administrative burden that happens when you have so many different types of coverage permutations. You have to think of every possible scenario and who will pay. But hopefully for readers that have two different insurance plans, you know to watch out for this one.

There’s really only one birthday rule that should exist. If I die, bury me inside the Gucci Store.

2 Midnight Rule

One of the very first things we go over in the healthcare 101 course (*cough* starting in July *cough*) is the difference between an inpatient and outpatient setting. At a very high level:

Inpatient: you’re typically staying overnight and taking a bed in the hospital, it’s usually for more complex care/surgeries, and it’s usually much more expensive

Outpatient: typically you’re going home same-day, usually for less complex stuff, and usually cheaper

Here’s where it gets tricky. Sometimes hospitals will put you on “observation status”. They want to see if your issue is severe enough to actually admit you as an inpatient. So they’ll put you in a bed somewhere in the hospital and watch you, maybe. If you seem to get better, they’ll take care of you and discharge you and you’ll be an outpatient. If you get worse, they’ll admit you and you’ll become an inpatient.

Well-intentioned and makes sense. The next question becomes…how long do you keep them on observation status before it’s considered an inpatient visit?

This mainly matters in Medicare, which is divided into Part A and Part B when it comes to getting care. If it’s an inpatient stay, it’ll be paid from Part A which is a large lump sum payment and will also cover stuff like going to a skilled nursing facility afterwards. If it’s an outpatient stay, it’s usually smaller amounts per service rendered and typically won’t cover a lot of the post-hospital stuff. 

So getting the inpatient vs. outpatient status right is important. However, it’s sort of ambiguous when a hospital should switch a person over from a billing perspective. There are two particularly thorny areas:

  • Short inpatient stays: In this case, the hospital probably should have discharged them as an outpatient but could make more money by classifying them as an inpatient.
  • Long outpatient stays: In this case, a hospital can actually make more money in aggregate through a bunch of small piecemeal payments instead of the one lump sum they’d get if the patient was an inpatient. Plus in certain cases, they wouldn’t get penalized if a patient got re-admitted, which can happen for inpatient stays.

Hospitals were billing this very inconsistently, to the point that CMS believes it gave $3B in inappropriate payments in 2014 due to this. Every anecdote like this puts me one step closer to not paying my taxes.

So in 2013, CMS came out with the 2 Midnight Rule, which also feels like a name for a coke bender. This essentially says that if a physician believes that a patient will require care that spans at least 2 midnights, it should be classified as an inpatient stay.

They also started auditing this more regularly, and if they found a stay classified as “inpatient” was less than 2 midnights then Medicare wouldn’t pay them. After this change, short inpatient stays went down considerably and long outpatient stays went down a little bit.


Some changes have been made over the years including some case-by-case exceptions, flexibility in short inpatient stays, and how CMS enforces and audits hospitals around compliance with this. 

This rule could theoretically create some weird scenarios, especially as it relates to how a patient ends up getting billed. The below example doesn’t usually happen, but it’s an extreme scenario to illustrate a point.

Let’s say you’re a 66 year old on Medicare and go to the hospital with chest pain at 10 PM on Wednesday. Since it’s late, the doctor feels pretty confident you’ll be there for at least a day and a half. You get discharged on Friday at 8 AM, which is 34 hours and two midnights later.

  • You’re admitted as an inpatient under Medicare Part A. 
  • You pay the Part A deductible ($1,600 in 2023), covering all hospital services and medications during your stay.
  • The hospital gets a total of $4-5K approximately 

Now instead let’s say you were admitted at 8 AM on Wednesday. You’re placed on observation status, but seem to be fine. Let’s say you asked to be discharged at 6 PM on Thursday because you have a big evening planned of scrolling the original Facebook feed. 

Still 34 hours of care. But this time: 

  • You get put under observation status and then released, so you’re covered by Medicare Part B.
  • You’re on the hook for 20% of the cost for each service that happened (eg. ER visit, tests, treatments). The hospital will likely end up billing $2-3K for something like this. You would pay $400-$550 (20% of that).
  • Medications you take on your own might not be covered, costing you an additional $200.
  • You wouldn’t get care covered for anything after the hospital (e.g. nursing facility, rehab, etc.)

It can seem a little weird that despite the same “time” spent in the hospital, you’re billed differently depending on what time you got to the hospital. Depending on what services you ended up getting the $ out of pocket can be a lot more for the patient.

Practically, the 2 Midnight Rule ends up less literally interpreted. It’s usually physicians estimating severity of the patient using a two midnight stay as the quick heuristic on whether they’re severe enough to be an inpatient or not. This stops patients getting chucked into “observation status” indefinitely.

[If you were curious how good physicians were at guessing whether a patient should be admitted for 2 midnights vs. the reality of what actually happened, this paper looked at that question and found the docs predicted right ~2/3rd of the time.]

But the status can change for a patient during a visit even after an admitting doctor makes a decision. Other teams at the hospital will usually review these decisions/charts for medical appropriateness and might change their status when it comes to the bill. Those review teams might also make “suggestions” to the floor teams on when they should push them to observation/inpatient. There are tools like InterQual and Milliman Care Guidelines which help floor teams make decisions about whether a patient should be inpatient, observation, or outpatient. 

If the status changes from “inpatient” to “observation” or vice versa during the course of the patients stay, the hospital usually gets reimbursed less than if the hospital just picked the first designation and stuck to it.

I don’t think the 2 midnight rule itself is that crazy to be honest - for a program that works across all hospitals in the country, you need an easy rule that will work for 90% of cases and providers understand. But what I do think is kind of crazy is that patients really have no idea how any of this works and it has large cost ramifications for them. Plus if they’re sick enough to need observation, it’s probably not exactly top of mind. 

Here are some Reddit threads of people trying to figure this out (it’s mostly people on behalf of their parents). They basically argue that their mom stayed overnight so Medicare Part A should cover the whole stay. Even floor staff in surgery and emergency departments seem to just guess and wait for the review teams at hospitals to adjust. 

“Observation status” , “bedded outpatient”, “inpatient-lite, 0 calories”

The reason the 2 Midnight Rule has been in the news a lot recently is that Medicare Advantage plans now have to also follow this 2 Midnight Rule. Until now, Medicare Advantage plans (the private insurance version of Medicare) have not had to. They could prevent a patient from getting admitted as an inpatient in these scenarios with things like prior authorizations or clawing back payments if they deemed the stay was medically unnecessary.

That has changed in 2024, which potentially has some big ramifications to the economics of these plans and how much money hospitals will be making from them.


I could have written a whole thing just dedicated to requiring wet ink signatures for random things, but decided these would be more fun.

Tell me the fun and weird healthcare rules you’ve run into. I’ll keep it anonymous if you want me to.

Thinkboi out,

Nikhil aka. “Rule of Three…of Rules”

Twitter: ​@nikillinit​

IG: ​@outofpockethealth​

Other posts: ​​



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