In the Fiscal Year (FY) 2014 Inpatient Prospective Payment System (IPPS) final rule, the Centers for Medicare & Medicaid Services (CMS) revised its Medicare policy for determining whether hospital encounters will be considered appropriately inpatient or outpatient. The status distinction has important consequences for both the provider and the beneficiary, including differences in co-insurance and deductibles, and what items and services are billable and the level of reimbursement paid to providers.

Under the so-called “two-midnight” rule, an inpatient admission is generally appropriate if the physician (or other qualified practitioner) admits the patient based upon the reasonable expectation that the patient will need hospital care that crosses at least two midnights, regardless of the intensity of the services provided. In promulgating the two-midnight rule, CMS estimated that Medicare Part A (Part A) expenditures would increase by approximately $220 million in FY 2014 due to CMS’ predicted increase of 40,000 inpatient admissions. In order to offset this projected increase in Part A expenditures, CMS imposed an across-the-board reduction of 0.2% to the standardized amounts (and, where applicable, the hospital-specific payment rates) for discharges occurring on or after October 1, 2013. Hospitals brought suit in five cases in the District Court for the District of Columbia, challenging the payment cut as without statutory authority, procedurally defective, and arbitrary and capricious. The cases were consolidated under the name of Shands Jacksonville Med. Ctr. v. Burwell, No. CV 14-1477 (Shands).

In a September 21, 2015 order (__ F. Supp. 3d __, 2015 WL 5579653 (D.D.C. Sept. 21, 2015)), the court in Shands held that the agency had statutory authority to make an across-the-board payment adjustment. However, it also held that the payment reduction was procedurally invalid because CMS did not explain adequately in the proposed rule its methodology for arriving at its conclusion that the revised two-midnight rule would result in a net increase of 40,000 inpatient cases and thus did not give the public a meaningful opportunity to comment. Over the plaintiffs’ objections, the court remanded the rule to CMS instead of vacating it. Because the court held that the rule should be remanded to give CMS an opportunity to cure the procedural defects, it did not then address the plaintiffs’ argument that the rule was arbitrary and capricious.

The court issued a schedule directing CMS to issue an initial notice by December 1, 2015, explaining its methodology for its prediction of an increase in inpatient admissions and soliciting comments, and to issue a final notice by March 18, 2016. On December 1, 2015, per the court’s order, CMS published a notice with comment period in the Federal Register that discussed CMS’ explanation for its belief that the two-midnight rule would result in an increase of approximately 40,000 inpatient admissions for FY 2014 and the basis for the 0.2% reduction, along with its underlying assumptions. Subsequently, while the final notice was already at the Office of Management and Budget for its review, CMS requested and was granted an extension from the court to prepare the final notice.

In the FY 2017 IPPS proposed rule, CMS stated that whereas it still believes that its assumptions underlying the 0.2% reduction to the payment rates were reasonable at the time it made them in 2013, it also believes that it is appropriate to rescind the 0.2% payment reduction both prospectively and retroactively. Therefore, CMS has proposed to increase the payment rates prospectively, beginning in FY 2017, by 0.2%, as well as to make a one-time positive adjustment of 0.6% in order to reverse the effects of the 0.2% payment cut for FYs 2014, 2015, and 2017. The proposed rule states that its discussion and proposals concerning the reversals of the payment cuts constitute the final notice required by the court in Shands.

Originally, this article was an alert sent to the American Health Lawyers Association’s (AHLA) Regulation, Accreditation and Payment; Academic Medical Centers and Teaching Hospitals; and Hospitals and Health Systems Practice Group Members. For more information, visit AHLA’s website.