Judge's ruling raises possibility that a two-midnight rule pay cut could be reversed

Portion of rule will be reopened for public comment

See the Advisory Board's take on this story.

A federal judge on Monday ruled that CMS must provide better justification for the Medicare hospital payment reductions included in the two-midnight rule.

Background on two-midnight rule

The final rule for the fiscal year 2014 Inpatient Prospective Payment System instituted a time-based presumption period for medically necessary inpatient care.

Under the two-midnight rule, an inpatient admission is considered appropriate when the physician expects a case will require a two-midnight stay. Cases that fall short of this rule and do not meet medical necessity requirements for admission may be converted to and paid as an outpatient visit.

The CFO's guide to the two-midnight rule

The rule has never been fully enforced, and CMS last month announced that it would extend a partial enforcement delay on the "two-midnight" rule through the end of the year.

Details of payment reduction controversy, court case

The fiscal year 2014 final rule estimated that the two-midnight policy would raise costs for CMS by $220 million, and Medicare proposed offsetting those costs by decreasing Medicare reimbursement rates for inpatient care by 0.2%.

Hospitals filed suit against the rate cut. In the case, Shands Jacksonville Medical Center v. Burwell, hospitals argued that the payment reduction was included in the rule without sufficient notice or a meaningful comment period. The hospitals also refuted HHS's predictions about the two-midnight rule's costs and say the rate cut is not needed.

In addition, the hospitals challenged whether HHS has the statutory authority to enact the reductions.

Ruling details, reaction

U.S. District Court Judge Randolph Moss ruled that HHS must provide further details to justify the cuts and reopen that part of the rule to public comment.

How is the two-midnight rule affecting your bottom line?

Moss wrote in the ruling, "This is not a case where the agency simply failed to provide sufficient detail in its explanation for its action or failed to address a discrete comment," adding, "Rather, the [HHS] Secretary omitted 'critical material on which it relie[d],' and thus 'deprive[d] commenters of a right … to participate in rulemaking."

The decision does not overturn the rule. Instead, Moss gave CMS and hospital groups until Oct. 1 to propose a timeline for reconsidering the payment reduction. However, Moss noted that the rule could be overturned if HHS does not take quick action to address the issue and seriously consider any public comments it receives.

Meanwhile, Moss rejected the hospitals' argument that implementing the payment reduction was beyond HHS' statutory authority.

HOPPS proposal: What's next for the two-midnight rule?

While the decision does not immediately affect hospitals' finances, it allows them additional time to challenge the payment cut.

American Hospital Association Assistant General Counsel Lawrence Hughes calls the ruling "a significant victory for hospitals" (Schencker , Modern Healthcare, 9/22; Young, CQ HealthBeat News, 9/22 [subscription required]).

The Advisory Board's take

Eric Fontana, Data and Analytics Group

The 0.2% cut (estimated to be equal to about $220M) was implemented in the FY 2014 Final Rule to offset what CMS's actuarial analysis anticipated would be a net growth of inpatient cases as a result of the implementation of the two midnight rule—specifically an expected growth in cases with a 2-4 day length of stay.

In this year's proposed CY 2016 hospital outpatient rule, CMS went to some effort to justify the cut, citing updated actuarial analysis showing that the implementation of the rule had been followed by an 11% reduction in long stay observation cases; a 9.0% reduction in very short stay cases (0-1 days); and a 3.0% uptick in 2-4 day cases.

Naturally, as with all things two-midnight, the debate is unlikely to be over anytime soon—that goes for the 0.2% cut and the future of the admissions standard. The final hospital outpatient rule is expected no later than November 1. We'll be keeping an eye out for any more details related to a potential reversal of the payment rate.

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