Proposed rule will eliminate and offset reduction resulting from Two Midnight Policy


The Centers for Medicare and Medicaid Services (CMS) announced a proposal to remove and offset the 0.2 percent rate cut that was adopted as part of the “two midnight” rule in FY 2014. On April 27, 2016, CMS published a proposed rule (Proposed Rule) to update payment policies and rates for the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) in FY 2017.

Under the IPPS, CMS prospectively establishes payment rates based on diagnosis and severity of illness. Based on these payment classifications, CMS will generally pay a hospital a single payment for a particular case. CMS adjusts the payment rates annually.

The Proposed Rule discusses the proposed annual update to the payment rates. Under the IPPS, CMS proposes a 0.9 percent rate increase for hospitals that participate in the Hospital Inpatient Quality Reporting Program and that are meaningful users of electronic health records. To calculate the proposed rate increase, CMS took into account the following factors: the annual market basket update; a 1.5 percent reduction for documentation and coding as required by the American Taxpayer Relief Act of 2012; and a 0.8 percent increase that is designed to remove and offset the 0.2 percent reduction that was implemented as part of the two-midnight rule.

CMS adopted the two midnight rule in the IPPS Final Rule for FY 2014. Under the two midnight rule, Medicare Part A will generally cover an inpatient admission if the patient is reasonably expected to need hospital care for at least two midnights. When a patient is expected to need less than two midnights of hospital care, then services furnished to the patient should be billed as outpatient services. In 2015, CMS modified an exception to the two midnight rule. Under the current exception, if documentation in the medical records supports an admitting p r act i t ioner ’s conclusion that a patient requires inpatient services, then Medicare Part A will cover the inpatient services on a case-by-case basis, even though the patient’s length of stay is expected to be less than two midnights.

When the two midnight rule was initially adopted, CMS expected a significant increase in the number of inpatient stays. Due to the expected increase in utilization, CMS anticipated expenditures to increase by $220 million in FY 2014. To offset the expected increase in expenditures, CMS adopted a permanent reduction of 0.2 percent to the payment rates under the IPPS.

After the two midnight rule was enacted, several hospitals filed suit to challenge the rate cut. In Shands Jacksonville Medical Center Inc. v. Burwell, the U.S. District Court for the District of Columbia determined that CMS had the authority to implement the rate cut. However, the court found procedural errors with CMS’s adoption of the 0.2 percent rate cut and ordered CMS to correct the deficiencies and reconsider the adjustment. The court’s order was issued on September 21, 2015.

In accordance with the court’s order, CMS published a notice with comment period on December 1, 2015. The notice discussed the basis of the 0.2 percent reduction. Based on public comments and other considerations, CMS proposes to prospectively remove the 0.2 percent rate reduction and to provide a temporary rate increase of 0.6 percent in FY 2017. The temporary rate increase is designed to retrospectively address the reductions that were made in FY 2014, FY 2015, and FY 2016.

In the Proposed Rule and a corresponding fact sheet, CMS stated that “the assumptions underlying the 0.2 percent reduction to the rates put in place beginning in FY 2014 were reasonable at the time we made them in 2013.” Based on the evolution of the two midnight rule and facts revealed after implementation of the rule, however, CMS finds the removal of the rate reduction necessary and appropriate. In the Proposed Rule, CMS made the following statement regarding the temporary rate increase designed to offset the reduction from past years: “While we generally do not believe it is appropriate in a prospective system to retrospectively adjust rates even where we believe a prospective change in policy is warranted, we take this action in the specific context of this unique situation, in which we have been ordered by a Federal court to further explain the basis of an adjustment we have imposed for past years.”

In addition to the proposed adjustment to the payment rate under the IPPS, the Proposed Rule discusses CMS’s proposal to distribute $60 billion in uncompensated care payments to disproportionate share hospitals in FY 2017. This proposed amount of uncompensated care payments is $400 million less than the amount paid in FY 2016.

The Proposed Rule outlines proposed changes for several programs designed to facilitate a policy by which Medicare pays providers based on the quality of care rather than quantity of care rendered to patients. Specifically, the Proposed Rule discusses new reporting measures under the Hospital Value-Based Purchasing Program, the PPSExempt Cancer Hospital Quality Reporting Program, and the LTCH Quality Reporting Program. The Proposed Rule also proposes to update the public reporting policy under the Hospital Readmission Reduction Program; to modify reporting requirements under the Medicare and Medicaid Electronic Health Records Incentive Program; and to revise reporting requirements under the Inpatient Quality Reporting Program. Furthermore, the Proposed Rule proposes changes in the Hospital Acquired Conditions Reduction Program and discusses the notice that must be furnished to outpatients receiving observation services for more than twentyfour hours. Finally, the Proposed Rule discusses proposed changes designed to facilitate the establishment of two different types of PPSs for LTCHs.

CMS will accept public comments on the Proposed Rule until June 16, 2016. Thereafter, CMS is expected to publish the final rule by August 1, 2016. The final rule will apply to hospital discharges occurring on or after October 1, 2016.