Judge Orders Reconsideration of “Two Midnight Rule” for Medicare Payment

October 31, 2015 | Health Services

Recently, a federal judge for the District of Columbia sided with several hospitals and health care organizations in ruling that the Centers for Medicare and Medicaid Services (“CMS”) must reconsider a regulation that reduced the provider payment rate for Medicare Part A services. While the decision did not overturn the regulation, it did push the so-called “two midnight rule” into greater uncertainty.

The two midnight rule was issued by CMS in October 2013. Under the rule, Medicare beneficiaries (“beneficiaries”) who require hospitalization for less than two consecutive nights only qualify for outpatient services, while hospitalization that requires two or more nights is presumed medically necessary and qualifies as inpatient care. CMS predicted that under this rule services are more likely to be classified as inpatient rather than outpatient and consequently, Medicare cost would increase by approximately $220 million. To offset this cost, the rule included a 0.2% reduction in the payment rate for inpatient services under Medicare Part A.

Since it was issued, the two midnight rule has faced continuous opposition. Most recently, the payment reduction for inpatient services was challenged in Shands Jacksonville Medical Center v. Burwell. The plaintiffs in the case argued that CMS did not follow adequate rule-making procedures and that it over-estimated the expected increase in inpatient services. The plaintiffs believed that the rule would in fact increase the number of outpatient rather than inpatient services, as CMS predicted, thus making the reduction in payment unjustified.

The district court judge agreed with the plaintiffs that the rule was flawed. CMS failed to provide adequate support for the payment reduction or explain the methodology it used when calculating the 0.2% reduction rate. CMS also failed to address important issues raised in public comments that it received regarding the predicted increase in inpatient services and the correlated costs. The judge concluded that collectively the failure to provide adequate support and respond to public comments resulted in arbitrary decision-making on the part of CMS. However, the judge decided not to overturn the rule and instead he sent it back to CMS for further review. The judge did not believe that the procedural flaws were substantial enough to preclude CMS from an opportunity to take remedial measures and reconsider the rule.

Although the two midnight rule remains in effect, Shands represents a significant change to its implementation and enforcement. CMS must now re-open the rule to public comment and provide adequate justification for the reduction in Medicare Part A payment rate. The judge ordered the parties in Shands to propose a timetable for re-issuing of the rule. If CMS fails to abide by the proposed timetable, or fails to remedy the procedural flaws, the judge may reconsider his decision and revoke the two midnight rule in its entirety.

It is important to note that the payment reduction is only one of many provisions of the rule that has faced strong opposition. The two midnight requirement for classification of inpatient services has also been challenged for impeding medical judgement of Medicare providers. Opponents of the rule have argued that the decision to admit a patient to a hospital is a complex medical judgement that requires consideration of several factors and should not be limited by the expected duration of the hospitalization. The classification of services as inpatient or outpatient also has tremendous impact on providers’ payment plans. For inpatient services, covered under Medicare Part A, providers receive a single payment for all services rendered during a hospital stay. On the other hand, for outpatient services covered under Medicare Part B, payment is based on a fee-for-service rate. Short-term hospital admissions have generally been associated with higher reimbursement costs for CMS than outpatient services. To minimize costs, CMS reviews Medicare claims and denies reimbursement when it determines that hospital admission was not medically reasonable and necessary. Under the two midnight rule, hospitalization that requires two or more nights is presumed medically necessary and thus avoids the need for patient status review.

On July 1, 2015, CMS responded to some of the opposition by proposing to modify the two midnight rule to allow for case-by-case exceptions. The modified rule would allow providers to classify short-term hospitalization as inpatient services if underlying factors were sufficient to support the decision, thus allowing providers to use their medical judgement when making exceptions. However, the judgements would still be subject to review by CMS. The comments period for the modified rule closed on August 31, 2015, and CMS is expected to release a response to the comments in November 2015.

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