In the FY 2017 IPPS Proposed Rule, CMS announced that it would reverse the 0.2 percent IPPS  rate cut that was imposed in FY 2014 (and re-adopted in subsequent years) related to the Two Midnight Rule and increase the standardized amount for FY 2017 by 0.8 percent.  This reversal comes on the heels of a September 2015 decision from the U.S. District Court for the District of Columbia ordering CMS to provide the public with an opportunity to comment as to whether CMS’s assumption regarding the rate reduction was reasonable.  On behalf of over 200 hospitals, King & Spalding challenged CMS’s decision based on the comment letter it submitted identifying CMS’s incomplete and undisclosed assumptions that formed the basis of the rate reduction.  Rather than continue to defend its original analysis, CMS has decided to reverse the rate reduction altogether. 

King & Spalding submitted comments in response to the 0.2 percent rate cut when it was proposed in FY 2014, pointing out that Medicare’s own data showed that total Medicare payments would go up, not down, as a result of the Two Midnight Rule.  In response to those comments, CMS revealed for the first time that it had assumed that the Two Midnight Rule would only apply to inpatient cases involving surgeries, which account for only 25 percent of inpatient cases and which also means CMS ignored the impact of the Rule on nearly 75 percent of all inpatient cases.  When CMS finalized its rate reduction based on this previously undisclosed basis, King & Spalding challenged the agency’s action as a violation of the Administrative Procedure Act.

In September 2015, the United States District Court for the District of Columbia agreed with King & Spalding and ordered CMS to provide the public with an opportunity to comment as to whether CMS’s assumption regarding surgical cases was reasonable.  The public comment period ended in February 2016, and CMS was under court order to publish its response in the Federal Register on March 18, 2016.  The agency asked the court for more time to finalize its response, which was due at the end of April 2016.  Ultimately CMS decided against continuing with the litigation and instead reversed the FY 2014 0.2 percent Two Midnight rate cut by proposing a one-time 0.6 percent increase in FY 2017 to address the effects of the rate cut in FYs 2014-2016 and eliminating the 0.2 percent factor prospectively, resulting in a 0.8 percent increase in the IPPS rate for FY 2017. 

King & Spalding continues to evaluate CMS’s proposal and plans to submit comments on providers’ behalf as the agency works toward the final FY 2017 IPPS Rule.

Reporters, Mark Polston, Washington, DC, + 1 202 626 9253, mpolston@kslaw.com; Christopher Kenny, Washington, DC, + 1 202 626 9253, ckenny@kslaw.com.