CMS Boosts Payments to Hospitals Impacted by Two-Midnight Rule

November 21, 2017 - Sixty-seven hospitals affected by the Two-Midnight Rule will receive a boost in Medicare reimbursement on Part A discharges for the next year, a recent CMS notice explained.

The notice ordered Medicare Administrative Contractors (MACs) to apply an unspecified interest adjustment factor when calculating Medicare reimbursements for discharges occurring between June 1, 2017, and May 31, 2018. The federal agency did not include how much more the hospitals will receive for Part A discharges during the period.

The additional reimbursement is part of the partial settlement agreement between CMS and Oakwood Health Center, Dignity Health, and Shands Jacksonville Medical Center.

The healthcare organizations each challenged the Two-Midnight Rule’s 0.2 percent downward payment adjustment to the Medicare Inpatient Prospective Payment System in 2014.

The Two-Midnight Rule instructed MACs to only reimburse short-term hospital stays under the Medicare inpatient rate if the stay spanned at least two midnights. If the stay was not expected to last that long, hospitals would be reimbursed using the lower outpatient observation rate.

CMS enforced the negative payment adjustment to offset the projected increase in the number of outpatient cases being transferred to inpatient cases under the rule.

Oakwood Health Center, Dignity Health, and Shands Jacksonville Medical Center argued against the Medicare reimbursement cut in separate lawsuits. The lawsuits inspired hundreds of other healthcare organizations to oppose the payment reduction.

A group of 55 hospitals contended in 2016 that the payment reduction was neither lawful nor developed on a rational basis. Their lawsuit against CMS stated that the Medicare reimbursement reduction was “based on CMS’s assumption that inpatient stays will increase as a result of the 2 Midnights Policy, which is in turn based on an assumption as to how hospitals and CMS’s contractors will react to the 2 Midnights policy; however, the policy, as set forth in the preamble and the text of the Final Rule, is confusing, ambiguous and internally inconsistent.”

The American Hospital Association (AHA) also commented in 2016 that actual inpatient claims data never demonstrated the predicted increase in inpatient admissions on which the Medicare reimbursement was based. The data actually revealed a decrease in inpatient stays.

After several lawsuits against CMS regarding the Two-Midnight Rule, the federal agency permanently removed the 0.2 percent downward payment adjustment in 2016. The federal agency also finalized a 0.8 percent increase in inpatient rates to address the effects the rule had on providers since 2014.

In addition to the net 0.6 percent Medicare reimbursement rate boost, 67 hospitals will now also receive additional payments to address the financial impact the rule had on their organizations.

However, additional reimbursement does not truly fix the financial strain put on hospitals under the rule, explained Michael Abrams, MA, Managing Partner at Numerof & Associates.

“The lawsuits that followed were a predictable response, and the capitulation by CMS regarding the rate reduction last year is an unfortunate acknowledgment that this approach is more about power politics than anything else,” he wrote in an emailed statement. “The latest ‘rule’ amounts to a deal made on the courthouse steps to make the lawsuits go away.”

“We agree that patients should be seen by the right providers at the most cost-effective point of care,” he continued. “That said, continued ‘tweaking’ of the site-based billing and coding structure is just a ‘Band-Aid’ approach that adds to the complexity of the current reimbursement system. In this case, it led to costly lawsuits and now what appears to be a payoff for the plaintiffs.”

CMS and providers will not see meaningful changes using these type of corrective measures and rules dictating where providers should deliver care, he added. Healthcare payment reform is needed to truly encourage providers to steer patients to the most appropriate setting.

“As long as the dominant payment model offers site-based differentials, institutions will find ways to route patients to those sites with the most generous reimbursement and/or the least onerous oversight,” he elaborated. “A population health approach that held providers accountable for both outcomes that matter and total cost of care, would focus hospitals on how to get to the goal, rather than how to maximize revenue within the rules.”

“Complaints by the healthcare delivery lobby about the pace of change notwithstanding, too many would prefer a status quo riddled with loopholes to one in which they are accountable for outcomes that matter and total cost of care,” he stated. “That needs to change.”