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From Health Law Daily, September 22, 2015

Court orders HHS to allow further comments on two-midnight rule rate adjustment

By Bryant Storm, J.D.

A district court ordered HHS to repromulgate its Proposed rule establishing the Medicare two-midnight rule and a corresponding reduction in Medicare inpatient-service compensation because, by not disclosing all of its methodology, HHS improperly deprived hospitals of the opportunity to comment on HHS’ rationale for the rate reduction. The court held that, although, under Medicare law, HHS had authority to make rate reduction adjustments to cover the costs of the two-midnight rule, the agency violated the Administrative Procedure Act (APA) (5 U.S.C. § 706(2)(A)) by not providing the actuarial basis for its conclusion that the two-midnight rule would increase Medicare costs. The court held that, while HHS did not comply with APA requirements, it would be too disruptive to vacate the Medicare rate reduction, so it allowed the reduction to stand and remanded the issue back to HHS to reissue the Proposed rule (78 FR 27486) and allow for meaningful comments and agency reconsideration on the basis for the rate change (Shands Jacksonville Medical Center v. Burwell, September 21, 2015, Moss, R.).

Two-midnight rule. In response to inconsistencies that resulted from HHS’ open-ended approach to the definition of an inpatient for Medicare billing, in May 2013, HHS adopted the two-midnight rule. The new standard for inpatient admissions authorized an admission “if the patient’s stay was expected to span at least two midnights.” As a result, there would be a presumption that those patients who met the two-midnight benchmark were reasonably and necessarily admitted as inpatients. Due to inflated costs that HHS projected would result from a net shift in patients who would move from outpatient to inpatient status, HHS proposed reductions in inpatient service compensation in the Final rule (78 FR 50496) that established the two-midnight test.

Added costs. Specifically, HHS estimated that the new rule would cause a “net shift of 40,000 encounters,” representing an increase of 1.2 percent in shorter inpatient hospital stays. HHS estimated that the additional cost of the increased stays to the Medicare program would be $220 million over the course of 2014. The HHS Secretary proposed to use her “exceptions and adjustments” authority under 42 U.S.C. § 1395ww(d)(5)(I)(i) to effectuate an across-the-board reduction to payments for inpatient services. Specifically, HHS proposed “adopting 0.2 percent reductions to the operating IPPS standardized amount, the hospital-specific rates, and the Puerto Rico-specific standardized amount.” Despite comments in opposition to that proposal, HHS finalized those proposals in the Final rule.

Lawsuit. Following the publication of the Final rule, several hospitals brought lawsuits, which were consolidated, alleging that the Final rule’s attempt to reduce compensation for inpatient services was invalid because (1) the across-the-board 0.2 percent rate reduction exceeded HHS’ general “exceptions and adjustments” authority; (2) it was promulgated without adequate notice or a meaningful opportunity for hospitals to comment, in violation of the APA,; and (3) it was arbitrary and capricious. The hospitals moved for summary judgment on those grounds.

Exceptions and adjustments. The court interpreted the meaning of the “exceptions and adjustments” provision of the Medicare statute, which states: “the Secretary shall provide by regulation for such other exceptions and adjustments to such payment amounts under this subsection as the Secretary deems appropriate.” According to HHS, the provision unambiguously authorized the 0.2 percent rate reduction. The hospitals asserted that the provision did not grant HHS the authority to adjust the standardized amount—a reality that they alleged became apparent when the provision was read together with other provisions that restrict the authority of the HHS Secretary to adjust reimbursement rates. The court disagreed with the hospitals and held that “the plain language” of the statute authorized adjustments to the standardized amount. It stated that Congress could not have been said to have unambiguously foreclosed the Secretary’s authority to make such a rate adjustment.

Reasonable. With regard to whether the HHS interpretation of the exceptions and adjustments authority was reasonable, the court again agreed with HHS. It explained that the Secretary’s decision in the past to decline to rely on her general adjustment and exception authority and instead, wait for specific congressional authorization to act did not undercut her current claim to deference. The court held that the Secretary’s decision “to give the expansive language of Section 1395ww(d)(5)(I)(i) its plain meaning” could not be described as unreasonable. The court also rejected an argument that the reduction violated the Medicare Act by negating payment for the additional inpatients that the hospitals are expected to treat. The court agreed with HHS that nothing about the Secretary’s interpretation of the statute could be said to depart “from the per-discharge structure of the payment scheme.” As a result, the court explained, hospitals would still be paid for each Medicare inpatient treated and discharged.

APA. The hospitals also asserted that even if the authority was appropriately exercised, HHS committed procedural errors by not reporting important information about the Secretary’s methodology for the net-shift calculation in the proposed rulemaking. The hospitals argued that because they were not properly informed of HHS’ calculation methods, they were not afforded a meaningful opportunity to comment on the Proposed rule. The court agreed with the hospitals that “the Secretary did not provide sufficient notice of the actuarial assumptions and methodology she employed and that disclosure of this information was essential to communicate the basis for the proposed adjustments and to permit meaningful public comment.” The court held that the APA requires an agency to disclose “the models and methodology” used by the agency to support the agency action at issue. Specifically, the court held that HHS “failed to reveal key assumptions applied by the HHS actuaries in concluding that the change from the 24-hour rule to the 2-midnight rule would actually increase the number of inpatient stays, and that it would do so by 40,000 stays in fiscal year 2014.”

Harm. The court held that by not disclosing consequential steps in the calculation methodology for the increased number of inpatient stays until the Final rule was published, the hospitals were not provided a fair opportunity to comment and critique the HHS methodology. The undisclosed information was central to the analysis that led to the Secretary’s conclusion” and the omission of that information left the hospitals without a basis to understand or to critique the HHS conclusion. The court also noted that while the case did not represent a total failure by the agency to provide notice and an opportunity for comment, it did “involve a significant defect.” Accordingly, the court found that the failure to disclose the methodology constituted harmful error in that it may have been meaningful enough to affect the agency’s final disposition on the rate reduction.

Remedy. Although the court reasoned that the HHS failure to disclose the methodology was, under the APA, a serious failure, it explained that the disruptive consequences of vacating the 0.2 percent reduction were too great to allow that to be the remedy. Accordingly, because HHS agreed to abide by a timetable (to repromulgate the Proposed rule to allow for comments) and to expedite proceedings on remand, the court held that a remand, without vacating the reduction, was the appropriate remedy. The court explained, however, that to the extent HHS fails to give meaningful consideration to additional comments on the 0.2 percent reduction, it could in the future order that the rate reduction be vacated.

The cases are Nos. 14-263, 14-503, 14-536, 14-607, 14-976, and 14-1477.

Attorneys: Christopher L. Keough (Akin Gump Strauss Hauer & Feld LLP) for Shands Jacksonville Medical Center, Inc., dba UF Health Jacksonville; Shands Teaching Hospital and Clinics, Inc., dba UF Health Shands Hospital; Dignity Health, dba Arroyo Grande Community Hospital, California Hospital Medical Center, Chandler Regional Medical Center, Dominican Hospital, French Hospital Medical Center, Glendale Memorial Hospital and Health Center, Marian Regional Medical Center, Mercy General Hospital, Mercy Gilbert Medical Center, Mercy Hospital Bakersfield, Mercy Hospital of Folsom, Mercy Medical Center Merced, Mercy Medical Center Redding, Mercy San Juan Medical Center, Methodist Hospital of Sacramento, Northridge Hospital Medical Center, Sequoia Hospital, St. Bernardine Medical Center, St. Elizabeth Community Hospital, St. John's Pleasant Valley Hospital, St. John's Regional Medical Center, St. Joseph's Hospital and Medical Center, St. Joseph's Medical Center of Stockton, St. Mary Medical Center, St. Mary's Medical Center, St. Rose Dominican Hospitals - Rose De Lima Campus, St. Rose Dominican Hospitals - San Martin Campus, St. Rose Dominican Hospitals - Siena Campus, and Woodland Memorial Hospital; Adirondack Health Services, Inc., dba Glens Falls Hospital; and Albany Memorial Hospital. Daniel Edward Bensing, U.S. Department of Justice, for Sylvia M. Burwell, Secretary, U.S. Department of Health and Human Services.

Companies: Shands Jacksonville Medical Center, Inc.; Shands Teaching Hospital and Clinics, Inc.; Dignity Health; Adirondack Health Services, Inc; Albany Memorial Hospital; U.S. Department of Health and Human Services.

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