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From Health Law Daily, December 1, 2015

HHS follows the rules, releases two-midnight rate reduction methodology

By Kayla R. Bryant, J.D.

HHS has repromulgated its rule reducing the inpatient prospective payment system (IPPS) rate by 0.2 percent with an explanation of its methodology as mandated by a district court. After the Final rule reducing the rates was issued (78 FR 50495), several hospitals sued HHS on the basis that the agency violated the Administrative Procedure Act (APA) (5 U.S.C. 7026(2)(A)) by depriving them of the opportunity to comment. The rate reduction is intended to cover the costs for the two-midnight rule, which provides that inpatient admission are authorized for payment if the patient is expected to stay at least two midnights (Notice, 80 FR 75107, December 1, 2015).

Two-midnight rule. Inpatient admissions qualify for Part A payment if a qualified practitioner admits a patient with the expectation that the hospital care will cross at least two midnights. If the care is expected not to last this long, the services are generally billed as outpatient. HHS estimated that the implementation of the rule would increase inpatient encounters and therefore cost an additional $220 million in fiscal year (FY) 2014. To account for this increase, HHS decreased the IPPS payment amount by 0.2 percent.

Methodology. The district court found that HHS failed to disclose the assumptions that the actuaries applied in concluding that the new policy would increase the number of inpatient stays by 40,000 in FY 2014 in violation of the APA. This lack of disclosure prevented the hospitals from commenting on the methodology (see Court orders HHS to allow further comments on two-midnight rule rate adjustment, September 22, 2015). In the new rule, HHS explained that the actuaries analyzed claims from calendar year (CY) 2011 that included observation care or a major procedure to determine how many of them involved stays of at least two midnights. HHS also analyzed FY 2011 surgical inpatient claims for the same purpose.

The actuaries assumed that under the new rule, some stays would shift from inpatient to outpatient and the reverse, resulting in an increase of 40,000 inpatient discharges. It assumed that outpatient stays would be 30 percent of the IPPS payments. This ultimately resulted in an estimated $290 million increase in inpatient claims partially offset by a $70 million decrease in outpatient claims.

Comments. To ensure that comments on various issues related to the two-midnight methodology are considered, HHS requests that they be submitted by February 2, 2016. The agency will publish the notice no later than March 18, 2016.

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