On April 18, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that addresses the controversial inpatient payment cuts resulting from the so-called “two-midnight” rule.  The two-midnight rule, which was introduced in the Fiscal Year (FY) 2014 Inpatient Prospective Payment System (IPPS) final rule, said that inpatient payment under Medicare Part A was generally only appropriate if the patient’s hospital stay was expected to span two midnights. If the patient’s stay was expected to be less than two midnights, the care should generally be billed as outpatient services. Because CMS anticipated that this two-midnight rule would actually lead to an increase in Part A reimbursement, the 2014 IPPS final rule implemented a 0.2 percent cut to hospital inpatient reimbursements, resulting in a national reduction of approximately $220 million. CMS has since modified the two-midnight rule to permit Medicare Part A payment on a case-by-case basis, even when the patient’s stay does not span two midnights.

Under the new 2017 IPPS proposed rule, CMS plans to permanently eliminate the 0.2 percent payment reduction. Additionally, CMS proposed to increase FY 2017 payments by 0.8 percent in order to offset the two-midnight rule payment cuts experienced by hospitals in FY 2014, FY 2015, and FY 2016. CMS estimates that this increase will result in an additional $539 million in payments in FY 2017, affecting approximately 3,300 acute care hospitals.

CMS stated that it continues to believe that its assumptions underlying the 0.2 percent cuts were reasonable when made and that it did not generally believe it was appropriate to retroactively adjust payment rates. Nonetheless, CMS issued the 2017 proposed rule “in light of recent review and the unique circumstances surrounding” the two-midnight rule payment cuts. Strongly motivating this decision was the order issued by the District Court for the District of Columbia in Shands Jacksonville Medical Center, Inc. v. Burwell, which instructed CMS to reconsider and address the 0.2 percent cuts. This reversal will be welcome news to hospitals that had seen their reimbursements shrink in recent years due to the two-midnight rule’s payment cuts.