Judge orders HHS to provide further justification for two-midnight rule's inpatient pay cut

A federal judge has sided with the American Hospital Association and numerous other associations and organizations across the country in a lawsuit challenging a cut to hospital inpatient payments in conjunction with the controversial "two-midnight" rule.

Under the two-midnight rule, which was introduced in the 2014 Inpatient Prospective Payment System rule, CMS generally considers hospital stays of less than two midnights to be outpatient cases, while hospital admissions for stays spanning two midnights or longer are deemed appropriate.

Expecting a decline in the number of long observation stays and an increase in the number of inpatient admissions, CMS proposed offsetting the cost through a 0.2 percent reduction in inpatient payments. Hospitals strongly disagreed with the proposed cut and brought a lawsuit claiming HHS violated the Administrative Procedure Act by not providing adequate notice or a meaningful opportunity to comment on the payment reduction.

In his opinion, Judge Randolph Moss said that although a notice and comment period was provided, there were "substantial" flaws.

"This is not a case where the agency simply failed to provide sufficient detail in its explanation for its action or failed to address a discrete comment," the judge wrote in his opinion. "Rather, the Secretary omitted 'critical material on which it relie[d],' and thus 'deprive[d] commenters of a right… to participate in rulemaking."

The judge chose not to throw out the entire rule. Instead, he called for HHS to provide further justification for the payment cut and to take steps to fix the notice and comment issues.

"Although the deficiencies in the rule are serious, the court is not convinced that they are so grave that the Secretary should be precluded from taking corrective steps" with respect to the 2014 IPPS rule, the judge wrote.

The judge ordered all parties involved in the action to propose, by no later than Oct. 1, a timetable for reissuing the rule.

Although the ruling doesn't change the two-midnight rule or the payment cut for now, if CMS fails to comply with the timetable, the court noted that the payment cut may be set aside.

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