AHA lawsuit over 'two-midnight' rule called uphill battle

No matter how strong their legal arguments, hospitals will have a tough time convincing judges to overturn Medicare's controversial new rules on classifying inpatients, some legal experts say.

The CMS' so-called “two-midnight” rule was intended to clarify which patients are sick enough to be admitted to the hospital by requiring doctors to certify they have good reason to expect patients to need two nights in the hospital. Only then will Medicare pay inpatient hospital rates for the patients' care.

On Monday, the American Hospital Association and a coalition of members filed two federal lawsuits challenging the rule and its reduction in payments to hospitals. At least three other lawsuits challenging Medicare's inpatient rules are pending. One is a class action filed on behalf of Medicare beneficiaries by the Center for Medicare Advocacy that currently is on appeal.

The U.S. Supreme Court has ruled in other cases that government agencies such as HHS are entitled to wide discretion in issuing rules to implement laws. Michael E. Clark, healthcare lawyer at the law firm Duane Morris, said hospitals challenging the CMS policy have to demonstrate that the agency violated its discretionary authority. “It is, at best, a very uphill battle,” he said.

Hospitals and patients complain that the CMS' two-midnight rule unfairly drives patients into a kind of healthcare limbo known as outpatient observation, in which patients sleep in hospital beds and have tests taken on-site but are not classified as inpatients. Patients who arrive at the emergency department with chest pains or fainting spells are commonly admitted for observation, for example.

Outpatient observation stays pay hospitals much less under Medicare Part B than acute-care stays pay under Medicare Part A, and they require a 20% copayment from beneficiaries. Plus, under Part B, beneficiaries on observation are often denied Medicare coverage for post-acute rehabilitation care.

CMS officials documented an uptick in hospital observation stays of two, three and four days after Medicare's recovery auditors began aggressively probing why hospitals didn't use observation care more often. The auditors have taken back money in thousands of cases nationwide where they have determined retroactively that care should have been given under observation, not as inpatient care.

Hospitals complained that those rules were unclear. In 2012, the AHA filed suit to stop the CMS from denying payments under rules that were allegedly vague or contradictory. The two-midnight policy, effective Oct. 1, 2013, was supposed to clarify the issue by saying definitively that nearly all Medicare inpatient care must be reasonably expected at the outset to last two nights.

That rule has had a tough rollout. Through administrative actions and an act of Congress, Medicare's recovery auditors have been banned from auditing hospitals under the two-midnight policy until March 2015. But Medicare administrative contractors will still be doing limited “probe and educate” audits intended to inform hospitals how to submit claims that meet the new requirements.

Last month, a group of 24 hospitals sued HHS in U.S. District Court in Washington, D.C., seeking to overturn the part of the two-midnight rule that cut Medicare funding. The CMS cut 2014 inpatient rates by 0.2% because it calculated the rule would increase net payments to hospitals by decreasing long observation stays. Hospitals said it would reduce payments.

“How CMS could say, with a straight face, that the two-midnight rule is going to increase payments to hospitals is kind of nuts,” said Minneapolis healthcare attorney David Glaser of Fredrikson & Byron.

Yesterday the AHA joined with four healthcare providers and hospital associations in New York City, New York state, New Jersey and Pennsylvania to file two new cases—one challenging the rule itself (PDF) and a second suit seeking to overturn the related 0.2% rate cuts (PDF).

Glaser and Clark both said more litigation doesn't make it more likely that the hospitals will prevail. “If hospitals just want more money, I don't know that litigation is always the best way, because after a ruling things can always go back to Congress,” Glaser said. “The drumbeat right now is to cut Medicare, and even if the litigation is successful there is a risk that Congress comes in and makes readjustments.”

Although hospital officials are likely aware of the odds of losing in court, they may be interested in a settlement with the CMS similar to what the Center for Medicare Advocacy negotiated last year in an unrelated case on how Medicare pays for skilled-therapy services, both Clark and Glaser say. In that case, Jimmo v. Sebelius, the CMS agreed to settle by clarifying its existing payment rules in ways that satisfied the litigants who were upset that Medicare was denying coverage for certain therapy services.

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