A federal judge handed hospitals a partial win Monday when he ruled the HHS secretary must provide better justification for the part of the much maligned two-midnight rule that would cut inpatient payments to hospitals.
The judge's ruling doesn't change the two-midnight rule or the payment reductions for now, but it may open the door to possible changes in the future, experts said. The judge also ordered HHS to re-open that part of the rule to comments.
U.S. District Court Judge Randolph Moss sided Monday with the American Hospital Association and scores of hospitals and other associations around the country who challenged payment reductions accompanying the two-midnight rule. The rule, currently on hold, directs CMS payment contractors to consider short-term hospital stays as inpatient admissions if they span two midnights even though they otherwise should have been billed as an outpatient observation visit.
The HHS secretary predicted the two-midnight change would lead to a large shift of encounters from outpatient to inpatient status at a cost of $220 million to Medicare. She proposed offsetting that cost by reducing compensation for inpatient services by 0.2%.
Hospitals, however, disagree with that prediction and say the rate cut is unnecessary.
The hospitals argued in this case, Shands Jacksonville Medical Center v. Burwell, that the payment reduction was put forward without adequate notice or a meaningful opportunity to comment. Randolph agreed Monday that the agency did not allow for adequate comment.
“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. “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, however, stopped short of throwing out the entire rule. Instead he said the HHS secretary must provide additional justification for that part of the rule and allow public comment. The judge wrote, however, that vacating the entire rule may be a possibility if the Secretary doesn't take corrective action quickly and give serious consideration to new comments.
CMS referred a request for comment on the case to the Department of Justice, which declined to comment Tuesday.
Lawrence Hughes, assistant general counsel for the American Hospital Association, called the decision Monday “a significant victory for hospitals.”
Some experts say that while the decision is potentially good for hospitals, it doesn't necessarily change anything for them in the immediate future. But it gives them a chance to keep fighting against the rate reduction.
“It doesn't have any immediate impact, but it means the Secretary is going to have to explain the basis for its conclusion … so the hospitals are still in the game,” said David Glaser, a shareholder at Fredrikson and Byron.
He called the decision “a slap to CMS.”
Michael Clark, special counsel at Duane Morris, said hospitals shouldn't change what they're doing in response to the latest decision on the controversial rule. “If I'm one of the affected hospitals, I'm certainly not going to run the risk of violating the pronouncement of the Secretary,” Clark said. “If it turns out they can justify the rulemaking later on, you're putting yourself at risk.”
The decision Monday is not a clear victory for hospitals but rather a “partial victory in the sense that they've won their procedural challenge,” Clark said. He noted that any type of victory in administrative rulemaking cases is unusual.
The real issue, he said, will be whether HHS can justify the rate cut. “The ultimate question is going to be can they win the war after they've won this battle,” Clark said.
The judge rejected hospital arguments that the decision to reduce payments exceeded the agency's statutory authority. They had also argued that the payment reduction was arbitrary and capricious, but the judge didn't weigh in on that argument in his opinion, saying he didn't need to because he had already decided HHS didn't provide a meaningful opportunity to comment.