In an unexpected move on April 18, the Centers for Medicare and Medicaid Services (CMS) proposed reversing a controversial payment cut to hospitals related to the implementation of the “two-midnight rule.”

Specifically, CMS proposed eliminating a 0.2 percent reduction in inpatient prospective payment system (IPPS) rates which was implemented in fiscal year 2014 based on the assumption that the two-midnight rule, which generally requires a hospital stay to cross two-midnights to qualify for inpatient reimbursement, would lead to an increase in inpatient admissions, thereby resulting in a corresponding increase in IPPS expenditures.

This assumption was challenged in federal court by a group of hospitals in the case of Shands Jacksonville Medical Center, Inc. v. Burwell, where the court recently remanded the issue of the 0.2 percent reduction back to CMS to correct certain procedural deficiencies and to reconsider the adjustment.

In the fiscal year 2017 IPPS Proposed Rule, CMS states that although it believes “the assumptions underlying the 0.2 percent reduction to the rates put in place in fiscal year 2014 were reasonable at the time we made them in 2013,” it nonetheless proposed permanently eliminating the reduction beginning in fiscal year 2017. Additionally, to compensate hospitals for the reductions incurred in prior years, CMS proposed a one-year temporary increase of 0.6 percent to IPPS rates for fiscal year 2017 to address the effects of the 0.2 reduction to the rates in effect for fiscal years 2014, 2015 and 2016.

CMS’s shift in policy should come as welcome news to hospitals, which have long argued that the 0.2 percent payment reduction was based on flawed assumptions and resulted in an unfair reduction in IPPS payments.

A full copy of the fiscal year 2017 IPPS Proposed Rule can be found by clicking here.