On April 18, CMS submitted to the Federal Register (for publication on April 27) its annual notice of proposed IPPS rates and policy changes for federal fiscal year (FY) 2017. CMS’s notice contains a proposal to eliminate permanently the .2% payment reduction that CMS had implemented in FY 2014 to offset a projected net increase in IPPS cases occasioned by CMS’s Two Midnight rule.

CMS’s proposed action is in response to the remand order issued  by the US District Court for the District of Columbia in Shands Jacksonville Medical Center v. Burwell (Shands). As we have previously reported, the court in Shands ruled that CMS had violated mandatory notice and comment requirements regarding  key information the agency had used to rationalize its .2% payment reduction – specifically, the data and details underlying CMS’s actuarial assumptions that the Two Midnight rule would yield a net increase in IPPS cases. The court ordered CMS to provide notice of such data and details and an opportunity to comment thereon. The judge warned that the .2% reduction might be vacated if the agency failed to give “meaningful consideration” to the comments and also reserved consideration of various challenges that the reduction was substantively  invalid.

On December 1, 2015, CMS published the notice as directed by the Shands court, soliciting comments by February 2, 2016. The major hospital associations submitted comments presenting robust critiques of CMS’s modeling and illustrating further grounds for challenge to CMS’s .2% reduction. When properly considered, the data shows an anticipated net decrease in IPPS cases and – contrary to CMS’s offsetting IPPS rate decrease – arguably justifies raising IPPS rates. The court gave CMS until April 27, 2016, to publish a final notice addressing the comments.

Though defending its decision as “reasonable at the time” it was made, CMS has now proposed “to permanently remove” the .2% payment reduction, starting in FY 2017. In addition, “given the unique nature of this situation in which the court has ordered [CMS] to further explain the assumptions underlying an adjustment applicable to past years,” CMS also proposed to correct for the .2% reduction   in each of FYs 2014-2016 by increasing the FY 2017 rates by an additional 0.6%. CMS stated: “We take this action in the specific context of this unique situation, in which we have been ordered by a Federal court to further explain the basis of an adjustment we have imposed for past years.”

Following the official publication of CMS’s April 18 notice in the Federal Register (on April 27), the court in Shands will determine whether CMS has satisfied the terms of its remand order and whether to award any further relief to the plaintiff hospitals in that action.

Given that the Shands case has yet to be decided – and that CMS has emphasized that its correction will be prospective only – hospitals should include the .2% payment reduction and related policies as a protest items on each of their FYs 2015 and 2016 cost reports.