On April 27, 2016, the Centers for Medicare & Medicaid Services published a proposed rule that, among other things, would eliminate the 0.2 percent inpatient payment reduction resulting from the “2-Midnight Rule." CMS estimates that eliminating the payment reduction would yield an additional $539 million in reimbursements in Fiscal Year 2017, a significant benefit for hospitals. The Proposed Rule for FY 2017 comes after the September 2015 ruling in Shands Jacksonville Medical Center v. Burwell, in which the United States District Court for the District of Columbia ruled that the Secretary of Health and Human Services had not provided sufficient justification for the across-the-board reimbursement cuts to hospitals that CMS implemented as a result of the 2-Midnight Rule. The deadline to comment on the proposed rule is June 17, 2016.


The Proposed Rule for 2017 addresses a key difference in payment for inpatient services (which are compensated under Medicare Part A) and outpatient services (which are compensated under Medicare Part B). Generally, the Medicare reimbursement rate is higher for inpatient stays than it is for outpatient. In 2013, CMS implemented the 2-Midnight Rule, which was intended to address confusion regarding whether certain patients should be classified as inpatient or outpatient. The 2-Midnight Rule provided that if the Medicare beneficiary’s hospital stay was expected to span at least two midnights, the patient would be classified as an inpatient and hospitals would be reimbursed under Part A; if the Medicare beneficiary’s stay was expected to span fewer than two midnights, the patient would be considered an outpatient and hospitals would bill under Part B. CMS then determined that the 2-Midnight Rule would result in a net increase cost to the Medicare program. It attempted to offset this cost by implementing an across-the-board reduction of 0.2 percent in hospital inpatient reimbursements. 

Proposed Rule for FY 2017

Under the Proposed Rule for FY 2017, CMS would permanently remove the 0.2 percent reduction to the hospital-specific payment rate. Additionally, CMS is proposing a one-time prospective increase to the FY 2017 standardized amount, the hospital-specific payment rates, and the national capital Federal rate, which are all elements comprising the calculation of the inpatient fixed rate. This one-time prospective increase remedies the effect of the 0.2 percent rate reduction that was in effect for FYs 2014, 2015, and 2016. Of note, a lawsuit was filed on May 18 challenging the Medicare Part A 0.2 percent rate reduction for FY 2015, despite CMS’ Proposed Rule for 2017.

Additional Matters Covered in the Proposed Rule

The Proposed Rule also addresses several other issues, including changes relating to direct graduate medical education and indirect medical education payments to hospitals with rural track training programs; new or revised requirements for quality reporting by acute care hospitals, PPS-exempt cancer hospitals, long term care hospitals, and inpatient psychiatric facilities; and certain notification requirements by hospitals and critical access hospitals to Medicare beneficiaries. These are issues that are of significant importance to many providers and affected providers should evaluate them closely.