On December 1, 2015 CMS published a Notice in the Federal Register that provides additional information as to the methodology the agency used to arrive at the 0.2 percent rate reduction associated with the implementation of its two midnight rule.  The 0.2 percent rate cut has been challenged by hundreds of IPPS hospitals, including more than 200 hospitals represented by King & Spalding.  On September 21, 2015, the United States District Court for the District of Columbia held that CMS had failed to disclose to the public a critical assumption in its methodology and ordered the agency to provide an additional notice and comment period in which it identified this assumption and offered the public an opportunity to comment.  See Shands Jacksonville Medical Center v. Burwell, No. 14-00263 (D.D.C. Sept. 21, 2015).  CMS’s Notice responds to the Court’s order.  Comments are requested by February 2, 2016.  The Notice can be found here

CMS’s Flawed FY 2014 IPPS Rulemaking

CMS implemented the 0.2 percent rate cut during the FY 2014 IPPS rulemaking in order to offset what the agency predicted would be an increase in aggregate IPPS expenditures caused by the two midnight policy.  This prediction was based upon the CMS actuaries’ analysis of FY 2011 inpatient and outpatient claims data which, according to CMS, suggested that 400,000 extended outpatient encounters would shift to inpatient cases under the two midnight policy while only 360,000 short stay inpatient encounters would shift to outpatient cases under the policy.  The net 40,000 new inpatient cases, according to CMS actuaries, translated to $220 million per year or 0.2 percent of aggregated IPPS expenditures.  In order to offset this predicted increase, CMS implemented the 0.2 percent cut which has remained in effect for FY 2015 and FY 2016 as well. 

On behalf of a number of hospitals, King & Spalding filed comments during the FY 2014 IPPS rulemaking process challenging the 0.2 percent rate cut on many grounds, including the fact that King & Spalding’s own analysis of FY 2011 claims data revealed that there were more than 1 million short stay inpatient cases in the data that could be predicted to move to outpatient status under the two midnight policy, suggesting that the new policy would drastically lower aggregate IPPS expenditures, not increase them as CMS predicted in the proposed rule.  King & Spalding’s comments are available here.  In response, CMS disclosed for the first time in the FY 2014 IPPS final rule that its actuaries had included only surgical MS-DRGs in its analysis and excluded medical MS-DRGs, but provided no explanation as to why.  This revelation was significant, because medical MS-DRGs, or medical cases, account for approximately 75 percent of all hospital inpatient cases. 

Federal Court Orders New Notice and Comment Period

In Shands, the district court cited to the King & Spalding comments, among others, and held that by failing to disclose the exclusion of medical cases, CMS had failed to disclose a critical assumption in its analysis, denied the public an opportunity to comment on that assumption, and therefore violated the Administrative Procedures Act.  While the hospitals had asked the court to set aside the rate cut as a remedy for this violation, the court opted instead to require CMS to publish an additional notice that would explain the exclusion of medical MS-DRGs from the rate cut analysis and allow the public an opportunity to comment.  CMS published its Notice on December 1, 2015, and the public has until February 2, 2016 to respond.

CMS’s Explanation for Exclusion of Medical Cases

In the December 1 Notice, CMS explains that its actuaries excluded medical MS-DRGs because “it was assumed these cases would be unaffected by” the two midnight rule.  According to the CMS Notice, CMS “actuaries . . . believed that due to behavioral changes by hospitals and admitting practitioners, most inpatient medical encounters spanning less than 2 midnights . . . might be reasonably expected to extend past 2 midnights after” implementation of the two midnight policy.  These actuaries believed, according to the CMS Notice, “that the clinical assessments and protocols used by physicians to develop an expected length of stay for medical cases were, in general, more variable and less defined than those used to develop an expected length of stay for surgical cases.”  In other words, CMS actuaries believed that medical case “clinical assessments and protocols” would allow physicians and hospitals to justify extending inpatient care past two midnights such that it was reasonable to exclude 100 percent of all such medical cases from their rate impact analysis.

CMS published substantially the same explanation of the exclusion of medical cases from the 0.2 percent two midnight rate cut in the FY 2016 OPPS proposed rule which was promulgated during, and in response to, the Shandslitigation.  In response to the FY 2016 OPPS proposed rule, King & Spalding submitted comments on behalf of the hospitals it represents in the Shandslitigation which are available here.  The King & Spalding comments point to an analysis of FY 2011 Medicare claims data, which were available to CMS at the time of the FY 2014 IPPS rulemaking, that shows that, contrary to CMS actuaries’ assumptions, the average length of stays for surgical cases are in fact more variable than those for medical cases.  King & Spalding plans to emphasize and expand upon these comments in response to the CMS December 1 Notice and invites interested providers to contact the King & Spalding reporters below if they wish to join in these comments. 

In addition to its explanation for exclusion of medical cases from its two midnight policy impact analysis, CMS discloses a number of additional items of information upon which it also solicits the public’s comment.  For example, CMS states that during the FY 2014 IPPS rulemaking, it defined observation care with the codes for “Hospital observation service, per hour” and “Direct admission of patient for hospital observation care.”  CMS states in the December 1 Notice that the use of only these two codes might have been “overly conservative,” as those codes do not capture every use of observation care.  Similarly, to determine whether the observation stays spanned two midnights or more, CMS states that during the FY 2014 IPPS rulemaking, it analyzed the difference between the first date of service for the observation code and the claim through date.  CMS also states in the Notice that this method of calculating the length of stay for observation care may also have been overly conservative, as patients may have spent time in the hospital before the observation code was used.  CMS contends that if its actuaries had used these less conservative analysis, it would have predicted that a much greater number of outpatient encounters would have moved from outpatient to inpatient claims, a comparison of 570,000 cases to the 400,000 outpatient cases identified in the FY 2014 IPPS rulemaking analysis.  While CMS does not say so directly in the December 1 Notice, this higher figure, of course, would justify an even larger rate cut.  Therefore, it is important for hospitals to respond to CMS’s request for comments on the appropriate method to define observation services and the appropriate method used to calculate whether observation services spanned two midnights.    

Finally, since the implementation of the two midnight policy, CMS actuaries have been analyzing claims data for FY 2014 and FY 2015.  CMS contends that this analysis is not complete, and CMS is requesting comment on whether it should await that analysis before the resolution of the Shands case.