The Centers for Medicare & Medicaid Services (CMS) did not meet legal requirements for rulemaking when it cut hospital inpatient payments by 0.2 percent in fiscal year (FY) 2014, according to a U.S. district court. CMS first included a provision to cut payments in the FY 2014 Inpatient Prospective Payment System (IPPS) final rule, in conjunction with the two-midnight policy. In the rule, CMS argued that the payment cut was necessary to offset an expected increase in the number of short inpatient stays due to the two-midnight policy. However,  the policy initially proposed in the rule has never been implemented, yet CMS never reversed the payment cut.

The parties challenging the final rule note that CMS provided insufficient justification for this cut and did not adequately explain the methodology used to derive its assumptions. The court’s ruling does not require CMS to return the funds to hospitals but requires CMS to reissue the FY 2014 IPPS rule with further justification for the cut and an additional opportunity for hospitals to comment.

CMS proposed changes to the two-midnight policy in the July 2015 Outpatient Prospective Payment System proposed rule but did not propose reversing the 0.2 percent payment cut.

If you have questions or concerns, please contact Erin O’Malley, director of policy, at eomalley@essentialhospitals.org or 202.585.0127.