Newly Released CMS Actuary’s Report Confirms CMS Ignored Impact of Two Midnight Rule on Medical Admissions When Setting 0.2 Percent Two Midnight Rate Cut; New Hospital Data Show Decline in Admissions in FY 2014

by King & Spalding

On June 30, 2014, King & Spalding filed comments in response to Medicare’s proposed IPPS rule for Fiscal Year (FY) 2015 on behalf of more than 200 hospitals it represents in a federal court challenge to the FY 2014 Two Midnight rate cut.  The comments, which oppose the continuation of the 0.2 percent rate cut into FY 2015, cite two new pieces of information that question CMS’s prediction that the Two Midnight rule would lead to an aggregate increase in IPPS payments.  A recently released CMS Actuary’s Report, which is attached as an exhibit to King & Spalding’s comments, relied upon a flawed assumption about the Two Midnight rule.  Actual data from nearly 100 hospitals demonstrates that the Two Midnight rule has led to a sharp decrease in inpatient admissions rather than an overall increase as CMS predicted.  

CMS Actuaries Failed to Calculate Impact of Rule on Medical MS-DRGs

When CMS adopted the Two Midnight rule for FY 2014, it also adopted a 0.2 percent capital and operating PPS rate cut to inpatient rates.  According to CMS, the rate cut was necessary to offset what CMS actuaries predicted would be an overall increase in IPPS expenditures resulting from the Two Midnight rule.  Specifically, looking at past claims data, CMS actuaries predicted that the Two Midnight rule would lead to approximately 360,000 inpatient cases being converted from IPPS to OPPS encounters and approximately 400,000 outpatient encounters converting to inpatient cases paid under IPPS.  The net 40,000 inpatient encounter increase, according to the actuaries, translated to approximately $220 million in IPPS payments justifying a 0.2 percent rate decrease according to CMS. 

In response to litigation filed by King & Spalding on behalf of hospitals contesting the 0.2 percent reduction for FY 2014, CMS recently provided the actuarial report that was relied upon by CMS to support the 0.2 percent reduction in rates.  That report shows that the actuaries’ methodology was faulty because, among other reasons, it factored only surgical MS-DRGs into its analysis and excluded medical MS-DRGs from its calculation.  Specifically, the actuaries’ report states:

In estimating the number of inpatient stays that would shift to the outpatient setting, claims containing a surgical MS-DRG were analyzed.  Claims containing medical MS-DRGs and those that resulted in death or a transfer were excluded because it was assumed that these cases would be unaffected by the policy change. 

Memorandum, Office of the Actuary, CMS, Estimated Financial Effects of Two Midnight Policy, (Aug. 19, 2013) (emphasis added).   This assumption is consistent with a statement in the final hospital IPPS rule for FY 2014 in which CMS suggested, for the first time, that only “surgical” MS-DRGs were factored into its analysis. 

There was no explanation for the actuaries’ conclusion that the “claims containing medical MS-DRGs” “would be unaffected by the policy change” contained in the Two Midnight rule.  CMS policy is clear that the Two Midnight rule applies to all MS-DRGs.  CMS’s recent “Probe & Educate” program, which focuses on hospitals’ experience with implementing the Two Midnight rule, includes review of both surgical and medical cases.  Nothing in the proposed rule alerted hospitals or the public to the omission of medical cases from CMS’s estimate of the number of cases that would no longer be billable as inpatient cases.

Thus, this flawed assumption would appear to show that, in calculating the impact of the Two Midnight rule for purposes of setting IPPS rates for FY 2014 and, now, FY 2015, CMS made a critical error.  The 360,000 short stay inpatient cases that it predicted would move from inpatient to outpatient were grossly underestimated.  In fact, more than 70 percent of all inpatient encounters are medical, and the net increase that CMS predicted in inpatient encounters is flawed because it fails to include medical encounters.

Actual Impact of Two Midnight Rule on FY 2014 Admissions Reveals Decline In Inpatient Admissions Across Several Hospitals

King & Spalding’s comments show that the Two Midnight rule has led to a decrease, rather than increase, in inpatient admissions.  King & Spalding analyzed data from 96 hospital clients for the first six months of FY 2014, representing 21 states and six of CMS’s ten regions.  For the first six months of FY 2014, October 2013-March 2014, these hospitals have experienced a 6.7 percent decline in Medicare inpatient admissions, and a decline of 4.7 percent in Medicare payment for inpatient services.  CMS had predicted that, without a reduction in PPS rates, payments to hospitals for inpatient services would increase by 0.2 percent; but in fact, Medicare inpatient payments for this representative group of hospitals have decreased by 4.7 percent. 

Reporter, Mark Polston, Washington, D.C., + 1 202 626 5540,


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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