The Centers for Medicare and Medicaid Services (CMS) will no longer enforce inpatient payment cuts under the controversial “two-midnight” rule, according to a statement released by the agency. Instead of continuing plans for a 0.2% cut in Medicare reimbursement, the CMS plans a temporary increase of 0.6% in fiscal year 2017 to offset the estimated cost of the two-midnight rule policy.

Under the two-midnight rule, the CMS treats any hospital stay lasting less than two midnights as an outpatient stay. Anticipating more inpatient stays, the agency proposed a 0.2% reimbursement cut for Medicare payments to offset the increased revenue.

Last year, 55 hospitals filed a lawsuit against the Department of Health and Human Services in response to the Medicare payment reduction. Among other things, the lawsuit claimed the rule was based on unfounded assumptions, such as taking for granted that approximately 400,000 stays will shift from outpatient to inpatient stays, while 360,000 inpatient stays will shift to outpatient.

“CMS believes the assumptions underlying the –0.2% adjustment were reasonable at the time they were made,” the agency said in its recent statement. “Additionally, CMS does not generally believe it is appropriate in a prospective payment system to retrospectively adjust rates. However, in light of recent review and the unique circumstances surrounding this adjustment, for FY [fiscal year] 2017, CMS is proposing to permanently remove this adjustment and also its effects for FYs 2014, 2015, and 2016 by adjusting the FY 2017 payment rates. The impact of this proposal is to increase FY 2017 payments by approximately 0.8%.”

In a press release, the American Hospital Association (AHA) commented: “Today’s rule includes a very important outcome because it reverses the inappropriate and unfair 0.2%  payment reduction for inpatient services that was implemented as part of the original ‘two-midnight’ policy. The AHA successfully challenged the Centers for Medicare and Medicaid Services’ (CMS) interpretation through the courts to convince them to restore the resources that hospitals are lawfully due.”

The AHA noted, however, that CMS’ plans still include another large payment reduction.

“While a cut in the hospital update factor was mandated by law in 2012, CMS’s proposal is significantly larger than Congress indicated and the hospital field anticipated,” the AHA said. “Congress was clear in its passage of physician payment reform last year that this cut should be 0.8%, but CMS ignored this directive and almost doubled the reduction. This cut poses another challenge to hospitals’ ability to care for their communities.”

Sources: FierceHealthFinance; April 19, 2016; CMS; April 18, 2016; AHA; April 18, 2016; and FierceHealthFinance; January 12, 2016.