AHA Lawsuits Challenge Two-Midnight Rule, 0.2 Percent Cut, Other IPPS Changes

The American Hospital Association (AHA), together with several hospitals and hospital organizations, has filed two lawsuits in the United States District Court for the District of Columbia asking that four components of the August 19, 2013, Inpatient Prospective Payment System (IPPS) Final rule be declared invalid. One complaint challenges: (1) the two-midnight rule; (2) the requirement that claims for outpatient services filed after the denial of a claim for inpatient services be submitted within one year of the date that services ended; and (3) the requirement that a physician order use the words “inpatient services” as a condition of payment for a stay. The second complaint claims that the 0.2 percent cut in the rate for inpatient services is invalid.


The AHA is joined in both lawsuits by Banner Health, based in Phoenix, Arizona; Mt. Sinai Medical Center in New York City; Einstein Healthcare Network in Philadelphia, Pennsylvania, Wake Forest Baptist Medical Center in Winston-Salem, North Carolina, and hospital organizations in New York, New Jersey, and Pennsylvania. Each of the hospitals claims to have lost thousands of dollars as a result of the 0.2 percent rate cut and even larger sums due to the two-midnight rule.

The Rate Reduction

The complaint alleges that the reduction is invalid for several reasons. First, CMS did not include the reduction in an actual regulation, but only described it in the preamble to the Final rule. Second, the factual premises on which the rule was based are based on assumptions that are demonstrably wrong. Allegedly, CMS stated that it expected that the two-midnight rule, if applied to the fiscal year (FY) 2011 discharges, would result in 400,000 cases switching from outpatient to inpatient and 360,000 from inpatient to outpatient. But the Final rule stated that CMS considered only surgical discharges, excluding diagnosis related groups (DRGs) involving medical services only. The AHA notes that length of stay is easier to predict in surgical cases, and the exclusion of medical discharges distorts CMS’ analysis. Third, the Proposed rule did not describe the changes in policy with enough clarity or specificity to allow effective notice and comment.

The Two-Midnight Rule

The AHA and its co-plaintiffs contend that the two-midnight rule departs abruptly from long-standing policy defining inpatient services and describing the physicians’ role in determining whether a patient should be admitted. Under the prior policy, the AHA alleges, a physician could admit a patient if his or her condition and the anticipated services were likely to result in a stay of at least 24 hours. If a stay must cross two midnights to qualify for inpatient status, a patient admitted early in the morning might not qualify as an inpatient until nearly 48 hours had passed. The complaint alleges that the rule replaces the many medical factors the physician might consider with a single requirement based on time, so that even services provided in an intensive care unit might not qualify for inpatient reimbursement.

One-Year Limit

The AHA contends that the post-discharge review and denial of payment for inpatient services by recovery audit contractors (RACs), combined with the requirement that claims for outpatient services be submitted within one year of service deprives hospitals of the outpatient reimbursement because RAC reviews generally do not even begin until one year after services were furnished. The complaint notes that the agency has exercised its authority to make exceptions to the one-year deadline in other situations but refuses to do so here and that it could simply direct its administrative contractors to reprocess the rejected inpatient claims as outpatient services.

Finally, the hospitals claim that the physician order requirement is inconsistent with Soc. Sec. Act sec. 1814(a)(3) because the statute requires certification for hospital services to be provided over an extended period, not for all inpatient services.