Over 500 hospitals reach DSH payment settlement with CMS

Resolving 11 pieces of litigation stretching back to 2010, over 500 hospitals on July 14, 2016, entered into confidential settlement agreements with CMS regarding Medicare disproportionate share hospital (DSH) payments. Details of the settlements were not available at press time, although they involve disputed DSH payments for cost reporting periods from 1991 through 2007, depending on the hospital. Neither CMS nor the attorneys at Akin Gump, lead counsel for the hospitals involved in the settlements, would comment on the settlements.


Medicare makes DSH payments as a percentage add-on to the standard payment amount per discharge under the prospective payment system for the operating costs of inpatient hospital services. The fact situations for the hospitals involved in the settlement were similar – the hospitals challenged CMS’ payment determinations on the grounds that errors and omissions in the calculation of the DSH payment formula wrongfully reduced the resulting DSH payments. The hospitals also challenged a subsequent ruling by CMS – CMS-1498-R – that the Provider Reimbursement Review Board and the other Medicare administrative appeals tribunals lack jurisdiction over provider appeals of specific DSH payment adjustment issues.

Treatment of Part C days

The hospital parties in four cases also filed a motion to stay further proceedings pending a final, non-appealable merits decision in either Allina Health Services, et al. v. Burwell, 1:14-cv-01415-GK (D.D.C.) (see Court has jurisdiction to hear health system’s challenge to DSH calculation, Health Law Daily, November 2, 2015) or Allina Health System, et al. v. Burwell, 1:16-cv-00150-GK (D.D.C.). The substantive issue in dispute in those cases concerns the treatment of Medicare Part C days in the Medicare DSH payment calculation for periods after October 1, 2004.

Original complaints and stipulations

Listed below are the complaints for the 11 cases that were settled, along with the number of hospitals involved in each complaint and the cost years involved on the original complaints, followed by a link to the July 14, 2016 stipulation.

IPPS, LTCH Proposed Payment Changes–Quality Programs and Recent Laws

Acute care hospitals that participate in the Hospital Inpatient Quality Reporting Program and have demonstrated meaningful use of electronic health records would see their Medicare payments increase 1.3 percent in fiscal year (FY) 2015, under a Proposed rule issued on April 30, 2014. Payments to long-term care hospitals (LTCHs) would increase by about 0.8 percent under CMS’ proposal. About 3,400 hospitals and 435 LTCHs receive Medicare payments under these two prospective payment systems (PPS). The Proposed rule will be published in the Federal Register on May 15, 2014.

The Proposed rule also implements or revises regulations relating to various sections of the Affordable Care Act (ACA) (P.L. 111-148), the American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112-240), and the Protecting Access to Medicare Act of 2014 (P.L. 113-93).

CMS sets payment rates for hospitals and LTCHs for inpatient stays based on a patient’s diagnosis and severity of illness. The payment rates are based on an annual market basket update that is then adjusted for various factors, explained below. Because of these adjustments, CMS projects that total IPPS payments will decrease by $241 million in FY 2015, while payments to LTCHs will increase by $44 million.

IPPS Payment and Adjustments

For hospitals, the FY 2015 market basket update is 2.7 percent. This is reduced by (1) 0.4 percentage points related to multi-factor productivity (based on average changes in economy-wide productivity over a 10-year period); (2) 0.2 percentage points (a productivity adjustment mandated by ACA sec. 3401); and (3) 0.8 percentage points (the documentation and coding recoupment adjusted mandated by ATRA). Overall payments to hospitals under IPPS will be further reduced because of the hospital readmissions reduction program, the hospital acquired condition program, Medicare disproportionate share hospital (DSH) adjustments, the expiration of certain temporary payment increases to hospitals, and other proposed IPPS changes.

Quality Measures

The Proposed rule includes several adjustments relating to various hospital quality programs, including—

Hospital Value-Based Purchasing Program—For FY 2015, CMS is increasing the portion of Medicare payments available to fund value-based incentive payments to 1.5 percent of the base operating diagnosis related group (DRG) payment amounts to all participating hospitals.

Hospital Readmissions Reduction Program—The maximum reduction in payments will increase from 2 to 3 percent. For FY 2015, CMS proposes to assess hospitals’ readmissions penalties using five readmissions measures endorsed by the National Quality Forum (NQF). CMS estimates that Medicare hospital readmissions declined by 150,000 from January 2012 through December 2013.

Hospital-Acquired Condition (HAC) Reduction Program—Beginning in FY 2015, hospitals scoring in the top quartile for the rate of HACs (i.e., those with the poorest performance) will have their Medicare inpatient payments reduced by 1 percent.

Further quality changes are highlighted in a CMS fact sheet.

Two-Midnight Rule

CMS recognizes in the Proposed rule that hospitals continue to have concerns about implementation of the “two-midnight rule,” the benchmark for determining the appropriateness of an inpatient hospital admission versus treatment on an outpatient basis. CMS notes that “there could be additional rare and unusual circumstances that have not been identified that justify inpatient admission and Part A payment absent an expectation of care spanning at least 2 midnights” and is inviting feedback from providers, which can be sent to CMS via written correspondence or emailed to SuggestedExceptions@cms.hhs.gov, with “Suggested Exceptions to the 2-Midnight Benchmark” in the subject line.

Disproportionate Share Hospitals

Under ACA sec. 1104, hospitals’ Medicare DSH payments were reduced to reflect lower uncompensated care costs relative to increases in the number of insured. Starting in FY 2014, hospitals receive 25 percent of the amount they previously would have received under the former formula for Medicare DSH; the remaining 75 percent would be distributed to hospitals based on each hospital’s share of uncompensated care costs relative to all hospitals that receive DSH payments. CMS proposes to use the Office of the Actuary’s estimate of payments that would otherwise be made for Medicare DSH in FY 2015, adjusted by the change in the percentage of individuals that are uninsured as estimated by the Congressional Budget Office and a statutory factor to determine the amount available for uncompensated care payments.

Updated Labor Markets

CMS is proposing to use the most recent labor market area delineations based on the 2010 Census and issued by the Office of Management and Budget (OMB). Recognizing that using updated data might impact a hospital’s designation as “urban” or “rural,” CMS is proposing that “hospitals currently located in an urban county that would become rural under the new OMB delineations would be assigned the urban wage index value of the labor market area in which they are physically located for FY 2014 for 3 years beginning in FY 2015.”

Long-Term Care Hospitals

LTCHs would see Medicare payments increase by 0.8 percent (about $44 million) in FY 2015 under the Proposed rule. Sec. 1206 of the Bipartisan Budget Act of 2013 (P.L. 113-67) established a new framework for the application of patient criteria for LTCHs starting in FY 2016; in the Proposed rule CMS solicits feedback on policies relating to establishing the relative payment weights and high-cost outliers so that the agency may evaluate various options in preparation for developing proposals to implement the statutory changes beginning in FY 2016.

CMS also proposes to implement sec. 1206(b)(1) of P.L. 113-67, which provides for the retroactive reinstatement and extension, for an additional four years, of the statutory moratorium on the full implementation of the 25-percent threshold policy. Under this policy, if an LTCH admits more than 25 percent of its patients from a single acute care hospital, Medicare will make payments comparable to IPPS hospitals for patients above that threshold. CMS also proposes to implement the moratoria included in P.L. 113-67 on new LTCHs, LTCH satellites, and new beds in existing LTCHs and satellites from April 1, 2014, to September 30, 2017. The Proposed rule outlines three exceptions to the moratorium on new LTCHs and satellites; there is no exception to the moratorium on new beds in existing facilities.

CMS also is proposing to expand the interrupted stay policy, which addressed circumstances under which a person would be discharged from an LTCH and admitted to another facility, then directly readmitted to the LTCH within a certain period. The threshold is expanded to 30 days, which matches the 30-day window for hospitals that is applied under the Hospital Readmissions Reduction Program.


Hospital Groups Challenge Two-Midnight Rule; Legislators Seek to Delay It

After this blog post appeared on January 28, CMS announced on January 31 that it was further delaying Recovery Auditor (RA) post-payment patient status reviews of inpatient hospital claims until October 1, 2014. Previously, RA reviews of claims relating to the “two-midnight” rule put in place October 1, 2013, had been delayed until March 31, 2014. As noted in this blog hospital groups and members of Congress have been seeking to delay or revise the two-midnight rule since it was first proposed in 2013.


The American Hospital Association, along with regional hospital associations and four hospital systems, have taken the first steps to challenge the two-midnight rule and other Medicare payment changes implemented on October 1, 2013 under the Inpatient Hospital Prospective Payment System (IPPS) update for fiscal year (FY) 2014. In addition, the House of Representatives is considering legislation that would delay implementation of the rule until October 1, 2014.


Final rule CMS-1599-F incorporated two changes to the IPPS for FY 2014 that affects reviews by Medicare contractors, when an inpatient admission is considered reasonable and necessary: (1) a two-midnight presumption, which directs Medicare review contractors not to select inpatient claims for review if the inpatient stay spanned two midnights from the time of admission, absent evidence of gaming or abuse; and (2) a two-midnight benchmark, which instructs admitting practitioners and Medicare review contractors that an inpatient admission is generally appropriate when the admitting practitioner has a reasonable and supportable expectation, documented in the medical record, that the patient would need to receive care at the hospital for a period spanning two midnights.

The two-midnight rule applies to acute care inpatient hospital facilities, long-term care hospitals (LTCHs), inpatient psychiatric facilities (IPFs), and critical access hospitals (CAHs). It does not apply to admissions to inpatient rehabilitation facilities.

According to CMS, “hospital inpatient admissions spanning 2 midnights in the hospital will generally qualify as appropriate for payment under Medicare Part A.” CMS estimated that IPPS expenditures would increase by approximately $220 million due to an expected net increase in inpatient encounters under this policy, so it imposed a 0.2 percent reduction in IPPS payments to offset this estimated $200 million in additional IPPS expenditures.

The hospital organizations, along with hospitals that are part of Banner Health (AZ), Einstein Healthcare Network (PA) and Wake Forest University Baptist Medical Center (NC) and The Mount Sinai Hospital (NY) filed an appeal with the Provider Reimbursement Review Board (PRRB) asking the Board to grant expedited judicial review for the hospitals’ claims that the rule’s 0.2% payment cut in FY 2014 for IPPS hospitals is unlawful. According to the filing, “the Providers seek judicial review of pure questions of law regarding the substantive and procedural validity of the 0.2% reduction. Because the [PRRB] lacks the power to grant the Providers’ requested relief, it should grant expedited judicial review.”

Delay in RAC reviews

In order to give hospitals time to adjust to the two-midnight guidelines, CMS also instructed Medicare Administrative Contractors (MACs) and Recovery Auditors (RAs) that, absent evidence of systematic gaming or abuse, they were not to review claims spanning two or more midnights after admission for a determination of whether the inpatient hospital admission and patient status was appropriate. In addition, CMS has prohibited RAs from conducting patient status reviews on inpatient claims with dates of admission between October 1, 2013 and March 31, 2014. CMS has noted that “physicians should generally admit as inpatients beneficiaries they expect will require 2 or more midnights of hospital services, and should treat most other beneficiaries on an outpatient basis.”

Admissions down due to change?

A December 2013 report on the hospital industry from Citi Research showed inpatient admissions to hospitals declined 4.5 percent in November 2013 compared to November 2012. Only 5 percent of hospitals that responded to the Citi survey reported year-over-year growth in overall admissions, the lowest percentage in 11 years of Citi Research tracking these numbers. Citi analysts attributed the slowdown in hospital admissions to the two midnight rule. CMS has not released any information yet as to whether the two-midnight rule has affected hospital admissions for medicare beneficiaries.

Legislation to delay two-midnight rule

In December, several congressmen sponsored the Two-Midnight Rule Delay Act of 2013 (HR 3698) which would delay enforcement of the two-midnight rule for admissions occurring before October 1, 2014.

The bill prohibits Medicare review contractors from denying a claim for inpatient hospital services furnished by a hospital (including a long-term care hospital or inpatient psychiatric facility), or inpatient critical access hospital services furnished by a critical access hospital, for discharges occurring before October 1, 2014: (1) for medical necessity due to the length of an inpatient stay in such hospital or due to a determination that the services could have been provided on an outpatient basis; or (2) for requirements for orders, certifications, or recertifications, and associated documentation relating to such matters.

The legislation also directs HHS to develop: (1) a Medicare hospital payment methodology for short inpatient hospital stays; (2) general equivalency maps to link the relevant International Statistical Classification of Diseases and Related Health Problems (ICD)-10 codes (used to report medical diagnoses and inpatient procedures) to relevant Current Procedural Terminology (CPT) codes, and the relevant CPT codes to relevant ICD-10 codes, in order to permit comparison of inpatient hospital services and hospital outpatient department services; and (3) a second crosswalk between Diagnosis-Related Group (DRG) codes for inpatient hospital services and Ambulatory Payment Class codes for outpatient hospital services.

CMS Updates Policies on Medicare Coverage for Skilled Care and Therapy

CMS has revised portions of the Medicare Benefit Policy Manual to implement the settlement agreement reached earlier this year in Jimmo v Sebelius. The changes clarify that coverage of skilled nursing and skilled therapy services do not “turn on the presence or absence of a beneficiary’s potential for improvement, but rather on the beneficiary’s need for skilled care.”


Before the settlement between CMS and a class of Medicare beneficiaries was reached in October 2012, a long-standing Medicare coverage policy required that beneficiaries show medical or functional improvement or restoration to receive reimbursement for skilled nursing facilities (SNFs), home health (HH), and outpatient therapy (OPT) services. The proposed settlement arose out of a class action suit filed by Medicare beneficiaries seeking declaratory, injunctive and mandamus relief against the HHS Secretary.

The settlement agreement required CMS to revise the relevant portions of the Medicare Benefit Policy Manual to clarify the coverage standards for SNF, HH, and OPT benefits when a patient has no restoration or improvement potential but when the patient needs those services. The settlement agreement did not modify, contract or expand the existing eligibility requirements for receiving Medicare coverage for post-hospital SNF care, home health services, outpatient therapy services and inpatient rehabilitative services services.

In April 2013, CMS released its plan to implement the settlement agreement, including updating the Manual  and beginning an educational outreach campaign for beneficiaries and providers.

Manual updates

The changes to the Manual were implemented by Transmittal 176, issued December 13, 2013, and effective January 7, 2014. The Manual changes emphasize that (1) no “improvement standard” is to be applied in determining Medicare coverage for maintenance claims that require skilled care; (2) better guidance is available on the role of appropriate documentation in facilitating accurate coverage determinations for claims involving skilled care; and (3) the revised Manual sections do not represent an expansion of coverage, but provide “clarifications that are intended to help ensure that claims are adjudicated accurately and appropriately in accordance with existing policy.”

In effect, whether a beneficiary gets skilled nursing care or therapy services depends upon an individualized assessment of the beneficiary’s medical condition and the reasonableness and necessity of the care, treatment, care or services in question. If an assessment demonstrates that skilled care is necessary “to safely and effectively maintain the beneficiary at his or her maximum practicable level of function,” that skilled care will be covered by Medicare. If the beneficiary’s maintenance care can be fulfilled by nonskilled personnel, then skilled care would not be covered by Medicare.