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.

Supplement Company to Pay $2.2 Million for False Diabetes Treatment Claims

The Wellness Support Network, Inc., a supplement company, and its two principals, Robert Held and his daughter Robyn Held (owners) will pay nearly $2.2 million to the Federal Trade Commission (FTC) as ordered by the U. S. District Court for the Northern District of California after the court found that that owners engaged in false advertising and deceptive practices for treating and preventing diabetes in violation of Sections  5(a) (15 U.S.C. sec. 45(a)) and 12 (15 U.S.C. 52(a)(2)) of the Federal Trade Commission Act (FTC Act). The court order also prohibited the company and owners from claiming without rigorous scientific proof that their supplements would treat and prevent diabetes and from making other deceptive claims, according to an FTC press release. The FTC will use the funds it recovers to reimburse consumers. 

The Court’s Holding

The U.S. District Court in the Northern District of California granted the FTC’s request for summary judgment against the owners and the company concluding that the owners of the company that sold the Diabetic Pack and the Insulin Resistance Pack were liable for the claims made on the company’s website and in the advertising and marketing materials for those products, in part, because the owners created the advertising and marketing materials used to promote and sell those products. According to the FTC press release, the owners advertised primarily online, relying heavily on consumer testimonials and running ads that claimed a “Diabetes Breakthrough” and a “clinically proven natural solution to diabetes with a 90% success rate.” The products were sold for $76.70 for a 30-supply supply.

The court specifically found that the following claims to be false or unsupported by scientific evidence: “Diabetic Pack is an effective treatment for diabetes, is proven as an effective treatment for diabetes, reduces or eliminates the need for insulin and other diabetic medications, and is proven to cause an average drop in blood glucose levels of 31.9 percent;” and “Insulin Resistance Pack reverses and manages insulin resistance, is proven to be an effective treatment for insulin resistance, prevents diabetes, and is proven to cause an average drop in blood glucose levels of 31.9 percent.”

The court found that the claims were misleading consumers who purchased the products giving the impression that the Diabetic pack was an effective treatment for diabetes because they lacked a reasonable basis on which they were founded. The claims needed to be substantiated by human clinical studies that had the following requirements: controlled, randomized, double-blind, and statistically meaningful; however, no studies with these requirements existed for either of the products, the court said. In addition, the court found that the studies referenced by Wellness in its advertising were flawed because the studies did not test the two products at issue. Finally, the court concluded that the advertising claims were material because they involve issues of health, safety, and other issues that would concern reasonable consumers.

The FTC press release noted that “the case against Wellness Support Network, Inc. is part of its ongoing efforts to stop bogus claims that unproven remedies can be used to prevent and treat serious diseases such as diabetes and cancer.”

SCOTUS Denies Petition from Patients Refused Oral Surgery Medicare Coverage

The U.S. Supreme Court has denied Delores Berg’s and Thomas DiCecco’s petition for certiorari on a class action suit contending that the Medicare Benefit Policy Manual misinterprets the dental exclusion provisions of 42 USC 1395y(a) and 42 CFR 411.15. Berg and DiCecco suffer from autoimmune disease, which has destroyed their salivary glands, teeth, gums, and has led to life-threatening infections. However, according to the HHS manual, oral surgery is not included in their coverage. “When an excluded service is the primary procedure involved, it is not covered regardless of its complexity or difficulty,” states the manual. The district court and Ninth Circuit accorded Chevron, U.S.A., Inc. v Natural Resource Defense Council, Inc. deference to the Secretary’s interpretation and rejected Berg and DiCecco’s claims.

Legislative History

According to the petition, Congress never intended for the dental exclusion to deny coverage in instances of extraordinary oral surgical work, but for routine dental care. “The committee bill provides a specific exclusion of routine dental care to make clear that the services of dental surgeons covered under the bill are restricted to complex surgical procedures. Thus,… a routine annual or semi-annual checkup would not be covered…Similarly, too, routine dental treatment – filling, removal, or replacement of teeth or treatment of structures directly supporting the teeth, would not be covered,” stated Senate Report No. 89-104 (1965). However, the Ninth Circuit found that the dental exclusion provisions were ambiguous and found the Secretary’s interpretation to be reasonable under Chevron.


In their petition, Berg and DiCecco argued that the Supreme Court should grant certiorari because the Ninth Circuit’s decision conflicts with other appellate court rulings that preclude Chevron deference in instances where agency actions lack the “force of law.” Specifically, they argued that Medicare Appeals Council decisions and manual provisions lack precedential authority, and therefore cannot be subjected to Chevron deference. Further, Berg and DiCecco asserted that the Ninth Circuit’s decision “establishes an irrational policy and misconstrues” Barnhart v Walton. “Nothing in Barnhart alludes to or suggests that a ‘process of adjudication’ supports Chevron deference to an administrative review system’s decisions that lack the force of law,” stated the petition. Nevertheless, the Supreme Court denied the petition.

Arizona Can’t Exclude Planned Parenthood From Medicaid Funding

The United States Supreme Court has let stand a Ninth Circuit decision upholding an Arizona district court’s permanent injunction barring Arizona Medicaid officials from enforcing an Arizona statute prohibiting state Medicaid beneficiaries from obtaining covered family planning services through health care providers who perform abortions in cases other than incest, rape or medical necessity. The Arizona statute would have effectively disqualified providers of elective abortions from receiving Medicaid funding. Arizona’s petition for certiorari was denied.

The Ninth Circuit also held that (1) the Medicaid Act’s free-choice-of-provider requirements at 42 U.S.C. sec. 1396a(a)(23) confer a private right to action under 42 U.S.C. sec. 1983 and (2) the Arizona statute contravenes the Medicaid Act’s requirement that states give Medicaid recipients a free choice of qualified provider by preventing patients from selecting a provider only because the provider separately provides privately funded, legal abortions.


In the spring of 2012, the Arizona legislature enacted House Bill 2800. The bill would have prevented Arizona or any political subdivision of Arizona from entering into a contract or providing a grant to any person that performs non-federally qualified abortions, or maintains or operates a facility where non-federally qualified abortions are performed for the provision of family planning services. The bill defines “non-federally qualified abortion” as one that does not meet the requirements of federal reimbursement. The federal Hyde Amendment, which applies to Medicaid funds, prohibits federal funds from being used for abortions except in the case of danger to the life of the mother, rape, or incest.

After House Bill 2800 was passed, the Arizona Health Care Cost Containment System (AHCCCS) sent letters to all Arizona Medicaid providers, including Planned Parenthood Arizona, Inc. (Planned Parenthood). The letter asked Planned Parenthood to sign a form attesting that as of August 2, 2013, it would not perform any abortions or maintain or operate a facility where any abortion is performed, except in cases of rape, incest or medical need. Failure to return the form would lead to AHCCCS terminating its provider participation agreement, and Planned Parenthood would receive no reimbursement from Arizona for any medical service.

Legal Proceedings

Planned Parenthood and individual plaintiffs filed suit to block House Bill 2800 and the district court granted a preliminary injunction barring implementation of the law. Arizona filed an appeal with the Ninth Circuit, and before it was heard, the lower court granted summary judgment for Planned Parenthood, holding that House Bill 2800 violates the free-choice-of-provider requirement, and permanently enjoined Arizona from enforcing House Bill 2800. Arizona appealed to the Ninth Circuit, and the court consolidated the two appeals.

The Ninth Circuit held that the free-choice-of-provider provision may be enforced through individual lawsuits under 42 U.S.C. sec. 1983, which creates a federal remedy against anyone who deprives a citizen of rights, privileges or immunities secured by the Constitution and laws. As a cooperative federal-state health care program, under 42 U.S.C. sec. 1396a(a)(23(A) states must allow Medicaid recipients to obtain care from any provider who is “qualified to perform the service or services required” and “who undertakes to provide…such services.” Although the word “qualified” is not defined, the court read the term to convey its ordinary meaning, a health care provider having an officially recognized qualification to practice as a member.

Certiorari Petition

Arizona’s petition to the Supreme Court presented two issues: (1) whether the claimed right to choose a “qualified” health care provider, as the Ninth Circuit construed that right, is so vague that its enforcement strains judicial competence, and (2) whether the Ninth Circuit’s definition of “qualified” engenders a Spending Clause violation and strips Arizona of powers reserved under the Tenth Amendment, namely, the power to regulate health care according to state law by disqualifying from Medicaid participation any provider who performs non-federally qualified abortions.