Health Law Daily Failure to consider the 2-midnight policy did not violate the APA
Wednesday, January 2, 2019

Failure to consider the 2-midnight policy did not violate the APA

By Elizabeth M. Dries, J.D.

HHS did not violate the Administrative Procedure Act (APA) by failing to consider evidence demonstrating that its inpatient hospital prospective payment system (IPPS) 2-midnight policy would result in a substantial decrease in impatient admissions, failing to consider reasonable alternatives to the rate reduction that was adopted, or by failing to respond to comments purporting to show that the 2-midnight policy would result in a substantial decrease in inpatient admissions. The hospitals’ motion for summary judgment was denied and HHS’ cross-motion for summary judgment was granted (Shands Jacksonville Medical Center, Inc. v. Azar, December 28, 2018, Moss, R.).

Legislative background. In an earlier decision, the court held that HHS failed to provide a meaningful opportunity to comment publicly on a rule that imposed a 0.2 percent, across-the-board reduction in IPPS rates used to compensate hospitals for FY 2014 under the Medicare Program. In August 2013, HHS adopted a "2-midnight policy" to distinguish between inpatient and outpatient visits. Specifically, the 2-midnight policy requires Medicare Part A coverage when the physician expects the patient to require a stay that crosses at least 2 midnights and admits the patient to the hospital on that expectation.

In light of the policy HHS adopted a 0.2 percent rate reduction in order to offset the cost to the program. In response, an array of hospitals brought suit under the APA arguing that HHS lacked statutory authority to adopt the rate reduction; that the FY 2014 rule failed to comply with the procedural requirements of the APA; and that the 0.2 percent rate reduction was arbitrary capricious. While the court rejected the hospital’s challenge to HHS’ statutory authority and declined to reach their arbitrary and capricious challenge, it held that HHS did not reveal key actuarial assumptions until after the close of the comment period thereby depriving the hospitals of a meaningful opportunity to comment on the rate reduction. The court remanded the matter to provide an opportunity for meaningful public comment. Following public comments, HHS abandoned the 0.2 percent reduction, and instead proposed that the department no longer impose the rate reduction going forward and adopt a one- time, 0.6 percent rate increase for FY 2017 to address the effects of the 0.2 percent reduction to the rates in FY 2014. Four months later the increase was finalized.

The hospitals. Two groups of hospitals raised separate challenges to HHS’ actions on remand. The first group of hospitals, "the Bakersfield plaintiffs," argued that the adoption of the 0.6 percent increase for FY 2017 did not redress the problem, arguing the rate increase did not fully compensate the hospital for the rate decrease in earlier years and failed to repeal the FY 2014 rule. The second group of hospitals, "the Athens plaintiffs" argued that the FY 2017 rule adopting the 0.6 percent increase was correct, but too small, and that HHS should have adopted an across the board rate increase to compensate hospitals for the reduced payments. They contended that the court should remand the matter, but this time vacate the FY 2014 rule and direct HHS: (1) to consider the hospital’s comments and data; and (2) budget neutralize any replacement rule. The court rejected both groups’ arguments. The court reasoned that HHS properly addressed the court’s order on remand when it provided the public with a meaningful opportunity to comment on the 0.2 percent rate reduction. HHS was not required to rescind the FY 2014 rate adjustment. The 0.6 percent increase was never intended to mirror the 0.2 percent reductions for FYs 2014-2016, or to make each hospital subject to the reductions whole again. Instead, the 0.6 percent increase was adopted as the most transparent, expedient, and administratively feasible method to address the effect of the 0.2 percent decrease. Finally, HHS’ actions on remand complied with the APA.

The case is No. 14-263.

Attorneys: Robert L. Roth (Hooper Lundy & Bookman, PC) for Shands Jacksonville Medical Center, Inc. Benjamin R. Dryden (Foley & Lardner, LLP) for Alex Azar.

Companies: Shands Jacksonville Medical Center, Inc.

MainStory: TopStory CaseDecisions IPPSNews CMSNews BillingNews PaymentNews PartBNews ProviderNews DistrictofColumbiaNews

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