Following industry criticism and legal challenges, the Centers for Medicare & Medicaid Services (CMS) will no longer enforce an inpatient payment cut to hospitals under the two-midnight rule. Instead it will provide a onetime bump to hospitals to offset the cuts.

Under this two-midnight rule, only patients that the doctor expects will need to spend two nights in the hospital would be considered as hospital inpatients. The rule directs CMS payment contractors to presume hospital stays are appropriately billed as inpatient admissions rather than outpatient observation visits when they span two midnights.

Medicare spending was estimated to increase by $220 million due to an expected increase in inpatient admission resulting in the two midnight. Hospitals are likely to see a temporary increase of 0.6 percent in 2017, making up for the 0.2 percent reduction to the rates the last three years. This accumulation which includes other increases outlined in the proposed rule, will result in a net increase of approximately $539 million to hospital inpatient prospective payment systems providers in 2017.

As noted by Modern Healthcare, a federal judge sided with the American Hospital Association and various other hospitals around the U.S. in the decision to drop the cut, after the September ruling in Shands Jacksonville Medical Center v. Burwell, by ordering The U.S. Department of Health and Human Services (HHS) to better justify the cut and re-open the policy to comments.

The case made by hospitals had challenged the 0.2 percent reduction for inpatient services which were meant to offset estimated costs to Medicare associated with the two-midnight rule. While the policy was intended to reverse the higher rates of observation stays, experts have attributed defensive billing practices by hospitals to the facilities being wary that their admissions are being challenged by Medicare audit contractors.

While the September ruling didn't demand the CMS to withdraw the pay cut, the agency wrote that it still believes "the assumptions underlying the 0.2% reduction to the rates put in place beginning in fiscal year 2014 were reasonable at the time we made them in 2013. Nevertheless, taking all the foregoing factors into account, in the context of this case, we believe it would be appropriate…to prospectively remove, beginning in 2017, the 0.2 percent reduction."

The decision to remove the 0.2 percent reduction, coupled with other increases outlined in the proposed rule, will result in a net increase of approximately $539 million to inpatient payments in 2017. For long term hospitals, the CMS proposes a decrease of 6.9 percent or $355 million next year because of a new site-neutral policy for less intensive cases.