News & Insights


September 28, 2015

Health Headlines – September 28, 2015


District Court Says CMS’s 0.2 Percent IPPS Rate Cut Violated APA

On September 21, 2015, the United States District Court for the District of Columbia ruled that the Secretary of the U.S. Department of Health and Human Services (HHS) failed to provide a meaningful opportunity to comment on a 0.2 percent reduction in Medicare inpatient hospital prospective payment rates related to the “two midnight rule,” in violation of the Administrative Procedure Act (APA).  While the court did not overturn the rate cut altogether, it held that the Secretary did not disclose critical assumptions central to her decision-making during the comment period.  The Secretary only disclosed these assumptions during in the FY 2014 Inpatient Prospective Payment System (IPPS) Final Rule after several hospitals—led by King & Spalding—submitted detailed comments questioning how the Secretary arrived at her result.  The court directed the parties (including hospitals represented by King & Spalding) to propose to the court no later than October 1st a timetable for a new comment period in order to give stakeholders a meaningful opportunity to comment on all elements central to the Secretary’s rate calculation.  The decision is Shands Jacksonville Medical Center v. Burwell, No. 14-00263 (D.D.C. Sept. 21, 2015).

Background on the 0.2 Percent Payment Rate Reduction

When CMS proposed the two midnight rule in the FY 2014 IPPS Proposed Rule, the agency estimated that that the two midnight rule would actually increase the number of inpatient admissions by 40,000 cases.  78 Fed. Reg. 27486, 27644-50 (May 10, 2103).  Specifically, the Secretary reviewed Medicare claims data from FYs 2009-2011 and estimated that approximately 360,000 inpatients cases would shift to outpatient status if the two midnight rule applied, while 400,000 outpatient encounters would shift to inpatient admissions under the new standard—a net increase of 40,000 inpatient cases.  Id.  The Secretary estimated that these 40,000 net new inpatient cases would result in $220 million in additional IPPS payments, and thus proposed to reduce IPPS payment rates by 0.2 percent to maintain budget neutrality.  Id. at 27651.

The Secretary did not elaborate in any detail as to how she arrived at these estimates.  She only provided a brief reference to analysis of the 2009-2011 claims data but did not specifically explain the basis for her estimate that only 360,000 inpatient admissions would shift to outpatient under the new standard or how 400,000 outpatient encounters would shift to inpatient status.  Nor did she explain how the net result of that shift—40,000 new inpatient admissions—would equal $220 million in increased IPPS payments.

While many commenters opposed the payment reduction as a matter of principle, one comment letter (prepared by King & Spalding and FTI Consulting on behalf of 14 hospitals and health systems) specifically attempted to recreate the Secretary’s calculations using the same 2009-2011 claims data cited in the Proposed Rule.  The commenters stated that they could not arrive at the Secretary’s result.  Instead, the commenters estimated that there were more than 1.5 million short stay inpatient cases in FY 2011 alone—a number more than four times what the Secretary predicted would shift from inpatient to outpatient status.  The commenters’ analysis also found only 121,662 outpatient encounters of 48 hours or more, less than the 400,000 that the Secretary predicted would shift from outpatient to inpatient status.  The data simply did not show that the two midnight rule would have the effect of creating 40,000 net inpatient admissions. 

In the FY 2014 IPPS Final Rule, 78 Fed. Reg. 50496, 50953 (Aug. 19, 2013), the Secretary disclosed for the first time her actuaries’ hidden assumptions: the 40,000 case analysis only looked at the impact of the two midnight rule on surgical cases; CMS’s actuaries had excluded medical cases, which comprise 75 percent of all Medicare inpatient admissions.  Not only did the Secretary not provide commenters with this critical information during the comment period, she also did not provide any explanation in the Final Rule as to why she limited her review to surgical cases while applying the two midnight rule to both medical and surgical cases.  She also provided no response to the commenters’ analysis of the 2009-2011 claims data. 

Plaintiffs in the Shands case argued, among other things, that failure to disclose the assumption regarding the exclusion of medical cases was a serious violation of the APA.  Had they known about the assumption, plaintiffs argued, they would have commented that the exclusion of medical cases from CMS’s analysis was irrational because the two midnight rule applies equally to both medical and surgical cases.  Including medical cases in the analysis would eliminate the rationale for the 0.2 percent rate cut, because the data would show that inpatient cases would, on net, decline as a result of the two midnight rule, not increase. 

The Court’s Decision in Shands

District Court Judge Randolph D. Moss “agree[d] that the Secretary’s failure to disclose the critical assumptions relied upon by the HHS actuaries deprived Plaintiffs and other members of the public of a meaningful opportunity to comment on the proposed 0.2 percent reduction.”  The Secretary’s decision to analyze the two midnight rule’s effect only on surgical cases was, in the court’s view, “central to the analysis that led to the Secretary’s conclusion that 40,000 discharges would shift to inpatient status in 2014, and, without that information, commenters had no basis to understand or to critique the Secretary’s conclusion.”  Judge Moss specifically noted the King & Spalding comments that “endeavored—without success—to recreate the Secretary’s conclusions” as proof that the commenting public had no idea how the Secretary arrived at her 40,000 increase in inpatient admissions.

The plaintiff hospitals in Shands asked the court to set aside the rate cut immediately, which would have required CMS to retroactively reimburse hospitals for the 0.2 percent reduction.  The plaintiff hospitals argued not only that it was contrary to the APA for CMS not to disclose that its actuaries excluded medical cases from their analysis, but that this assumption is irrational on its face, as medical cases are covered by the two midnight rule the same as surgical cases.  The court did not grant that relief.  Instead, Judge Moss concluded that although CMS violated the APA because the agency did not give hospitals an opportunity to challenge the hidden assumption that excluded medical cases, the court did not have an adequate record before it to determine whether or not this assumption was truly irrational.  Therefore, the court remanded the case back to CMS to provide another comment period where hospitals can respond to this assumption.  The plaintiff hospitals and CMS must propose to the court a timetable for the new comment period no later than October 1, 2015. 

Next Steps

Even before the court’s ruling in Shands, CMS had already attempted to justify its exclusion of medical cases in the CY 2016 Outpatient PPS Proposed Rule.  There, CMS explained that its actuaries excluded medical cases principally because of their belief that “clinical assessments and protocols used by physicians to develop an extended length of stay for medical cases were in general more variable and less defined than those used to develop an expected length of stay for surgical cases.”  80 Fed. Reg. 39200, 39369 (July 8, 2015).  Given this variability, CMS stated, the actuaries excluded medical cases from their analysis because they believed that medical cases would be “unaffected” by the two midnight rule, as they predicted that short stay medical cases would likely be stretched to longer periods of time in the hospital and remain as inpatient cases.  King & Spalding submitted comments to that rulemaking on behalf of more than 200 hospitals, finding that a review of claims from FY 2011—data that was available to CMS when it adopted the payment reduction—shows the exact opposite: the average length of stay for medical cases is in fact more predictable than the average length of stay for surgical cases.  Should the Secretary insist upon these unfounded assumptions as justification for her rate cut in the new comment period, a new round of litigation challenging that decision-making will be the inevitable result.

So while the ruling in Shands is not the final chapter to this dispute, it underscores that the agency must detail its assumptions and methodologies before implementing rate changes.  This case also demonstrates the importance of verifying through analysis the many factual assertions that CMS makes during the rate making process.  CMS often relies upon past data and the conclusion its actuaries draw from this data to support its rate proposals.  In this case, the King & Spalding commenters did not accept those conclusions at face value, but instead attempt to recreate the rate calculation and filed comments the eventually forced CMS to concede that its actuaries had failed to disclose a hidden assumption.  CMS’s failure to explain its methodology in full is exactly why the court found that it violated the APA and remanded for further comments. 

The court’s decision is available here.

Reporters, Mark Polston, Washington, DC, +1 202 626 5540,; Christopher Kenny, Washington, DC, +1 202 626 9253,; and Ethan Davis, San Francisco, +1 415 318 1224,

CMS Proposes Lab Data Collection Requirements to Update Fee Schedule

On September 25, 2015, CMS released proposed rulemaking that would extensively revise payment and reporting requirements for clinical diagnostic laboratory tests (CDLTs), as paid on the Clinical Laboratory Fee Schedule (CLFS).  Under the proposed rule, certain laboratories would be required to report to CMS private payor payment rates and test volume for CDLTs.  Ultimately, CMS would use the data to set CLFS payment rates to the weighted median of private payor rates. CMS estimates a Medicare Part B savings of $2.94 billion over 5 years and $5.14 billion over 10 years. 

The rulemaking would implement a portion of the Protecting Access to Medicare Act of 2014, which added section 1834A to the Social Security Act and requires a phase-in of certain reductions in CLFS payments through 2022.  Maximum reductions are limited to 10 percent for each of 2017 through 2019, and 15 percent for each of 2020 through 2022.  No such reduction limit exists for subsequent updates, and no other adjustments (annual update, budget neutrality, or geographic variation) will apply. 

Under the proposal, CMS would require data reporting from certain laboratories on a calendar year basis.  However, CMS proposes a shortened initial period, by which data would be collected from July 1, 2015 through December 31, 2015 and reported to CMS by March 31, 2016.  CMS would use that data to update CLFS rates effective January 1, 2017.  Data reporting would then generally be required every third subsequent calendar year, with corresponding updates to the CLFS occurring again on January 1, 2020 based on data collected during calendar year 2018 and reported by March 31, 2019.  Prior to the finalization of any payment updates, the public will have the opportunity to provide comments.

As proposed, “applicable laboratories” must report, by HCPCS code, the private payor payment rate for each CDLT and the volume of tests performed, by private payor.  By statute, private payors include Medicare Advantage plans and Medicaid managed care organizations.  From this data, CMS will calculate the weighted median private payor payment rates to adjust CLFS rates.

“Applicable laboratories” are defined as those entities receiving more than 50 percent of their Medicare revenues under the CLFS or Physician Fee Schedule during the data collection period.  This threshold applies by Taxpayer Identification Number (TIN)-level entity, rather than by National Provider Identifiers (NPI), such that even NPI entities that are not laboratories would count towards the TIN-level entity’s revenue total.  Medicare revenue includes payments under Parts A, B, C, and D, as well as any associated beneficiary deductible or coinsurance.

TIN-level entities receiving less than $50,000 in Medicare revenues ($25,000 during the initial shortened reporting period) would be excluded.  CMS estimates that this low expenditure threshold will exclude approximately 50 percent of independent laboratories and 90 percent of physician offices.  Applicable laboratories that fail to report, or make a misrepresentation or omission in reporting, will be subject to a civil monetary penalty under the proposed rule.

CMS proposes differing reporting requirements for advanced diagnostic laboratory tests (ADLTs), which are CLTS furnished by a single laboratory meeting certain other criteria.  Applicable laboratories must report on ADLTs annually, rather than every three years under the proposed rulemaking.  Further, new ADLTs (for which Medicare payment was not made prior to January 1, 2017) would report for three quarters by actual list charge, setting the payment rate until the following ADLT data collection period.  If the initial payment rate is 130 percent or greater than the eventual ADLT payment rate based on the weighted median of private payor rates, CMS proposes to recoup the difference.  As proposed, new CDLTs would be priced based on crosswalking (if a similar test exists) or gapfilling (if no comparable test exists) until weighted median information can be established.

The proposed rulemaking is available here.  CMS’s factsheet is available here and its press release is here.  The proposed rule is expected to be published in the Federal Register on October 1, and interested parties may submit comments through November 25.

Reporter, Elizabeth N. Swayne, Washington, D.C., + 1 202 383 8932,

OIG Report Finds CMS’s MIDAS System Needs Improvement in Information Security Controls

On September 14, 2015, the OIG released a Public Summary Report finding that although CMS had implemented controls to secure the Multidimensional Insurance Data Analytics System (MIDAS) and consumer personally identifiable information, there were a number of areas for improvement in CMS’s information security controls. 

MIDAS is a central repository for insurance-related data on a number of initiatives mandated by the Patient Protection and Affordable Care Act.  OIG conducted its review because MIDAS collects, generates, and stores a high volume of sensitive consumer information.

OIG’s report identified the following four areas for improvement in its information security controls:

    1. CMS had not disabled unnecessary generic accounts in its test environment;
    2. CMS had not encrypted user sessions;
    3. CMS had not conducted automated vulnerability assessments that simulate known attacks, which would have revealed vulnerabilities (e.g., password weaknesses and misconfigurations) specific to the application or databases that support MIDAS; and
    4. CMS used a shared read-only account for access to the database that contained personally identifiable information.

In addition to the above, OIG’s analysis identified additional vulnerabilities consisting of 22 “high,” 62 “medium,” and 51 “low” vulnerabilities.  OIG shared this information with CMS immediately, and made recommendations to CMS to address the issues OIG identified.  CMS began remediation efforts before the OIG completed its fieldwork, and in written comments, concurred with all of OIG’s recommendations.  CMS reported to OIG that it remediated all vulnerabilities and addressed all findings that OIG identified before OIG issued its final report.  The complete report is available here

Reporter, John Whittaker, Sacramento, +1 916 321 4808,

Also in the News

HHS Publishes Final Federal Health IT Strategic Plan 2015-2020 On September 21, 2015, the Office of the National Coordinator for Health Information Technology (ONC) of HHS laid out the federal government’s final version of its long-term strategy for nationwide health information technology adoption.  The plan signals a shift away from a provider-centered approach that aims to achieve electronic health record adoption by and among hospitals and primary care providers through meaningful use and other initiatives to a more patient-centered approach that seeks more collaboration by and among additional providers across the care continuum.  HHS sets forth four long-term information technology goals.  The first goal is to “advance person-centered and self-managed health.”  The second is to “transform health care delivery and community health.”  Third, HHS aims to “foster research, scientific knowledge, and innovation,” and finally, HHS seeks to improve the country’s health information technology infrastructure.

IOM Report Calls for Increased Awareness of Diagnostic Errors  On September 22, 2015, the Institute of Medicine (IOM) released a report entitled Improving Diagnosis in Health Care.  The report estimates that diagnostic errors—inaccurate or delayed diagnoses—account for 6 to 17 percent of hospital adverse events and are the leading type of paid medical malpractice claim.  Furthermore, IOM estimates that 10 percent of patient deaths result from diagnostic errors, based on postmortem examination.  Lastly, approximately 5 percent of individuals seeking outpatient care can be expected to experience a diagnostic error.  Diagnostic errors may result in prevented or delayed treatment, unnecessary/harmful treatment, or psychological and financial repercussions for patients.  IOM’s full report, as well as other related resources, are available here.

King & Spalding Healthcare Roundtable: “Unlevel Playing Field: What Can You Do When Your Competitor Is Gaining An Illegal Advantage?” – On October 20, 2015, King & Spalding will host a Healthcare Roundtable analyzing strategic options that healthcare and life sciences companies may consider when faced with credible evidence that a competitor is breaking the law to gain an unfair business advantage.  More information and registration options are available here.

The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice.

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