Medicare payments to general acute care hospitals will drop by more than $750 million over the next year, and the controversial two-midnight policy will move forward as scheduled, according to a new federal regulation.

On Aug. 4, the Centers for Medicare & Medicaid Services released the final rule governing payment policies for general acute care hospitals and long term care hospitals for fiscal year 2015, which begins on Oct. 1, 2014.

While Medicare will increase the payment rate for general acute care hospitals by 1.4% in fiscal year 2015, a combination of policy changes and penalties under quality programs will actually decrease payments overall by 0.6%, or about a $756 million drop in Medicare spending on inpatient hospital services overall, according to CMS. In contrast, CMS projects that payments to long-term-care hospitals will rise by about 1.1% in fiscal year 2015.

"Today’s policies further support our efforts to continue improving the care our Medicare beneficiaries receive while also cutting the growth of Medicare costs," Marilyn Tavenner, CMS administrator, said in a statement. "This final rule builds on our recent efforts to improve hospital performance while giving hospitals the clarity and resources they need to deliver the best possible patient care."

The final inpatient hospital payment rule does not make changes to the controversial two-midnight policy released by Medicare officials last year. Under the rule, the decision to admit a Medicare patient as an inpatient depends on two factors: whether the condition meets medical necessity requiring a patient to be in a hospital setting and the expectation that their time in the hospital will surpass two midnights.

The two-midnight policy technically went into effect on Oct. 1, 2013, but enforcement through postpayment claims audits by Recovery Audit Contractors has been delayed until March 31, 2015. In the meantime, Medicare Administrative Contractors have been performing prepayment reviews on samples of short-stay inpatient claims to determine hospital compliance with the new policy.

In the final inpatient hospital rule, CMS officials said that they will spend the summer and fall of 2014 to evaluate the results of the prepayment reviews and issue additional guidance on the application of the policy. The agency is also accepting suggestions for exceptions to the two-midnight policy at suggestedexceptions@cms.hhs.gov.

The Association of American Medical Colleges criticized CMS for failing to either revise or replace the two-midnight policy in this most recent round of rulemaking.

The current policy "continues to ignore physicians’ medical judgment, results in inadequate reimbursement to hospitals for medically necessary care, and creates confusion and new financial liabilities for Medicare beneficiaries," Dr. Darrell G. Kirch, AAMC president and CEO, said in a statement.

Dr. Kirch called on CMS to issue supplemental guidance that would allow hospitals to bill certain short stays as inpatient, under Medicare Part A, when the physician determines that the stay is medically necessary. He also urged the agency to suspend the prepayment reviews being conducted by Medicare Administrative Contractors until the policy is either revised or replaced.

Dr. Bradley Flansbaum, a hospitalist at Lenox Hill Hospital in New York and a member of the Society of Hospital Medicine’s public policy committee, said he thinks CMS could still make changes to the two-midnight policy, despite the lack of action in the recently released inpatient payment rule.

"CMS sees the delay as a cooling off and retrenchment period. They know the two-midnight rule and auditing practice have raised the hackles of many folks," he said. "Business as usual won’t return, and I am pretty certain we will see changes, both in how we make observation determinations and in the payment and surveillance process."

In a proposed rule issued earlier this year, CMS raised the possibility of creating a new payment method under Medicare for short, but intensive inpatient hospital stays. The final rule summarized some of the public comments received so far, but did not propose any new policies.

The inpatient hospital payment rule also contains updates for several of Medicare’s quality improvement programs, including increasing the penalties for hospitals that perform poorly on the measures.

Starting Oct. 1, 2014, hospitals will be subject to a 3% penalty on their Medicare payments if they have high readmission rates for acute myocardial infarction, heart failure, pneumonia, chronic obstructive pulmonary disease, and hip/knee arthroplasty. Starting in October 2016, CMS will add another measure to the Hospital Readmissions Reduction Program: coronary artery bypass graft surgical procedures.

The inpatient payment rule also makes changes to the Hospital Value-Based Purchasing Program. For fiscal year 2015, the penalty will rise to 1.5% of base operating DRG payment amounts to all participating hospitals. CMS estimates that there will be about $1.4 billion available for value-based incentive payments in fiscal year 2015.

mschneider@frontlinemedcom.com

On Twitter @maryellenny

CMS finalizes plan to cut hospital payments, move ahead with two-midnight policy