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Finding in favor of hospitals, a federal judge late yesterday rejected the Centers for Medicare & Medicaid Services’ arguments that it met all legal requirements for rulemaking when the agency cut hospitals’ inpatient payments by 0.2% in conjunction with its “two-midnight” policy. Specifically, Judge Randolph Moss found that CMS violated the Administrative Procedure Act and ordered the agency to provide further justification and additional opportunity for hospitals to comment. He specifically ordered all parties involved in the consolidated challenge – which includes a case brought by the AHA, four hospital associations and four hospital organizations – to propose, by no later than Oct. 1, 2015, a timetable for reissuing the rule. If CMS fails to comply with that timetable, the court noted that the payment cut may be set aside. “Although the deficiencies in the rule are serious, the Court is not convinced that they are so grave that the Secretary should be precluded from taking corrective steps with respect to the 2014 inpatient prospective payment system,” Moss wrote. While finding the imposition of the payment offset was a serious violation of the APA that harmed hospitals and other members of the public by preventing them from offering meaningful comments on the agency’s proposal, the court specifically rejected an argument, advanced by counsel representing other hospital parties, that the Medicare Act does not authorize the Secretary to make an across-the-board 0.2% reduction to compensation for inpatient services. The court also rejected outright  advanced for the first time by the government at an Aug. 3 hearing that it was “self-evident” that the Medicare-Severity Diagnosis-Related Group medical cases would be unaffected by the two-midnight rule and, accordingly, could be excluded from the agency’s analysis in support of the need for the offset.