California Hospital Files First Lawsuit Challenging a Recovery Audit Contractor Reopening

May 7, 2009

A California hospital recently challenged the decision of a Medicare recovery audit contractor (RAC), alleging that the RAC unlawfully reopened claims submitted by the hospital. Palomar Medical Center v. Johnson, S.D. Cal., No. 3:09-cv-00605-BEN-NLS (S.D. Cal. complaint filed 3/24/09). The case is the first since the inception of the Medicare RAC program to challenge the ability of RACs to reopen Medicare claims more than one year after payment, and its outcome will significantly affect the ability of hospitals to generally treat Medicare payments as final a year after receipt.

The case involves the reopening by the RAC PRG-Schultz International of a two-year-old claim by Palomar Medical Center in connection with medical care provided to a patient in the San Diego, California, hospital’s acute rehabilitation unit in June 2005. The RAC retroactively denied coverage for the claim based on medical necessity. Palomar Medical Center appealed the adverse RAC decision and a Medicare administrative law judge (ALJ) determined (at the third level of the RAC appeals process) that the RAC had not shown “good cause” to reopen the claim. Medicare regulations require a showing of good cause to reopen claims paid more than one year prior to reopening. However, at the fourth appeal level the Medicare Appeals Council (MAC) subsequently reversed the ALJ’s decision, holding that the ALJ lacked jurisdiction to determine whether the reopening of the claim was lawful.

In response to the MAC’s decision, Palomar Medical Center then filed its complaint in the U.S. District Court for the Southern District of California. The complaint challenges the RAC’s showing of “good cause” and the MAC’s determination that ALJs do not have authority to decide whether a RAC has unlawfully reopened a claim.

Medicare regulations permit RACs to reopen and review claims for any reason within one year of payment. This rule provides an opportunity for the Medicare program to audit claims for compliance with applicable regulations. To reopen and review claims between one and four years after payment, a RAC must show “good cause,” as defined in the regulations. Palomar Medical Center’s complaint alleges that PRG-Schultz regularly and impermissibly reopened claims up to four years after payment without any showing of good cause. Palomar Medical Center argues that such reopenings were invalid and could not support the recovery of paid claims.

The complaint further alleges that the Council misinterpreted applicable regulations in determining that ALJs lack jurisdiction authority to review whether RACs have lawfully reopened claims.

The Palomar Medical Center case follows an early 2008 determination by the MAC that ALJs and the MAC lack jurisdiction to decide contested reopenings under the Medicare appeals process. Critical Care of North Jacksonville v. First Coast Serv. Options, Inc., decided February 29, 2008.

A District Court decision in favor of Palomar Medical Center would reaffirm an important basis for hospitals to challenge RAC claim reviews. An unfavorable determination could significantly increase hospitals’ uncertainty with respect to Medicare payments. As the rollout of the RAC permanent program continues, hospitals and other providers should be aware of developments concerning claim reopening requirements and procedures, as well as other potential legal defenses, in case they should find themselves the subject of Medicare recovery audits.

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