Three Key Arguments in Hospitals’ Challenge to Medicare Payment Denial Policy

On Nov. 1, 2012, the American Hospital Association (AHA) and four hospital systems (collectively, the Plaintiffs) filed a lawsuit in federal court against the Department of Health and Human Services (HHS) for allegedly “refusing to pay hospitals for hundreds of millions of dollars’ worth of care provided to patients” that was “reasonable and medically necessary” under the Medicare program. In challenging this policy, the Plaintiffs made the following key arguments:

1. RACs have the authority to undermine physician decisions and this affects reimbursement. HHS may refuse to reimburse hospitals for inpatient care when HHS determines, retrospectively, that such care should have been provided in an outpatient setting. Authority granted to Recovery Audit Contractors (RACs) by HHS (acting through the Centers for Medicare and Medicaid Services (CMS)) permits RACs to engage in “wide-ranging review[s] of physicians’ decisions to admit patients.” Plaintiffs maintain that “[even] though they operate with nothing but a cold paper record, [RACs] [may] … overrule physicians’ expert medical judgment long after the fact, determining that particular Medicare patients — patients whom [the RACs] have never seen — should not have been admitted to the hospital to receive inpatient care.” If a RAC decides that patient care could have been provided in an outpatient setting, a hospital must repay to CMS all payments it made to the hospital for the patient’s care. Despite the RACs’ authority, the complaint maintains that when challenged by physicians, RACs’ decisions are often overturned on appeal.
2. Hospital patient care services should be covered under Medicare Part B. The Plaintiffs maintain that even if a patient admission is improper, payment for patient care services should still be reimbursed to hospitals under Medicare Part B, which covers hospital outpatient services. The Plaintiffs allege that CMS, however, has “categorically refused to provide” Part B reimbursement under a “Payment Denial Policy,” which prohibits Part B reimbursement for most items and services that were billed under Part A (which covers inpatient services): “In short, CMS simply refuses to pay hospitals for services that it acknowledges are covered under Medicare Part B and that it acknowledges were reasonable and medically necessary in the particular case.” The Plaintiffs maintain that CMS’s Payment Denial Policy has resulted in hospitals’ losing hundreds of millions of dollars for necessary care that hospitals had provided to Medicare beneficiaries months or years earlier.
3. CMS’s Payment Denial Policy should be set aside. The Plaintiffs are ultimately seeking to set aside CMS’s Payment Denial Policy on the grounds that it is “contrary to federal law, arbitrary and capricious, and invalid for failure to undergo notice and comment.” The Plaintiffs are also seeking an order that mandates CMS to repay hospitals for the reasonable and medically necessary services they provide to patients: “No matter whether it was provided in the inpatient or outpatient setting, Medicare must pay hospitals for such medically necessary care.”

For more information concerning this case or for information relating to hospital reimbursement under the Medicare program, please contact the attorneys on this page.

American Hospital Association, et al. v. Sebelius , Complaint, Case No. 1:12- cv-1770, U.S. District Court for the District of Columbia (Washington) (Nov. 1, 2012).

John DeGaspari, “Hospitals Sue HHS Over Alleged Unfair Medicare Practices,” Healthcare Informatics (Nov. 5, 2012).