On March 24, 2009, a California medical center filed a complaint in the U.S. District Court for the Southern District of California, alleging that the Recovery Audit Contractor (“RAC”) unlawfully reopened a Medicare claim submitted by the medical center. Specifically, the medical center alleged that the RAC impermissibly reopened a claim more than one year after payment without showing good cause for doing so. The medical center challenged the RAC’s showing of good cause, arguing that the reopening at issue was invalid and could not support the RAC’s recovery of paid claims.

Medicare regulations permit RAC’s to reopen and review claims for any reason within one year of receipt of payment for such claims. This one year review period provides the Medicare program with an opportunity to audit claims for compliance with applicable regulations. A RAC must show “good cause,” as defined in the regulations, to open and review claims one to four years after payment by Medicare.

The California case involves the reopening of a two-year old Medicare claim submitted by Palomar Medical Center in connection with care provided in the hospital’s acute rehabilitation unit in June 2005. Such claim was paid by Medicare on July 7, 2005. Upon review of the medical records, on July 10, 2007, the RAC retroactively denied coverage for the claim on the basis of medical necessity. Palomar appealed the RAC’s decision to a fiscal intermediary and to a qualified independent contractor, both of which upheld the RAC’s denial of coverage. The medical center subsequently appealed to an ALJ, arguing both that the care provided was medically necessary and thus covered by Medicare and that the RAC had no authority to reopen the claim because no “good cause” was shown for reopening the claim more than one year after payment. The ALJ held that it had jurisdiction to determine whether the reopening was proper and found that the RAC had not shown good cause to reopen the case. The Medicare Appeals Council (“MAC”) reversed the ALJ’s decision, holding that the ALJ lacked jurisdiction to determine whether the claim was lawfully reopened by the RAC.

The present lawsuit was filed in response to the MAC’s decision. It is the first lawsuit to challenge the ability of RACs to reopen claims more than one year after payment and raises questions regarding which body has the jurisdiction to determine whether cases are properly reopened. A District Court decision in this matter has important implications for providers: a decision in favor of the medical center would affirm an important basis for challenging RAC claim reviews, but a decision in favor of the government would increase provider uncertainty with respect to which Medicare claims may be subject to RAC review.

A copy of the complaint filed March 24, 2009 in Palomar Medical Center v. Johnson, S.D. Cal., No. 3:09-cv-00605-BEN-NLS can be found at http://op.bna.com/hl.nsf/id/jthn-7qhs4x/$File/Palomar%20Medical%20Center%20v.%20Johnson.pdf.