On November 1, 2012, the American Hospital Association (AHA) and four healthcare providers brought suit against HHS for maintaining a policy of refusing to pay for medically necessary care provided to patients. The suit specifically deals with the "wrong setting" scenario where hospitals provide services under Part A, and Recovery Audit Contractors (RACs) subsequently audit and deny those services as not appropriate at an inpatient level. In denying the services under Part A, HHS and CMS have taken the position that no payment to the hospitals is warranted; however, hospitals have long argued that the services still were medically necessary and should be reimbursed under Part B. Now the AHA and a handful of hospital systems and medical centers are suing in an effort to overrule this nonpayment policy.

The AHA challenges HHS's policy of prohibiting Part B payment for Part A denials as violative of the Administrative Procedure Act (APA). The AHA argues this prohibition of Part B payment for medically necessary services violates the Medicare Act and thus is invalid under APA. The suit also alleges that the policy of not allowing payment under Part B is arbitrary and capricious, that CMS's failure to follow precedent is arbitrary and capricious, is invalid for failure to undergo notice and comment rulemaking and is invalid because the policy was not promulgated as a regulation.

In sum, the AHA takes the position that "[p]ut simply, when a hospital furnishes reasonable and medically necessary items and services, if payment cannot be made under Part A, it must be made under Part B." The suit requests declaratory relief and an order that "all hospitals that have received Part A denials based upon the wrong setting of care be paid full Part B reimbursement."

The suit is in line with recently introduced legislation which, if passed, would legislatively provide for rebilling denied Part A inpatient claims under Part B where the services are found medically necessary at the outpatient level. See the October 25, 2012, issue of the Health Law Update. The AHA voiced support for that bill as well.