The latest shot in the war between hospitals and RACs has been fired.  The American Hospital Association (AHA) and four hospital systems brought a lawsuit against the Department of Health and Human Services (HHS), alleging that the government’s recovery audit contractor (RAC) program improperly demands repayment of legitimate Medicare payments.  They filed suit because they argue that Medicare’s refusal to pay for reasonable and medically necessary care provided to Medicare beneficiaries by the hospitals under the Centers for Medicare and Medicaid’s (CMS’s) “Payment Denial Policy” violates the Medicare Act and the Administrative Procedure Act (APA).

CMS employs RACs – which are private third party contractors – to review physicians’ decisions to admit patients to the hospitals.  The RACs are paid a percentage of the amount of the “improper” Medicare reimbursement.  The RACs review medical records, often a year or more after a patient’s hospital admission, and decide whether or not to overrule a physician’s decision to admit a patient to the hospital.  If the RAC believes that the patient should have been treated on an outpatient basis rather than inpatient, the hospital must reimburse the entire amount it received from Medicare under Part A. Under CMS’s Payment Denial Policy, the hospital is also prohibited from receiving reimbursement under Medicare Part B for most items and services that were billed under Medicare Part A.  As a result, when a RAC concludes that a hospital should have provided items and services on an outpatient, rather than an inpatient, basis, the hospital ends up receiving little if any reimbursement for reasonable and medically necessary items and services provided to Medicare beneficiaries. 

The RAC approach is in sharp contrast to the approach used historically by the Department of Justice, the OIG, and Program Safeguard Contractors.  For example, when DOJ pursued hospitals for inappropriately admitting patients for kyphoplasty procedures, rather than treating them on an outpatient basis, DOJ gave hospitals credit for the APC payment they would have received had the procedure been correctly billed initially.   Particularly when the medical necessity of an inpatient admission related to a specific procedure is involved, an APC payment can be significant.

The hospitals argue that they are losing hundreds of millions of dollars for necessary care, including surgeries, drugs, and observation care, that they provided to Medicare beneficiaries months or years prior to the RACs’ payment determination.

The complaint seeks a ruling that the Payment Denial Policy violates the Medicare Act, which entitles hospitals to receive payment for all reasonable and necessary medical and other health services provided to beneficiaries. The hospitals also allege that CMS’s policy is in violation of the APA, because it is arbitrary and capricious, because CMS failed to undergo the notice and comment rulemaking process prior to enacting the policy, and because it was not promulgated as a regulation.

The complaint is available here.