Hospital Lawsuit Challenges CMS Payment Denial Policy

The American Hospital Association (AHA), joined by three individual hospitals and a hospital group, has asked a federal court in the District of Columbia to rule that a Medicare policy the AHA describes as “payment denial” violates federal Medicare law. Under the challenged policy, if a recovery audit contractor (RAC) finds that an inpatient setting was not necessary, the hospital must refund the entire payment, regardless of the medical necessity of the items or services furnished. Except for a few ancillary items that comprise a small part of the costs, the hospital will not be reimbursed for the services under Part B. The complaint alleges that the hospitals have lost hundreds of millions of dollars after providing medically necessary services because a RAC has determined, based on a review of medical records, that the services should have been performed on an outpatient basis.

The AHA and the hospitals contend that the payment denial policy is invalid for several reasons. First, Soc. Sec. Act sec. 1871(a)(2) requires that any change in the scope of benefits or payment requirements be promulgated as a regulation. Second, the policy was adopted without the notice and comment process required under the Administrative Procedure Act. Third, they contend, the policy is arbitrary and capricious, both because it is inconsistent with applicable statutes and because the agency has offered no explanation of its reasoning other than a provision of the Medicare Benefit Policy Manual (CMS Pub. No. 100-02), which states that services may not be paid under Part B if they could have been paid under Part A.

The hospitals allege that in the vast majority of these post-payment reviews, the RAC finds that all of the services furnished were medically necessary, but demands that the entire Part A payment be refunded because they should have been outpatient services. They also allege that the Departmental Appeals Board has ruled at least four times that hospitals should be paid under Part B for these “right-services, wrong setting” cases.

The complaint highlights the amounts that the RACs keep from the Part A payments and states that a high percentage of appeals of RAC decisions are successful.