CMS pays $1.3B to settle hospital inpatient claims

As of June 1, 2015, CMS had entered into settlement agreements with 1,900 hospitals and paid $1.3 billion to settle more than 300,000 appeals of claims involving inpatient status. The CMS announcement is the latest in a settlement program that it announced in September 2014. Hospitals wishing to participate in the program had until October 31, 2014, to submit appeals information.


In January 2014, the Office of Medicare Hearings and Appeals (OMHA) noted an “unprecedented growth in claim appeals” that exceeded adjudication resources; in 2013, there were more than 136,000 pending appeals related to the recovery audit program (Notice, 79 FR 393, January 3, 2014). OMHA Chief Judge Nancy Griswold indicated in a December 2013 memo that there was a backlog of close to 357,000 claims (see CMS offers partial payments for certain Part A hospital claims under appeal, Health Law Daily, September 3, 2014). In September 2014, CMS announced a settlement program intended to decrease the backlog.

Settlement program

Pursuant to the program, CMS would pay 68 percent of the net allowable amount to acute care hospitals and critical access hospitals who had appealed, or were still eligible to appeal, claims denied by Medicare contractors on the basis that while the claims were reasonable and necessary, “treatment on an inpatient basis was not.” Patients could not have been enrolled in Medicare Part C and claims must not have been paid as Part B claims. Dates of admission must have been before October 1, 2013, since CMS hoped that its Two Midnight rule, which states that inpatient claims in which an inpatient is admitted based upon the presumption that his or her stay will span two midnights are presumed eligible for Part A coverage, would allow for more clear-cut coverage decisions (Final Rule, 78 FR 50496, August 19, 2013).

In Round 1 of the process, hospitals were to submit spreadsheets of eligible claims and appeals and a signed administrative agreement. If CMS had identical information, it would sign the agreement, issue payment, and dismiss the impacted appeals; if there was a discrepancy in information, CMS would execute an agreement with respect to the agreed-upon information. In Round 2, hospitals would submit information for which discrepancies had been uncovered with CMS; where CMS had identical information, settlement would be executed and appeals dismissed. Where discrepancies continued to exist, CMS would engage in discussions with hospitals until they could reach an agreement.

Recovery audit contractors

Much of the backlog is attributed to recovery audit contractors (RACs), who identify and correct improper Medicare payments. Critics of the Recovery Audit Program note that RACs are paid on a contingency fee basis on both the overpayments and underpayments they identify, creating an incentive for them to identify as many overpayments as possible. The American Hospital Association has referred to the incentives as “perverse” and urged Congress to enact RAC reforms.