In filing suit against the Department of Health and Human Services for refusing to make Medicare payments on care that hospitals contend is proper, the American Hospital Association has launched an assault on the Recovery Audit Contractors program.

In the suit, filed Nov. 1 in U.S. District Court in the District of Columbia and available here, the AHA charges that RACs have taken upon themselves, and not “the expert judgment of the attending physician,” to judge the medical necessity of a hospitalization, often for treatments months or years old.

“These contractors are paid based on the amount of Medicare reimbursement they can ‘claw back’ from hospitals,” the lawsuit states. “And although they operate with nothing but a cold paper record, they now regularly overrule physicians’ expert medical judgment long after the fact, determining that particular Medicare patients--patients whom they have never even seen--should not have been admitted to the hospital to receive inpatient care. CMS then takes back all the payments it made to the hospital for the patients’ care and gives the RAC a percentage of those funds.”

Further, hospitals win the large majority of appeals, yet CMS refuses to provide Part B reimbursement, and while hospitals can rebill most items and services under Part A as outpatient care, CMS only pays “for a few ancillary items like splints and casts--items that typically amount to a small percentage of the total cost of care,” according to the lawsuit.

Consequently, Medicare is flat-out not paying for a huge chunk of appropriate care, the hospitals contend, while RACs get a bounty. They further charge that CMS justifies this under a provision of the Medicare Benefits Policy Manual that never underwent public notice and comment.

The lawsuit also give case studies for each of the hospitals explaining patient cases where payment was demanded back, and the overall harm brought to the hospitals under the RAC program. For instance, since January 2010, 26-bed Missouri Baptist had repaid Medicare $226,501 while the RAC got $21,495; Munson repaid $6.485 million with the RAC getting $810,625; and Lancaster paid back $3.8 million with the RAC receiving $480,000. Trinity Health has repaid $33.6 million and has spent $8.4 million handling RACs’ requests and appeals.

The AHA and hospitals ask the court that the CMS Payment Denial Policy, which they charge five counts of violating the federal Administrative Procedures Act, be declared arbitrary and capricious, as well as invalid. They further ask that plaintiff hospitals be fully reimbursed for Part B appeals at issue, 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; and an award of such other temporary and permanent relief as this Court may deem just and proper.”

HHS is not yet ready to comment on the suit, according to a spokesperson.

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