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How a bill becomes a flaw

Hospitals shortchanged?

Interpretation of payment rules leads to lawsuits


By Joe Carlson
Posted: January 26, 2013 - 12:01 am ET
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Some federal officials say Medicare auditors are routinely misapplying CMS payment rules on denials that short hospitals hundreds of millions of dollars in revenue for legitimate services.

The American Hospital Association sued the federal government over the issue in November. And it recently amended its case to add new allegations from the 37-hospital system Dignity Health, accusing the government of breaking its own rules guaranteeing that hospitals are paid when regulations are unclear.

The CMS says that hospitals are, for the most part, not entitled to a dime when they provide legitimate emergency or surgical care to a patient but then wrongly file a claim for an expensive inpatient stay. Medicare's controversial recovery audit contractors have been pushing hospitals to bill for less-expensive outpatient or “observation” care.

Patients say hospital decisions to push them to lower levels of care subject them to greater costs and eliminate Medicare reimbursement for rehabilitation services after they're discharged, according to a class-action federal lawsuit filed in Connecticut that is separate from the AHA case.

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Meanwhile, experience is showing that when hospitals fight back against efforts to deny payments in these “wrong setting” cases, they often win—even though it may take years to reach a final answer on a single case involving $10,000 or less.

The highest level of administrative appeal for the CMS is an entity known as the Departmental Appeals Board's Medicare Appeals Council. That agency has been routinely overturning CMS contractors' decisions, saying that the CMS is misreading its own rules and denying hospitals payments for services that were medically necessary.

In one case last June, Administrative Appeals Judge Gilde Morrisson rendered a decision for the council ordering the CMS to pay 306-bed Providence Health Center in Waco, Texas, outpatient fees after the hospital admitted a 67-year-old man with chest pains for cardiac catheterization and angioplasty and implanted a drug-eluting stent to prop open a failing artery.

Providence reasoned that since the man was at immediate risk for heart attack, his care justified expensive Medicare Part A inpatient care. Medicare contractors disagreed, and so did Morrisson, who ruled that inpatient care should have been used only if more serious complications appeared. But rather than provide $0 for care the man needed, she ordered the hospital receive the less-lucrative Medicare Part B outpatient rate for the surgery.

Hospitals have won at least 15 such outpatient-payment victories since 2010. In fact, healthcare providers have racked up so many victories before the appeals council and lower-ranking administrative law judges—known as ALJs—that the CMS quietly sent a memo to its contractors last July instructing them how to pay hospitals for outpatient care while making it clear the agency disagrees with the legal rulings.

“We note that while these unusual steps are necessary to comply with the ALJ decisions, they are not consistent” with the Medicare benefits manual, according to the July 15 memo to CMS contractors, which was obtained by Modern Healthcare. “We are instructing contractors to take action that is inconsistent with CMS policy solely to effectuate these specific ALJ orders.”

Meanwhile, the administrative law judges and appeals council officials who work for HHS—the same federal bureaucracy that includes the CMS—read the Medicare manual differently.

Morrisson, for example, considered the same section of the Medicare manual that the CMS cited in its letter to contractors, but the judge came to the opposite conclusion as the Medicare agency in the Providence Health Center case.

“This manual section clearly indicates that payment be made for covered hospital services under Medicare Part B if a Part A claim is denied,” she wrote. The ruling by Morrisson, who declined an interview request, went on to cite several other sections of the Medicare rules that in her opinion would justify paying the hospital lower rates rather than nothing for wrong-setting claims.

Andrew Wachler, the managing partner at Wachler & Associates in Royal Oak, Mich., who has closely followed the issue, said he offers one piece of advice to all hospitals that are denied payments for billing in the wrong setting:

“Appeal it. And you should get your Part B money,” he said. “And in my opinion, it is only by all hospitals recognizing this, and doing it, and unfortunately clogging the system, that some resolution will be provided.”

That extreme level of conflict and uncertainty is the basis for arguments by Dignity Health—which were added to the AHA's lawsuit Dec. 13—that hospitals are entitled to Part B outpatient money.

Section 1879 of the Medicare Act says hospitals that provide noncovered services can still be paid if the hospital “could not reasonably have been expected to know” that the claim would be denied. Officials for the CMS and Dignity declined to comment.

The CMS launched an ongoing demonstration project at the start of 2012 allowing 380 hospitals to resubmit Part B bills, but the program has failed to convince critics that the agency is serious about overturning its policy of not paying bills submitted for the wrong setting.


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