AHA sues HHS over Medicare payment denials

(Updated at 3:15 p.m. ET.)

In a federal lawsuit, the American Hospital Association and four healthcare providers accuse HHS of illegally denying hospitals Medicare payments for audited outpatient procedures.

The Chicago-based interest group for nearly 5,000 hospitals says in the complaint (PDF) that HHS maintains an illegal policy of refusing to pay hospitals for Medicare outpatient services in cases where auditors retroactively conclude that inpatient care should have been delivered outside the hospital.

“It's not acceptable that we have to go through a long, laborious and costly appeal process for payments for medically necessary services and especially when that payment is denied,” Richard Umbdenstock, president and CEO of the AHA, said in an interview.

Four plaintiffs joined the AHA on the lawsuit: 56-bed Missouri Baptist Sullivan (Mo.) Hospital; 391-bed Munson Medical Center, Traverse City, Mich.; 640-bed Lancaster (Pa.) General Hospital; and 36-hospital Trinity Health, Livonia, Mich. The AHA asked members with bad RAC experiences to volunteer to be named on the lawsuit, and those four were the first to come forward.

The common thread between the four is that they've all been second-guessed by a RAC auditor and spent a large amount of money on appealing the decision, Umbdenstock said.

“They were all following, unfortunately, a very familiar kind of storyline,” he said.

The lawsuit followed the failure of year-long discussions on the care settings issue by the AHA and the CMS to reach a resolution, Umbdenstock said. He would not provide details of those talks and added that the CMS knew the lawsuit was coming as the logical “next step.”

A CMS spokesman declined to comment on the lawsuit because it is active litigation.

The AHA, with data collected from members through its RAC Trac Initiative, said that despite the challenges hospitals face when challenging an auditor, that 75% of appeals filed are successful in the hospitals' favor.

The AHA stated in a release (PDF) that although hospitals and auditors may have disagreed about the appropriate settings for care and subsequent reimbursement rates, government officials were not questioning the fact that needed services were delivered to the patients.

"Allowing government auditors to second-guess these difficult medical decisions about where to best treat a patient years later based on a cold record and then refuse to pay for that care is indefensible," Umbdenstock said.

The suit maintained that hospitals have lost “hundreds of millions of dollars” as a result of the CMS policy that provides very little reimbursement for the care that is provided in the disputed setting.

“Put simply, when a hospital furnishes reasonable and medically necessary items and services, if payment cannot be made under Part A, it must be made under Part B,” said the lawsuit.

The CMS policy to deny payment for wrong setting services violates federal law, according to the lawsuit, because it was never established through the formal rulemaking process.

“This is just something they have put in their policy manual,” Umbdenstock said.

The lawsuit also noted that smaller hospitals often choose not to appeal RAC decisions due to the cost of the appeals process.

The payment uncertainty from unpredictable appropriate-care-setting audits “wreaks havoc” on hospital financial planning, including staffing and capital needs, AHA argued.

The CMS reported RACs collected $657 million in overpayments from April to June 2012 according to the CMS' third-quarter RAC report. It noted inappropriate inpatient hospital care settings as a common factor behind the findings of overpayments, although no specific dollar amount was attributed to the practice.

The AHA backed legislation introduced in October that would implement a range of restrictions on RACs' ability to deny hospitals Medicare reimbursements, in part, because of a “significant number of inappropriate denials” of payment.

The healthcare treatment setting policy targeted by the lawsuit may already be having unintended consequences of pushing physicians to treat as outpatients people who require inpatient care, according to the AHA. As evidence that a similar concern is shared by the CMS, the lawsuit cited a July 2010 letter to the AHA from CMS Administrator Marilyn Tavenner that expressed concern about a trend toward observational services stemming from hospitals' experience with RAC audits.

Ashok Selvam also contributed to this report.