[JURIST] Five hospitals filed a lawsuit [complaint, PDF] against the US Department of Health and Human Services [official website] in the US District Court for the District of Columbia [official website] Thursday over what they contend is a scheme to deny them reimbursement from Medicare [official website] for necessary medical services. The coalition, led by the American Hospital Association (AHA) [advocacy website; case backgrounder], alleges that Recovery Audit Contractors (RAC) [official profile], private contractors that assess overpayment and underpayments in Medicare reimbursements, are encouraged to prevent hospitals from obtaining appropriate reimbursements. The AHA argues that because RACs—which are managed by four private corporations that are then assigned to hospitals based on regional location—are paid on contingency fees they have a vested interest in denying funding. The complaint cites several examples where an RAC admitted that the patient’s treatment was necessary, but should have been provided on an outpatient basis, and thus the hospital is denied reimbursement or expected to return previous reimbursements.

The RACs are frequently wrong in their assertions about what a physician, confronted with a patient in need of medical treatment, should have done months or years earlier. Indeed, hospitals report that when they pursue appeals through the administrative appeals process—an expensive and burdensome exercise—they are successful in overturning RAC denials 75 percent of the time. Despite this alarming error rate, when a RAC determines that a provider was paid for inpatient hospital services but that the patient in question should have been treated as an outpatient, [Centers for Medicare & Medicaid Services] takes back the entire Part A payment. Moreover, CMS takes the position that once an inpatient claim that was paid under Medicare Part A is later—usually years later—denied, the hospital cannot receive Medicare Part B payment except for a few ancillary services. As a result, when a RAC concludes that a hospital should have provided items and services on an outpatient, rather than an inpatient, basis, the hospital ends up receiving little if any reimbursement for reasonable and medically necessary items and services provided. The RACs fare significantly better. They keep a contingency percentage—9 percent to 12.5 percent—of the entire Part A payment.

The Centers for Medicare & Medicaid Services (CMS) [official website] declined to comment [Reuters report] on the suit.

RACs were made permanent through the Tax Relief and Health Care Act of 2006 [text] and were controversial at the time of enactment. RACs have a three-year lookback period and are the only Medicare audit option for hospitals in all 50 states. They were implemented in 2008 [press release], with the CMS describing their goal as “to identify improper payments made on claims of health care services provided to Medicare beneficiaries.” In the CMS’s 2010 report to Congress [pdf] it determined that RACs had “identified and corrected $92.3 million in combined overpayments and underpayments,” with 82 percent being overpayments that were returned to the Medicare Trust Fund [Medicare backgrounder, PDF].