The American Hospital Association, in conjunction with hospitals in three states, has filed suit against the U.S. Department of Health & Human Services charging that the Recovery Audit Contractor (RAC) program is illegally withholding millions of dollars in Medicare reimbursements due U.S. hospitals.

The suit, filed in U.S. District Court of Washington, D.C., is the first legal salvo against implementation of the Patient Protection and Affordable Care Act (ACA).

The ACA, in its entirety, is seen as a boost for healthcare providers. Wall Street, for example, gave its approval of the ACA by lifting stock prices of large healthcare provider corporations following the election of President Barrack Obama.

With regard to not-for-profit hospitals, Moody’s Investor Services long-term forecasts  rates the President’s election will have a neutral impact. While hospitals will benefit the individual mandate provision of the ACA will mean insurance coverage for millions currently uninsured, “the reform remained a net long-term negative overall for not-for-profit hospitals because of significant reductions in Medicare and Medicaid funding, increased insurer regulation, and lower reimbursement rates,” the ratings service said in a statement.

Seeking Freedom from ‘Claws’ of RAC

The AHA and provider lawsuit claims the RAC system is broken, ineffective, and illegal. According to the lawsuit:

Traditionally, the decision to admit a patient for inpatient treatment has been committed to the expert judgment of the attending physician. But in recent years, the Secretary of Health and Human Services (HHS) acting through the Centers for Medicare & Medicaid Services (CMS) has employed private third parties—known as Recovery Audit Contractors, or RACs—to engage in wide-ranging review of physicians’ decisions to admit patients. These contractors are paid based on the amount of Medicare reimbursement they can “claw back” from hospitals. And though they operate with nothing but a cold paper record, they now regularly overrule physicians’ expert medical judgments 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.

RAC audit decisions are frequently overturned, and even when they are not, the provider should be compensated under Medicare Part B. “In short, CMS simply refuses to pay hospitals for services that it acknowledges are covered under Medicare Part B and that it acknowledges were reasonable and medically necessary in the particular case,” according to the suit. “That policy has resulted in hospitals losing hundreds of millions of dollars for necessary care—surgeries, drugs, observation care, and on and on—that the hospitals provided to Medicare beneficiaries months or years earlier.”

This policy is illegal, the suit claims.

CMS has no comment on the suit, according to Reuters.

In addition to the lawsuit, the AHA has come out in support of the the HHS Office of Inspector General that it will investigate  the effectiveness of the RAC program.

According to the OIG:

We will review CMS’s overall strategy to maintain the integrity of the Medicare. The Medicare Integrity Program (MIP) was established through 42 U.S.C. § 1395ddd and requires CMS to contract with entities to carry out various program integrity activities to safeguard against fraud, waste, and abuse in Medicare Parts A and B. Over the past few years, Congress has submitted multiple letters to CMS questioning the effectiveness of the program integrity efforts of these contractors. We will also determine how CMS allocates funds for MIP activities and review the measures CMS uses to evaluate the performance and overall effectiveness of the MIP.

At the same time, CMS is pushing RAC to investigate new areas of possible fraud, such as the possibility of upcoding as reported in September after a flurry of media reports estimated fraud in that area to be in the billions.

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