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The Breathtaking Power of Medicare Contractors

©Jack Edward Urquhart

The power wielded by private Medicare Contractors is breathtaking. But this secret is well hidden within the dense web of laws, regulations, guidelines, policies and practices that is our federal health care system. Casting light on the power held by Medicare Contractors is vital as the federal government further expands its authority over American health care.

November 1, 2012, the American Hospital Association spotlighted the power of private Medicare Contractors to wipe out payments for physician-approved hospitalizations. The AHA and four hospital organizations sued the U. S. Department of Health & Human Services in The American Hospital Association v. Kathleen Sebelius, No. 1:12-cv-01770 (U.S. D.C. 2012).

Eye-catching AHA allegations paint a troubling picture of private-for-profit government contractors denying payment for hospital stays with limited, if any, legal or scientific reason. Moreover, AHA asserts the contractors pay from the government is directly related to reversing the admitting physician’s decision to hospitalize a patient. The more frequently the contractor reverses the admitting decision, the more the contractor is paid.

According to the lawsuit, this is the way it works. A doctor responsible for a patient’s care determines that hospitalization is reasonable and necessary and the patient is hospitalized. Then, Medicare compensates the hospital. Afterwards—months or years afterwards—a private Medicare Contractor “audits” the admitting doctor’s decision.

This is a paper audit—the contractor takes a look at the medical records to second-guess the admitting physician. If the contractor concludes that the treatment could have been provided out-patient, the hospital must pay back Medicare and the contractor gets a cut of the pay back.

There is more. The contractor can reverse the hospitalization without explanation. Millions and millions of dollars can be clawed back from hospitals on nothing more than a contractor’s say so. And the contractor pockets a portion of the repayment.
Medicare uses private-for-profit contractors for many of its reimbursement determinations. Recovery Audit Contractors a/k/a RACs are the featured players in this AHA lawsuit.

The AHA acknowledges that many wrongful RAC coverage denials are eventually overturned in the languorous and costly administrative review process. But is this due process? Is this within the authority granted by Congress to Secretary of Health and Human Services?
The AHA argues that at the very least the hospitals should be paid under Part B of Medicare. It reasons that the RACs do not question the need for the treatment. Rather, the RACs just second-guess whether the treatment required hospitalization paid for under Part A. The AHA asserts that there exists a “Payment Denial Policy” that prohibits Part B reimbursement if the hospital billed under part A and a RAC decides that the treatment could have been provided outpatient.

If the allegations are correct, the AHA understandably claims this audit practice “wreaks havoc” on hospital financial planning.
The lawsuit is in its infancy. And similar lawsuits involving the power of Medicare contractors never reach the merits, falling to preliminary standing and jurisdictional defenses.

However, the federal government’s already substantial role in health care is dramatically increasing. And the AHA lawsuit bears watching.
Health care costs must be controlled, and the CMS unquestionably has the right and responsibility to steward Medicare funds. But effort must be taken to ensure that coverage denials by government contractors are not simply arbitrary. Relying on an inordinately cumbersome and costly administrative appeal process to catch and correct systemic abuses of discretion is, at the very least, imprudent.
This is not written to condemn Medicare contractors. It is written to warn of their power and the roll money plays. Pie-in-the-sky claims of health care coverage expanding to folks who never before had access to coverage lose a great deal of meaning if—on whim—a private-for-profit contractor can wipe out coverage with a baseless denial of benefits.

We can not accept this as the truth of our health care system:

The good news is you now have health insurance coverage. The bad news is your claim has been denied without explanation by a government contractor. You can administratively appeal of course. Good luck and hope you have a lot of time and money.