The American Hospital Association (AHA) and several hospitals seek to invalidate a Centers for Medicare and Medicaid Services (CMS) auditing policy in a lawsuit filed on November 1 whose ultimate outcome could affect thousands of hospitals across the country and hundreds of millions of dollars in Medicare payments.

The policy at issue in the case, American Hospital Association v. Sebelius, No. 1:12-cv-01770 (D.D.C. Nov. 1, 2012), involves private entities that contract with CMS to audit payments to providers and suppliers in the Medicare program. Under the policy, these entities, called recovery audit contractors (RAC), review payments to hospitals under Medicare Part A, which pays for inpatient hospital care. If a RAC concludes that a hospital could have provided treatment on an outpatient (and therefore most likely, less expensive) basis, CMS deems the payment an “overpayment” and requires the hospital to return the entire payment. Where a RAC finds such an overpayment, moreover, CMS generally does not reimburse the hospital under Medicare Part B, which pays for outpatient care.

To the detriment of hospitals and patients, the AHA argues in its complaint, this policy results in CMS “refusing to pay hospitals for hundreds of millions of dollars’ worth of care provided to patients, even though all agree that the care provided was reasonable and medically necessary as the Medicare Act requires.” The AHA asks the federal court overseeing the case to set aside the policy for violating the Medicare statute and other legal requirements that govern policymaking by agencies like CMS. Additionally, the AHA, which represents nearly 5,000 hospitals and health systems, asks the court to order CMS to pay all hospitals denied payment under the policy the full amount for their services.

The AHA lawsuit marks the culmination of years’ worth of administrative-level challenges to the policy, which grew out of legislation in 2006 making permanent a RAC demonstration project from legislation in 2003. In its complaint, the AHA notes that hospitals have been successful 75 percent of the time in overturning RAC determinations under the policy in non-precedential administrative proceedings on the theory that the hospitals were entitled to payment under Medicare Part B for reasonable and medically necessary services that the hospitals provided in the inpatient setting but could have provided in the outpatient setting. While it remains to be seen whether the court will agree with this theory, the AHA lawsuit will at a minimum require CMS, in its response to the AHA’s complaint, to provide insight into the agency’s rationale for the policy, which the AHA alleges has otherwise been absent.