Medicare-Medicaid Audit World
Depending on a doctor’s opinion as to the severity of a patient’s medical condition, a hospital may either provide the patient with services after he or she is admitted to the hospital (inpatient services) or without the patient being admitted (outpatient services). Although many of the services are the same, the hospital is paid more if the patient is admitted than if the services are provided on an outpatient basis.
During the last few years, CMS’ Recovery Audit Contractors (RACs) have determined that millions of dollars paid to hospitals for inpatient treatment should be refunded to CMS because although the patient needed the medical services provided, the services should have been provided on an outpatient basis. Although most people might think that the result of the hospital’s mistaken classification would simply be for the hospital to repay Medicare the difference between the amount it was paid for inpatient services and the amount that it would have been paid for the services on an outpatient basis, CMS has a different view. According to CMS, because the hospital submitted a bill for what was later determined to be unnecessary inpatient services, the hospital is entitled to no payment for its services.
On November 1, 2012, the American Hospital Association and four individual hospitals filed a lawsuit in the United States District Court for the District of Columbia against Kathleen Sebelius, the Secretary of the Department of Health and Human Services, in an attempt to overturn this unreasonable policy and to force CMS to pay hospitals for the legitimate outpatient services provided. While the hospital’s position is undoubtedly fair and reasonable, their lawsuit may not succeed.
Will CMS’ Broad Power to Administer the Medicare Program Defeat the Hospitals?
There is no doubt that Congress has given CMS broad powers to enact rules and regulations governing the operation of the Medicare Program. CMS has used that 
authority to promulgate thousands of regulations and policies to govern, among other things, who is eligible to participate in the Medicare program, what benefits the program will provide, the amounts to be paid for services and what hospitals and other providers must do to be paid. According to 42 C.F.R. ยง 424.32(a)(1), in order for a hospital or provider to be paid:
A claim must be filed with the appropriate intermediary or carrier on a form prescribed by CMS in accordance with CMS instructions.
As anyone involved with billing Medicare can attest, CMS has issued specific and detailed instructions as to how an inpatient claim is to be billed, how an outpatient claim is to be billed and how a hospital may change the status of a patient initially admitted as an inpatient to that of an outpatient. One of the many instructions requires a hospital to identify the services being billed as being provided to either an inpatient or an outpatient. Once the claim has been submitted, CMS does not permit a change in the patient’s status or the type of bill to be changed from inpatient to outpatient
The current lawsuit, in essence, asks the Court to force CMS to change its billing policy by forcing CMS to treat a bill submitted for inpatient services as a bill for outpatient services if a RAC or other contractor determines that it was not medically necessary to provide the services in an inpatient setting or to permit the hospital to file a new claim for the medically necessary outpatient services provided because it would be unjust to not pay the hospital for the obviously necessary services provided to the Medicare beneficiary. For the hospitals to be successful, they will have to convince the Court that CMS’ policy is so far beyond the scope of its authority to regulate the operation of the Medicare program that it is, in legal terms, arbitrary and capricious. History teaches that this will be an uphill battle for the hospitals.
Please contact us if you would like further information about this lawsuit or for assistance in helping to resolve other issues with any of the legion of CMS auditors that inhabit the Medicare-Medicaid Audit World.