The American Hospital Association (AHA) has filed suit against the U.S. Department of Health and Human Services (HHS) over its alleged refusal to meet its financial obligations for hospital services provided to some Medicare patients. The AHA was joined in the suit by four hospital systems: Missouri Baptist Hospital, a critical access hospital in Sullivan, Mo.; Munson Medical Center, a 391-bed hospital in Traverse City, Mich.; Lancaster General Hospital, a 631-bed facility in Lancaster, Pa.; and Trinity Health Corporation, which owns 35 hospitals.

The AHA maintains that the issue is the refusal of HHS to reimburse hospitals for reasonable and necessary care, when the government, in hindsight, decides that such care could have been provided in an outpatient facility instead of the inpatient portion of the hospital itself. It notes that the decision that a physician makes regarding where the patient should be treated is often complicated for Medicare patients, who may older or suffering from ailments such as diabetes or high blood pressure.

According to the AHA, doctors are routinely second-guessed about these difficult decisions by government-sponsored recovery audit contractors, or RACs, which are paid primarily on the basis of how much Medicare funding is taken back from hospitals and physicians. It maintains that reviews often take place years after the decisions are made, without seeing or talking to the patient.

When RACs decide that care could have been provided in an outpatient setting, the hospital must return the funding they received, even years earlier. The suit maintains that when hospitals appeal the RAC decisions, they prevail most of the time. But even when they are not, payment for the services should be made under Medicare Part B, which covers hospital outpatient services.

The suit maintains that the Centers for Medicare and Medicaid Services (CMS) has refused to provide the Part B reimbursement under a “Payment Denial Policy” that prohibits Part B reimbursement for most items and services that were billed under Part A, which covers inpatient hospital care. The plaintiffs maintain that the policy has resulted in hundreds of millions of dollars for necessary care that the hospitals provided to Medicare beneficiaries months or years earlier.

According to the lawsuit, RACs collected $1.86 billion in overpayments between October 2009 and March 2012; it identified only $245 million in underpayments during the same period.