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Palomar Medical Center v. Sebelius: Ninth Circuit Affirms Bar on Review of RAC Audits

Health Law Update Lisa E. Davis, Christopher T. Dang

The Ninth Circuit Court of Appeals recently affirmed the decision of the Medicare Appeals Council ("MAC") holding that there was no administrative or judicial right to review a Recovery Audit Contractor's ("RAC") decision to reopen Medicare claims. The decision of the Court gives RACs unfettered ability to reopen Medicare claims that are between one and four years from an initial determination, creating a higher risk of ongoing audits and increasing the risk for repayment.

Overview

In June 2005, Palomar Medical Center ("Palomar") provided inpatient rehabilitation services to a patient. On July 27, 2005, Palomar was paid in full for the services. Nearly two years after the payment was made, Palomar received notice from a RAC the claim would be reviewed. Upon review the RAC determined that, while rehabilitative services were required, it was not "reasonable and necessary" that the services were provided in an inpatient hospital environment. Palomar was ordered to repay the overpayment amount.

Palomar appealed the RAC's determination of overpayment through four levels of administrative review. When the appeal reached an Administrative Law Judge ("ALJ"), relief was granted to Palomar. The ALJ reasoned that relief was appropriate because 42 C.F.R. § 405.980(b) required that any claim between one and four years from initial determination may only be reopened for good cause, and that the RAC in this instance had made no showing on the record of good cause for late reopening.

The Secretary of Health and Human Service (the "Secretary") appealed to the MAC. The MAC reversed the ALJ, relying on two other provisions of the administrative rule: 42 C.F.R. 405.980(a)(5) and 42 C.F.R. § 405.926(l). According to these provisions, a determination to reopen is "final" and "not appealable." Palomar then appealed to the federal district court which granted summary judgment for the Secretary holding that the regulations bar appeals of reopenings.

The Ninth Circuit agreed with the MAC. According to the Ninth Circuit, the requirement of "good cause" was not subject to either administrative or judicial review. Or said differently, providers have no mechanism to ensure that claims may only be reopened for cause. Instead, the RAC can reopen any claim, for any reason, at any time for up to four years after an initial determination. The Secretary may, in her discretion, use a RAC's determination (or failure to determine) "good cause" as a tool in reviewing RAC performance.  It remains unknown how the Secretary will review good cause determinations, and how much weight will be given in comparison to the amounts recovered as a result of RAC reviews.

Impact

The immediate impact of this decision is RACs have an unchallengeable right to reopen Medicare claims in the Ninth Circuit. While this decision is only binding in the Ninth Circuit, it will likely be considered persuasive authority across the country and result in all providers losing the ability to challenge RAC decisions to reopen claims under the "good cause" requirement. Eventually, this could lead to an increase in the number and frequency of RAC reviews.

Should this occur, oversight of RAC reopenings will be left to the discretion of the Secretary of Health and Human Services. Given the amount of the overpayments returned as part of the RAC program it is unclear how willing the current or potential future administrations would be in strictly enforcing the "good cause" requirement.

A provider faced with a RAC reopening Medicare claims in violation of the "good cause" requirement and a Secretary that is unresponsive or unwilling to enforce the standard could potentially raise a due process claim. Notably, Palomar did not appeal and the Ninth Circuit did not weigh on the district court's rejection of Palomar's due process arguments. The District Court determined that Palomar was not deprived of due process, because Palomar otherwise had ample opportunity to challenge the substantive elements of the initial determination, redetermination, reconsideration or hearing decision which was revised by the reopening. Arguably, this view nulls any protective power to the "good cause" requirement.

At the outset of a reopening, a provider could seek declaratory relief on the argument that the Secretary's inaction in enforcing its own "good cause" requirement, and the Secretary's promulgation of an reopening process without administrative or judicial review violates the provider's due process rights. By putting the reopening process beyond administrative or judicial review and limiting its application of the "good cause" requirement as a criterion of RAC performance, the Secretary is unable to prevent abusive practices by RAC auditors until after the damage is done and without credence to fairness or due process to providers.

For more information, please contact Lisa Davis at (602) 229-5247 / lisa.davis@quarles.com, Christopher Dang at (602) 230-5530 / christopher.dang@quarles.com or your local Quarles & Brady attorney.