Health Law Perspectives
February 2006
In this issue:
RAC Demonstration Project Raises Concerns for State Hospitals Exemption from Medicare Reimbursement Limit For Hospital-Based SNF Management Company Cannot Be Held Liable for Death of Patient HLB News HLB Calendar RAC Demonstration Project Raises Concerns for State Hospitals
A new program is currently underway in three states—California, Florida and New York—under which private companies contracted with the Centers for Medicare and Medicaid Services (CMS) are reviewing old Medicare claims to discover overpayments and demand their repayment from providers. The entities performing these audits are known as “Recovery Audit Contractors” or “RACs”.
RACs were created under section 306 of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). Sectio 306 directs the Secretary of HHS to conduct a demonstration project to determine whether using RACs is a cost effective method of identifying underpayments and overpayments and recouping overpayments under the Medicare program. As the states with the largest Medicare expenditure amounts, California, Florida and New York were selected for pilot RAC programs that will last for three years.
One of the most troubling aspects of the RAC demonstration project is that RACs are compensated through the retention of a percentage of the overpayments they recover. Although RACs are also charged with identifying underpayments, CMS is not presently offering any incentives to the RACs to do so. Further, the recovery of an overpayment by a RAC does not necessarily preclude CMS or other federal authorities, such as the attorney general, from investigating and prosecuting allegations of fraud or abuse arising from such overpayment.
The RAC charged with performing claims reviews for providers who are serviced by carriers or fiscal intermediaries in California is PRG Shultz and its subcontractor, Concentra Preferred Systems. PRG Shultz already has started to issue audit notices and overpayment recovery letters to hospitals throughout the State.
Under the RAC demonstration project, Medicare providers will have the same appeal rights as they would if CMS or a carrier or fiscal intermediary identified the alleged overpayment. Once the provider appeals, the RAC must stop pursuing the claim. However, interest continues to accrue throughout the appeal process.
Providers should be aware that the implementation of the RAC demonstration program coincides with significant changes to the rules governing the procedures for appealing Medicare overpayment determinations. Among other things, the new rules speed up the entire appeals process, require a full presentation of evidence at a much earlier phase of the proceedings, and make it unlikely that providers will participate in evidentiary hearings before an Administrative Law Judge regarding the overpayment. These new rules, particularly the faster time frames, create a greater incentive for providers who are subject to significant overpayment determinations to promptly obtain legal assistance.
For additional information call Patric Hooper, Lloyd Bookman, Jodi Berlin or Jordan Keville at 310.551.8111 in Los Angeles, Craig J. Cannizzo In San Francisco at 415.875.8511, or Mark Johnson at 619.744.7301 in San Diego.
Exemption from Medicare Reimbursement Limit For Hospital-Based SNF
By Jordan B. Keville
A federal district court ruled on November 9, 2005 that a hospital-based skilled nursing facility (SNF) was entitled to an exemption from the Medicare routine cost limits (RCL) as a “new provider,” after finding that the hospital did not previously act as a SNF by briefly operating a Medicare swing bed program.
In S.C. Management, Inc. formerly d/b/a Twin Rivers Regional Medical Center v. Leavitt, (E.D. Mo., 05CIV12 CDP), the United States District Court for the Eastern District of Missouri reversed and remanded the decision of the Secretary of the Department of Health and Human Services to deny Twin Rivers Regional Medical Center a new provider exemption for cost reporting periods December 31, 1993 and December 31, 1994. The Secretary concluded that the SNF was entitled to a new provider exemption for only a single period because Twin Rivers previously operated as a SNF through the provision of swing bed services. Twin Rivers was able to convince the court otherwise.
The court concluded that, although skilled nursing services may be provided in swing-beds, a facility does not necessarily act as a SNF merely by operating swing beds. Instead, the court focused on language in the Medicare statute that defines what a SNF is for Medicare purposes, which states that in order to be a SNF, a facility must be “primarily engaged” in furnishing skilled nursing and rehabilitative services.
In this connection, Judge Catherine D. Perry wrote that “Twin Rivers statistics clearly show that its swing-bed facility utilized its swing bed certification at roughly three percent of its full capacity . . . Under no circumstances could the Secretary construe these statistics to support a claim that the Twin Rivers swingbed hospital was primarily engaged in providing SNF services.”
Twin Rivers discontinued participation in a hospital swing-bed program in May 1991 and, in August 1992, admitted the first patient to a newly established hospital- based SNF. The Centers for Medicare and Medicaid Services (CMS) initially denied the Provider's request for an RCL exemption for the SNF for fiscal years December 31, 1992, December 31, 1993 and December 31, 1994. CMS later acknowledged that the SNF qualified as a “new provider” for the purposes the RCL exemption, but limited the exemption to only the December 31, 1992 fiscal period because CMS concluded that Twin Rivers furnished services “equivalent” to SNF services through the swing bed program, years before the SNF was opened. Twin Rivers appealed CMS’s determination to the Provider Reimbursement Review Board (PRRB), which reached the same conclusion as CMS.
After the CMS Administrator declined to review the PRRB’s decision in the case, Twin Rivers sought judicial review in the districtcourt on the grounds that the PRRB decision, which constituted the final decision of the Secretary, was arbitrary, capricious and unsupported by applicable law. Specifically, Twin Rivers asserted that the Secretary’s interpretation of the regulation governing RCL exemptions was inconsistent withthe plain language of the regulation and thwarted the purpose of the new provider exemption.
The Court rejected the Secretary’s argument that using the statutory “primarily engaged” standard in the context of a swing bed hospital is illogical because swing-bed hospitals, by definition, always provide SNF services. Further, the Court concluded that the Secretary offered no evidence to show that Twin Rivers’ SNF did not suffer from the low occupancy rates and underutilization that the new provider exemption was designed to help ameliorate.
After concluding that Twin Rivers’ was entitled to an exemption for both of the additional cost reporting periods at issue, the Court remanded the case for a determination of the amount of reasonable costs to which Twin Rivers was entitled.
In addition, in a later, but related ruling, the Court confirmed that Twin Rivers was entitled to interest under the Medicare Act on any amount it ultimately is awarded as a result of the Court's judgment. The Court ruled that the Medicare Act clearly provides that the prevailing party in a case challenging a decision of the PRRB or Secretary is entitled to interest on any additional payment arising from the judgment.
The Twin Rivers case is important in demonstrating that courts will be receptive to the argument that in order to be acting as a SNF for the purposes of RCL “new provider” exemption requests, a facility must be primarily engaged in providing SNF services. This may be useful for providers that are denied a new provider exemption on the grounds that they previously rendered SNF or equivalent services, but did not operate primarily as an actual SNF.
For additional information, please contact Mr. Keville or Jon Neustadter at 310.551.8111.
Management Company Cannot Be Held Liable for Death of Patient
A hospital management company owes its duty of care to the hospital with which it contracts and cannot be held liable for negligence toward patients of the hospital, a state appellate court has ruled in Myers v. Mathias (Cal. App. Ct. 2nd District #B170968).
Though the decision is unpublished, the court’s reasoning is applicable to similar cases, according to HLB attorney Lil Delcampo, who represented the management company.
The case involved a man who died five months after undergoing weight-reduction surgery and falling from a wheel chair that did not accommodate his size. His wife and daughter sued the physicians and medical treatment centers involved in the man’s care, as well as the hospital management company (FOCA Management), for wrongful death/negligence, fraud, negligent misrepresentation and unfair and deceptive business practices.
FOCA Management employed the medical director/manager and served as the management company for Tri-City hospital, where the man received his post-operative care. On behalf of FOCA Management, HLB argued that FOCA could not be held vicariously liable for medical negligence directly or vicariously as the medical director’s employer because it employed the medical director solely to manage the business duties of the hospital and not to provide medical treatment. The trial court agreed and granted summary judgment in favor of FOCA. A jury further found none of the defendants was negligent in treating the man.
On appeal, the plaintiffs contended, among other things, that the trial court erred in granting summary judgment for FOCA. The plaintiffs argued that FOCA had a contractual obligation to provide and maintain adequate hospital equipment at Tri-City, which it breached by failing to supply Tri-City with wheelchairs that were large enough for use by bariatric patients. FOCA did not dispute it owed contractual duties to Tri-City, instead it successfully argued that those duties—to assist the hospital in ordering medical equipment and supplies—ran to Tri-City, not to Tri-City’s or the medical director’s patients, thereby negating an essential element of the plaintiff ’s claim of direct negligence. The appeals court affirmed the trial court decision.
“This case is a victory for the health care industry,” Ms. Delcampo said. “This case explains that as a matter of law, management companies cannot be held liable to patients in a medical malpractice action.”
For additional information, please contact Ms. Delcampo at 310.551.8111.
HLB News
Delaney Promoted to Partner; Levy-Biehl, Delcampo to Senior Counsel
Hooper, Lundy & Bookman is pleased to announce the promotion of Elspeth K. Delaney to partner.
Ms. Delaney is a member of the firm’s business department, advising clients regarding business, compliance, finance, tax-exemption and real property issues and transactions. She also advises clients on various health care matters, including self-referral laws, anti-kickback laws and requirements of the California Board of Medicine. Ms. Delaney has conducted numerous transactions, including purchases and sales of hospitals and other healthcare businesses, syndications, financing and leasing arrangements, instituting and auditing hospital compliance programs, structuring professional corporations, hospital/physician joint ventures, physician contracting, and board governance restructuring.
The firm is also pleased to announce the promotion of associates Hope Levy-Biehl and Lil Delcampo to the position of Special Counsel. Ms. Levy-Biehl’s practice includes advising providers, including hospitals, long term acute care hospitals, laboratories and pharmacies, regarding regulatory compliance, licensure and certification, payment and operational issues. She has handled complex Medicare disputes before the Provider Reimbursement Review Board and advises clients on various healthcare fraud and abuse matters including the self-referral laws, anti-kickback laws and requirements of the California Board of Medicine.
Ms. Delcampo practices in the firm’s litigation department, where she has litigated and arbitrated a broad range of civil matters in both state and federal court in both bench and jury trials. Ms. Delcampo also has litigated employment matters, representing defendant employers.
HLB Calendar
March 8 |
California Hospice Foundation 2006 Spring Conference, Berkeley. HLB Attorney Jodi Berlin presents Preparing for Medicare Audits: Tips to Avoiding Disaster. |
March 22-24 |
AHLA Annual Medicare and Medicaid Payment Institute, Baltimore. HLB Attorney Jon Neustadter presents Bad Debt and Waiver of Copayments; HLB Attorney John Hellow presents a Medicare Litigation Update. |
April 23-26 |
HCCA 10th Annual Compliance Institute, Las Vegas. HLB Attorney Elspeth Delaney copresents Sarbanes-Oxley: Best Practices for Private and Nonprofit Health Care Entities; HLB Attorney Mark Hardiman presents Current OIG Enforcement Initiatives: A Road Map for High Risk Compliance Areas. |
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Health Law Perspectives is produced monthly, 10 times per year and is provided as an educational service only to assist readers in recognizing potential problems in their health care matters. It does not attempt to offer solutions to individual problems but rather to provide information about current developments in California and federal health care law. Readers in need of legal assistance should retain the services of competent counsel. Occasionally articles produced in Health Law Perspectives will reference California Health Law Monitor, a biweekly publication covering legislation, litigation, and regulation. For more information on California Health Law Monitor, contact M. Lee Smith Publishers at (800) 274-6774.