Sequestration and Medicare Advantage Organizations: Hospitals May Challenge Reimbursement Cuts

Andrew B. Wachler, Esq.
Jessica C. Forster, Esq.

The Centers for Medicare & Medicaid Services (“CMS”) released a memorandum in March 2013 announcing that payments made to Medicare Advantage Organizations (“MAOs”), Part D sponsors and other programs would be reduced by two percent due to the Balanced Budget and Emergency Deficit Control Act of 1985 (“Balanced Budget Act”). CMS announced that the payment reduction would begin on April 1, 2013 and that it would apply the Net Capitation Payment (NCP) made to the plans, including MAOs. Therefore, the payment reduction, referred to as sequestration, did not directly affect or change Medicare rates and fee schedules.

Hospitals nationwide noticed that some MAOs reduced hospital reimbursement by two percent following the implementation of sequestration; these MAOs were essentially passing the payment reductions they incurred on to the hospitals. Many hospitals that contracted with MAOs that based reimbursement on Medicare rates disputed the MAO practice of passing the payment reductions on to the hospitals because sequestration had no actual impact on Medicare rates. In August 2013, the American Hospital Association (“AHA”) wrote an open letter to the CMS Administrator seeking clarification on how sequestration affects hospitals with contracts with MAOs. The AHA requested CMS to provide guidance to MAOs to explain that sequestration did not change Medicare rates and, thus, if a contract with a hospital uses Medicare rates as a reference point for determining reimbursements, then the two percent reimbursement cut should not be passed on to Medicare providers. Further, the AHA specifically stated that it was concerned many MAOs were ignoring the actual terms of its contracts with hospitals and were erroneously passing the burden of sequestration on to hospitals.

In April 2014, CMS responded to AHA’s letter and stated that they agreed that sequestration did not change the rates or fee schedules in the Medicare Fee for Service program. However, CMS also stated that it is prohibited from interfering in the payments arrangements between MAOs and hospitals. CMS included the following frequently asked question in its response to AHA:

Question: Does the two percent payment reduction under sequestration apply to the payment rates reflected in Medicare FFS fee schedules or does it only apply to the final payment amounts?

Answer: Payment adjustments required under sequestration are applied to all claims after determining the Medicare payment, including application of the current fee schedule, coinsurance, any applicable deductible, and any applicable Medicare Secondary Payment adjustments. All fee schedules, pricers, etc., are unchanged by sequestration. Only the final amount is reduced.

CMS reiterated that the contract between a hospital and an MAO governs the impact of sequestration on hospital reimbursement. Therefore, if an MAO has cut a hospital’s reimbursement by two percent, the hospital should review its contract with the MAO to determine whether the payment reduction was appropriate and what steps the hospital must take to address the payment reduction.

It is important that a hospital review its contract with an MAO in its entirety, including any amendments and appendices. This is because, even though the portion of the contract that governs reimbursement may use Medicare rates and/or fee schedules as a reference point, other portions of the contract may in some way hinder the hospital’s ability to challenge the MAO’s actions with regard to sequestration. For instance, the contract may set a narrow timeframe for the hospital to raise an issue with payment methodology or the contract may include a sweeping clause that allows the MAO to pass payment cuts from CMS on to the hospital.

After reviewing the contractual language governing the MAO’s actions, the hospital should review the contract with the MAO for instructions regarding dispute resolution. Many contracts require the hospital to engage in an internal dispute resolution process before either filing an action in state court or requesting binding arbitration. A “binding arbitration” clause in a contract may provide that if the parties cannot resolve or settle a dispute by mutual agreement, then the dispute will be resolved through binding arbitration. In these cases, if the hospital disagrees with the MAO’s actions regarding sequestration, then the hospital should reach out to the MAO to first attempt to resolve the issue through mutual agreement. If that process fails, then the next step is binding arbitration. However, it is essential that the hospital is very careful when reviewing its contract with the MAO in order to accurately determine the hospital’s contractual rights and the appropriate steps to effectuate those rights.

It is important that hospitals evaluate and analyze the contractual language and the steps prescribed to resolving a contractual dispute. A careful review of the MAO contract and the appeals process available will help a hospital determine if it is entitled to retain full reimbursement from MAOs.

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