Medicare Advantage Organizations and Medicare Sequestration: Hospitals May Challenge Reimbursement Cuts

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

In March 2013, the Centers for Medicare & Medicaid Services (“CMS”) released a memorandum announcing that beginning April 1, 2013, payments made to Medicare Advantage Organizations (“MAOs”), Part D sponsors and other programs were reduced by two percent due to the Balanced Budget and Emergency Deficit Control Act of 1985 (“Balanced Budget Act”). The payment reduction, referred to as sequestration, is applied to the Net Capitation Payment (NCP) made to the plans, including MAOs. Therefore, Medicare rates and fee schedules remain unaffected by sequestration.

Following the implementation of sequestration, hospitals nationwide noticed MAOs reducing hospital reimbursement by two percent; essentially passing the payment cut onto the hospitals. Many hospitals with contracts with MAOs that based reimbursement on Medicare rates disputed the MAOs actions because sequestration left Medicare rates unaffected. In August 2013, the American Hospital Association (“AHA”) wrote a public letter to Marilyn Tavenner, the Administrator of CMS at that time. AHA sought clarification from CMS on how sequestration affects hospital with contracts with MAOs. AHA specifically stated that it was concerned that many MAOs were erroneously passing the two percent reduction to hospitals without regard to the terms of the contracts with those hospitals. AHA requested CMS to provide additional guidance to MAOs to explain that Medicare rates have not been altered and, thus, if a contract with a hospital bases reimbursement on Medicare rates, then the two percent reimbursement cut should not be passed onto the Medicare providers.

CMS responded to AHA’s letter in April 2014. CMS stated that they agreed that sequestration did not change the rates or fee schedules in the Medicare Fee for Service program. 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.

However, CMS also stated that it is prohibited from interfering in the payments arrangements between MAOs and hospitals. CMS reiterated that the impact of sequestration on hospital reimbursement is governed by the contract between the hospital and an MAO. Therefore, if a hospital’s reimbursement has been cut by two percent by an MAO, the hospital should review its contract with the MAO to determine the appropriateness of the payment reduction and the necessary steps to take to address the payment reduction.

Upon review of contracts with MAOs, it is important that hospitals review the entire contractual document (including any amendments and appendices). This is because while the portion of the contract that governs reimbursement may set reimbursement on Medicare rates and/or fee schedules, other portions of the contract may in some way limit the hospitals ability to challenge the MAO’s actions with regard to sequestrations. For instance, the contract may set a limited timeframe for the hospital to raise an issue with payment methodology or the contract may include a broad clause that allows the MAO to pass payment cuts from CMS onto the hospital.

Following a review of the contractual language regarding the MAO’s actions, the hospital should review the contract with the MAO for instructions regarding dispute resolution. Many contracts will require the hospital to engage in an internal dispute resolution process before either requesting binding arbitration or filing an action in state court. A “binding arbitration” clause of a contract may provide that if the parties cannot resolve or settle a dispute by mutual agreement, then the dispute will be resolved by 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 attempt to resolve the issue through mutual agreement. If that process fails, then binding arbitration would be the next step. However, it is essential that the hospital very carefully review 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 to hospitals will help an individual hospital determine if it is entitled to retain full reimbursement from MAOs.