The complaint was filed on March 24, 2009, in the Southern District of California with the support of the Fund for Access to Inpatient Rehabilitation (the “FAIR” Fund), a common legal defense fund comprised primarily of inpatient rehabilitation hospitals and units.


This suit alleges that the Centers for Medicare and Medicaid Services (CMS) unlawfully reopened a claim by Palomar Medical Center without showing “good cause” for the reopening as required by Medicare regulations. Palomar Medical Center also disputes CMS’s contention that Medicare Administrative Law Judges (ALJs) may not review whether contractors, such as RACs, have complied with federal regulations when reopening claims.


The complaint addresses two related issues that arose from practices of PRG-Schultz in its capacity as a RAC under CMS’s demonstration project in 2006 and 2007.


First, the complaint alleges that PRG Schultz did not have “good cause” for reopening the hospital’s claim as required by CMS regulations.


Second, the complaint challenges the Medicare Appeals Council’s decision that ALJs do not have jurisdiction to decide whether Medicare contractors have complied with the reopening regulations.


“The FAIR Fund has supported this complaint to preserve the ability of inpatient rehabilitation hospitals and units to continue to serve patients in need of intensive services following surgery, injury, or a debilitating illness,” said Phil Loverso, president of the FAIR Fund.  “The claim reviews being undertaken by CMS have rendered any sense of finality in the Medicare payment system nonexistent.  And the end result is that valuable health care resources, including Medicare funds, are being drained away from patient care.  We hope this suit will help change that.”


Medicare regulations permit Medicare contractors to reopen and review claims within one year of payment for any reason, thus ensuring that the Medicare program has an opportunity to audit claims for compliance with Medicare regulations.


Between one and four years after payment, a contractor must show “good cause” for doing so, as defined in the regulations.  PRG-Schultz regularly reopened claims up to four years after payment without any showing of good cause.  The complaint alleges that this was impermissible and that the reopening of this claim was invalid.


Hospitals were very successful in administrative appeals on this issue.  ALJs have held that thousands of RAC claims were unlawfully reopened.


However, in February 2008, the Medicare Appeals Council (the Council) ruled that ALJs do not have jurisdiction over this issue.  While ALJs have continued to rule in favor of hospitals and other providers on this issue, the Council has consistently overturned those decisions.  The complaint alleges that the Council has misinterpreted the regulations and that ALJs do have authority to review whether contractors have lawfully reopened claims.


“Our hospital, like many other Medicare providers, has endured heavy burdens as a result of the RAC’s violations of the reopening procedures,” said Janine Sarti, general counsel of Palomar Pomerado Hospital.  “Although we stand behind the medical necessity of the care provided to this patient, we have chosen to appeal this case based on procedural grounds to help define the Medicare rules that we and all providers will be subject to in the future when being audited by the RACs and other Medicare contractors.  It is our intent that hospitals that are in the same situation as PPH are not shortchanged for services provided in good faith.  This is a groundbreaking suit, and will hope other hospitals will benefit from this litigation.”


It is perfectly reasonable to expect CMS and its contractors to adhere to the regulations when auditing claims.  These are regulations that CMS itself drafted and published, and they provide important due process protections for hospitals and other Medicare providers.  Without these protections, providers have absolutely no finality during the first four years of payment, and perhaps even after this if no right to administrative review exists.  If the actions of CMS and PRG Schultz are allowed to stand, providers will not be able to rely upon their Medicare revenues for years after treating Medicare beneficiaries, creating uncertainty and potential financial turmoil, which can only negatively impact patient care.


While the complaint hinges on a Medicare claim related to inpatient hospital rehabilitation, the legal issues addressed in the complaint impact all types of providers.  CMS is now implementing a permanent RAC program-in which PRG-Schultz is a subcontractor-and other types of contractors are also auditing and retroactively denying payment for old Medicare claims.  The FAIR Fund believes that this suit will help clarify the rights that providers have during the administrative appeals process and force CMS to comply with its own regulations.


About the Author

Ronald S. Connelly is a principal in the law firm of Powers Pyles Sutter & Verville PC.  Ron and the firm have been at the forefront of the RAC program, successfully assisting healthcare clients with thousands of coverage denials.  Ron is counsel to Palomar Medical Center and the FAIR Fund. To Contact Ron – call: 202-466-6550


About Palomar Pomerado Health

Palomar Pomerado Health, California’s largest public health district is San Diego North County’s most comprehensive health-care delivery system, nationally recognized for clinical excellence in cardiac care, women’s services, cancer, orthopedics, trauma, rehabilitation and behavioral health services.  As the largest employer in Inland North County, with more than 3,600 employees and 700 physicians, Palomar Pomerado Health was named San Diego County’s Best Place to Work in 2006.  Facilities include Palomar Medical Center, Pomerado Hospital, Villa Pomerado, Palomar Continuing Care Center, the Jean McLaughlin Women’s Center and the PPH expresscare centers.  Please visit for more information on PPH’s comprehensive services and facilities.


About the FAIR Fund

The FAIR Fund is a common legal defense fund comprised primarily of inpatient rehabilitation hospitals and units that have organized to bring legal challenges to overly restrictive interpretations of medical necessity and violations of procedural requirements by Medicare contractors.  The FAIR Fund’s mission is to raise awareness of, and build support for, policies that will preserve and increase access to inpatient rehabilitation. For more information, please contact either Ronald S. Connelly at (202) 466-6550 or email Ron or contact Phil Loverso at (909) 450-0123. Please visit for additional information.

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