Hospitals Sue Agency in Payment Dispute : Health care: They want to be reimbursed for use of experimental devices. But the government calls it billing fraud.

In a sharp counterattack to a federal investigation into Medicare and Medicaid fraud, nearly two dozen of the nation’s largest and most prestigious hospitals have sued the Department of Health and Human Services in federal court in Los Angeles.

The suit seeks to overturn the government’s recent decision to deny payment for medical care that uses experimental devices not yet approved by the Food and Drug Administration.

A nationwide investigation was opened last year into allegations that scores of hospitals improperly billed the government for the experimental devices, contrary to federal policy that allows for payment only for devices found to be safe and effective by the FDA.

But the hospitals contend that the government never had any valid policy that excluded the devices from coverage. They say their financial existence could be threatened if the government decides to prosecute them for fraud in past billings, according to the suit.

The stakes in the case also loom large because the outcome could have broad repercussions on the $45-billion U.S. medical devices industry and the huge infrastructure that conducts clinical trials on new medical devices.

In the worst case, the hospitals say, the fraud probe would drive medical research abroad and undermine U.S. leadership in an important new high-technology industry.

The Health and Human Services Department declined to comment on the lawsuit, saying only that it will file a response in court next month. The suit, filed quietly earlier this month, has not been previously disclosed.

The hospitals bringing the suit include three major research facilities in Southern California: Cedars-Sinai Medical Center, UCLA Medical Center and Loma Linda University Medical Center. Other major institutions include Johns Hopkins Hospital of Baltimore, Mt. Sinai Hospital of New York, Northwestern Memorial Hospital of Chicago and St. Luke’s Medical Center of Chicago.

“These aren’t some kind of wild-haired experiments going on,” Cedars-Sinai Vice President Peter E. Braveman said. “In some cases, there would be no alternatives to these devices and the patients will die.”

The devices at issue are approved for use in clinical trials by the FDA, so the issue does not revolve around whether the devices are safe and effective, Braveman said.

But a source close to the investigation took strong exception to that, saying 80% of the devices are ultimately rejected for final approval by the FDA.

“We have a list of horror stories about these medical devices killing people on the operating room table,” the source said. “And when one of these devices is approved, the stock price of the company soars the next day. They are using taxpayers to fund the whole system.”

Russell Hayman, an attorney at the Los Angeles law firm of Latham & Watkins that is representing the hospitals, said many of the institutions could face liabilities in the hundreds of millions of dollars if they are forced to repay the government for past billings.

Moreover, the denial by the federal government to pay for experimental devices will not save taxpayers any money, since Medicare and Medicaid will still have to provide medical services with older technology, the hospital say.

Hospital industry sources say the massive federal probe was launched last year after an anonymous whistle-blower filed a private lawsuit under the False Claims Act, asserting that 130 hospitals around the nation had been defrauding taxpayers for more than a decade. The False Claims Act allows individuals to sue corporations on behalf of the government and share in any recovery.

A source close to the federal investigation estimated the hospitals’ liability under the False Claims Act case may reach as high as $800 million.

So far, the Justice Department is still investigating the private suit, which remains under court seal. Under the act, the Justice Department can join the case and take over the prosecution if it believes the suit has merit.

The dispute was triggered by the government’s decision to take a closer look at payments for devices used in surgical procedures, many of which involve cardiac catheters and other equipment used in heart surgery, according to one federal health official who asked not to be identified.

The use of devices that were experimental, or in clinical trials, has often been billed to the government and paid for improperly, the official said. The billing reports submitted “didn’t always describe with a sufficient level of detail the nature of the device being implanted,” he noted.

Last July, the Health and Human Services office of the inspector general issued subpoenas to hospitals across the nation, seeking information on billing for dozens of devices.

In December, Health and Human Services Secretary Donna Shalala signed a memo saying that experimental devices have never been covered under Medicare or Medicaid. The memo says the policy is not a new one.

Under Medicare and Medicaid, the government pays for “reasonable and necessary” care for the elderly and poor, a vague definition that depends on a large body of rules and regulations.

The hospitals contend that Shalala’s memo represented a new rule and was issued without any of the formalities that are required in the federal rule-making process, such as the opportunity for public comment.

The suit asks that the policy be declared invalid and that Shalala be stopped from enforcing the policy. If successful, the suit would refute that the hospitals violated any past policies, according to Hayman, the attorney.

Meanwhile, the medical devices industry is bracing for the worst.

“The U.S. is clearly the leader, but our position is increasingly in jeopardy because of policies like this one,” said Steven Speil, associate vice president for policy at the Health Industries Manufacturers Assn., a trade group in Washington.

Speil said the United States has a near monopoly on clinical trials of new medical devices, owing to the strong clinical infrastructure for such studies and the commanding medical knowledge in this country. But a recent survey on the industry disclosed that 60% of U.S. firms plan to relocate operations or clinical trials overseas, he said.