Medicare to settle hospital reimbursement dispute

Medicare agreed to settle a dispute with about 2,200 hospitals nationwide over a decade-long error in reimbursement rates, offering what could amount to a $3-billion infusion to hospitals already bracing for funding cuts under the federal healthcare law.

More than 200 California hospitals are included in three similar agreements reached April 5, and they stand to share a total of more than $310 million. For instance, Cedars-Sinai Medical Center said it would receive $14.3 million and Long Beach Memorial Medical Center said it was due about $6 million.

Hospital representatives welcomed the agreement, but they say it does little to resolve larger complaints that Medicare pays too little for patient care.

The federal Centers of Medicare and Medicaid Services said it agreed to settle lawsuits related to this matter “to resolve potential liability associated with an alleged error in calculating inpatient hospital rates.” A spokeswoman for the agency declined to comment on what the overall settlement would cost or what individual hospitals might receive.

Jon Neustadter, an attorney at Hooper, Lundy & Bookman in Los Angeles, which represented 500 hospitals in the settlements and most of the California facilities, estimates the federal government will pay hospitals about $3 billion overall.

Nationwide, many hospitals have struggled to cope with a pullback in government spending and a sluggish economy, in which many cash-strapped consumers have postponed medical care. The federal Affordable Care Act cuts Medicare reimbursements for hospitals that don’t meet certain performance benchmarks, and that provision could reduce federal spending for hospitals by $155 billion over 10 years, according to the American Hospital Assn.

Analysts say this case won’t drastically improve the fortunes of hospitals facing those fiscal pressures. “It doesn’t change our financial picture,” said John Bishop, chief financial officer at Long Beach Memorial Medical Center, “but it helps put a little salve on the wound.”

The hospital trade group said federal officials should have remedied the issue sooner. “In comment letters since 2006, the AHA and other national hospital associations, as well as other stakeholders, repeatedly alerted CMS to its miscalculation,” said Joanna Kim, senior associate director of policy for the American Hospital Assn.

HCA Holdings Inc., based in Nashville and the largest U.S. hospital operator with 163 hospitals in 20 states, said it expected to receive additional Medicare payments of about $271 million under the settlement.

Tenet Healthcare Corp., a Dallas-based company with 50 hospitals nationwide, said it was due about $84 million from the case.

The agreements apply to about 2,200 hospitals out of 3,500 that may have been affected. Those other 1,300 hospitals that are not part of these settlements could still pursue litigation, Neustadter said. The federal government has until June 30 to pay the hospitals.

The case stems from changes Medicare made starting in 1998 to adjust certain reimbursements for inpatient hospital care that reflect area wages. Congress had requested the change in the Balanced Budget Act of 1997 to ensure that urban and rural hospitals were being reimbursed adequately.

Hospitals argued that Medicare committed a mathematical error and it kept recurring through last year, resulting in significant underpayments to thousands of hospitals. A group of hospitals complained about the error in 2007 and sought repayment. According to court records, the error came to light in a May 2006 email exchange between a Medicare employee and a hospital consultant.

A district court judge in 2009 sided with the federal agency. In January 2011, the federal appeals court in Washington ruled in favor of the hospitals and ordered the Obama administration to address the problem.

In August, Medicare corrected the payment rates for fiscal year 2012. Federal officials didn’t agree to settle the matter for prior years until last week.

The federal government “is doing the right thing by reaching a settlement,” Neustadter said. “They could have dragged this out for many years.”

Times staff writer Anna Gorman contributed to this report.