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The federal courts have no power to call off the planned audit of a hospital by the Department of Health and Human Services, the 3rd U.S. Circuit Court of Appeals has ruled — even if the hospital can show that the government inspectors plan to employ an unfair standard, and that complying with the audit will cost $1 million. In University of Medicine and Dentistry of New Jersey v. Corrigan, a unanimous three-judge panel found that the cost of submitting to an audit is an expense that hospitals, as recipients of Medicare funding, simply must face as a “burden of living under government.” Although the court said it recognized that the plaintiff hospital had “raised profoundly serious questions about the wisdom and fairness” of the audits, it nonetheless found that such audits “are within the broad authority of the [HHS] inspector general.” Chief U.S. Circuit Judge Anthony J. Scirica said the court was aware of “the special responsibilities entrusted to healthcare providers and the obstacles they face.” “The economics of healthcare are at a precarious juncture,” Scirica wrote in an opinion joined by Judges Joseph F. Weis and Thomas L. Ambro. “Placing additional burdens — financial and otherwise — on already taxed hospitals may have serious consequences for access to healthcare, either by increasing its cost or by diminishing its availability,” Scirica wrote. Scirica found that, despite the potential consequences, the courts cannot offer any solace to hospitals facings audits, but instead can offer only a shared expression of hope. “It is to be hoped that a decision to initiate a[n] . . . audit will be made only after consideration of these consequences. But these considerations are, in the first instance, ones for the inspector general, who has been charged with uncovering fraud and has been given the authority to determine when audits are appropriate to that end,” Scirica wrote. The dispute between the University of Medicine and Dentistry and HHS stems from a major investigation by HHS of the Medicare billing practices at teaching hospitals. Under Medicare regulations, hospitals are paid on a fee-for-service basis for work performed by physicians. But work performed by resident doctors is not reimbursed since Medicare already contributes to the salaries of residents, Scirica wrote. That simple distinction quickly becomes complicated in practice because physicians are permitted to bill Medicare for services in which residents or interns participate so long as the physician is “sufficiently involved.” In 1992, HHS amended its regulations to authorize payment to a teaching physician only when that doctor “furnishes personal and identifiable direction to interns or residents who are participating in the care of the patient.” By the mid-1990s, the Health Care Financing Administration began to interpret the phrase “furnishes personal and identifiable direction” as requiring the physician to be “physically present” when and where the resident or intern provided the billed service in order to be eligible for payment. Scirica found that HCFA’s interpretation “led to widespread complaints from healthcare providers, many of whom claimed that it amounted to a change in the regulation.” Hospitals argued that a physician could provide “personal and identifiable direction” without being physically present. The auditing of teaching hospitals for alleged overbilling began with an audit of the University of Pennsylvania Health System’s Medicare billing records from 1989 to 1994. The audit uncovered three alleged deficiencies in Penn’s billing — billing by physicians for work performed by residents; a practice known as “upcoding” which entails billing for procedures more complex than were actually performed; and inadequate documentation for many of the billed items. Penn Health System paid $30 million to settle all potential False Claims Act charges. Scirica found that after the Penn audit, HHS’s inspector general expanded the investigation to determine if these practices were widespread. Launched in 1996, the wave of audits explicitly adopted the “physical presence” requirement for billing of work performed by student doctors. Hospitals objected, claiming the audits amounted to retroactive application of new rules. In response, the inspector general insisted that the rules had always required the physical presence of the physician, and that the new rule simply stated that requirement more clearly. When HHS informed the University of Medicine and Dentistry of New Jersey that it was soon to be the subject of an audit, the hospital filed suit in federal court seeking a ruling that the audits are unlawful because the standard HHS employs is unfair. U.S. District Judge Harold A. Ackerman of the District of New Jersey dismissed the suit, finding that it was not yet ripe for judicial review because the agency’s decision to conduct an audit is not a “final” agency action. On appeal, lawyers for the hospital argued that the Ackerman should have enjoined HHS from conducting the audit because it will cost the hospital more than $1 million to comply, and because the audit itself is a disruptive process that will detract from providing healthcare. The 3rd Circuit sided with the government and held that Ackerman was correct to toss the case out. “The present dispute is not sufficiently ‘fit’ for review at this time,” Scirica wrote. Scirica rejected the hospital’s argument that HHS’s decision to employ a particular standard is a “final” decision by the agency that courts may review. Instead, Scirica said, shifting the emphasis to the standard only highlighted the “lack of finality.” “It seems unlikely that the choice of which standard would be applied in assessing the billing data compiled would have a significant effect on the university during the audit,” Scirica wrote. “The relevant costs would seem to be associated with collecting the data, not applying any particular standard in interpreting it. The only apparent effect from that choice would come if and when it resulted in a conclusion about plaintiffs’ compliance with the applicable standards,” Scirica wrote. The courts, Scirica said, are “not now in a position to assess what might or might not happen at the end of this process.” (Copies of the 27-page opinion inUniversity of Medicine and Dentistry of New Jersey v. Corrigan , PICS No. 03-1646, are available fromThe Legal Intelligencer . Please call the Pennsylvania Instant Case Serviceat 800-276-PICS to order or for information. Some cases are not available until 1 p.m.)

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