$3 billion lawsuit alleges Medicare underpayment to physicians

Seven California counties and three physicians have sued the Dept. of Health and Human Services for $3.2 billion, accusing the agency of Medicare underpayments to physicians.

The lawsuit claims that Medicare knowingly has used an outdated geographic rate system to pay physicians for more than 10 years. The formula has led to severe underpayments to doctors in some parts of the state while providing overpayments to physicians in other areas, according to the suit, filed Feb. 19 in the U.S. District Court for the Northern District of California.

This is the second time the lawsuit has been filed. The court battle started in 2007, when seven California counties, including Santa Cruz, San Diego and Monterey, sued HHS. A federal trial court dismissed that case in 2009, saying the counties did not have standing to sue on behalf of doctors.

But a Sept. 29, 2010, ruling by the 9th U.S. Circuit Court of Appeals allowed the case to move forward. The court dismissed some portions of the complaint, but said the counties could pursue their claims that the government's lack of action may violate their equal protection rights.

The case was sent back to the plaintiffs to be re-filed. The amended lawsuit now includes three California physicians.

Dario de Ghetaldi, an attorney for the plaintiffs, said the Medicare underpayments stem from a formula that continues to group some urban areas with rural areas under a locality map to determine the geographic practice cost index, which helps determine final Medicare rates in a given area. The model has not been updated since 1996 and fails to account for areas in which the cost of living has increased and the price of practicing medicine is higher, he said. As a result, physicians are paid up to 24% less than their colleagues in neighboring, demographically-similar counties, he said.

Health care professionals in some Texas, North Carolina and Ohio counties also are among those impacted by the geographic payment system, according to the suit.

HHS had not returned calls seeking comment at this article's deadline. A spokeswoman for the Centers for Medicare & Medicaid Services said the agency had no comment.

The California Medical Assn. is not involved in the lawsuit but is looking at the larger issue of how the Medicare payment structure impacts physicians, said CMA spokeswoman Rosanna Westmoreland.

Frustration among doctors

Physicians have grown frustrated with pointing out Medicare payment discrepancies to HHS but receiving no remedy, said Ted Mazer, MD, a San Diego otolaryngologist and past president of the San Diego County Medical Society. He is a plaintiff in the lawsuit.

"I'm hoping someone is going to wake up and see the struggle of these medical practices," he said. "This is driving doctors out."

Dr. Mazer said a patient recently asked if he could recommend a new primary care physician. The patient's other physician no longer could afford to take Medicare patients, Dr. Mazer said.

Dr. Mazer and de Ghetaldi acknowledged that the legal fight places California doctors on different sides. "If you're practicing in a rural area, you're not exactly going to agree you're being paid too much," Dr. Mazer said.

De Ghetaldi said the federal government has hesitated to change the payment system without the support of medical societies because of a possible backlash from affected doctors.

The fact that HHS is not stopping unearned overpayments is "the most offensive fact of what is going on here," he said. "It's incomprehensible."

Steve Barrow, policy director for the California State Rural Health Assn., said rural physicians in the state are also concerned with the pay rate system and want the underlying formula to be fixed for all doctors.

"I don't get the sense that physicians are blaming each other" for what they're being paid, he said. "I think everyone would like to be able to make sure everybody's paid adequately so that the whole system is stable."

The current problem, he said, is that evening out the funding is going to give more to some practices while taking from others.

"Right now, the pie is only so big, and there's not enough resources," he said. "It's not like there's going to be more money being put in because some people are getting paid lower rates."

Maggie Elehwany, government affairs and policy vice president for the National Rural Health Assn., said her organization sympathizes with California doctors who believe they are being underpaid by Medicare. However, from a national perspective, pay rates for Medicare physicians in rural areas are too low, she said.

Elehwany said the NRHA strongly supports greater payment equity in rural areas and has had long-standing concerns with the Medicare geographic practice cost index. The organization is looking forward to an upcoming Institute of Medicine study that Elehwany said she hopes will "shed some light on this troubling formula and offer solutions to the payment inequities that plague rural areas, as well as the more unique problem in California."