News & Insights


January 31, 2022

Health Headlines– January 31, 2021

Court of Appeals Affirms Ruling that Hospital Utilization Review Committee’s Medicare Part A Inpatient Reclassifications Trigger Appeal Rights Under Due Process – On January 25, 2022, the U.S. Court of Appeals for the Second Circuit affirmed a lower court ruling that the Secretary of HHS violated the due process rights of Medicare beneficiaries by failing to provide an administrative review process when a hospital’s utilization review committee (URC), acting pursuant to CMS’s regulations, reclassified beneficiaries’ status from “inpatient” to “observation.” The Second Circuit’s decision in Barrows v. Becerra finds that a URC’s determination to reclassify a patient who was initially admitted as an inpatient to an outpatient receiving observation services is a “state action” and, thus, must be afforded due process under the Fifth Amendment. 

URCs are the internal hospital committees responsible for reviewing inpatient status determinations under CMS regulations. The Medicare statute requires hospitals to have a URC, and URCs must include at least two physician members. URCs have the authority to reclassify an admission from inpatient to outpatient (observation) if the URC determines that a patient should not have been admitted for inpatient services. The URC’s decision can have significant financial impact on Medicare beneficiaries. Inpatient admissions are covered under Part A, and patient cost sharing does not apply once the inpatient deductible has been met. Observation services are outpatient services covered under Part B and may include copayment obligations that are higher than what a beneficiary would incur if they had remained as an inpatient.   

The Second Circuit noted that CMS’s standards for when a patient should be classified as an “inpatient” have varied over the years. Prior to 2013, CMS directed physicians to use a 24-hour period as a benchmark. In other words, a physician should consider a number of factors, including the patient’s medical history and medical needs, to determine whether the patient would be expected to need hospital care for 24 hours or more. In 2013, CMS promulgated its so-called “Two Midnight Rule,” which allowed payment under Medicare Part A when a physician reasonably expects a patient to require medically necessary hospital care that will span two midnights after the patient arrives at the hospital. Claims that do not meet the Two Midnight Rule may be billed as outpatient observation services under Medicare Part B.

Medicare has historically reimbursed hospitals at a higher average rate for Part A inpatient claims than for Part B observation claims. In general, the Secretary utilizes his contractors to ensure that Part A inpatient claims are supported and payable under Medicare guidelines through audits and post-payment reviews. Additionally, hospitals’ inpatient claims can be investigated by the OIG or the DOJ. Under these scenarios, formal appeal procedures are readily available for providers to challenge a finding that a hospital’s Part A inpatient claims were improperly submitted. No such appeal rights, however, exist for beneficiaries when a URC reclassifies a patient’s status from “inpatient” to “observation” before submitting the claim to the Medicare contractor for payment. 
The central question in Barrows v. Becerra is whether hospital URCs, are “state” actors for purposes of constitutional due process. In other words, are URCs acting for CMS when they implement Medicare coverage standards even though these committees are typically employed and staffed by the hospitals. 

The Court provided reasons in support of its finding that the URCs are considered “state” actors, including:

  • The Medicare statute expressly requires hospitals to form and utilize URCs in admission decisions and that the URC decision-making process is governed largely by statute and regulation.

  • By engaging in audits and post-payment reviews, CMS pressures URCs to adhere closely to those regulations so that hospitals only submit claims for reimbursement that the regulations direct are appropriate for payment by Medicare. As the Court put it, “[b]ecause a hospital faces a risk that it will not be reimbursed for services it already provided to a patient if it improperly classifies that patient as an inpatient, URCs are strongly incentivized to make decisions that conform to CMS guidance.”

  • URC members and utilization review staff may use the same commercial screening tools utilized by Medicare contractors.

As a result, the Court affirmed that the Secretary of HHS violates due process rights when URCs reclassify inpatient admissions to observation status without providing a mechanism to appeal that decision. Because the Second Circuit’s decision applies only to providers in New York, Connecticut, and Vermont, the Secretary of HHS is only bound by the decision in those areas. Further, it is unclear what steps a hospital may need to take to provide the necessary due process if a Medicare beneficiary disagrees with the URC’s reclassification decision. These steps may place an additional administrative burden on the hospital and offset reimbursement gains realized by hospitals being able to bill those claims under Medicare Part A.

The Barrows v. Becerra opinion is available here.

Reporter Michael L. LaBattaglia, Washington, D.C., +1 202 626 5579,

HHS Distributes Additional $2 Billion in Provider Relief Fund Payments – Last week, HHS announced the distribution of more than $2 billion in Provider Relief Fund (PRF) Phase 4 General Distribution payments. These payments bring the Phase 4 distribution total to approximately $11 billion of the total allotted $17 billion. In this round of distributions, more than 7,600 providers received payments based on changes in revenue and expenses, with an increased focus on equity.

Phase 4 payments are based on providers’ lost revenues and expenditures between July 1, 2020 and March 31, 2020. Notably, Phase 4 applications added new elements specifically focused on equity. Of note, the elements focus on reimbursing a higher percentage of losses for smaller providers, and include “bonus” payments for providers who serve Medicaid, CHIP, and Medicare beneficiaries. HHS has processed approximately 82 percent of all Phase 4 applications, and payments are expected to continue through 2022.

Within 90 days of receiving a payment, recipients must use the PRF portal to sign an attestation confirming receipt and agreeing to the terms and conditions. As previously reported in Health Headlines, the terms and conditions for Phase 4 require recipients that receive payments greater than $10,000 to notify HHS during the applicable Reporting Time Period of any mergers with, or acquisitions of any other healthcare provider that occurred within the relevant Payment Received Period. HRSA considers changes in ownership, mergers/acquisitions, and consolidations to be reportable events. Whether a Reporting Entity has undergone a merger or acquisition during the applicable Payment Received Period will be considered when determining whether an entity will be audited. Additionally, if applicable, PRF recipients must immediately notify HRSA about any bankruptcy petition or involvement in a bankruptcy proceeding.

Recipients that choose to reject the funds must complete the attestation and return their payment no more than 15 days later.

The HHS press release regarding the PRF payments is available here. The Phase 4 Terms and Conditions are available here.

Reporter, Alana Broe, Atlanta, +1 404 572 2720,


GAO Identifies HHS’s Leadership and Coordination of Public Health Emergencies as “High Risk” – Last week, the Government Accountability Office (GAO) identified HHS’s leadership and coordination of public health emergencies as “High Risk” due to significant and longstanding issues. The High Risk List is a list of federal programs and operations that are vulnerable to fraud, waste, abuse, and mismanagement, or need transformation. Notably, the GAO identified HHS’s oversight of COVID-19 relief funds as an area that it will continue to examine. The GAO previously recommended that HHS provide projected time frames for its spending of the remainder of its COVID-19 relief funds in the spend plans HHS submits to Congress. HHS partially agreed with the recommendation, but stated that it would not be able to provide specific time frames because the department needed to remain flexible in responding to incoming requests. The GAO does not believe that providing projected time frames would affect HHS’s ability to be flexible, as these plans are not binding and can be revised. The GAO’s report is available here.

King & Spalding Webinar – Annual Healthcare Fraud Enforcement Update: What Does 2022 Hold? – On February 1, 2022, at 1:00 PM ET, King & Spalding will be hosting a roundtable webinar exploring the evolving healthcare fraud enforcement patterns from 2021 and focusing on what to expect from the government and whistleblowers in 2022.

Topics for discussion will include:

  • Department of Justice and Office of Inspector General False Claims Act (FCA) enforcement initiatives impacting providers, including the Deputy Attorney General’s speech on individual accountability and focus on pandemic issues;

  • Specific FCA enforcement trends, including post-acute care, Medicare Part C, pursuit of private equity investors, the Provider Relief Fund, and the focus on the Anti-Kickback Statute;

  • FCA procedural updates, such as the False Claims Amendments Act of 2021; and

  • Thoughts on strategies for risk assessment and proactive compliance steps to mitigate risk.

The presenters include Amy Boring, Ethan Davis, Stephanie Johnson and Michael Paulhus. To register for the event, click here.