Yesterday the D.C. Circuit dismissed a lawsuit brought by the American Hospital Association and five hospitals seeking relief from a notorious Catch- 22 recognized by everyone in the industry—and by the court itself.  As usual, it involves the hated Recovery Audit Contractors (RACs).

Here’s how the catch works. A hospital admits and treats a Medicare patient who needs care. The hospital bills Medicare and gets paid. Later—usually much later—a RAC auditor rules that the patient needed only outpatient care rather than inpatient care. So the hospital has to refund the money to Medicare.

But remember, the patient got the care and no one questions its quality. So shouldn’t Medicare either give the hospital credit for that care on the refund or let the hospital submit a new bill for it? Well, until March of last year CMS’s answer was a flat no: the hospital couldn’t get credit or submit a new bill, except for some ancillary services. The hospital was simply out of luck.

In March of last year CMS appeared to relent, ruling that hospitals can submit a bill for the outpatient services after refunding the inpatient bill. But the bill has to be a new bill and not an amendment of the old, inpatient bill.

Oh, and by the way, all Medicare bills have to be submitted within one year of the date the patient was treated.  CMS can make exceptions to the deadline but hasn’t for this situation.

See where this is going?  By the time the RAC procedure is over and the hospital’s inpatient bill has been denied, more than a year has already passed. So although CMS graciously allows the hospital to file a new bill, it’s a pointless exercise because CMS will reject it as too late. That’s the Catch-22.

AHA and plaintiff hospitals wanted relief from this Catch-22. But on Wednesday the court threw the case out, ruling that it might have jurisdiction when CMS does something wrong but not when the complaint is that CMS didn’t do something—namely, make an exception to the one-year deadline for these cases.