State officials have commissioned a legal review to determine whether a Department of Human Services executive gave a Twin Cities pediatric hospital an unfair exemption from a cut in public payments.

An internal department audit recommended the review last week after finding that the exemption granted to the University of Minnesota Amplatz Children’s Hospital appeared inconsistent with state law and unfair to competitors in Duluth and Rochester. If agency attorneys agree the exemption was improper, the state might “take back” $3 million in excess payments to Amplatz, which is part of the Fairview Health Services hospital and clinic group.

The controversy dates to 2011, when the Legislature and Gov. Mark Dayton balanced the state budget with a temporary, 10 percent cut in rates paid to hospitals for care of Minnesotans covered by Medical Assistance and other publicly subsidized health plans.

They included an exemption for children’s hospitals, which clearly applied to Children’s Hospitals and Clinics of Minnesota, and Gillette Children’s Specialty Healthcare because both operate licensed, free-standing hospitals in the metro area.

But while Amplatz has its own shiny new building on the West Bank campus of the university, it technically is licensed as part of the larger university Medical Center.

“There is no definition in state law of a children’s hospital, so there’s some degree of interpretation here,” said Chuck Johnson, deputy human services commissioner for policy and operations. “Is [Amplatz] a hospital? Or is it just a children’s unit or a subhospital within a hospital?”

The same question applies to pediatric hospitals within the Mayo Clinic in Rochester and the in Duluth. But leaders of those hospitals never requested the exemption, as Fairview executives did in a November 2011 meeting with DHS Assistant Commissioner Scott Leitz.

According to an Oct. 1 summary of an internal audit, Leitz made his own judgment that Amplatz should qualify for an exemption because it treats only children and is a stand-alone hospital with its own emergency department.

“We should have sought a legal opinion at the time,” Johnson said. “It doesn’t mean the decision was necessarily wrong. We’re still examining that.”

Johnson said the department will recommend changes in state law to clarify the definition of pediatric hospitals. It will also pursue a clear process for deciding whether hospitals qualify for exemptions to the rate cut, which is scheduled to expire in 2015.

Since September 2011, Amplatz has received $29 million from the state for hospital services. Had it not been exempt from the rate cut, Amplatz would have received only $26 million, according to state estimates.

The end result of the legal review could be that Amplatz pay the $3 million difference to the state or that the pediatric hospitals in Duluth and Rochester receive payments equaling what they should have received if they had also been exempt to the rate cut over the past two years.

Fairview officials believe Amplatz meets the definition of a children’s hospital, according to a statement, but declined to speculate on how they will respond to the legal opinion until it is issued.