Recent contributors to the Intensive Care column of the ABI Journal have highlighted health provider issues in chapter 11 reorganizations. Contributors have focused on a variety of issues—most notably jurisdictional considerations, recoupment and §363 sales involving provider agreements. The articles have offered invaluable insight as to how the courts have ruled on these subjects. Conversely, the United States must also evaluate a host of legal issues involving health care providers—e.g., subject-matter jurisdiction, recoupment of Medicare claims and suspension of providers for fraud. This column will examine recoupment and suspension from the government's perspective because the exercise of those remedies as prescribed under the Medicare statutes many times precipitates a bankruptcy filing.

Statutory and Regulatory Background

Part A of the Medicare program, established by Title XVIII of the Social Security Act (42 U.S.C. §1395 et seq.), provides for payment on behalf of eligible beneficiaries for inpatient hospital services and certain post-hospital services that include home health services furnished by a home health agency (HHA). 42 U.S.C. §1395d and b; Manakee Professional Medical Transfer Ser. v. Shalala, 71 F.3d 574, 577 (6th Cir. 1995). Part B establishes a voluntary program of "supplemental medical insurance" covering physician's and ambulance's charges, as well as other medical services including home health and outpatient services. Schweiker v. McClure, 456 U.S. 188, 190 (1982) (the Supreme Court described Part B as a private medical insurance that is largely subsidized by the federal government). HHS administers the Medicare program and has delegated this function to the Health Care Financing Administration (HCFA), a component of HHS. The day-to-day administration of Medicare, Part A (i.e., auditing and reimbursement activities) is handled by fiscal intermediaries. Part B is handled by carriers who receive the actual requests for payments from beneficiaries or their assignees, determine whether the claims are covered by Medicare, and then determine the proper amount and pay the claim. 42 U.S.C. §1395u(a)(1)(A)-(C).

An HHA that meets Medicare certification standards may enter into a provider agreement with HCFA, 42 U.S.C. §1395cc, and be reimbursed for the "reasonable cost" of covered services as determined under detailed statutory and regulatory criteria by private fiscal intermediaries acting under contract with HCFA. 42 U.S.C. §§1395f(b), 1395h and 1395x(v); 42 C.F.R. 413.1 et seq. With respect to the actual amounts to be paid to providers, the statute states:

The secretary shall periodically determine the amount which should be paid under this part to each provider of services with respect to the services furnished by it, and the provider of services shall be paid, at such time or times as the secretary believes appropriate (but not less often than monthly) and prior to audit or settlement...the amounts so determined, with necessary adjustments on account of previously made overpayments or under-payments.

42 U.S.C. §1395g(a).²

HHS, through its regulations, has implemented a payment scheme that fulfills the above statutory mandate that (1) providers be paid periodically on an interim basis before an audit is conducted to determine the precise amount payable, and (2) the overpayments or underpayments that are an inevitable incident of such interim payments will be corrected through ongoing adjustments to the stream of subsequent Medicare reimbursement. The regulations provide for "interim payments" to be made during a 12-month cost year based on estimates of the provider's projected costs for the entire year, which may be adjusted on the basis of audit determinations regarding prior years' costs. 42 C.F.R. §413.64(b) and (e). The intent is that interim payments be set to approximate actual costs as nearly as practicable to minimize any subsequently determined overpayment or underpayment for the cost year. 42 C.F.R. §413.64(b).

At the end of the cost year, the provider must file a "cost report" stating the actual "reasonable cost" it claims is payable for the entire year. 42 C.F.R. §§413.20(b) and 413.24(f). The intermediary subsequently performs a full audit of the cost report and issues a Notice of Program Reimbursement (NPR), which is the intermediary's final determination of the total reasonable cost payable for the year together with any overpayment or underpayment. 42 C.F.R. §§405.1803 and 413.64(f)(2). Because interim payments are made on the basis of estimated costs, actual costs reimbursable to a provider cannot be determined until the cost report is filed, reviewed and settled. In order to more promptly arrive at a settlement for a cost year, a retroactive adjustment is made after the cost report is filed so as to bring the interim payments made to the provider during the cost year into agreement with the reimbursable amount payable to the provider for the services furnished during that cost year. To accomplish this, the intermediary makes an initial determination when the cost report is received. For this determination, the costs as reported by the provider are accepted as reported, unless there are obvious inconsistencies or errors, subject to the later, more thorough review and settlement. On the basis of the initial determination, the intermediary then makes the retroactive adjustment. 42 C.F.R. §413.64 (f).

If it is dissatisfied with the intermediary's NPR determination and the amount in controversy is $10,000 or more, the Medicare provider may, within 180 days, request a hearing before the Provider Reimbursement Review Board (PRRB), a statutorily designated five-member administrative tribunal established by Congress with the exclusive authority to hear such disputes. See 42 U.S.C. §1395oo; 42 C.F.R. Part 405, Subpart R. The filing of an administrative appeal with the PRRB does not stay the intermediary's recovery of the overpayment. See 42 C.F.R. §405.1803(c). Within 60 days after the PRRB issues a decision, the HHS, on its own motion, may reverse, affirm or modify the decision. See 42 U.S.C. §1395oo(f)(1); 42 C.F.R. §405.1875. The final decision of the secretary is subject to judicial review by filing a civil action in the appropriate federal district court. See 42 U.S.C. §1395oo(f); 42 C.F.R. §405.1877.

Recoupment in Health Care Bankruptcies

Should the fiscal intermediary determine that a provider is liable for an overpayment, HHS may in its discretion recoup the overpayment against future Medicare reimbursement claims as filed by the provider.³ HHS has both a statutory and common-law right of recoupment, because the disputed funds are part of the same transaction—the ongoing stream of Medicare payments. Moreover, HHS contends that recoupment is not a claim subject to allowance or disallowance; rather, it is a defense to a debtor's claim for payment. Consequently, HHS does not have a claim to assert under the Bankruptcy Code and may not file a claim in a case.

Several courts have recognized that the right of recoupment is not a claim under §101(5) of the Bankruptcy Code. See, e.g., A and C Elec. Co. Inc. v. Meade Elect. Co. Inc., 211 B.R. 268, 273-74 (Bankr. N.D. Ill. 1997); Bram v. Aetna Life Ins. Co., 179 B.R. 824, 827 (Bankr. E.D. Tex. 1995); Harmon v. Harmon, 188 B.R. 421, 425 (9th Cir. BAP 1995); Mercy Hosp. of Watertown v. New York State Dep't. of Social Serv., 171 B.R. 490, 495 (N.D.N.Y. 1994).⁴ Instead, the right of recoupment is viewed as an equitable right that is based on the premise that "where the creditor's claim against the debtor arises from the same transaction as the debtor's claim, it is essentially a defense to the debtor's claim against the creditor rather than a mutual obligation." Bram, 179 B.R. at 827, citing Lee v. Schweiker, 739 F.2d 870, 875 (3rd Cir. 1984) (emphasis added). This view is supported by the fact that the right of recoupment does not permit affirmative recovery. Id. Because no affirmative recovery is permitted, the right cannot properly be considered a claim or a debt. Therefore, HHS is not precluded from exercising its right of recoupment merely because it did not file proof of claim in a bankruptcy case.

Furthermore, the United States contends that no principle of bankruptcy law bars the government from relying on statutory provisions that expressly limit the extent of its substantive liability on the debtor's claims. United States v. Consumer Health Services, 108 F.3d at 394-395. Moreover, as the court noted in United States v. Inslaw, 932 F.2d 1467, 1472-73 (D.C. Cir. 1991), cert. denied, 112 S.Ct. 913 (1992), a creditor with valid defenses to a claim asserted by the debtor need not surrender property to the bankruptcy estate merely because the debtor has demanded it.

A number of courts have explicitly recognized that HHS has a statutory right to adjust current payments to a provider to account for a prior overpayment. See, e.g., In re St. John's Home Health Agency Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994) (United States's withholding of Medicare Part A reimbursement is within its statutory right); In re Visiting Nurse Association of Tampa Bay Inc., 121 B.R. 114 (Bankr. M.D. Fla. 1990) (right to recoupment arises within the statutory scheme established by the Medicare program); In re Advanced Professional Home Health Care Inc., 94 B.R. 95 (E.D. Mich. 1988) (Congress provided in the Medicare Act that HHS has a statutory right to recoup overpayments and that nothing in the Bankruptcy Code overrides this scheme).

In United States v. Consumer Health Services, 108 F.3d 390, the Court of Appeals for the District of Columbia issued a detailed and persuasive decision construing the language and import of 42 U.S.C. §1395g(a). The court declared that this Medicare statutory provision provides that the amount of Medicare's substantive liability for services rendered must take into account prior overpayments. Furthermore, the court emphasized that

[t]o conclude otherwise, we think, would allow the Bankruptcy Code to modify an explicit statutory scheme defining liability for particular services. Neither the trustee, the bankruptcy court nor the Third Circuit in In re University Medical Center has offered authority for the proposition that the Bankruptcy Code can act to override an explicit statutory limitation on what the government owes for particular service.

Id. at 394-395.

This view was recently adopted (September 2000) by the Ninth Circuit in In re TLC Hospitals Inc., 224 F.3d 1008 (9th Cir. 2000), wherein the Ninth Circuit followed the D.C. Circuit's analysis in allowing recoupment of both pre- and post-petition Medicare payments. It also agreed with the D.C. Circuit's analysis that HHS's right of recoupment is not a "claim" in bankruptcy. Id. at 1011.

Additionally, the Ninth Circuit rejected the Third Circuit's analysis in University Medical Center, which had found that recoupment could only apply where there is "a single integrated transaction so that it would be inequitable for the debtor to enjoy the benefits of that transaction without also meeting its obligations." Id. at 1013; In re The Southern Institute for Treatment and Evaluation Inc., 217 B.R. 962, 965 (S.D. Fla. 1998) ("the ongoing flow of payments and subsequent yearly adjustment constitutes one single transaction"); In Re AHN Homecare L.L.C., 222 B.R. 804 (Bankr. N.D. Tex.).⁵

Can HHS Recoup an Overpayment After Discharge?

Recouping after discharge presupposes that HHS has not filed a proof of claim or objected to a chapter 11 plan. Case law on the subject has been fairly uniform in allowing a creditor to recoup post-discharge, but application to Medicare overpayments may be limited.

For example, in In re Flagstaff Realty Assoc., 60 F.3d 1031 (3d Cir. 1995), the Third Circuit found that a tenant had the right to recoup repairs it made to its premises against the tenant's obligation to pay rent. The court found that the tenant could take the "offensive" (under the lease) and recoup against its rent obligations by the cost of the repairs it had made. See, also, A and C Elec. Co. Inc. v. Meade Elec. Co. Inc. (In re A and C Elec. Co. Inc., 211 B.R. 268 (Bankr. N.D. Ill. 1997) (recoupment unaffected by discharge in bankruptcy). The Third Circuit found that the recoupment was valid post-confirmation, but did not elaborate on the treatment (if any) of the tenant's claims in the chapter 11 plan.

The Ninth Circuit held in Newbery Corp. v. Fireman's Fund Ins. Co., 95 F.3d 1392 (9th Cir. 1996), that recoupment does not conflict with the bankruptcy principle of ratable distribution of assets among creditors. While this rationale would support HHS's argument that it should be able to recoup overpayments even if a plan is confirmed, the Newbery case did not analyze the right of recoupment versus a discharge, but rather examined the relative rights between a contractor and its surety. But, see In re De Laurentis Entertainment Group Inc., 963 F.2d 1269 (9th Cir. 1992) (right of setoff under §553 trumps discharge under §1141).

While Newbery and Flagstaff arguably support the ability to recoup post-discharge, the only health care case on point does not support this argument. In re Kings Terrace Nursing Home and Health Related Facility, 184 B.R. 200 (S.D.N.Y. 1995). In Kings Terrace, the New York Department of Social Services (DSS) did not file a proof of claim, even though DSS was aware of the bankruptcy and in the process of auditing cost reports post-petition. DDS did not participate in the chapter 11 plan process, and a plan was confirmed.

Roughly two years after confirmation, DDS attempted to recoup overpayments determined from its audit. The district court found on appeal that DSS's right of recoupment gave rise to a claim under §101(5) and thus was discharged. The court also found that to allow DSS to recoup outside the plan process would frustrate the bankruptcy judge's feasibility determination and make confirmation more difficult to predict. See, also, In re Lykes Bros. Steamship Co. Inc., 217 B.R. 304 (Bankr. M.D. Fla. 1997) (plan could prohibit post-discharge setoff); U.S. Postal Service v. Dewey Freight System Inc., 31 F.3d 620 (8th Cir. 1994) (USPS could not recoup for damages from an executory contract because the contract had not been assumed).

Kings Terrace is distinguishable for the fallacious ruling that recoupment gives rise to a claim. Moreover, the court's conclusion regarding a plan proponent's inability to determine the feasibility of a plan if recoupment were to occur post-confirmation is misleading. To begin with, the debtor in Kings Terrace was aware of the audit and could have provided for its effect in the plan, thereby allowing the judge to factor the prospect of a post-confirmation recoupment into the determination of feasibility. Further, if indeed DSS had a claim, then the debtor could have provided for payment of the claim through the plan or estimated it under §502(c). Finally, if the audit was a claim, then DSS could have argued that it was a post-petition claim that would have not been discharged by the plan.⁶

Suspension for Fraud

42 C.F.R. §405.371(a) authorizes HHS or its intermediaries to suspend payments when "the intermediary or the carrier possesses reliable information that an overpayment of fraud or willful misrepresentation exists." The preamble to the Medicare regulations provides that the purpose of suspending payments is to determine the correct amount due the provider for past claims and to ensure that if the provider was overpaid that sufficient funds are available to recover the overpayment. The action is taken to protect the Medicare trust funds from loss.

A suspension is limited to 180 days. 42 C.F.R.§405.372(d)(1). In the case of fraud and misrepresentation, it may be extended for an additional 180 days. HCFA may or may not provide prior notice of the suspension. 42 C.F.R. §405.372(a)(4). If a suspension letter is issued, the letter must state HCFA's intention to suspend and the reasons for the suspension. The provider may rebut/respond to the suspension letter within 15 days.

The decision to suspend payments is not an initial determination under 42 U.S.C. §405(h) and not appealable. Neurological Assoc.-H. Hooshmand M.D. P.A. v. Bowen, 658 F.Supp. 468, 471 (S.D. Fla. 1987). A suspension freezes a provider's cash flow and has the practical effect of putting a provider out of business without alternative sources of income. A suspension may cause a provider to seek bankruptcy court intervention in the form of injunctive relief and turnover of funds.⁷

Section 405(h) provides that no action may be brought under 28 U.S.C. §§1331 and 1346 to recover any claim arising under Medicare and no finding of fact or decision of the secretary shall be reviewed except as provided for under 42 U.S.C. §405(g). As the Eighth Circuit noted in Clarinda Home Health v. Shalala, 100 F.3d 526, 530 (8th Cir. 1996), the temporary suspension of Medicare benefits during an ongoing fraud suspension will not trigger jurisdiction under the Social Security Act. The Eighth Circuit found that once the secretary made a final determination, the provider will be given a hearing, and eventually the provider would be entitled to judicial review. Id.; see, also, Cathedral Rock of N. College Hill Inc. v. Shalala, 223 F.3d 354, 361 (6th Cir. 2000); Affiliated Professional Home Health Care Agency, et al. v. Shalala, et al., 164 F.3d 282 (5th Cir. 1999).⁸ One court has recognized that the potential demise of a business in upholding a suspension is not subject to judicial review until all exhaustive challenges are concluded. Midwest Family Clinic Inc. v. Shalala, et al., 998 F.Supp. 763, 771-72 (E.D. Mich. 1998) (court found that although provider's request for a temporary restraining order was supported by irreparable injury in the form of layoffs and lost patients, the harm to the plaintiff did outweigh the harm to government and the public).

Conclusion

HHS's exercise of its statutory right of recoupment and suspension will cause providers to seek redress in bankruptcy court. Once there, providers will learn of HHS' success in convincing courts of its overriding mandate of protecting the public treasury from abuse and loss. Insolvency professionals will respond with inventive arguments to counter these principles. Absent Supreme Court rulings or Congressional involvement, bankruptcy lawyers will press the courts to resolve these disputes.

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Footnotes

¹ The views expressed in this article are Mr. Gargotta's, and do not necessarily reflect the views of the Department of Justice or Department of Health and Human Services (HHS). Return to article

² As the D.C. Circuit has observed, under this statute the secretary is liable for current Medicare services only for the amount that "shall be paid," and that amount consists of what the secretary has determined "should be paid" (i.e., the amount ordinarily payable for those services under the reimbursement rules), less adjustments for prior overpayments. United States v. Consumer Health Services, 108 F.3d 390, 394 (D.C. Cir. 1997). Return to article

³ HHS will consider entering into an extended repayment plan, but only after the NPR has been issued and recoupment has commenced. Return to article

⁴ Contra In re Kings Terrace Nursing Home & Health Facility, 184 B.R. 200 (S.D.N.Y. 1995); In re Baker, 100 B.R. 80 (M.D. Fla. 1989). Return to article

⁵ The automatic stay does not apply to recoupment. New York State Elec. and Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93 (2nd Cir. 1997); Consumer Health Serv. of America, 108 F.3d at 397; University Med. Center v. Sullivan (In re University Med. Center), 973 F.2d 1065 (3d Cir. 1992). Return to article

⁶ HHS generally asserts that its claim for recoupment does not constitute a claim under §101. But what if a court holds that it does? The question then becomes, how do you classify the claim? HHS might argue that the claim is determined by the date the cost report is due. The debtor might argue that the cost year determines whether the claim is pre- or post-petition—i.e., if the year ended before the petition date, then it is a pre-petition claim. Finally, one could argue that the claim for recoupment is determined by the date that the services were rendered. Return to article

⁷ The Supreme Court has recently held that §405(h) "channels most, if not all, Medicare claims through [the] special review system...[and] purports to make exclusive the judicial review method set forth in §405(h). Shalala v. Illinois Council on Long Term Care Inc., 529 U.S. 1, __, 120 S.Ct. 1084, 1091 (2000). Return to article

⁸ Courts are split on whether a suspension is a valid exercise of police power and exempt from the automatic stay. Medicar Ambulance Co. v. Shalala (In re Medicar Ambulance Co.), 166 B.R. 918, 926-27 (Bankr. N.D. Calif. 1994) (suspension violates stay); New York Therapeutic Techs. Inc. v. Shalala, (In re Orthotic Ctr. Inc.), 193 B.R. 832 (N.D. Ohio 1996) (HHS suspension does not violate stay). Return to article