Medicares Recoupment Rights Get More Confusing

Medicares Recoupment Rights Get More Confusing

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Medicare's Recoupment Rights Get More Confusing

R Contributing Editor:
Samuel R. Maizel
Pachulski, Stang, Ziehl & Young P.C.

[email protected]

Web posted and Copyright © September 1, 1997, American Bankruptcy Institute.

Editor's Note: This is the first article of ABI's new column discussing health care insolvency issues. Many ABI members will have been affected by health care insolvency issues of some kind, and the trend toward further problems, as demonstrated by the recent criminal indictments of officials of the nation's largest health care entity, Columbia/HCA, and the continuing debate over reform of the health care system, means that health care cases will become more frequent in the days and years ahead. This column is intended to provide readers with valuable insights from knowledgeable writers on new developments and significant issues in the health care insolvency area. Contributions to the column are most welcome. Anyone who has a prospective topic or a suggestion for a topic of a health care insolvency nature may contact contact Samuel R. Maizel via fax at (310) 201-0760, or by E-mail at [email protected].

ecoupment is the right of a creditor to assert a demand arising from the same transaction as the debtor's claim, solely for the purpose of abating or reducing that claim. Although this equitable doctrine did not originate in nor is it unique to bankruptcy law, it is an important creditor right long recognized in bankruptcy law. Because it is considered merely the means used to determine the proper liability on the amounts owed rather than the assertion of an independent claim, it gives the recouping creditor many important and unique rights in bankruptcy cases. For example, a creditor asserting a right of recoupment is not stayed by the automatic stay and can recover pre-petition claims from ongoing, post-petition payments without regard to the mutuality requirements imposed on a creditor asserting a right of setoff. Thus, creditors will often seek to characterize efforts to offset obligations as recoupment rather than setoff.

The ABI Journal recently published an article on the differences between recoupment and setoff and their application in bankruptcy,[1] however, the application of the doctrine of recoupment is an important and frequently litigated issue in health care insolvency cases. Outside of bankruptcy cases, the Health Care Financing Administration (HCFA) (the federal agency administering the Medicare system) has the judicially recognized right to recover prior overpayments from ongoing payments to a health care provider and that right has been characterized as a right of recoupment.[2] Not surprisingly, then, when a health care provider commences a bankruptcy case, HCFA asserts that its right to recover any pre-petition overpayments to the debtor by reducing the amount of its ongoing post-petition payments is a right of recoupment not subject to the automatic stay. As many health care providers are heavily dependent on Medicare payments, if HCFA's offset is characterized as recoupment, the debtor's efforts to reorganize are inevitably hindered.

In 1992, the 3rd Circuit decided in In re University Medical Center (UMC)[3] that HCFA's efforts to recover pre-petition overpayments from ongoing post-petition Medicare payments was setoff rather than recoupment and, therefore, was subject to the automatic stay. This determination was based on the court's finding that Medicare's requirements for submission of a consolidated annual "cost report" and the subsequent audit and reconciliation of amounts paid during that year constituted a separate transaction for recoupment purposes. Thus, only overpayments in the same "fiscal" year could be recovered from ongoing payments under the doctrine of recoupment. UMC was criticized by some commentators (including this author),[4] and government attorneys litigated this issue vigorously in courts across the nation.[5]

In the recent decision of the District of Columbia Circuit, United States of America v. Consumer Health Services of America Inc.,[6] HCFA finally obtained the circuit split it had long sought. The D.C. Circuit, on almost identical facts as the 3rd Circuit, held that HCFA's adjustments were merely a statutory determination of the amounts to be paid to providers of Medicare services and therefore unaffected by the bankruptcy case—not a recoupment of an overpayment. Further, the D.C. Circuit rejected the notion that Medicare's annual audits created separate annual transactions, holding, in the alternative, the 3rd Circuit had been mistaken when it refused to treat the ongoing Medicare relationship as a single transaction for recoupment purposes. This recent decision only serves to further confuse the application of the doctrine of recoupment in general and HCFA's right to recoupment in particular.

The D.C. Circuit's holding that HCFA's adjustments were not recoupment relied on the language of the Medicare statute which states that "the Secretary [of HHS] shall periodically determine the amount which should be each provider of services...and the provider shall be paid...the amount so determined, with necessary adjustments on account of previously made overpayments."[7] The court held this language requires the conclusion that HCFA's post-petition efforts to recover pre-petition over-payments are not recoupment because they merely determine "the amount actually due under the [Medicare] statute."[8] However, this holding simply restates the commonly accepted definition of recoupment. For example, the Supreme Court's decision in Reiter v. Cooper[9] characterized recoupment as nothing more than the "determination of the just and proper liability" of what is owed between the parties. In Newbery Corporation v. Fireman's Fund Ins. Co.[10] the 9th Circuit held that recoupment is merely the right of a party to show that "he or she is not liable in full for the [opposing party's] claim." Many other courts have similarly defined recoupment as an adjustment of accounts to determine what is properly owed the estate from the creditor.[11] Collier's on Bankruptcy recognized that "a right of recoupment is merely a defensive right that assists in the just and proper determination of the [party's] liability."[12] Thus, to say that the Medicare statutes permit, or even direct, HCFA to determine what is properly owed to the Medicare provider by adjusting on-going payments to account for prior overpayments is to say nothing more than that they create a statutory right of recoupment, not some undefined right other than recoupment. Even HCFA's own regulations define its adjustments as recoupment.[13] HCFA's right to adjust prior overpayments has been recognized outside of bankruptcy as a right of recoupment, and there is no reason for it to be viewed any differently inside of bankruptcy.

Of more general concern is that this is not the only circuit court to have looked at a governmental unit's statutory right to determine what is owed to a debtor and found that right to be something other than recoupment or setoff. In Pettibone Corp. v. United States[14] the 7th Circuit held that because the Internal Revenue Code (IRC) permitted the Internal Revenue Service to adjust 13 tax years as a single transaction that created a right not subject to the Bankruptcy Code and something other than a right of setoff or recoupment. Many federal and state statutes permit or direct that prior overpayments or other obligations to the government be offset prior to payments to debtors.[15] Defining those rights, merely because they are created by statute, as neither setoff nor recoupment and, therefore, beyond the reach of bankruptcy law creates a new creditor right that apparently makes certain governmental actions immune from the automatic stay.

The D.C. Circuit relied on the explicit language of the statute, finding the use of the term "shall be paid" persuasive. Although the D.C. Circuit makes much of the fact that HCFA is required to adjust amounts owed to recover prior overpayments and that this actually determines the amount to be paid, HCFA has the discretion to ignore such overpayments. In other words, despite the seemingly mandatory language of the statute, HCFA can permit health care providers to be paid without recovery of prior overpayments. For example, in the case of In re First American Health Care Services of Georgia,[16] which was the nation's largest privately-owned home health care provider, the Department of Health and Human Services entered into a settlement which provided that payments from August 27, 1996, through December 31, 1996, (from the period after the date on which the buyer of this health care entity had purchased it through the end of that calendar year) would be maintained at a bi-weekly amount of approximately $18.5 million "notwithstanding actual costs incurred in such period and without reduction for any liability or overpayment." In other words, although the D.C. Circuit relied on the statute's language as creating a mandatory adjustment for prior overpayments, HCFA used its discretion to allow a health care provider to be paid without recovery of prior overpayments. Moreover, in First American Health Care Services, HCFA not only waived its ability to recover prior overpayments, but agreed to pay in the future without regard to actual costs incurred, in effect, guaranteeing there would be no future efforts to recover future overpayments. Thus, the statutory analysis upon which the D.C. Circuit's opinion is based is questionable.

The D.C. Circuit also addressed the issue of whether HCFA's adjustments were recoupment, and accepted without criticism UMC's definition of recoupment: that "both debts...arise out of 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." The D.C. Circuit held that the 3rd Circuit had misapplied its own definition and that all Medicare fiscal years were a single transaction. Thus, the doctrine of recoupment was satisfied. However, by failing to reject the 3rd Circuit's definition of recoupment, the D.C. Circuit failed to follow binding Supreme Court precedent. The Supreme Court has repeatedly said that statutes, including the Bankruptcy Code, do not abrogate established common law principles unless the statute speaks directly to the question addressed by the common law. Statutes that invade the common law must be read "with a presumption favoring the retention of long-established and familiar principles, except when a statutory purpose to the contrary is evident...In order to abrogate a common law principle, a statute must 'speak directly' to the question addressed by the common law."[17] This principle is applicable in bankruptcy cases. According to the Supreme Court, bankruptcy laws are not written "on a clean slate," and courts should be "reluctant to accept arguments that would interpret the effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history."[18]

Because nothing in the plain language of the Bankruptcy Code nor any legislative history suggests Congress intended to alter the well-established parameters of recoupment, practitioners and the courts should take it as a given that Congress enacted the Bankruptcy Code with an expectation that the common law principle would apply.[19] Therefore, the common law principles of recoupment should control whether Medicare's adjustments of ongoing payments to recover prior overpayments are properly characterized as recoupment. In UMC, the 3rd Circuit expressly stated that the common law definition of recoupment was too broad to be applied in bankruptcy, and that, therefore, it would articulate the new, narrower definition of recoupment repeated above. The Supreme Court's decisions in Reiter v. Cooper and United States v. Texas demonstrate that the creation of a new bankruptcy-unique definition of recoupment was judicial error. The D.C. Circuit's failure to expressly reject the 3rd Circuit's definition and apply the common law definition articulated by the Supreme Court further confuses the status of recoupment in general and Medicare's right to recoupment in particular.


[1] Drew S. Norton, "Recoupment: From Last in Line to First in Line," ABI Journal (June 1997).[RETURN TO TEXT]

[2]See, e.g., Mount Sinai Hospital Inc. v. Weinberger, 517 F.2d 329 (5th Cir.), modified, 522 F.2d 179 (5th Cir. 1975), cert. denied , 425 U.S. 935 (1976); Lowry Hospital Ass'n v. Blue Cross, 415 F. Supp. 589 (E.D. Tenn. 1976).[RETURN TO TEXT]

[3] 973 F.2d 1065 (3d Cir. 1992).[RETURN TO TEXT]

[4] Elizabeth Swinton Schoen and Samuel R. Maizel, "The Medicare Contract in Bankruptcy: In Which Direction Does University Medical Center Lead?," 11 Bankr. Dev. J. 405 (1994- 95).[RETURN TO TEXT]

[5]See, e.g., In re Heffernan Memorial Hosp. Dist., 192 B.R. 228 (Bankr. S.D. Cal. 1996); In re St. Johns Home Health Agency Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994)[RETURN TO TEXT]

[6] 108 F.3d 390 (D.C. Cir. 1997).[RETURN TO TEXT]

[7] 108 F.3d at 394 (quoting 14 U.S.C. §1395g(a)).[RETURN TO TEXT]

[8] 108 F.3d at 394.[RETURN TO TEXT]

[9] 507 U.S. 258, 265 n.2, 113 S. Ct. 1213, 1218 n.2 (1993).[RETURN TO TEXT]

[10] 95 F.3d 1392, 1401 (9th Cir. 1996).[RETURN TO TEXT]

[11]See, e.g., United Structures of Amer. v. G.R.G. Eng'g, 9 F.3d 996, 999 (1st Cir. 1993) ("Allowing the creditor to recoup damages simply allows the debtor precisely what is due when viewing the transaction as a whole."); In re Izaguirre, 166 B.R. 484, 490-93 (Bankr. N.D. Ga. 1994) ("[R]ecoupment speaks not simply to the net amount due from one party to the other computed by subtracting one claim from the other, but rather to the amount of the plaintiff's claim alone on a particular contract, transaction or event.").[RETURN TO TEXT]

[12] Lawrence P. King, 5 Collier on Bankruptcy, ¶ 553.10, at 553-100 (15th ed. rev. 1997).[RETURN TO TEXT]

[13] 61 Fed. Reg. 63745 (Dec. 2, 1996) (modifying 42 C.F.R. section 405.370 (1996).[RETURN TO TEXT]

[14] 34 F.3d 536, 539 (7th Cir. 1994).[RETURN TO TEXT]

[15]See, e.g.,In re Harmon, 188 B.R. 421 (B.A.P. 9th Cir. 1995) (discussing Oregon's statutory right toadjust disability payments as recoupment).[RETURN TO TEXT]

[16] Chapter 11 Case No. 96-20218 (Bankr. S.D. Ga.).[RETURN TO TEXT]


[18]Dewsnup v. Timm, 502, U.S. 416, 421, 112 S. Ct. 773, 779 (1992).[RETURN TO TEXT]

[19]United States v. Texas, 507 U.S. 529, 534, 113 S. Ct. at 1631, 134 (1993) (internal quotations and citations omitted).[RETURN TO TEXT]

Bankruptcy Code: 
Journal Date: 
Monday, September 1, 1997
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