Government Recovery of Medicare Overpayments and the Automatic Stay

Publication year2017

Government Recovery of Medicare Overpayments and the Automatic Stay

Maleaka Guice



The automatic stay in bankruptcy is in place to protect the debtor's fresh start and discourage creditors from pursuing their own collection efforts outside of the equitable distribution bankruptcy contemplates. In healthcare bankruptcies, the automatic stay is not always applied consistently, especially for the largest creditor in these cases, the government.

The government, through its agencies, decides whether it will require the bankrupt healthcare provider to repay any Medicare overpayments the agency has previously made. During bankruptcy and the automatic stay, government agencies continue to demand and collect repayments from healthcare entities, allowing the government to jump other creditors based on the equitable doctrine of recoupment.

Recoupment is a non-statutory doctrine recognized by bankruptcy courts as a means for creditors to offset their debts against payments, but recoupment is similar to setoff, an action that is stayed under the Bankruptcy Code. This Comment argues that government agencies should not be allowed to continue repayment actions against healthcare entities that will jeopardize their reorganization process during bankruptcy. This Comment suggests that courts can fix this issue by narrowly applying the doctrine of recoupment and reducing the circumstances in which government agencies can collect from bankrupt healthcare entities without seeking relief from the automatic stay.

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In 2010, the Patient Protection and Affordable Care Act ("ACA") was passed with the goal of decreasing healthcare costs and increasing the quality of patient care.1 The ACA is the most comprehensive healthcare law passed in recent times, making health law one of the fastest-growing fields in the legal profession. Many people understand the new healthcare reforms affecting individuals, such as the individual mandate and preexisting condition limitations. However, most people are unaware of the greater impact that the ACA and other federal healthcare regulations have on healthcare providers and their ability to deliver services and conduct business.

Since the passage of the ACA, healthcare entities have been subject to numerous new regulations promulgated by the Department of Health and Human Services ("HHS").2 Some of these regulations closely monitor the quality of care the public receives by requiring healthcare providers to report quality and readmission rates to determine "winners and losers" in the healthcare system.3 When healthcare providers report these factors, patients can make more informed decisions about their providers, and the government can determine which entities are efficiently spending government funds.4

In this "winner-loser" system, more healthcare entities will be pushed into bankruptcy by consumers or the government.5 When healthcare entities file for bankruptcy, they will likely find that the goals of bankruptcy and healthcare regulations frequently clash.6 Although healthcare regulations seek to provide efficient health services to citizens, a goal of bankruptcy is to reorganize businesses to allow for creditor recovery on debts.7 A common issue that could have a drastic effect on healthcare entities is receiving necessary Medicare payments from the government during bankruptcy. The Medicare system operates by estimating the amount of reimbursement the healthcare provider

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should receive from servicing Medicare recipients.8 This estimation process often leads to overpayments that the government must recover from the provider.9 When a healthcare entity files for bankruptcy, HHS's Centers for Medicare and Medicaid Services ("CMS") frequently argues that it may continue to seek repayments from healthcare entities for the excess funds it provided prior to the bankruptcy.10 Healthcare providers question whether these recovery actions are violations of the automatic stay under § 362 of the Bankruptcy Code (the Code).11

Alternatively, CMS utilizes the non-statutory doctrine of recoupment as a permissible way to recover debts from future payments. Because courts allow recoupment of debts made during the same transaction as an equitable remedy, CMS regularly argues that recovery of Medicare overpayments during bankruptcy does not violate the automatic stay.12 However, Medicare payments are vital to the survival of the majority of healthcare providers.13 Taking prepetition payments back from these providers after they filed for bankruptcy strips them of assets needed for reorganization, and even forces some hospitals to close their doors.14 Unfortunately, courts have yet to resolve whether the automatic stay applies to these recovery actions by the government.15

The split in judicial opinions hinges on whether Medicare payments and Medicare overpayment recovery actions are considered to be within the "same transaction."16 If overpayment recovery actions are considered separate transactions from Medicare payments, CMS's recovery actions fall under the definition of setoff and are subject to the automatic stay.17 On the other hand, if Medicare payments and overpayment recovery efforts are considered to be

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within the same transaction, the equitable doctrine of recoupment allows overpayment recovery without implicating the automatic stay.18 Five federal circuits and several bankruptcy courts have addressed this specific issue by analyzing the "same transaction" distinction.19

When courts determine that the government's post-petition recovery efforts should be exempt from the automatic stay solely based on their understanding of "same transaction," courts are ignoring the unique nature of the healthcare industry and its regulatory system. In contrast, the minority view implements a test that considers other factors relevant to the rules of construction and public policy when determining the appropriate definition of "same transaction": the "single integrated transaction test." In turn, this Comment proposes that courts adopt the minority approach by utilizing the single integrated transaction test and considering the public policy issues that specifically affect healthcare providers.

First, this Comment will discuss the conflicting provisions of Medicare law and bankruptcy law that courts must resolve. Next, this Comment will compare the tests that circuits have used to resolve the issue of Medicare overpayment recovery within bankruptcy. Finally, this Comment will advocate for the minority approach to this issue by highlighting the appropriateness of limiting the equitable doctrine of recoupment, looking to CMS's accounting practices to evaluate separate transactions, and considering the public policy implications for healthcare providers in bankruptcy.


In general, conflicts occur when the government attempts to regulate the healthcare system in the United States.20 Healthcare laws and regulations seek to protect the public health by providing efficient services, but also regulate the costs and availability of services for all Americans.21 The conflicting policies in health law are of particular concern when a healthcare organization files for bankruptcy.22 While one goal of bankruptcy is to allow equitable recovery for

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creditors, another goal is to provide the debtor with a fresh start.23 Chapter 11 of the Code provides entities with the opportunity to cure their financial issues while staying in business by reorganizing the business and debts.24 The conflict between health law and bankruptcy is heightened when the government operates as both a regulator of the public health system and a creditor within the bankruptcy system.

A. Medicare

As one of the largest national healthcare programs, Medicare laws and regulations will frequently affect healthcare entities inside and outside of bankruptcy.25 Title XVIII of the Social Security Act established the Medicare program to provide health insurance coverage for the elderly.26 Medicare provides this benefit by paying the cost of certain health services for eligible citizens.27 Under the Medicare system, healthcare entities enter into "provider agreements" with Medicare's administrating agency, CMS, to be reimbursed for the cost of services rendered to Medicare-covered patients.28 The provider agreements require healthcare entities to agree to certain terms and abide by regulations as a condition of participating in the Medicare program.29 CMS employs a prospective payment system ("PPS") as a method to reimburse entities prior to incurring the costs for their services.30 Under the PPS, CMS estimates the costs the healthcare provider will incur based on predetermined amounts for various types of entities.31

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Since these payments are based on estimates, CMS must reconcile the payments with the actual amount due to the provider from actual services rendered and costs accumulated at the end of the accounting period.32 If CMS determines there has been an overpayment, a fiscal intermediary, acting on behalf of CMS, sends out an initial demand letter to the provider notifying them of the overpayment and requesting repayment or offering the option to enter into a repayment arrangement with reduced or suspended future payments.33 If the provider does not respond to the demand letter within 15 days, the fiscal intermediary may begin subtracting the amount owed from current or future payments to providers.34

In the alternative, the provider may appeal the overpayment demand or request that recovery be waived.35 This response may temporarily pause the recovery process pending the determination of the appeal or waiver.36 The appeals process consists of five levels of review, beginning with redetermination by the fiscal intermediary up to judicial review by a federal district court.37 This lengthy process can lead to years of...

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