Among the many healthcare-specific legal services we at Chapman Law Group provide, representing national healthcare providers and practices on matters involving Medicare audits, Medicaid audits and third-party payor audits is one of them. There are times, however, when medical ventures must go through the Chapter 7 bankruptcy process, and sometimes the Chapter 11 bankruptcy process.
With Chapter 7, debtors file to obtain discharge of their debts. Companies that file under Chapter 7 generally close. A court-appointed trustee accumulates the assets of the debtor, sells them, and distributes the money among those whom the debtor owes (the creditors).
Chapter 11, on the other hand, provides a formal process that allows debtors and creditors to resolve the problem of the debtor’s financial shortcomings through a reorganization plan.
How, then, can Medicare recover overpayments to these debtor providers?
The answers aren’t always clear cut, as federal jurisdictions are known to determine things differently in this area of law. Here’s some of the insight we’ve gathered on what is involved.
Medicare’s right to recover prepetition and postpetition overpayments varies by federal jurisdiction. The petition date (i.e., the date the debtor files its petition in bankruptcy with the bankruptcy court) draws a line in the sand between prepetition and postpetition actions.
Recoupment and set-off are two of Medicare’s strongest tools for recovering overpayments to debtor providers, and jurisdictions vary in their decisions about how Medicare can use these tools.
Recoupment permits a party to reduce current payments to account for prior overpayments made under the same contract or transaction; allows adjustment across the petition date; and does not require approval of the bankruptcy court. Set-off permits making similar adjustments in situations involving one or more contracts or transactions.
Once it is discovered that a provider is in bankruptcy, Medicare can enact a temporary administrative freeze. An administrative freeze will allow time for Medicare to determine if there are any overpayments and to ask the bankruptcy court to allow set-off.
In addition, some jurisdictions consider the Medicare part A provider agreement one contract/transaction, and they will allow it to be the basis for broad powers of recoupment. Other jurisdictions say each cost report year is a distinct contract and will restrict recoupment to periods within a particular cost report year.
There is conflict in the federal circuit courts about whether CMS may recoup prepetition overpayments from postpetition payments without first obtaining relief from the automatic stay.
For example, the 3rd Circuit forbids recoupment over different fiscal years without such relief, while, by contrast, the 9th and the District of Columbia circuits permit such recoupment. No other appellate court has decided the issue.
There also are conflicting decisions by district courts on whether CMS may continue to suspend payments due to suspected fraud when the provider files for bankruptcy.
In the 6th Circuit, a bankruptcy court in Kentucky decided that the Medicaid program could seek repayment of sum owed through recoupments without violating the bankruptcy automatic stay, Samaritan Alliance, LLC v. Commonwealth of Kentucky (In re Samaritan Alliance, LLC), Case No. 07-50735, Adv. No. 08-5098, (Bankr. E.D. Ky. Mar. 16, 2009).
The plaintiff maintained that the Cabinet’s action cannot be deemed a recoupment because it is, instead, a demand for reimbursement. The plaintiff also states that the Cabinet is not seeking to deduct the overpayment from any future reimbursements, and so there is no “flow of payments” from which the overpayment could be recouped. However, the bankruptcy court found that the Cabinet can seek repayment of the sum owed without engaging in any adjustment of future payments:
“Because both the Medicare and Medicaid Programs provide for the recovery of overpayments, common law recoupment claims are a recurring theme in bankruptcy case involving health care providers. See, e.g., In re TLC Hosps., Inc., 224 F.3d 1008 (9th Cir. 2000); United States v. Consumer Health Serv. of Am., Inc., 323 U.S. App. D.C. 336, 108 F.3d 390 (D.C. Cir. 1997); University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d 1065 (3d Cir. 1992).
“However, the Circuit Courts that have addressed this issue have employed different analytical approaches and adopted differing definitions of what constitutes the ‘same transaction’ for the purposes of recouping overpayments. Compare TLC Hosps., 224 F.3d at 1012 (holding that the ‘distinctive Medicare system of estimated payments and later adjustments’ met the court’s understanding of a single transaction), and Consumer Health Serv., 108 F.3d at 394 (holding that the federal Medicare statute’s provisions for adjustments for prior overpayments was dispositive on the issue of recoupment), with University Med. Ctr., 973 F.2d at 1081-82 (holding that each audit year constituted a single transaction for purposes of recouping Medicare overpayments from a bankrupt health care provider.” [In re District Memorial Hospital, 297 B.R. 451 (Bankr. W.D.N.C. 2002)]
Generally, bankruptcy law prohibits recovery of prepetition debt (debt arising prior to the filing of the bankruptcy petition) from postpetition payments. However, Medicare Part A payments require adjustments of ongoing payments to a provider to account for overpayments previously made to that provider. 42 U.S.C. §1395g(a); §1395x(v)(1)(A).
Most courts recognize this method of adjusting payments as recoupment, which is permitted in bankruptcy, and is not subject to the automatic stay. Alternatively, they recognize that bankruptcy law does not alter the adjustment of payments that the Medicare statute requires.
The general rule of limited liability applies to CMS and its contractors when dealing with shareholders of incorporated health care providers, just as it does to other creditors. No statute or case law makes owners of incorporated Medicare healthcare providers personally liable for their companies’ debts to CMS, except in certain very narrow circumstances which apply to all debtors and creditors. And nothing about the health care industry makes these circumstances more likely to arise than in other industries.
The principal exceptions to the rule of limited liability of shareholders are collectively known as piercing the corporate veil. Under certain circumstances, courts will allow creditors of an insolvent corporation, LLC, or other legal entity to reach through the corporate structure and collect their debts from shareholders or similar owners. Numerous factors have been cited by courts to justify imposing liability of shareholders for corporate debts, but common examples of circumstances that can justify veil piercing include:
While it is not typical for CMS and its Medicare contractors to seek to pierce the corporate veil and collect overpayment from the company’s owners, it is easily avoidable. The burden of providing facts to pierce the corporate veil falls on the creditor, and courts tend to disfavor such claims but that does not stop CMS or its contractors from having the option to try and recoup under this method.
Who comprises the Medical Practice? Is it a sole ownership or partnership or corporation? In a Chapter 7 case, a discharge is only available to individual debtors, not to partnerships or corporations, 11 U.S.C. § 727(a)(1).
Non-Dischargeable Debt: This is a debt that cannot be eliminated in bankruptcy. Medicare overpayments resulting from fraud are non-dischargeable. A complaint to determine dischargeability must be filed in the bankruptcy court. Some types of debt aren’t dischargeable in Chapter 7 personal bankruptcy. Unless the trustee sells your property and uses the proceeds to pay nondischargeable debt, you’ll still owe it when your case is over, just as if you hadn’t filed.
Exemption From Automatic Stay for Exclusion From Medicare Participation:
Section 362(b)(28) of the Bankruptcy Code exempts from the automatic stay the “exclusion” of a debtor from participation in Medicare or any other federal health care program by the U.S. Secretary of Health and Human Services. “Exclusion” is a specific remedy contemplated by 42 U.S.C. § 1320a-7. It refers to the prohibition of certain individuals and entities from participation in any federal health care program for a period of one to five years, and it can be either mandatory or permissive. Among the permissive exclusion grounds are convictions relating to fraud or obstruction of an investigation or audit, license revocation or suspension, failure to take corrective action, claims for excessive charges or unnecessary services, and the failure of certain organizations to furnish medically necessary services. See, e.g., MMM Healthcare, Inc. v. Santiago (In re Santiago), 563 B.R. 457, 475 (Bankr. D.P.R. 2017) (noting that “[c]ase law regarding the application of section 362(b)(28) is scant” and refusing to decide on a motion for summary judgment whether the termination of a physician’s provider agreement by health maintenance organizations was covered by section 362(b)(28) exclusion from the automatic stay).
The Viability of a Bankruptcy Sale: This depends on a number of factors, including whether the debtor’s Medicare or Medicaid provider agreements or provider numbers can be sold or assigned. Other issues impacting a sale may include zoning or regulatory restrictions, potential successor liability for medical malpractice claims, and the impact that a nonprofit health care debtor’s charitable mission has on determining the “highest and best” offer for assets. See In re United Healthcare Sys., Inc., 1997 BL 8656 (D.N.J. Mar. 27, 1997); In re HHH Choices Health Plan LLC, 554 B.R. 687 (Bankr. S.D.N.Y. 2016).
Section 363(f) of the Bankruptcy Code: This authorizes the trustee or chapter 11 debtor-in-possession (“DIP”) to sell property of the bankruptcy estate “free and clear of any interest in such property of an entity other than the estate” under certain specified conditions.
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