Is Bankruptcy an Option Following a Medicare/Medicaid Audit?

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.