In Re: Tlc Hospitals, Inc., a California Corporation, Debtor. Charles Sims v. United States Department of Health and Human Services
Docket: 98-16327
Court: Court of Appeals for the Ninth Circuit; September 12, 2000; Federal Appellate Court
TLC Hospitals, Inc. (TLC), which operated skilled nursing facilities reimbursed by Medicare, filed for Chapter 11 bankruptcy in June 1994 and continued providing services until converting to Chapter 7 liquidation. During the bankruptcy proceedings, audits revealed that the U.S. Department of Health and Human Services (HHS) had overpaid TLC $112,061.00 for pre-petition services while owing TLC $68,871.16 for pre-petition services and $46,952.84 for post-petition services. The key issue was whether HHS could deduct the pre-petition overpayments from the amounts owed for post-petition services.
The bankruptcy court allowed HHS to offset its pre-petition overpayments against pre-petition underpayments, but ruled against offsets across the petition date, preventing HHS from deducting pre-petition overpayments from post-petition liabilities. HHS argued it was entitled to recoup the overpayments under the recoupment doctrine, which the bankruptcy court rejected. HHS appealed this decision, and the district court reversed, permitting HHS to recoup pre-petition overpayments from post-petition underpayments based on equitable recoupment and statutory interpretation of the Medicare Act. TLC appealed to the Ninth Circuit, which affirmed the district court's ruling on the grounds of equitable recoupment.
Equitable recoupment and setoff share similarities but differ significantly in their application within bankruptcy law. The Bankruptcy Code allows for setoff, which enables mutual debts to cancel each other if incurred before the bankruptcy petition. Recoupment, however, is an equitable doctrine that allows for debt exemption from the automatic stay when the debt relates to a post-petition claim. Unlike setoff, recoupment can involve claims arising post-petition but requires that the claims originate from the same transaction as the liability enforced by the bankruptcy estate. The critical inquiry is whether overpayments from the Department of Health and Human Services (HHS) to TLC for nursing services in one fiscal year are related to underpayments in a subsequent year. It is concluded that these financial transactions are interconnected within the Medicare framework.
Medicare reimbursement involves provider agreements that allow facilities like TLC to receive payments for services rendered to eligible beneficiaries under Medicare Part A. Reimbursable amounts are based on "reasonable costs," with providers required to submit annual cost reports. An accelerated payment system facilitates prompt payments, leading to inevitable underpayments and overpayments. Fiscal intermediaries, contracted by HHS, calculate payments based on estimated costs and conduct audits to reconcile interim payments with actual amounts owed at the end of each reporting year, thus determining any overpayments or underpayments.
A 'retroactive adjustment' occurs at the end of an audit as specified by 42 C.F.R. § 413.64(f) and 42 U.S.C. § 1395g. If a provider has been underpaid, the intermediary pays the difference. For overpayments, the intermediary must provide a Notice of Program Reimbursement detailing the findings. Recovery of overpayments can be achieved by adjusting future reimbursements or requiring repayment from the provider, as outlined in 42 U.S.C. § 1395g(a) and 42 C.F.R. §§ 405.1803(c), 413.64(f). Overpayments from one fiscal year can be recouped by adjusting interim payments in a following year.
The relationship between overpayments and underpayments within the Medicare system is considered a single transaction for recoupment purposes, based on a 'logical relationship.' This is supported by case law, including Newbery Corp. v. Fireman's Fund Ins. Co., and further emphasized by the D.C. Circuit in United States v. Consumer Health Servs. of Am., Inc., indicating that the Medicare statute requires consideration of a provider's services as one transaction for claims. The district court affirmed that the payments are logically related despite spanning different fiscal years, as the Medicare reimbursement system inherently links these transactions. Audits typically begin only after providers submit their cost reports, which are due five months post-reporting period, resulting in delayed recognition of overpayments until after the cost year concludes.
The timing of audits is not significant in establishing the relationship between overpayments and underpayments in Medicare reimbursements. The audit serves merely as a tool for the intermediary to adjust future payments based on past discrepancies, independent of its frequency, which is determined by the Secretary for efficiency. The statute and regulations govern the implications of the audit on provider participation in Medicare. TLC's argument for a different interpretation, based on the Third Circuit's decision in University Medical Center v. Sullivan, requiring claims to arise from a single integrated transaction, is not persuasive. That court ruled that recoupment for pre-petition overpayments could not be applied against post-petition service claims from the same provider, as they were deemed separate transactions. While acknowledging the Third Circuit's equitable considerations, the current court does not adopt its restrictive definition of 'transaction.' It supports HHS's right to recoup overpayments, emphasizing the necessity for providers to maintain cash flow through estimated cost reimbursements. Providers can opt to cease Medicare services during bankruptcy if they do not wish to be subject to these adjustments. The conclusion is that the bankruptcy court incorrectly granted summary judgment in favor of TLC regarding equitable recoupment; the district court appropriately recognized the connection between pre-petition overpayments and post-petition underpayments, allowing HHS to recoup without being hindered by the automatic stay. The district court's order is affirmed based on equitable recoupment grounds.
AFFIRMED. The Honorable James M. Fitzgerald, Senior U.S. District Judge for the District of Alaska, sat by designation. TLC's motion to strike portions of HHS's supplemental excerpts of record and brief was granted, as the excerpts included material not presented in the district court, referencing Kirshner v. Uniden Corp. of Am. The facilities involved are identified as Heart of Napa, Heart of Sonoma, and Heart of Santa Clara. The court allowed HHS to offset pre-petition overpayments against pre-petition underpayments, regardless of the claims' association with separate facilities or fiscal periods. The specific amount in question is $43,189.84, calculated as the difference between $112,061.00 in overpayments and $68,871.16 in recovery via setoff, with HHS retaining an unsecured claim for this balance. The Heart of Santa Clara facility experienced a post-petition underpayment of $29,338.32, which the government chose not to recoup because it had not received prior overpayments. The review of the district court's decision on appeal from the bankruptcy court is conducted de novo, applying the same standards as the district court. Section 1395cc outlines requirements for patient data release, return of incorrectly collected funds, Medicare beneficiary charges, peer review processes, provider agreement terminations, and penalties for improper billing. HHS argues that the Medicare Act's plain language allows for overpayment adjustments without being classified as a 'creditor' in bankruptcy, but the court's ruling on equitable recoupment renders this argument unnecessary to address. The Medicare regulations define recoupment as the recovery of outstanding Medicare debt by reducing current or future payments. The District of Columbia Circuit also found that the Medicare statute supports HHS's right to deduct prior overpayments from post-petition underpayment liabilities, but this ground was not examined in the current case.
