Mid-Atlantic Health Law TOPICS

The health care industry presents unique bankruptcy problems. One of which involves Medicare overpayments.

More specifically, the question of whether a provider may be forced to give Medicare a full credit for pre-bankruptcy Medicare overpayments is often central to using the Bankruptcy Code to reorganize a failing health care provider. If Medicare may withhold payments currently due a debtor because of past overpayments, how can the debtor stay in operation long enough to pay any of its other creditors?

The Ninth Circuit Court of Appeals, the federal appellate court with jurisdiction for California, in Sims v. U.S. Dep't of Health and Human Services (In re TLC Hospitals, Inc.), recently held that Medicare is entitled to credit overpayments made to a provider prior to bankruptcy against amounts currently due from Medicare to the provider, notwithstanding the initiation of a bankruptcy proceeding.

As a result of the TLC Hospitals decision, the Ninth Circuit became the second federal circuit court to reach this conclusion. On the other hand, the Third Circuit, with jurisdiction for Pennsylvania, is now in the minority, since it previously ruled that Medicare must stand in line with other creditors to recover Medicare overpayments.

Medicare reimburses certain providers for services to Medicare patients by making estimated, interim payments that are periodically reconciled with a provider's services. The filing of a bankruptcy petition, however, creates an automatic stay that generally prevents efforts by a debtor's creditors to collect on pre-bankruptcy claims.

If the automatic stay prohibits adjusting Medicare reimbursements for pre-bankruptcy overpayments, then the administration of the Medicare program is thwarted. Conversely, if Medicare is permitted to adjust for prior overpayments, notwithstanding the imposition of the automatic stay, the provider loses a potential source of operating income, and Medicare essentially receives priority treatment for its prepetition claims.

Resolution of this dilemma depends on the doctrine of equitable recoupment. The doctrine provides that, notwithstanding the Bankruptcy Code's automatic stay, a creditor may offset prior overpayments against amounts currently owed to a debtor as a reconciliation of the proper amount owed in a single transaction.

In TLC Hospitals, the Ninth Circuit ruled that the automatic stay did not prohibit a full post-petition credit for pre-bankruptcy Medicare overpayments, because the parties are engaged in a "continuous system of estimated payments and subsequent adjustments" that constitute parts of the "same transaction."

No federal court with jurisdiction for Maryland has published a decision on this question. The Ninth Circuit's holding in TLC Hospitals, however, could signal a trend that full crediting of Medicare overpayments is permitted.