Recent opinions by the Fifth Circuit, the Northern and Southern Districts of Texas, and the District of South Carolina offer hope to providers seeking relief from substantial monetary recoupments during the Medicare appeals process. The uptick in audits by Medicare contractors, such as Zone Program Integrity Contractors (ZPICs), over the past several years has caused a significant backlog in the Medicare claims appeal process. Providers have faced the threat of refunding overpayment demands while waiting years to have their appeals heard by an Administrative Law Judge (ALJ). When the recouped amounts involve extrapolated overpayments, many providers are faced with recoupments in the millions of dollars, an amount often too much to allow them to continue to operate.
Recent case decisions promise some relief from this draconian situation. On June 4, 2018, the lower court affirmed the Fifth Circuit ruling in Family Rehab., Inc. v. Azar that a plaintiff need not exhaust its administrative remedies before a collateral claim can be litigated. In its seminal ruling, the Fifth Circuit determined that an alleged overpayment could not be recouped until after the home healthcare provider obtained a hearing before an ALJ, a process that typically occurs three to five years after submitting a request for hearing due to an extensive appeals backlog. Other courts have since adopted this decision to provide welcome relief to providers. These decisions provide a roadmap for providers facing crippling recoupment demands to consider in challenging recoupment efforts.
Family Rehabilitation, Inc. v. Azar
Family Rehabilitation, Inc., a home health agency providing skilled nursing and other services to nearly 300 patients in Texas, underwent a post-payment audit conducted by a ZPIC in October 2016. The audit of 43 claims resulted in a demand for an alleged $7.6 million extrapolated overpayment. Family Rehabilitation appealed the claims denials and extrapolation methodology through the first two levels of the Medicare appeals process and subsequently requested an ALJ hearing.
The Medicare appeals process involves four levels of administrative review before different adjudicators with varying timeframes and opportunities to stay recoupment of funds. Medicare contractors recoup alleged overpayments from providers after the second level of the Medicare appeals process, depriving providers of large sums of money for years before they can obtain meaningful review at the ALJ level. The Medicare appeals process includes the following four levels of review:
- Redetermination: Requests for redetermination by a Medicare contractor, the first level of review, must be filed within 120 days of the initial claim determination or within 30 days to stay recoupment. Redetermination decisions should be issued within 60 days of receipt of the redetermination request.
- Reconsideration: Requests for reconsideration by a Qualified Independent Contractor (QIC), the second level of review, must be filed within 180 days of receipt of the redetermination decision or within 60 days to stay recoupment. Reconsideration decisions should be issued within 60 days of receipt of the reconsideration request. If the reconsideration decision is unfavorable, CMS may begin recoupment immediately upon receipt of the reconsideration decision regardless of whether an appeal is filed to the ALJ level.
- Administrative Law Judge Hearing: Requests for an ALJ Hearing with the Office of Medicare Hearings and Appeals (OMHA) must be filed within 60 days of receipt of the reconsideration decision. The ALJ must issue a decision on an appeal of a QIC reconsideration decision no later than 90 days from receipt of the request for ALJ hearing unless otherwise extended according to the regulations.
- Medicare Appeals Council: Requests for review by the Medicare Appeals Council (Council) within the Departmental Appeals Board must be filed within 60 days after receipt of the decision issued by the ALJ. The Council must issue a decision within 90 days from receipt of the request for review. Parties may appeal Council decisions to federal district court within 60 days of receipt.
In Family Rehab., Family Rehabilitation contended that recoupment of $7.6 million following Reconsideration would cause it to go out of business before it had the opportunity for an ALJ hearing and violate its procedural due process rights despite a genuine billing dispute, among other claims. An extended repayment plan was not an option for Family Rehabilitation due to its contractual obligations prohibiting such a loan arrangement. Family Rehabilitation maintained that recoupment would cause irreparable damage to its ability to operate because of its large share of Medicare patients and would harm its patients by depriving them of care.
Noting that nearly 600,000 appeals are pending at the ALJ level, Family Rehabilitation warned of a widespread threat to similar providers faced with losing their businesses while waiting for a hearing. OMHA data indicates that claim denials are frequently reversed at the ALJ level, which is the first time providers’ claims are reviewed by a neutral adjudicator.
Initially, the Northern District of Texas denied Family Rehabilitation’s requested temporary restraining order (TRO) and injunctive relief, explaining that it lacked subject matter jurisdiction because the claim arose under Medicare and Family Rehabilitation had not exhausted its administrative remedies within the Medicare appeals process. The Court reached this decision despite its acknowledgment that the Medicare appeals process has “clear problems,” noting that no one at CMS or the Medicare contractor could be reached to testify on these issues.
On appeal, the Fifth Circuit reversed and remanded to the lower court, holding that a court could rule on Family Rehabilitation’s requested TRO and injunctive relief related to recoupment during the “Byzantine” Medicare appeals process with its “massive backlog” at the ALJ level. The Court highlighted that the majority of Family Rehabilitation’s revenue, or approximately 88% to 94% of its income, derives from services provided to Medicare patients. Describing the “harrowing labyrinth of the Medicare appeals process,” the Court explained that the current process does not afford appellants an ALJ hearing within the required 90 days from the filing of a request for hearing and that Family Rehabilitation would likely be required to wait three years before obtaining a hearing. The Court determined that the question of the extent of process required under the Constitution and federal law before recoupment is a collateral matter that requires no interpretation of Medicare law or other issues within the agency’s exclusive jurisdiction. The Court explained that plaintiffs may bring constitutional or procedural law claims that request temporary continuance of benefits until a governmental agency conducts the required statutory or constitutional procedures.
Here, Family Rehabilitation sought only a hearing before recoupment of its Medicare revenues, did not argue that recoupments are not permitted under Medicare, and its request was collateral to the hearing outcome and could not be adequately addressed through administrative review. Noting that Family Rehabilitation only asked that recoupment be suspended until a hearing and raised claims distinct from the merits of recoupment, the Court found that recoupment should not occur until after an ALJ hearing had been held. According to the Court, jurisdiction over Family Rehabilitation’s procedural due process and ultra vires claims was proper, given the possibility of irreparable injury to the appellant’s business and to patient care.
On remand, the Northern District of Texas affirmed the Fifth Circuit’s ruling and issued the requested TRO against recoupment. At the time of the Court’s review, CMS had initiated recoupment and Family Rehabilitation was forced to terminate 39 employees or 89% of its staff and was providing home health services to only eight of its former 289 patients. Family Rehabilitation maintained that it would be forced to shut down permanently before obtaining an ALJ hearing if recoupment continued.
In issuing its ruling, the Court found Family Rehabilitation was substantially likely to succeed on the merits of its procedural due process claims because it was not afforded an ALJ hearing within the required 90-day period and had shown a substantial threat of immediate and irreparable harm based on “dramatic financial hardship” for which there is no adequate remedy at law. The Court echoed the Fifth Circuit’s emphasis on the fact that Family Rehabilitation receives the majority of its income from Medicare, underscoring the dire impact recoupment had on its ability to operate. Continued recoupment would force Family Rehabilitation to close, fire its remaining employees, and deprive patients of care. The Court also noted that ensuring that Family Rehabilitation could continue to provide home healthcare services would benefit patients and that only reimbursement was at issue, not quality of care.
Other courts are following suit. In Adams EMS, Adams EMS, Inc., an ambulance supplier, sought a TRO to suspend recoupment of a $418,035 overpayment. On redetermination, Adams EMS argued that the ZPIC’s sampling methodology was inconsistent with statutory and regulatory guidelines. The Medicare Administrative Contractor (MAC) on redetermination and the QIC on reconsideration both sustained the overpayment; however, the QIC also determined that the sample size the ZPIC used was inadequate to justify the demand amount and that it must recalculate the demand based on a more conservative extrapolation methodology. Adams EMS requested an ALJ hearing, then sought a TRO against recoupment, arguing it exhausted its administrative remedies because it was not provided an ALJ hearing within 90 days, and that recoupment without this opportunity for a meaningful administrative appeal violated due process.
Relying on Family Rehab., the Southern District of Texas granted the TRO. It held that Adams EMS was substantially likely to succeed on the merits of its procedural due process claim because its property interest in receiving Medicare payments for its ambulance services was violated by failing to provide procedures for, and timely adjudication of, its appeal from the overpayment decisions. That Adams EMS had already been forced to sell one of its transport vehicles and downsize from 12 to two staff members due to financial constraints and that it would be forced to file bankruptcy and shut down if the full extrapolated overpayment amount was recouped, led the court to conclude that Adams EMS was at risk of suffering irreparable harm. Balancing the injury to Adams EMS against that to the Government, the court determined that harm to Adams EMS was much greater than the harm to the Government of waiting until the ALJ decision to recoup the overpayment. Lastly, due in part to the fact that Adams EMS was not alleged to have provided poor services, the public interest weighed in favor of allowing Adams EMS to continue to provide services to the community. The Government’s motion to dismiss for lack of subject matter jurisdiction and failure to state a claim is pending as of this writing.
Similarly, recognizing the “inherent problems for medical providers” due to the “backlogged administrative appeals process,” the District of South Carolina in Accident, Injury and Rehabilitation granted a TRO to delay recoupment of nearly $7 million in extrapolated overpayments. The plaintiff, a chiropractic practice, that had been waiting over two years for a hearing before the ALJ brought, inter alia, a claim for denial of due process. The court determined that the plaintiff had shown a substantial likelihood of succeeding on the merits of its due process claim. The continued viability and financial stability of the plaintiff’s business and that overpayment claims are overturned at the ALJ level 60% of the time weighed in the plaintiff’s favor. Furthermore, though the plaintiff could escalate its appeal to the Departmental Appeals Board, this procedure would not afford it important procedural safeguards, like testing the validity of the statistical sample in an evidentiary hearing. The plaintiff simply desired that “the Government not deprive it of money that it has earned when the Government cannot comply with its own procedural requirements in a timely manner.” The court concluded there was a substantial threat of immediate and irreparable harm because: 1. nearly one-third of the plaintiff’s gross revenue derived from Medicare reimbursements; 2. the delay caused the plaintiff to terminate 24 employees; and 3. its owner had to contribute over $1 million in capital contributions to keep the business operational to avoid bankruptcy. As a result, and by balancing the equities between the Government and plaintiff, the court concluded that the public interest would be served by granting the TRO.
Healthcare providers have long complained about the inequitable system in which Medicare could recoup overpayments despite the significant backlog in appeals cases preventing them from receiving a timely hearing before an ALJ. The recent line of decisions provides an opportunity for providers to obtain relief from this inequitable system. Providers facing large recoupments after the second level of the Medicare appeals process should consider filing a complaint for TRO and injunctive relief in relevant jurisdictions, citing the Fifth Circuit and Northern District of Texas precedents in Family Rehab, and/or the district court decisions of the Southern District of Texas in Adams EMS and the District of South Carolina in Accident, Injury and Rehabilitation.
As illustrated by Adams EMS, even small recoupment amounts may be eligible for a TRO if the provider is able to establish the requisite harm. In establishing irreparable injury, providers should not merely focus on the fact that recoupment will cause financial harm; rather, factors such as impact of the recoupment on the provider’s ability to operate and patient care should be analyzed. A review of the percentage of revenue derived from federal healthcare programs should also be analyzed. A large percentage of federal program revenue may increase a provider’s chances of a success.
But as shown by Accident, Injury and Rehabilitation, providers can show irreparable harm even if less than a majority of its revenue comes from Medicare reimbursements. Providers should also emphasize when the overpayment decision is not based on the quality of their services. Further, any errors in the extrapolation methodology should be raised to support the need for an ALJ hearing. These decisions, and future decisions likely to follow, will provide a helpful blueprint to providers hoping to delay recoupment until they have a more complete opportunity to contest the overpayment decisions.
For more information about these rulings or for those entities interested in filing a complaint for TRO and injunctive relief, please contact the authors or any of the attorneys in our Healthcare Practice Group.
 42 C.F.R. 405.1016(a).
 The American Hospital Association reported that 72% of post-payment denials for hospitals appealed through the ALJ level were overturned through the beginning of 2013. See AHA, Exploring the Impact of the RAC Program on Hospitals Nationwide, at 55 (Jun. 1, 2013). In 2015, Senator Orrin Hatch testified that 60% of post-payment denials were overturned at the ALJ level. See Opening Statement of the Honorable Orrin Hatch at April 28, 2015 Hearing before the Finance Committee of the United States Senate, Creating A More Efficient and Level Playing Field: Audit and Appeal Issues in Medicare.
 Family Rehab., Inc. v. Hargan, No. 3:17-CV-3008-K, 2017 WL 6761769 (N.D. Tex. Nov. 2, 2017), aff’d in part, rev’d in part sub nom. Family Rehab., Inc. v. Azar, 886 F.3d 496 (5th Cir. 2018).
 See id. at 3.
 Family Rehab., Inc. v. Azar, 886 F.3d 496, 498 (5th Cir. 2018).
 See id. at 499.
 See id. at 500.
 See id.
 Family Rehab., Inc. v. Azar, No. 3:17-CV-3008-K, 2018 WL 2670730, at *3 (N.D. Tex. June 4, 2018).
 See id. at 1.
 Adams EMS, Inc. v. Azar, No. 4:18-cv-01443, 2018 WL 3377787 (S.D. Tex. July 11, 2018).
 Id. at *2.
 Id. The MAC eventually issued a recalculation letter stating that the new overpayment amount would be $401,611.80. Adams EMS argued that because the use of statistical sampling and extrapolation was invalidated, the MAC should have limited the overpayment amount to the actual overpayment amount of $14,846. Id. at *3.
 Id. at *4–*5.
 Id. at *5.
 Motion to Dismiss, ECF No. 9, Adams EMS, Inc. v. Azar, No. 4:18-cv-01443 (S.D. Tex. July 3, 2018).
 Accident, Injury & Rehabilitation v. Azar, No. 4:18-cv-02173, 2018 WL 3980212, at *2, *5 (D.S.C. Aug. 21, 2018).
 Id. at *3.
 Id. at *4.
 If a decision by the ALJ is not issued within the requisite time frame, a provider may escalate the appeal. 42 U.S.C. § 1395ff(d)(3)(A); 42 C.F.R. § 405.1100(d).
 Accident, Injury & Rehabilitation, 2018 WL 3980212, at *4; see 42 C.F.R. 405.1108(d).
 Accident, Injury & Rehabilitation, 2018 WL 3980212, at *4.
 Id. at *3–*4.
 Id. at *5.
 Not all courts have followed Family Rehab.’s lead. For instance, in Baron and Baron Medical Corp. v. Hargan, the Southern District of California declined to waive the exhaustion requirement notwithstanding its recognition of the “massive backlog” in Medicare appeals. No. 17-cv-2133, 2018 WL 3532915 (S.D. Cal. July 23, 2018). Instead, it concluded that the “economic destruction” of the provider that would result from denial of injunctive relief, was insufficient to establish irreparable harm because it was a “mere financial injury,” which would be adequately remedied if the provider was successful in its appeal. Id. at *2–*3.