When a provider files for bankruptcy, the debtor-creditor relationship between the Medicare system and provider sometimes plays out in interesting ways. Given the importance of Medicare payments to the continued operation of a hospital, the Medicare administrator must balance the government's right to obtain repayment of overpayments to a hospital with the need to continue providing cash flow to allow the facility to continue operations.
An example of how this unusual creditor's rights relationship can play out was addressed in a decision by the U.S. Bankruptcy Court for the Eastern District of Michigan in In re Community Memorial Hospital, No. 12-20666, (Bankr. E.D. Mich. 2013), where the Centers for Medicare and Medicaid Services (CMS) attempted to obtain a super-priority administrative claim over all creditors for amounts owed for Medicare overpayments. In a holding that distinguished the concepts of recoupment and setoff, the bankruptcy court held that CMS could not assert a super-priority claim in the case because the ability to assert recoupment was not a claim.
The court noted that CMS's rights, as set by Congress, are recoupment and setoff, and the Bankruptcy Code does not override those rights. The opinion states, "Recoupment rights are not an interest in property but are instead a statutory adjustment that defines the proper payment due to a provider." Furthermore, "Recoupment is a defense, not a claim, and does not result in an affirmative recovery."
Andy and Joe conclude that ultimately, many providers will need to be reorganized or sold by utilizing bankruptcy proceedings, and how the government asserts its rights as a creditor in these proceedings will have an increasing impact on the success of such reorganizations and sales. The Community Memorial Hospital decision is a reminder that these rights will need to be defined in the early stages of the proceeding.