In an important break with the majority of case precedents, the United States Court of Appeals for the Fifth Circuit, reversing the District Court below, held that a Medicare provider, facing a $7.6 million recoupment for alleged overpayments, can file suit in federal court and seek an injunction against ongoing recoupments, even though the provider had not yet fully exhausted its administrative remedies. Family Rehabilitation, Inc. v. Azar, U.S.C.A., 5th Cir. March 27, 2018. (“Family Rehab”).

The “exhaustion of administrative remedies” requirement — that a person or entity aggrieved by a governmental action cannot file a lawsuit challenging the action before completing all avenues for appeal before the governmental agency — is a bedrock principle of administrative law and a formidable barrier to accessing the courts. Last year, we posted an article about a federal district court’s decision in MedPro Health Providers, LLC v. Hargan (“MedPro”),  filed in the Northern District of Illinois, that addressed this principle in the context of a Medicare audit and recoupment.  In that case, like the Family Rehab case, a home care agency challenged the recoupment of alleged Medicare overpayments determined by an audit contractor for the federal Centers for Medicare and Medicaid Services (CMS), known as a “Zone Integrity Program Contractor” or ZPIC.  The Court in MedPro turned aside the home care agency’s lawsuit and request for injunctive relief, holding that the Court lacked jurisdiction until the provider had gone through and completed the prescribed four-step administrative-appeal process.

The home care agency in Family Rehab was also audited by a ZPIC and mired in the same, “byzantine” four-step administrative appeal process.  The “colossal backlog” of “thousands” of administrative appeals pending before CMS, and the associated delay, did not go unnoticed.  The Fifth Circuit observed that it would take, by the federal government’s own estimate, “at least another three to five years” before the appeals process would be completed.  (Emphasis in original.)  In the meantime, CMS had begun recouping the $7.6 million in alleged Medicare overpayments from the home care agency. The provider argued that absent a court-ordered stay, it might be forced to shut down its operations and file for bankruptcy.

The Fifth Circuit addressed three discrete exceptions recognized by the courts to the exhaustion of administrative remedies, or “channeling,” requirement, and determined that one of them, the “collateral claim” exception, applied in this case. Under the collateral-claim exception, a court can exercise jurisdiction before all administrative appeals have been exhausted if (i) the claims being raised in the lawsuit are “entirely collateral” to the underlying bases for the government agency’s action, and (ii) “full relief cannot be obtained at a post-deprivation hearing.” With regard to the first element, the Fifth Circuit noted that a court would not need to “immerse itself” in, or “wade through,” the patient eligibility certifications completed by the home care agency found deficient by the ZPIC, in order to resolve the home care agency’s legal claims of “procedural due process” and “ultra vires.” As the Fifth Circuit noted, “those claims only require the court to determine how much process is required under the Constitution and federal law before recoupment.” The appellate court further explained that “Family Rehab does not seek a determination that the recoupments are unlawful under the Medicare Act” and thus “raises claims unrelated to the merits of the recoupment.”

With regard to the second “irreparable injury” element to the collateral-claims exception, the Fifth Circuit pointed to the home care agency’s contention that it would be forced to go out of business and file for bankruptcy, which would “have detrimental effects on its employees and patients.” On those bases, the Fifth Circuit held that the court could exercise jurisdiction over the home care agency’s “collateral” procedural due process and ultra vires claims and, if warranted, grant an injunction against ongoing recoupments.

The Court of Appeals, however, rejected the other two exceptions to the exhaustion requirement advanced by the home care agency: (a) the alleged futility of the administrative appeals process; and (b) the court’s exercise of “mandamus” jurisdiction, premised on a request to compel a government officer to perform a non-discretionary duty.  Regarding “futility,” the Fifth Circuit noted that this exception is “narrow” and that delay alone, however substantial or prejudicial, is insufficient without also showing that administrative review was a “legal impossibility.” The Circuit Court also held that the home care agency had not specifically requested mandamus relief in its court complaint and, accordingly, rejected that alternative basis for court jurisdiction.

Key Takeaway:  At bottom, a Medicare or Medicaid provider — faced with a substantial recoupment and delay in CMS’ administrative appeals process — may be able to petition a court to stop ongoing recoupments if it can fashion credible, “collateral” claims, such as procedural due process and ultra vires, that do not call upon the court to assess the merits of the underlying overpayment findings still being addressed at the administrative level.

On October 19, 2017, the United States District Court for the Northern District of Illinois, in the case of MedPro Health Providers, LLC v. Hargan, dismissed a home care agency’s suit — without deciding the merits of the agency’s challenge to a Medicare contractor’s determination to suspend the agency’s Medicare payments.  Noting that the delay in adjudication was “unfortunate,” the District Court nevertheless held that the home care agency had to exhaust its administrative remedies prior to filing suit.  The provider thus had to first let the administrative process play out to conclusion even while its Medicare payments were cut off and the alleged overpayments continued to be recouped.

Regulatory Background.  The Centers for Medicare & Medicaid Services (“CMS”) and its contractors may temporarily suspend Medicare reimbursement payments to providers for up to 180 days if they possess “reliable information that an overpayment exists” — even in the absence of any suspected fraud.  42 C.F.R. § 405.371(a)(1).  A provider has the right to submit to the Medicare contractor, a rebuttal statement explaining why the suspension should be lifted, and the contractor is required to review and consider the statement when determining if the suspension should continue.  Id. at 405.372(b)(2); 405.375(a).  If CMS or its contractor determines to continue the suspension, it must provide written notice to the provider.  Id. at 405.375(b)(2).  The suspension will not be rescinded until CMS or its contractor finally determines whether the provider was overpaid.  The suspended payments would then be released to the provider, less the amount of any overpayment.  Id. at 405.372(c)(1)(ii) and (e).  A provider may then appeal the subsequent overpayment determination through a four-part administrative process, and ultimately to the Medicare Appeals Council.  It is only after the four-step process has been exhausted and the Council had rendered its decision that CMS’ action can be challenged in court.  Id. at 405.904(a)(2); 405.1130.

Factual Background.  MedPro Health Provider (“MedPro”) is a home health agency authorized to provide services to Medicare beneficiaries.  AdvanceMed Corporation is a Zone Program Integrity Contractor (“ZPIC”) that has contracted with CMS to identify suspected cases of Medicare fraud and prevent the mistaken overpayment of Medicare funds to health care providers.  The ZPIC reviewed 32 MedPro patient charts in 2016 and notified MedPro that it was suspending future Medicare payments to the company on the grounds that its review revealed that MedPro had billed Medicare for services that were not medically reasonable or necessary.  MedPro provided the ZPIC with a rebuttal statement and supporting documentation but, as alleged in MedPro’s complaint, ZPIC determined to continue the suspension even though it admitted that it had not reviewed or considered the supporting documentation.

Shortly after the ZPIC’s suspension determination, MedPro filed a lawsuit in U.S. District Court against the Secretary of the U.S. Department of Health and Human Services and the ZPIC, alleging that the ZPIC’s refusal to review the supporting documentation violated regulations and effectively deprived MedPro of its right of administrative review.  For relief, MedPro asked the Court to compel CMS to immediately review its rebuttal statement and supporting documentation, and to declare that the ZPIC had committed fraud by representing that it would, and failing to, review such documentation as required.  The ZPIC moved to dismiss the complaint on the ground that MedPro had failed to exhaust administrative remedies.

After the suit was filed, the ZPIC terminated the payment suspensions and notified MedPro that it determined that MedPro had been overpaid by $6.9 million.

The Court’s Decision.  By decision dated October 19, 2017, the court granted the defendants’ motion to dismiss for lack of subject-matter jurisdiction.  The Court explained that MedPro could have raised the ZPIC’s failure to review the rebuttal submission as a ground for administrative appeal of the ZPIC’s overpayment determination.  The court acknowledged that the delayed review “and the resulting hardship” to MedPro resulting from having to wait until the ZPIC made its overpayment determination was “unfortunate.”  Nevertheless, the court concluded that MedPro was required to exhaust the administrative process before resorting to the courts, and that it lacked authority at that stage to compel the ZPIC to review MedPro’s rebuttal submission.

The court also determined that MedPro’s related fraud claim, premised on the ZPIC’s failure to review MedPro’s rebuttal submission, was “bound up with a claim for benefits under the [Medicare] Act . . . and a challenge to the ultimate overpayment determination.”  Accordingly, the court held that this claim too must be addressed through the administrative process and could not be adjudicated separately from the underlying reimbursement claim.

Implications.  This decision highlights the formidable hurdle that exhaustion of administrative remedies can present for a provider seeking relief from the court when operating under a suspension of Medicare payments.  The exhaustion requirement was enforced in this case even when the provider challenged the Medicare contractor’s compliance with the very procedures prescribed to ensure a meaningful administrative review.  Although a Medicare suspension of payments can cripple a health care provider, the immediacy of such harm does not excuse a provider from first following the prescribed administrative procedures to challenge the underlying overpayment determination.  It may be high time to consider the efficacy and fairness of the backlogged Medicare administrative appeal process that can often leave providers with no meaningful relief.