On March 27, 2018, the United States Court of Appeals for the Fifth Circuit held that a health care provider can seek an injunction in federal court against recoupment by Medicare of alleged overpayments despite not exhausting its administrative appeal remedies, in part because the current delay in scheduling of hearings before an Administrative Law Judge could cause the provider to go out of business before it has an opportunity to exhaust its administrative challenge of the recoupment. This decision could provide a template for other providers facing significant Medicare recoupment demands amidst the “colossal backlog” in Medicare appeals to delay such recoupments until their appeals receive a hearing.

Family Rehabilitation, Incorporated (Family Rehab) is a Medicare-enrolled home health provider that received a demand for $7,885,803.23 in overpayments from its Medicare Administrative Contractor (MAC) following a 2016 audit. The Medicare auditor reviewed 43 claims submitted to the Centers for Medicare and Medicaid Services (CMS) by Family Rehab, and determined that Family Rehab had overbilled Medicare on 93% of the claims. The auditor then extrapolated that alleged error rate to determine that Family Rehab had received the above amount of overpayments.

In response, Family Rehab appealed the overpayment demand in accordance with Medicare’s appeal process. A Medicare provider that would like to appeal such recoupments must go through a four-level appeals process that the Fifth Circuit calls a “harrowing labyrinth” before judicial review by a federal district court is available. First, the provider must submit a claim to the MAC for redetermination of the overpayment. Second, it must request reconsideration from a Qualified Independent Contractor (QIC) hired by CMS. If the QIC affirms the overpayment, the MAC may begin recouping the overpayment by garnishing future reimbursements otherwise due to the provider.

Third, the Medicare provider may request de novo review before an Administrative Law Judge (ALJ) within the Office of Medicare Hearings and Appeals. At this stage, the provider and CMS can have a live hearing, present testimony, cross-examine witnesses and submit written statements of law and fact. By law, the hearing and ALJ decision must be given no later than 90 days after a timely request, but there is currently a significant backlog in the scheduling of ALJ hearings. Fourth, the Medicare provider may appeal to the Medicare Appeals Council to review the ALJ’s decision de novo, and that Council is also required to issue a final decision within 90 days. If the ALJ does not issue a final decision within 90 days, the provider may escalate the appeal to the Council, which will review the QIC’s reconsideration. The fifth and final level of appeal allows a provider to request judicial review in a federal district court, as long as the amount at issue is not less than $1,600.

Family Rehab exhausted the first two stages of the administrative appeal process in a timely manner. Upon reaching the third stage – the ALJ hearing – Family Rehab’s MAC indicated that it would begin recoupment of the alleged overpayment because Family Rehab passed the second stage of appeals. Although an ALJ hearing is required by law within 90 days, Family Rehab alleged, and the government essentially conceded, that an ALJ hearing would not take place for another 3 to 5 years due to a logjam of Medicare appeals. Family Rehab therefore sued in federal court for a temporary restraining order and an injunction to prevent the MAC from recouping the overpayments until its administrative appeal concludes. Family Rehab alleged that if the MAC recoups before Family Rehab completes its administrative appeal, it will be forced to shut down from insufficient revenues. Family Rehab further alleged that this situation (1) violated its rights to procedural due process, (2) infringed on its substantive due-process rights, (3) established an ultra vires cause of action and (4) entitled it to a preservation of rights injunction under the Administrative Procedure Act.

The Fifth Circuit ultimately agreed with Family Rehab, holding that Family Rehab’s procedural due process and ultra vires claims establish federal court jurisdiction because they are “collateral” to Family Rehab’s substantive challenge to the overpayment demand. The court explained that Family Rehab’s action satisfied complicated jurisdictional requirements under a “collateral-claim exception” to the general rule requiring exhaustion of the administrative appeals process before a provider can challenge an administrative action in federal court. The court stated that the threats to Family Rehab’s business, and the potential disruption to its Medicare patients, are sufficient to show irreparable injury, and it therefore reversed the district court’s dismissal of the suit for lack of subject-matter jurisdiction over Family Rehab’s procedural due process and ultra vires claims.