Medicare’s implementation of post-payment review through private contractors who are overly aggressive in denying payments, combined with an ineffective review process at the first two levels of administrative appeal (redetermination and reconsideration), a severe backlog of cases in queue for hearing at the third level of administrative appeal (an Administrative Law Judge (ALJ) hearing), and statutory recoupment of “overpayments” prior to an ALJ decision have combined to create a perfect storm for Medicare providers. In a prior article, we explained the Medicare payment, post-payment audit, appeal, and recoupment processes; how flaws in those processes can result in the improper and premature recoupment of millions of dollars in Medicare payments; and how we helped one hospice provider fight back. The Fifth Circuit Court of Appeals has recently weighed in on another such case, holding that district courts have jurisdiction to resolve constitutional procedural due process and statutory abuse of power (also called, “ultra vires”) claims that seek to prevent premature recoupment pending completion of the administrative appeals process. This article discusses that case – Family Rehabilitation, Inc. v. Azar, No. 17-11337 (5th Cir. March 27, 2018) – and our observations about these types of cases.
A. The Fifth Circuit’s Family Rehabilitation Decision
The Family Rehabilitation case involved alleged Medicare overpayments, the recoupment of which posed an existential threat to the Medicare provider. The Fifth Circuit summed up the provider’s plight and the district court proceedings as follows:
[The provider] was assessed for about $7.6 million in Medicare overpayments. It appealed under Medicare’s Byzantine four-stage administrative appeals process but has completed only the second stage, at which point its Medicare revenue became subject to recoupment; it timely requested a hearing before an administrative law judge (“ALJ”), i.e., the third stage. Yet there is a massive backlog in Medicare appeals. [The provider] likely will not receive an ALJ hearing for at least three years and soon will go bankrupt if recoupment continues. Accordingly, [the provider] sued for an injunction against recoupment until it receives an ALJ hearing. The district court dismissed for lack of subject-matter jurisdiction.
Family Rehabilitation, at 1-2. Critically, the Medicare provider did not seek to have the district court prematurely resolve the merits of the administrative appeals; rather, the provider sought more limited relief – “injunction against recoupment until it receives an ALJ hearing.”
The principal question on appeal was whether the provider’s claims were subject to the exhaustion requirements of 42 U.S.C. § 405(g) and (h) and, if so, whether the exhaustion requirements should be deemed waived. Section 405 generally vests district courts with jurisdiction over only a “final decision” of the Secretary of Health and Human Services for claims “arising under” the Medicare Act. The provider acknowledged that its claims arose under the Medicare Act, but asserted that its claims for injunctive relief were not precluded because (among other reasons) “its procedural due process and ultra vires claims are collateral to the agency’s appellate process.” The provider premised its argument on the Supreme Court’s decision in Mathews v. Eldridge, 424 U.S. 319, 326-32 (1976). The district court determined that the provider’s claims were subject the exhaustion requirements of Section 405 and, accordingly, dismissed the provider’s complaint for lack of jurisdiction. The Fifth Circuit disagreed and reversed.
The Fifth Circuit noted that under Eldridge, “‘when a plaintiff asserts a collateral challenge that cannot be remedied after the exhaustion of administrative review,’ courts shall deem exhaustion waived.” Family Rehabilitation, at 7. Thus, two showings must be made for exhaustion to be waived under a “collateral challenge” argument – (1) the challenge must be “collateral” and (2) the issue must not be remediable following administrative review. With respect to the first prong, the Fifth Circuit noted that a “collateral” challenge must not require a determination of the substance of the Medicare claim and cannot seek “the substantive, permanent relief that the plaintiff seeks or should seek through the agency appeals process.” Id. Rather, a “collateral” challenge seeks “relief that would be unavailable through the administrative process.” Id. Applying these principles, the Fifth Circuit found that the provider’s procedural due process and abuse of power claims fell comfortably within the scope of a “collateral” challenge:
Under these principles, [the provider’s] procedural due-process and ultra vires claims are plainly collateral. Like the plaintiffs in Eldridge, [the provider] seeks only a hearing before the recoupment of its Medicare revenues. In its complaint, [the provider] does not seek a determination that the recoupments are wrongful under the Medicare Act. . . . And [the provider’s] procedural due-process and ultra vires claims will not require the court to wade into the Medicare Act or regulations; those claims only require the court to determine how much process is required under the Constitution and federal law before recoupment. Because [the provider] asks only that recoupment be suspended until a hearing, and because it raises claims unrelated to the merits of the recoupment, its claims are collateral.
Family Rehabilitation, at 9-10.
As to the prospects for remedying the constitutional and abuse of power violations after exhaustion of administrative appeal, the Fifth Circuit determined that the provider had “raised at least a colorable argument” that retroactive payments would not suffice. Id. at 11. The Court noted that “[t]he combined threats of going out of business and disruption to Medicare patients are sufficient for irreparable injury.” Id.
Thus, the Fifth Circuit reversed and remanded the district court’s decision to the extent that it had determined that it lacked jurisdiction to resolve the provider’s procedural due process and abuse of power claims, which sought only an injunction against recoupment pending completion of an ALJ hearing.
B. AGG’s Observations
The overly aggressive post-payment claim denials, the ineffective review process at the redetermination and reconsideration levels of administrative appeal, the severe backlog at ALJ level of administrative appeal, and the contractors’ determination to effectuate overly inflated “overpayments” through recoupment while providers await long overdue ALJ hearings have not abated in the three years since our earlier article. In fact, AGG was one of the first in the country to obtain a similar ruling for its client; yet, there have been few other successful cases since. Thus, Family Rehabilitation stands as a welcome reminder that the Supreme Court, in Eldridge, confirmed that Section 405 does not deprive district courts of jurisdiction to determine whether administrative agencies appeals processes conform to the demands of constitutional procedural due process and statutory requirements imposed by Congress. This decision also stands as a good reminder of what a complaint seeking such a determination should (and should not) include:
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Given the requirement that the relief sought be “collateral” to the issues that must be decided administratively, the complaint should seek relief that will allow the administrative process to run its course (i.e., an injunction against recoupment until after the administrative appeals have been completed). The complaint should not seek the district court’s determination, in the first instance, of the substance of the underlying claims (i.e., a determination that the claims were payable and should not have been denied).
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Given the requirement for irreparable injury, the collateral challenge exception would likely meet more resistance in cases involving smaller amounts or where the premature and potentially improper recoupment would not pose an existential threat to the provider.
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Even assuming a collateral challenge could be brought on a showing of something less than an existential threat, a provider should give serious consideration to several issues before mounting a collateral challenge that is not critical to its very survival:
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Because of the limitation on relief that may be requested – relief that protects the provider pending completion of the administrative appeals process – this litigation is not a substitute for the administrative appeals process. Prevailing in the litigation gives the provider an opportunity to complete the appeals process prior to recoupment. The provider will still need to complete the administrative appeals process and prevail within that process in order to reduce the ultimate recoupment.
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Where the provider has the resources to withstand recoupment, the provisions with respect to interest on overpayments should be considered. By statute, if the contractor over-recoups, the provider will be entitled to interest on the amount over-recouped; if the contractor under-recoups, the provider will owe interest on the under-recouped amount. Thus, delaying recoupment could result in the provider paying more interest (or not getting as much interest back).
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In assessing the jurisdictional issues, the Fifth Circuit focused on the large backlog at the ALJ stage of the administrative appeals process. Procedural due process, as articulated in Eldridge, is concerned with minimizing the erroneous deprivation of property. In this regard, it is important to note that the first two levels of administrative appeal are ineffective at weeding out erroneous overpayment determinations as demonstrated in numerous government reports demonstrating provider success at the ALJ level of appeal. Thus, complaints mounting a collateral challenge under procedural due process should note not only the delay in ALJ hearings but also the critical role that ALJ hearings play in avoiding the erroneous deprivations of property that would occur in the absence of ALJ hearings.
