UPDATE: Texas District Court issues preliminary injunction preventing CMS from recouping overpayments until an ALJ has heard and rendered a decision

In an update to our alert on June 8, 2018, “Texas District Court issues temporary injunction preventing CMS from recouping overpayments,” the U.S. District Court for the Northern District of Texas entered a preliminary injunction preventing CMS from recouping an alleged overpayment pending an Administrative Law Judge decision on the appeal of the alleged overpayment determination.  
As a summary of the facts of this case, CMS sent Family Rehabilitation, Inc. an overpayment demand of more than $7.5 million. Family Rehab timely appealed this overpayment up through the third level of appeal, the request for an ALJ hearing.  During the first two levels of appeal, CMS was not permitted to begin recoupment.  However, CMS in its discretion can begin recoupment at the start of the third level of appeal.  Pursuant to the statute, an ALJ is statutorily required to hear and render a decision on an appeal within 90 days, but the current backlog is 3-5 years just to get a hearing date. If the 90-day deadline is not met, Family Rehab has the option of escalating its appeal to the fourth level to the Medicare Appeals Council. At this stage the council relies solely on the documentation in the record to make its decision.
As a result of CMS’s recoupment, Family Rehab laid off 39 employees – or nearly 90% of its staff – and only provides service to eight of its prior 239 patients.  On June 4, 2018, the Texas court issued temporary injunction pending the hearing on Family Rehab’s motion for a preliminary injunction. The court subsequently held a hearing to determine if a preliminary injunction should be entered.
To be entitled to a preliminary injunction, Family Rehab needed to establish four equitable factors:
  1. A substantial likelihood of success on the merits
  2. A substantial threat of irreparable injury
  3. The threatened injury to the movant outweighs the threatened harm to the party to be enjoined
  4. Granting the injunctive relief will not disserve the public interest. 
In its opinion, the court focused most of its analysis on the first two factors and a summary of the analysis for each is provided below:
For this prong, the court looks to the standards of the substantive law of the underlying claim. The court found the substantive law to be considered is procedural due process.  The court explained procedural due process protects against “governmental deprivation of a liberty or property interest.” Family Rehab argued CMS’s failure to follow Congress’ mandated procedures resulted in inadequate procedural due process.  The court found the Family Rehab has a property interest in receiving payments owed to it for services rendered.  The statutory language requiring a hearing and decision within 90 days is mandatory.  CMS argued Family Rehab had access to adequate due process through the option of escalating its appeal to the council.  However, this escalation option is discretionary and would deprive Family Rehab of the opportunity to be heard and present witnesses at an evidentiary hearing.  Thus, the court found optional escalation did not provide a remedy to the backlogged AJLs because it does not provide adequate procedural due process.  Accordingly, the court found Family Rehab had established a substantial likelihood of success on the merits of its procedural due process claim.        
In support of this prong, Family Rehab argued the irreparable injury was the fact that it would be forced to close its doors long before an ALJ hearing would be set.  CMS again argued there is no threat of irreparable injury because of the option to escalate to the fourth level of appeal.  The court found CMS’s theory would cause an elective alternative appeals process to become a mandatory process due to the backlog and that was not the intended purpose of the escalation option.   Additionally, escalation would deprive Family Rehab of its right to an evidentiary hearing. CMS also argued there was no irreparable harm because Family Rehab is a subsidiary of a larger healthcare agency with the resources to financially support Family Rehab while the overpayment is recouped during the appeal process. Relying on 5th circuit and Texas case law, the court found liability cannot be imposed on a separate entity merely because it is related without piercing the corporate veil.  CMS made no attempt to do so and the court found no reason to do it.  The court found this argument was not relevant to the irreparable injury analysis and that Family Rehab had successfully established a substantial threat of immediate and irreparable harm.
The court found this prong weighed in favor of granting the injunction for the following reasons: 
  1. Family Rehab would close its doors, employees would lose their jobs and patients would lose their healthcare provider if the injunction was not granted
  2. CMS would not suffer harm from the grant of the injunction because it had the opportunity to recoup the overpayment if the ALJ found in CMS’s favor.
The court stated only the reimbursements for Family Rehab’s services were at issue – not the quality of care provided by Family Rehab.  Therefore, the court found no public interest would be affected by granting the temporary injunction and went on to state “if anything, the public would benefit from continued access to Family Rehab’s home healthcare services.”
The court ordered CMS is “restrained and enjoined from withholding Medicare payments and receivables to Family Rehab to effectuate the recoupment of the alleged overpayments in the underlying claims until such time as an ALJ has heard and rendered a decision on Family Rehab’s appeal of CMS’s overpayment determination.”
Please contact the attorneys below for further information and insight on the implications of this decision.
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