UPDATE: Texas District Court holds CMS may not commence recoupment until ALJ hearing occurs


On Jan. 15, 2020, a Texas District Court granted a permanent injunction in favor of the provider, Family Rehabilitation, Inc. (Family Rehab), preventing CMS from recouping on an alleged $7.5 million overpayment until an administrative law judge (ALJ) hearing is set. This court opinion and overview of the appeal process may serve as a guide (or provide insight) for providers in other jurisdictions that are at risk for future overpayments and potential recoupment. In two previous alerts discussing this case (June and July 2018), we summarized the Texas District Court’s entry of temporary and then preliminary injunctions in Family Rehab’s favor. This January ruling makes those injunctions permanent.


There are five levels in the Medicare Part A and Part B appeals processes:

  1. Redetermination by a Medicare Administrative Contractor (MAC)
  2. Reconsideration by a Qualified Independent Contractor (QIC)
  3. Decision by the Office of Medicare Hearings and Appeals (ALJ)
  4. Review by the Medicare Appeals Council
  5. Judicial Review in Federal District Court

Family Rehab was initially subject to a post-payment review of its CMS reimbursements in October 2016, which resulted in an overpayment notice by CMS demanding more than $7.5 million be repaid. Once a provider is given notice of an overpayment, the amount must be repaid in full within 30 days or interest begins to accrue on the whole amount and CMS will start recoupment. Family Rehab timely appealed its overpayment demand up through the third level of appeal, an ALJ hearing request. These ALJ hearings are statutorily required to occur within 90 days of a request being made; however, CMS has been battling with a significant backlog of appeals (delays of at least three to five years) in scheduling these requested hearings. During the first two levels of appeal, CMS is not permitted to begin recoupment if responses are filed within set timeframes. However, CMS in its discretion can and usually will begin recoupment at the start of the third level of appeal. In this case, CMS did start recoupment of the alleged overpayment from Family Rehab at the conclusion of the second level of appeal. Because the 90-day statutory deadline was not met, Family Rehab had the option of escalating its appeal to the fourth level, the Medicare Appeals Council.

As a result of the initial CMS recoupment, and coupled with the extremely lengthy delays in receiving an ALJ hearing, Family Rehab was forced to lay off 39 employees – nearly 90% of its staff – and was only be able to continue providing services to eight of its prior 239 patients. Bankruptcy was the next step for Family Rehab if relief was not granted by the court. The preliminary injunction granted in June 2018 only provided short-term relief from recoupment and as a result, Family Rehab had to request a permanent injunction.


In its January 2020 opinion, the Texas District Court analyzed whether a permanent injunction was warranted for Family Rehab based on the merits of their underlying procedural due process claim.

The court stated that while statutory timelines for an ALJ hearing are relevant, “a procedural due process inquiry does not turn on the agency’s adherence to its own guidelines.” However, the Court noted that the question was whether Family Rehab had received adequate due process when the monetary amount to be seized by CMS was such a large sum in comparison to the entity’s overall budget, such that it would force Family Rehab to cease existing as a business before it could timely receive the ALJ hearing it was entitled to by law.

The court ultimately concluded that Family Rehab should be granted a permanent injunction based on satisfying the following four-part test for injunctive relief:

Last, Family Rehab was found to provide quality healthcare to a rural area and no harm to the public could be found by the court. Therefore, an injunction would not disserve public interest.

  1. Family Rehab succeeded on the merits of their due process claim

    Altogether, the court found the below factors weighed in favor of Family Rehab:

    • Family Rehab had a substantial private interest in the receipt of Medicare payments for covered services it rendered that affect the private interest survival of its business.
    • A substantial risk of erroneous deprivation is present due to the rate that ALJs reverse lower administrative decisions.
    • CMS’ interest in efficient administration and preserving the Medicare fund is not substantially harmed by delaying recoupment.
    • Family Rehab established a violation of procedural due process.
  2. Family Rehab would suffer irreparable injury

    The court held that its failure to grant a permanent injunction would result in irreparable injury, acknowledging that Family Rehab going out of business would be permanent and that Family Rehab entering into a payment plan would not provide a viable solution.

  3. Family Rehab’s injury outweighed those to CMS

    The court considered the burdens on both parties and concluded that Family Rehab permanently going out of business outweighed the possibility of minimal burdens in delayed repayment to CMS, since recoupment could simply be reinstated if the ALJ found in favor of CMS.  

  4. Public interest favors the injunction

The court closed its opinion by declaring, “the backlog of appeals does not protect the government actor when it violates the procedural due process of the other side.” Although the court ultimately found in favor of Family Rehab, it is important to note that each jurisdiction will weigh and view the facts of each case differently and decisions across the country are not consistent.

For questions or further information, please contact one of the attorneys listed below.

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