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*Much of this article appears in Chapter 157 in Norton Bankruptcy Law and Practice 2d
published by the West Group and appears with their permission.
violation of the automatic stay. In 1992, the Third Circuit Court of Appeals agreed. In so doing, the court rejected the Secretary's argument that a Medicare provider agreement is a unique executory contract which should be deemed to have been assumed whenever performance continues after the bankruptcy filing. If the contract had been assumed and the repayment obligation was part of the assumed contract, it would not be a stay violation to recover the overpayments. Declining to follow several earlier cases, the Third Circuit stated that it found no justification to modify Medicare provider agreements the statutory requirement that an executory contract can be assumed only after court approval.
The Secretary was no more successful in the University Medical Center case with its argument that the doctrine of recoupment permitted it to withhold post-petition payments without violating the stay. The common law doctrine of recoupment is an exception to the automatic stay's prohibition against setoff in bankruptcy cases. Recoupment allows a creditor to offset against a debt owed to the debtor, any claim that arises out of the same transaction as the debt. The Secretary contended that its claim against the debtor arose out of the same transaction as the debtor's right to Medicare reimbursement, the Medicare provider agreement. However, because Medicare providers prepare a separate cost report for each fiscal year, the Third Circuit Court of Appeals refused to treat debtor's right to payment for services rendered in 1988 as arising out of the same transaction as the Secretary's right to reimbursement for 1985 payments.
Recovery of the 1985 overpayment, therefore, is the final act of the transactions that began in 1985. UMC's 1988 post-petition services were the beginning of transactions that would stretch into the future, but they were not part of the 1985 transactions.
In other words, the court treated each fiscal year's claims as though they arose out of separate transactions despite the perpetual term of a Medicare provider agreement.
Although the court concluded similarly in In re Dartmouth House Nursing Home, Inc., the decision is easier to understand because the provider agreements at issue were Medicaid agreements. Medicaid provider agreements, by their express terms, have only a one year term. Therefore, even assumption of the current year's agreement would not elevate claims for prior years' overpayments above general unsecured claims.
Taking an even narrower view of a "single transaction" for recoupment purposes, the bankruptcy court in In re Healthback, L.L.C. suggested that each time a provider delivered reimbursable services to a patient, a separate transaction occurs. The court distinguished the continuous stream of estimated Medicare payments from the series of separate transactions giving rise to a payment right. As the court astutely noted, the final adjustments by the Department of Health and Human Services to the amounts owed to a provider "reflect and correspond to each actual separate service provided by the debtor to its patients." Recognizing the administrative difficulties in calculating the amounts owing for each transaction, "at least prior to the end of a cost year," the court distinguished the debtor's pre and post-petition transactions as the defining transaction boundaries "in this matter," and prohibited HHS from withholding pre-petition overpayments from post-petition payments without relief from the stay.
In the context of an agreement between an independent practice association of doctors and an HMO, Judge Barliant took a similarly narrow view in interpreting a "single transaction" for recoupment purposes. The contract at issue provided that the doctors' association, St. Francis Physician Network ("St. Francis"), would receive capitation payments from Rush and would be obligated to pay the costs of providing and paying for health care services provided to Rush's HMO enrollees. The contract allowed Rush to pay the health care providers directly and deduct the payments from the capitation fee. When Rush attempted to deduct from the debtor's post-petition capitation fees payments that Rush had made to health care providers for pre-petition services provided to enrollees and the debtor sought to enjoin Rush from making the deductions. In addressing Rush's recoupment argument, the court stated:
