Delaware Bankruptcy Court Enforces Stay, Compels Certain CMS Payments

September 12, 2019

The bankruptcy court in Delaware recently ordered the Centers for Medicare & Medicaid Services (CMS) to resume making post-petition Medicare payments to chapter 11 debtor True Health Diagnostics LLC. CMS had been withholding payments in light of a pre-petition fraud investigation.

True Health is a laboratory provider of diagnostic and disease management solutions. Due to allegations of fraud against True Health, CMS suspended 35 percent of Medicare payments in May 2017 and increased the suspension to 100 percent of payments in June 2019. After its investigation, CMS ultimately determined that it had made overpayments totaling over $28 million to True Health from 2015 to 2017.

Citing CMS’ suspension of payments as a primary rationale, True Health filed a chapter 11 bankruptcy case in late July and initiated an action against CMS within its bankruptcy case asserting that CMS’ holdback of post-petition reimbursements violates the automatic stay. CMS argued in response that the bankruptcy court lacks jurisdiction because the claims arise under the Medicare Act, requiring exhaustion of administrative remedies, and that the bankruptcy code excepts the holdback from the stay as it is a proper exercise of CMS’ regulatory and police powers.

The bankruptcy court disagreed. It held that it has jurisdiction because the issue before it is not whether the overpayment determinations and fraud suspension were appropriate, but, instead, whether CMS violated the automatic stay. The court held that CMS violated the automatic stay because (i) the post-petition holdback was an act to recover and collect a claim against True Health for overpayments that CMS made before the bankruptcy filing, (ii) the holdback was an act to obtain possession or control over property of the bankruptcy estate (True Health’s right to receive Medicare payments), and (iii) the police power exception did not apply. The court said the police power exception did not apply because CMS was withholding payments to protect its private, pecuniary interest in pre-petition overpayments rather than to promote public welfare or effectuate public policy.

True Health’s counsel stated that CMS will have to pay about $2 million in post-petition payments it withheld and will continue to pay about $400,000 weekly for new billings. CMS filed a motion to stay the court’s order pending appeal and a motion for expedited consideration of the motion to stay. The court denied the motion for expedited consideration and stated that it was unlikely to grant a stay of its order. The court will continue to adjudicate the lawsuit underlying its initial decision as to the automatic stay and post-petition payments.