## Facts

- Consumer Health Services of America, Inc. participated in Medicare Part A under a provider agreement and received monthly interim payments estimated before final cost determination.
- After each annual reporting period, Medicare’s fiscal intermediary audited the provider and made a retroactive adjustment to determine over- or underpayment.
- A 1984 audit found Consumer had been overpaid by about $81,000; Consumer entered an agreement permitting Medicare to liquidate the overpayment by deducting amounts from future interim payments.
- In 1987, Consumer filed a Chapter 11 petition but continued providing Medicare-covered services and continued receiving interim payments.
- During the bankruptcy, the government stopped deducting amounts toward the prepetition overpayment, fearing the deductions might violate the automatic stay.
- The government later sought bankruptcy-court permission to deduct the remaining prepetition overpayment from reimbursements otherwise due for postpetition services, characterizing the deduction as recoupment rather than setoff.

## Issues

1. Whether deducting prepetition Medicare overpayments from postpetition reimbursements is barred by the Bankruptcy Code’s automatic stay or permitted as equitable recoupment.
2. Whether the prepetition overpayment and postpetition reimbursement obligations arise from the “same transaction” within the Medicare interim-payment and audit-adjustment system.

## Decision

- The D.C. Circuit reversed the district court and bankruptcy court.
- The court held the government could deduct (net) the prepetition overpayment against amounts otherwise payable for postpetition services.
- The court characterized the deduction as recoupment, not setoff, because it was part of a single, continuous reimbursement accounting under the provider agreement.
- Because the obligations arose from the same transaction, recoupment functioned as a defense to the provider’s claim for payment and was not barred by the automatic stay.

## Legal Principles

- Setoff generally involves mutual, independent debts and is subject to bankruptcy limits, including the automatic stay.
- Recoupment permits a creditor to reduce a debtor’s claim when both arise from the same transaction; it operates as an adjustment to determine the proper net amount due.
- In Medicare Part A, interim payments, annual audits, and retroactive adjustments form an integrated reimbursement mechanism under the ongoing provider agreement.
- When a Medicare overpayment and later reimbursements are components of that integrated mechanism, the government may recoup the overpayment from later payments even if the overpayment arose prepetition.
- The automatic stay does not bar recoupment that merely determines the net amount owed on the debtor’s postpetition claim arising from the same transaction.

## Conclusion

The D.C. Circuit held that Medicare’s reduction of postpetition reimbursements to account for a provider’s prepetition overpayment is equitable recoupment arising from a single, continuous reimbursement transaction, and therefore is not barred by the bankruptcy automatic stay.


United States v. Consumer Health Servs. of Am., Inc., 108 F.3d 390 (D.C. Cir. 1997)