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Why health care entities should pay attention to the Federal Priority Act

Claire Schenk June 4, 2015

The Federal Priority Act (FPA) is a little-known statute that dates back centuries, and has increasingly been used by the federal government to recover significant sums from all types of insolvent businesses and individuals.

Since the government has used the FPA in the health care setting to recover sums owed to the government after a health care organization or physician group becomes insolvent, health care organizations should be familiar with the exposure they may face under the FPA. This is particularly important since the FPA may impose personal liability upon representatives of the person making the improper payment, e.g., corporate officers and directors.  

In a recent article for The Federal Lawyer, the magazine of the Federal Bar Association, “Addressing the language and scope of the Federal Priority Act” I write in depth about the FPA, the types of cases where FPA claims crop up, successful defenses against the Act, and the surprisingly expansive breadth the law has enjoyed before federal and appellate courts.

Below are some relevant excerpts that detail how the FPA has been used in health care cases.

  • In U.S. v. Bridle Path Enters. Inc., a 2001 case from Massachusetts, the defendants owned Bridle Path, a health care corporation that acted as a medical provider. In this role, Bridle Path submitted claims for Medicare reimbursement to its fiscal intermediary, which then made payments to Bridle Path based on cost estimates. These payments were then subjected to later adjustment after the “reasonable cost” of the claims was determined.

    After an audit, it was determined that Bridle Path had been overpaid by over $200,000, and was required to repay its Medicare debt. During the period of repayment, the company became insolvent, as its liabilities exceeded its assets. Bridle Path ceased making Medicare repayments, and wrote numerous checks to several entities out of its operating account. These checks were written to both private creditors and to the corporation owners themselves. The government claimed that Bridle Path’s owners had violated the FPA by not paying their government debts first, and were personally liable for the Medicare debt at the time the insolvent corporation assigned property to themselves and others. The district court agreed, and Bridle Path’s representatives were held liable.

  • In In re Gottheiner, a medical doctor formed a corporation called Coordinated Health Services. The doctor was the sole shareholder of this corporation. The corporation occasionally submitted statements to the government’s fiscal intermediary, in a process similar to that described in Bridle Path. Although the corporation soon accrued debts that exceeded its assets, the doctor directed the company to make several loans and payments to himself and other corporations in which he owned shares. The government claimed that these payments violated the FPA, and argued that the corporation was indebted to the United States for the amount of the cash advances the corporation had received from the government insurer and not repaid. The District Court found that the corporation had been insolvent and owed a government debt at the time it assigned its assets elsewhere, and found the doctor personally liable for this debt.

  • In Garcia v. Island Program Designer, Inc., the defendant was a health service organization under Puerto Rico law. The defendant eventually became insolvent, and a court ordered its assets liquidated. The United States Internal Revenue Service intervened in the state liquidation proceedings and removed the case to federal district court, claiming priority under the FPA. In the district court, the United States was granted summary judgment.  The Court held that the FPA was not preempted by other local Puerto Rico laws and made clear that the United States had successfully invoked the FPA successfully against this health care provider.

Claire Schenk is a business litigation partner who concentrates her practice in the areas of Health Care Fraud and Abuse, False Claims Act litigation and other complex white-collar civil litigation. She can be reached at (314) 552-6462 or cschenk@thompsoncoburn.com.