By now, most providers are aware of the government's position regarding successor liability: when one assumes a Medicare provider agreement, one takes on whatever liability is associated with that agreement. That has been the government's position since at least the early 1990s and is reflected in the well-known decision United States v. Vernon Home Health, Inc., 21 F.3d 693 (5th Cir.), cert. denied, 513 U.S. 1015 (1994). Thus, purchasers of facilities need to research extensively the facility's potential Medicare liabilities before assuming its provider agreement and should consider placing sums in escrow to provide protection against future, but as yet unasserted, overpayment demands. A recent federal district court decision underscores the importance of these actions.

In Triad at Jeffersonville I, LLC v. Leavitt, Medicare & Medicaid Guide (CCH) ¶ 302, 403 (D.D.C. April 21, 2008), the court dealt with the application of the Vernon logic to an unusual fact pattern. Triad involved a contentious transfer of some five facilities from Mariner Health Care, the facilities' previous owner, to Triad. The parties had many disagreements related to the transfer, but despite the conflict Triad accepted assignment of Mariner's provider agreements and began operating the facilities on November 30, 2006.

At roughly the time of transfer, Triad submitted Form 855 applications to the facilities' fiscal intermediary, requesting that it be assigned the provider agreements as of December 1, 2006. Because of mistakes that were made in the application process, however, and because of other reasons, the tie-in notice was not issued by the Centers for Medicare & Medicaid (“CMS”) Regional Office until April 2007. In the meantime, the fiscal intermediary continued to pay the prior owner of the facilities, Mariner, for services furnished at the facilities. Once the tie-in notice was issued, Triad submitted claims for the services back to December 1, 2006, which the fiscal intermediary also paid. The result of this was that both Mariner and Triad were paid for the same services, something that the fiscal intermediary soon realized and sought to remedy by recovering the overpayments from Triad.

Triad filed suit challenging the overpayment recovery, claiming that the obligations were those of Mariner. The court, however, disagreed and upheld CMS's right to recover from Triad. The ruling by the court was principally a jurisdictional decision, with the court stating that it lacked jurisdiction because Triad had failed to exhaust its administrative remedies. In so ruling, however, the court also addressed the substance of Triad's claims, finding them to be without merit. The court stated that when accepting a provider agreement, a new owner must assume responsibility for all outstanding and future overpayments associated with that agreement. This holds true, the court ruled, even when the purchaser's contract with the former owner provides otherwise. Thus, even if CMS had made payment to Mariner in a fashion that was inconsistent with the new ownership of the facility — payments that were made to Mariner after the transfer and while the CHOW was actually being processed by CMS — it was up to the old and new owners, not to CMS, to resolve the parties' respective payment responsibilities. In the meantime, CMS could appropriately look to Triad, the current holder of the provider agreement, to recover any overpayments.

Ober|Kaler's Comments: The Triad case underscores CMS's aggressive use of successor liability theories to recover overpayments. It also underscores the need for purchasers to move quickly to ensure that 855 forms are properly executed, with tie-in notices issued as promptly as possible. Finally, the case reminds us that, in drafting closing documents, purchasers need to ensure that provision is made for the recovery of payments that are mistakenly made to the prior owner for services furnished after the date of sale.