HLD, v. 30, n. 10
U.S. Court In Illinois Holds State
Medicaid Provider Agreements With Hospital Contain Implied Right Of Setoff
Doctors Hospital of Hyde Park, Inc. (hospital), which provided
long term care to Medicaid patients pursuant to agreements it had with the Illinois
Department of Public Aid (Department), filed for bankruptcy in April of 2000.
The state, while acknowledging that it owed the hospital approximately $182,000
in Medicaid reimbursements, asked the bankruptcy court to set off this amount
by approximately $562,000 in taxes and penalties owed to it by the hospital.
Daiwa Special Asset Corp. (Daiwa) objected, arguing that it holds a perfected
security interest in the hospital's healthcare receivables that is superior
to the state's setoff interest. The bankruptcy court held that Daiwa's perfected
interest is superior to the state's setoff interest and the state appealed.
The U.S. District Court for the Northern District of Illinois reversed.
The state claimed, and the appeals court agreed, that � 10.05 of the Comptroller
Act, which gives the state its right of setoff, is an implied term in its contract
with the hospital. At the outset, the court noted that "Illinois court have
routinely held that certain terms which are not found in the express language
of the agreement are nonetheless fully enforceable as implied contractual terms."
See, e.g., Selke v. New England Ins. Co., 995 F.2d 688 (7th Cir. 1993)
(applying Illinois law). Applying that rule, the appeals court held that "every
State contract for Medicaid services necessarily includes an implied term which
allows the State to setoff any unpaid taxes or penalties owed by the contracting
hospital against the amount owed to that hospital by the State." In so holding,
the court rejected Daiwa's argument that, even assuming the state's right of
setoff is an implied contractual term, there remains a conflict between the
Comptroller Act and the Commercial Code, which Daiwa argues supports its theory
that its perfected security interest is superior to the state's right of setoff.
However, the appeals court said that Daiwa's argument "misses the point," explaining
that the alleged statutory conflict only arises if the hospital's agreements
with the state are read not to incorporate the right of setoff. Because the
appeals court did find that the agreements included the right of setoff, the
court reversed the bankruptcy court's contrary finding, and remanded for further
In re Doctors Hospital of Hyde Park, No. 02 C 1822
(N.D. Ill. July 30, 2002) (7 pages).