United States: Health Care Provider Agreements May Be Acquired 'Free And Clear' In Bankruptcies

Breaking from the overwhelming majority of prior case law, two bankruptcy courts recently held that Medicare and Medicaid provider agreements can be assigned as part of a Section 363 bankruptcy sale free and clear of the assignor’s liabilities under the provider agreements.

Purchasers of health care related assets often wish to obtain an assignment of the seller’s corresponding Medicare and/or Medicaid provider agreements (collectively, the “Provider Agreements”) because such an assignment permits the purchaser to begin billing for Medicare and Medicaid services immediately following the closing, instead of waiting several months to obtain the necessary approvals for new Provider Agreements. Having the ability to immediately bill Medicare and/or Medicaid for services is often critical to a purchaser of health care assets because the purchaser needs such revenue in order to insure that there is sufficient cash-flow to support the ongoing operation of the newly-acquired health care assets.

There is, however, a significant drawback to taking an assignment of a seller’s Provider Agreement(s).Namely, the Centers for Medicare & Medicaid Services (“CMS”) and their state counterparts (collectively and together with CMS, the “Administrators”) require the assignee to assume “successor liability” for all of the seller’s outstanding liabilities under the assigned Provider Agreements, including liabilities relating to any pre-assignment overpayments that the seller may have received. These overpayment liabilities can sometimes prove to be disastrously large.

For many years, the Administrators have been largely successful in imposing successor liability when a health care provider in Chapter 11 bankruptcy transfers its Provider Agreements to a third-party purchaser. Specifically, the Administrators have argued that for bankruptcy purposes, Provider Agreements constitute “executory contracts,” and that the rules governing the assumption and assignment  of executory contracts as set forth in Bankruptcy Code Section 365(b) apply. In this context, the Administrators contend that in order for a proposed assignment of a Provider Agreement to comply with Section 365(b), the Administrators must receive “adequate assurance” of “prompt cure” and “future performance.” In practical effect, this typically means that a party taking an assignment of a Provider Agreement from a Chapter 11 debtor must assume the same successor liability that it would outside the context of a bankruptcy proceeding.

Breaking from the majority of courts (and practitioners) that have adhered to this Section 365(b) analysis, two recent bankruptcy cases hold that Provider Agreements are not “executory contracts” under the Bankruptcy Code, so Section 365(b) does not apply. Instead, these cases hold that Provider Agreements constitute “statutory entitlements” and can be transferred by a Chapter 11 debtor under Bankruptcy Code Section 363(f) “free and clear of any interest,” including amounts due or that may become due under the Provider Agreement for pre-assignment activities.

The first of these decisions was an oral ruling issued by the Honorable Kevin Gross, United States Bankruptcy Judge from the District of Delaware, on September 5, 2019 in the Chapter 11 proceedings of Center City Healthcare, LLC and its affiliates (collectively, “CCH”).

CCH’s Chapter 11 proceedings were commenced on June 30, 2019—less than two years after CCH had been formed by private equity firm Paladin Healthcare to acquire two, long-enduring hospitals located in the City of Philadelphia: St. Christopher’s Hospital for Children, founded in 1875; and Hahnemann University Hospital, founded in 1885.

Prior to its Chapter 11 filing, CCH had already made plans to close Hahnemann University Hospital. As a teaching hospital, however, Hahnemann hosted a resident physician training program (the “Residency Program”) under which CCH is entitled to receive Medicare reimbursements up to $100,000 annually for each participating resident physician. During the course of its Chapter 11 proceeding, CCH sought authority under Bankruptcy Code Section 363(f) to sell and assign its Residency Program along with its Medicare Provider Agreement to a third-party purchaser. As part of the proposed transaction, CCH offered to establish a $3 million escrow, which would serve as CMS’s sole source of recovery for any and all pre-transfer overpayments and/or similar liabilities that might be found still owing under the Medicare Provider Agreement.

After receiving an initial stalking horse bid of $7.5 million, CCH commenced an auction on August 8, 2019, at which a local consortium of non-profit hospitals led by Thomas Jefferson University Hospital (the “Jefferson Consortium”) ultimately offered to pay $55 million to acquire CCH’s Residency Program and its corresponding Medicare Provider Agreement.

Attempting to block the bankruptcy court’s approval of CCH’s proposed assignment of its Medicare Provider Agreement, CMS insisted, among other things, that the Provider Agreement is an executory contract that CCH can only assign in accordance with the provisions of Bankruptcy Code Section 365(b). Specifically, CHS asserted that under Bankruptcy Code Section 365(b), CMS’s right to recover any pre-transfer overpayments or other amounts owing under the Provider Agreement could not be limited to the $3 million escrow proposed by CCH. Instead, CMS contended that the Jefferson Consortium had to effectively assume complete  “successor liability” in conjunction with the proposed assignment of the Provider Agreement.

The bankruptcy court, however, rejected CCH’s position. Specifically, Judge Gross concluded that “the [P]rovider [A]greement, which debtors seek to sell to the consortium, is a statutory entitlement and not a contract and, as such, debtors are entitled to sell the [P]rovider [A]greement pursuant to [Bankruptcy] Code Section 363. And the purchaser, Jefferson on behalf of the consortium, does not take with successor liability."1

Exactly three weeks later, a similar ruling was issued on the opposite side of the country by the Honorable Ernest R. Robles, United States Bankruptcy Judge for the Central of California. See In re Verity Health System of California, Inc., 2019 WL 4729457 (Bankr. C.D. Cal. September 26, 2019).

This second decision arose out of the Chapter 11 proceedings of Verity Health of California, Inc. (“Verity”), a non-profit California health care provider that was forced to file for Chapter 11 relief on August 31, 2018.

During the course of its Chapter 11 proceedings, Verity sought authority to sell a collection of its acute care hospitals and a dialysis center to an entity affiliated with KPC Health (“KPC”), a for-profit health care venture based in Southern California with extensive experience in acquiring financially-distressed health care assets.

As part of its proposed sale of the above facilities, Verity attempted to utilize the provisions of Bankruptcy Code Section 363(f) to transfer each of its corresponding Medi-Cal (i.e., California’s version of Medicaid) Provider Agreements to KPC “free and clear” of any successor liability claims.

Opposing the proposed transfer, the California Department of Health Care Services (“DHCS”)2 asserted that it remains owed in excess of $50 million in overpayments and other amounts under the Provider Agreements. If the Provider Agreements were to be transferred to KPC, DHCS insisted that it must receive adequate assurance that these liabilities would be fully “cured,” pursuant to the Bankruptcy Code’s executory contract provisions.

Like Judge Gross, however, Judge Robles concluded that the Provider Agreements are not contracts but rather are statutory entitlements and, as such, can be transferred by Verity to KPC under Bankruptcy Code Section 363(f) “free and clear” of any successor liability. Id., at 6-8.

In so ruling, Judge Robles declined to address whether DHCS might still retain a right of recoupment that it could use to recapture the $50+ million in alleged overpayments and related liabilities from those amounts that subsequently become payable to KPC under the Provider Agreements.

Harkening back to an anomalous decision rendered by a Massachusetts bankruptcy court more than a decade ago,3 Verity insisted that if the court were inclined to recognize such a right of recoupment in favor of DHCS and if the court were to conclude that such right of recoupment is not cut-off by the provisions of Bankruptcy Code Section 363(f), then DHCS should be required to recoup the amounts at issue  from any Medicaid reimbursements that remained payable to Verity and/or that Verity still retained within its possession. Then, after exhausting the foregoing sources, DHCS would recoup any amounts received by Verity in connection with the proposed sale of its assets to KPC. Judge Robles, however, refused to address these points and, instead, remained adamant that the question of recoupment must await another day. Id. at 9.4

The Administrators on the losing end of the bankruptcy court rulings in the CCH and Verity cases have not taken these decisions lying down. CMS appealed Judge Gross’s ruling in the CCH case to the United States District Court for the District of Delaware, which, on September 16, 2018, formally stayed the effect of Judge Gross’ ruling pending appeal. Similarly, DHCS filed a notice of appeal in the Verity case and has also moved that the ruling be stayed pending appeal.

In the event the bankruptcy court rulings in the CCH and Verity cases are ultimately upheld on appeal, they will most certainly embolden and encourage more health care debtors to attempt to utilize the provisions of Bankruptcy Code Section 363(f) to transfer their Provider Agreements free and clear of successor liability obligations. Such a development will no doubt further pique the interest of private equity firms, who have already been entering the health care arena with increasing frequency and ferocity. For the time being, however, we will have to wait and see.

Footnotes

1 Transcript of hearing held on September 5, 2019 before the Honorable Kevin Gross in In re Center City Healthcare, LLC, et al., Case No. 19-11466 (KG).

2 DHCS is effectively CMS’s counterpart in administering the jointly-funded Medicaid program made available in the State of California.

3 In re Vitalsigns Homecare, Inc., 396 B.R. 232 (Bankr. D. Mass. 2008).

4 If and to the extent that the Verity court were to ultimately allow DHCS to recoup the alleged liabilities at issue from any future reimbursement payable to KPC following Verity’s proposed assignment of the Provider Agreements, it would entirely “gut” the effect of permitting the foregoing assignments to occur “free and clear” of successor liability under Bankruptcy Code Section 363(f).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions