Difficulty in obtaining financing. General recessionary forces.

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1 American Health Lawyers Association Long Term Care and the Law Insolvency and Bankruptcy Proceedings Presented by Jill A Steinberg, Esq. Arent Fox LLP Washington, DC New York, NY Los Angeles, CA Date: February 28-29, 2012 Financial Issues Affecting Health Care Providers Causes of increased financial challenges facing health care providers: Decreased health care spending due to unemployment, loss of private health insurance by individuals, and Medicare and Medicaid budget cuts, especially among long term care providers. President Obama s FY 2013 budget proposal includes approximately $360 billion over 10 years in provider cuts under Medicare, Medicaid, and other health programs. Difficulty in obtaining financing. General recessionary forces. 2 1

2 Result Restructuring: Through bankruptcy: Chapter 7. Chapter 11. Outside of bankruptcy: Cost cutting. Consolidation. Downsizing. Receiverships. 3 Bankruptcy Law - Chapter 7 and Chapter 11 Chapter 7: Liquidation Office of the U.S. Trustee ( UST ) appoints Chapter 7 trustee to investigate debtor s finances, collect and reduce property of estate to cash, distribute cash; and in the case of a health care business, transfer patients. Closure and patient transfer issues will always arise because the business is terminating with no plans to continue post-bankruptcy. 4 2

3 Bankruptcy Law - Chapter 7 and Chapter 11 Chapter 11: Reorganization Debtor operates as debtor in possession ( DIP ) with powers of Trustee. UST appoints Creditors Committee which represents interests of creditors. Debtor typically requests DIP financing and/or use of cash collateral to keep administratively solvent. Often includes a sale of some or all of the debtor s assets. Usually a Plan of Reorganization; may involve CHOW issues. Occasionally a Plan of Liquidation, in which case closure and patient transfer issues arise. 5 Immediate Impact of Bankruptcy Filing The facility/agency will not lose its license solely due to the bankruptcy filing. The anti-discrimination provision of the Bankruptcy Code prohibits a governmental unit from denying, revoking, suspending, or refusing to renew a license, permit, charter, franchise, or other similar grant... solely because an entity has filed for bankruptcy relief. 11 U.S.C. 525(a). 6 3

4 The Bankruptcy Estate and the Automatic Stay Automatic Stay: The filing of a bankruptcy petition operates as a stay applicable to all entities with respect to most actions, including efforts to collect prepetition debt. 11 U.S.C How does this impact the case? Setoff. Recoupment. Remains in effect throughout the pendency of the case unless relief from the Automatic Stay is sought from and approved by the bankruptcy court. 7 Bankruptcy Provisions Relating Explicitly to Health Care Bankruptcy Abuse Prevention and Consumer Protection Act ( BAPCPA ) enacted in Provisions in the Bankruptcy Code explicitly related to health care, including changes from BAPCPA: 101: Definitions of health care business, patient, and patient records. 333: Creation of the patient care ombudsman ( PCO ). 351: Disposal of patient records where insufficient funds. 362(b)(28): Automatic Stay does not preclude HHS from excluding a debtor from Federal health care programs. 503(b)(8): Allows administrative expense claim status for closure of a health care business. 704: Transfer of patients from a closing facility/agency. 8 4

5 Definition of Health Care Business Health care business is defined in the Code as a public or private entity primarily engaged in offering to the public facilities and services for diagnosis or treatment of disease, deformity, or injury, and surgical, drug treatment, psychiatric, or obstetric care, and includes any: (a) general or specialized hospital; (b) ancillary ambulatory, emergency, or surgical treatment facility; (c) hospice; (d) home health agency; (e) other health care institution similar to the four aforementioned types of business; and (f) long-term care facility (including skilled nursing, intermediate care, assisted living, home for the aged, domiciliary care, and related health care institution) primarily engaged in offering room, board, laundry, or personal assistance with daily living and incidentals thereto. 11 U.S.C. 101(27A)(B)(i) and (ii). 9 The Patient Care Ombudsman Within 30 days of the filing of a health care business case, a bankruptcy court is required to order the appointment of a PCO to monitor the quality of patient care and represent the interests of patients, unless the court finds the appointment is not necessary for the protection of patients based on the case s specific facts. 11 U.S.C. 333(a)(1). Arguments as to whether appointment of a PCO is a benefit or burden costly, but could add value. Many DIPs attempt to avoid appointment by asserting that the PCO is not necessary. 10 5

6 The Patient Care Ombudsman Duties of the PCO: 1. Monitor quality of patient care and interview patients and physicians, if necessary; 2. Within 60 days of appointment and at 60 day intervals thereafter, report to the court regarding quality of care; and 3. If patient care is declining or is materially compromised, file a motion or written report to the court. 11 U.S.C. 333(b). 11 Concepts of Setoff and Recoupment Setoff: A cancellation of mutual debts which arose from separate and distinct transactions. Not available for reciprocal obligations where one arose prepetition and the other arose postpetition, unless the bankruptcy court provides relief from the Automatic Stay. 11 U.S.C. 362, 553. Recoupment: The offset of two debts which arose from one single, integrated transaction. BUT, what is a single integrated transaction? 12 6

7 Recovery of Medicare/Medicaid Overpayments Outside of bankruptcy, Medicare may suspend payments with reliable evidence of an overpayment and may recover overpayments upon a determination that an overpayment has occurred. 42 U.S.C. 1395g(a); 42 C.F.R (a)(1) and (2). Upon evidence of likely bankruptcy or insolvency, Medicare may impose a temporary administrative freeze and adjust payments to determine whether an overpayment has or will be made. 42 U.S.C. 1395g(a), 1395x(v)1(A); 42 C.F.R (i). 13 Setoff and Recoupment of Medicaid and Medicaid Overpayments Courts are split as to whether the government may recoup prepetition Medicare and Medicaid overpayments for post-petition services. Generally, the decision rests upon whether overpayments arose from a separate transaction than the post-petition payments. 14 7

8 Setoff and Recoupment of Medicare Overpayments U.S. v. Consumer Health Services of America, 108 F.3d 390 (D.C. Cir. 1997): D.C. Circuit Court of Appeals held that overpayments from all fiscal years may be recouped against current and future amounts due to providers. The court held that a provider s ongoing services under a provider agreement are considered part of one transaction. This reasoning has been followed by the 1 st, 7 th, and 9 th Circuits. 15 Setoff and Recoupment of Medicare Overpayments In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992): 3rd Circuit held that government s reduction of overpayments was not a recoupment, but rather an impermissible setoff which violated the Automatic Stay. The Circuit found that each provider s cost year constitutes a separate transaction; thus, postpetition services were not part of the same transaction as the prepetition services and the government could not recover prepetition overpayments. 16 8

9 Setoff and Recoupment of Medicaid Overpayments Courts are split as to whether the government may recover prepetition Medicaid overpayments. 2 nd Circuit: The Court held that recoupment is not applicable where reimbursements made post-petition are independently determinable and are due for services distinct from those reimbursed through the prepetition payments. In re Kings Terrace Nursing Home & Health Related Facility, 1995 WL at *11 (Bankr. S.D.N.Y. Jan. 27, 1995), aff d, 184 B.R. 200 (S.D.N.Y. 1995). 17 Setoff and Recoupment of Medicaid overpayments Other courts have adopted the Consumer Health approach and held that Medicaid may recover prepetition overpayments made to providers. For example, the court in In re Dist. Mem l Hosp. of Sw. North Carolina Inc. found no distinction between the Medicare and Medicaid provider agreement for purposes of recoupment when it held that the ongoing stream of services, advances, and reconciliations constitutes a single transaction. 18 9

10 Recovery of Medicare and Medicaid Overpayments Some cases suggest that the government s recoupment of prepetition claims violates the anti-discrimination provision of the Bankruptcy Code. See, e.g., In re Kings Terrace Nursing Home and Health Related Facility, 1995 WL (Bankr. S.D.N.Y.), aff'd, 184 B.R. 200 (S.D.N.Y.1995). 19 Financing in Bankruptcy Debtor-in-possession ( DIP ) financing: If approved by the bankruptcy court, often permits a debtor to incur post-petition debt entitled to superpriority status. 11 U.S.C Debtor may also seek the court s approval to allow the estate to use the lender s cash collateral rather than using it to satisfy the bank s lien. 11 U.S.C

11 Financing and the Reassignment Prohibition A provider generally may not reassign Medicare and Medicaid receivables to a third party. 42 U.S.C. 1395g(c); 42 U.S.C. 1395u(b)(6); 42 U.S.C. 1396a(a)(32); 42 C.F.R ; 42 C.F.R The reassignment restrictions do not prevent a creditor from securing a loan by Medicare or Medicaid receivables, as long as the provider retains ultimate control over receipt and disposition of payments, e.g., through the double lockbox approach. 21 Financing and the Reassignment Prohibition A secured creditor can take possession of governmental receivables pursuant to a court order; BUT, a lender that receives payment under a court-ordered assignment or reassignment will be jointly and severally responsible for any Medicare overpayment made to the provider. 42 U.S.C. 1395g(c); 42 U.S.C. 1396a(a)(32)(B); 42 U.S.C. 1395u(b)(6)(H); 42 C.F.R (b); 42 C.F.R (e); 42 C.F.R (c)

12 Creditors Claims in Bankruptcy In the context of a 363 sale or Plan of Reorganization, it is important to consider the classification of creditors claims. Types of Creditors Claims in Bankruptcy: Secured claims: Supported by a lien on debtor s collateral. Unsecured claims: No security interest in collateral. Administrative expense claims: Determined by Bankruptcy Code and paid ahead of most other types of claims. 11 U.S.C. 503, 507. Executory contracts and unexpired leases may gain administrative claim status for post-petition performance. 23 Creditors Claims in Bankruptcy Certain pre-bankruptcy tax claims gain payment priority over general unsecured claims. Executory contracts

13 Bankruptcy Section 363 Sale of a Health Care Business A 363 Sale permits the debtor to sell a portion or substantially all of its assets prior to confirmation. 11 U.S.C. 363(d). Debtor must demonstrate a significant business justification, such as likelihood of irreparable harm absent a quick sale. Debtor must notify all creditors and parties-in-interest so that such parties may object to the sale. 11 U.S.C. 363(b)(1). 25 Bankruptcy Section 363 Sale of a Health Care Business Under 363, debtor can sell the estate s property (including assumed executory contracts) free and clear of any interests or liens under certain circumstances. 11 U.S.C. 363(f). Usually considered a CHOW, subject to licensure/con filings and approvals. Important to confirm CHOW requirements and process with state regulators

14 Assumption and Assignment or Rejection of Contracts and Leases The Bankruptcy Code provides that unexpired leases and executory contracts must be assumed by the DIP or deemed rejected (within 60 days of filing unless extended in a Chapter 7 case; any time before confirmation of a plan in a Chapter 11). 11 U.S.C Debtor cannot simply reject and walk away; must continue to comply with state licensure and other regulations pertaining to patient/resident care. 27 Medicare Change of Ownership 42 CFR : CHOW under Medicare includes: 1. Change of partnership; 2. Transfer of title of an unincorporated sole proprietorship; 3. Merger of consolidation of a corporation creating a new corporation; and 4. A lease of all or part of a facility with respect to the leased portion only. Under Medicare, an asset transfer is a CHOW, but not a stock transfer

15 Assignment of Medicare Provider Agreement Upon a CHOW, the existing Medicare provider agreement will automatically be assigned to the new owner, unless the buyer chooses not to accept assignment. 42 C.F.R (c). If the new owner accepts assignment, both the old owner and the new owner must submit a CMS 855. Payments will go to old owner until tie-in notice is issued; parties may agree that buyer can bill under seller s provider number. 29 Medicare Successor Liability If the new owner accepts assignment of the Medicare provider agreement, the new owner will be responsible for the previous owner s overpayments and civil monetary penalties ( CMPs ). United States v. Vernon Home Health Inc.: 5 th Circuit held that assignment of the seller s Medicare provider agreement required the purchaser to assume the seller s liability for Medicare overpayments

16 Medicare Successor Liability Deerbrook Pavilion, L.L.C. v. Shalala: 9 th Circuit Court of Appeals expanded the Vernon decision to impose successor liability for CMPs against the purchasing entity that assumed the seller s provider agreement. The court held that the overpayment liability in Vernon was indistinguishable from CMPs, finding that both involve monetary liabilities that are transferred to the new owner when it assumes the provider agreement. Multiple cases have upheld successor liability for CMPs. See, e.g., Delta Health Group, Inc. v. U.S. Dept. of Health & Human Services, 459 F. Supp. 2d 1207, 1223 (N.D. Fla. 2006). 31 Medicare Successor Liability If the new owner rejects assignment of the provider agreement, it operates as a voluntary termination of the Medicare provider agreement. The new owner must file a CMS 855 for initial certification and will not be recognized as a Medicare provider or permitted to submit claims until the date of a satisfactory survey and the issuance of the tie-in notice

17 Medicare Provider Agreements in Bankruptcy Most courts (e.g., 1 st, 7 th, and 9 th Circuits), and the government, treat Medicare provider agreements as executory contracts which must be rejected or assumed and assigned. Medicare Financial Management Manual states that the Medicare provider agreement is executory (see Ch. 3 Overpayments, (Rev. 12, )); HHS will likely take this position in every case. In those instances where the provider agreement is not treated as executory, is there a difference between the provider agreement and an Extended Repayment Plan (ERP)? 33 Medicare Provider Agreements in Bankruptcy The debtor must consider the cost of curing any defaults and whether to initiate negotiations with the government in an attempt to lower such cure amounts. The purchaser must consider any liabilities that may come with the provider agreement if it chooses to accept assignment (and may even agree to contribute to cure amounts)

18 Medicare Provider Agreements in Bankruptcy If the court finds that the provider agreement is a statutory entitlement rather than an executory contract, the debtor may be permitted to transfer the agreement free and clear of interests pursuant to a 363 sale. Under such circumstances, there is no executory contract to assume, and the claims are treated as general unsecured claims of the debtor s bankruptcy estate. In re BDK Health Mgmt., B1, 1998 WL (Bankr. M.D. Fla. Nov. 16, 1998): The Court held that the seller s provider numbers were statutory entitlements and thus assets of the estate rather than executory contracts, which could be transferred to the buyer free and clear of the seller s Medicare liabilities. 35 Medicaid Change of Ownership Each state s Medicaid program has its own policies and procedures regarding a CHOW. State Medicaid agencies often look to whether the entity s federal tax identification number will remain the same. As with licensure, it is important to check the state s Medicaid rules and to confirm with regulators the regulatory requirements upon a transfer or lease

19 Assignment of Medicaid Provider Agreement 42 CFR (a) requires Medicaid agencies to automatically assign the Medicaid provider agreement to the new owner upon a CHOW. However, many states do not automatically assign the provider agreement. Research state law and contact state regulators to confirm whether the provider agreement will be assigned. 37 Medicaid Successor Liability States differ as to whether successor liability for Medicaid overpayments will be imposed on the new operator. Some states require the buyer to assume successor liability through statute or regulation; other states consider the provider agreement a statutory entitlement that can be transferred free and clear of liabilities pursuant to Section

20 Medicaid Provider Agreements in Bankruptcy Most cases addressing whether the provider agreement is an executory contract are focused explicitly on Medicare provider agreements. Only the 2nd Circuit has consistently held that the Medicaid provider agreement is a statutory entitlement rather than an executory contract. See, e.g., In re Kings Terrace Nursing Home and Health Related Facility, 1995 WL (Bankr. S.D.N.Y.), aff'd, 184 B.R. 200 (S.D.N.Y.1995). 39 Closure of a Health Care Business in Bankruptcy CMS and most, if not all, states have detailed rules about how a long term care company must close. These rules often govern the transfer of patients/residents, disposal of patient/resident records, and the notice requirements accompanying each, as well as closure in general. The Bankruptcy Code contains additional requirements regarding patient transfer, including: Prior notice. Transfer of patient records. Destruction of unclaimed records upon satisfaction of notice requirements and court approval

21 Receivership as an Alternative Receiverships: Substitution of a receiver in place of the present management of a company. Provide for ongoing court supervision; may facilitate resolution of creditor disputes. Can be more cost effective than bankruptcy. Does not assure adequate disclosure of the operator s assets and liabilities (unless court orders such information). If appointed, receiver may continue business or wind down operations. 41 Receivership as an Alternative Health care receiverships: Often governed by state law. Generally, state health commissioner files petition with state court. Receiver may wind down operations or restore it to compliance with new or existing owners taking possession. Same duties and responsibilities as a general receiver, but also must remedy causes of receivership, ensure adequate health care of patients/residents, or orderly transfer of patients to alternate operators within a set period of time

22 Receivership as an Alternative The receiver is paid fees, commissions, and necessary expenses from the operator s assets or in accordance with procedures analogous to those used for financial receivers. Pendency of a receivership does not prevent the operator from filing for bankruptcy, or a creditor from commencing an involuntary bankruptcy against the operator. 43 Conclusion How to protect against bankruptcy. Questions and Answers. For additional questions or to request copies of this presentation, please contact: Jill A. Steinberg, Esq. Arent Fox LLP 1675 Broadway New York, NY steinberg.jill@arentfox.com (212)