Chicken Little Comes to Roost in Bankruptcy Why 362(b)(28) Doesnt Mean the Sky Is Falling

Journal Issue

Jul/Aug 2006

Column Name

Intensive Care

Citation

ABI Journal, Vol. XXV, No. 6, p. 22, July/August 2006

Topic Tags

Automatic Stay

Health Care

Legislation

Journal HTML Content

The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (BAPCPA)1 made several health care
business amendments to the Bankruptcy Code. Among those amendments was
an addition to the exemptions to the automatic stay contained in
§362(b).2 Congress created §362(b)(28), which
provides that the automatic stay does not stay acts by the Secretary
of U.S. Department of Health and Human Services (HHS) to exclude
debtors from participation in the Medicare program or any other
federal health care program.3 The response of commentators
to this addition has been reminiscent of Chicken Little's hysterical
conclusion that the sky was falling.4 For example, one law
firm's blog opines that this addition "is of potentially massive
import to health care businesses as it provides the Center for Medicare
and Medicaid Services (CMS) huge amounts of leverage over health care
business debtors." Attorneys well known for their experience in
health care insolvency issues suggested that this provision alters the
existing case law that governs whether Medicare's right to adjust
ongoing post-petition payments to recover pre-petition obligations is
an act of setoff or an act of recoupment, that it is "intended to
make it harder for Medicare providers to avoid penalties," and go
so far as to prognosticate that this amendment may "affect the
structure of health care financing." Finally, it has been stated
that this amendment "effectively removes the bankruptcy court 'as
a limitation on the administrative powers of HHS, which will grant HHS
a significant role in the outcome'" of health care business
bankruptcy cases. Fortunately, neither the plain language of
§362(b)(28) nor the existing case law support such conclusions. To
the contrary, a review of the statute and cases decided prior to
passage of the Act suggest that this amendment will make little, if
any, change in how health care restructuring cases are resolved.

What the Statute Says Section 362(b)(28) makes explicit
that exclusions from the Medicare program are not subject to the
automatic stay; it states that "the filing of a petition...does
not operate as a stay...of the exclusion by the Secretary of Health
and Human Services of the debtor from participation in the Medicare
program or any other federal health care program."5
Exclusion is a specific term under the Medicare program; a person or
facility or supplier of goods or services who is "excluded"
from participation in the Medicare program "is no longer
permitted to provide items or services to Medicare patients and
receive any payment for them."6 Exclusion from the
Medicare program can also trigger exclusion from other federal and
state programs, even if they are unrelated to the provision of health
care. Since Medicare is the single largest payor for health care
services in the health care industry,7 being
"excluded" from participation can often be the "kiss of
death" for a health care provider. There are two types of
exclusion—mandatory and permissive—and while some
exclusions have been imposed for relatively short periods of time,
others have been lengthy or even indefinite. Mandatory Exclusion
The Office of Inspector General (OIG) for HHS (who is statutorily
responsible for such determinations) is required by law to exclude a
provider under four circumstances: (1) conviction for a crime related
to the delivery of an item or service related to Medicare or state
health care program; (2) conviction for a crime relating to patient
neglect or abuse; (3) a felony conviction relating to health care
fraud, theft, embezzlement, breach of fiduciary responsibility or
other financial misconduct; and (4) a felony conviction relating to the
manufacture, distribution, prescription or dispensing of a controlled
substance.8 All the mandatory exclusions must be based on a
conviction for an offense related to criminal acts directly affecting
the health care business and patient care. Statistically, individuals
are more likely to be convicted of such offenses, so that these
mandatory exclusions are more frequently imposed against individuals
rather than health care businesses. Permissive Exclusion

The OIG also has the discretion to exclude providers, but this
discretion is neither unguided nor unlimited.9 The Medicare
statutes provide 15 grounds for the imposition of a permissive
exclusion: <blockquote> 1. conviction for a misdemeanor crime
relating to fraud, such as theft, embezzlement or breach of
fiduciary responsibility that did not fall within the mandatory
exclusion provisions.10 2. conviction relating to
obstruction of a criminal investigation relating to the issues
mentioned above.11 3. misdemeanor conviction for an
offense relating to manufacture, distribution, prescription or
dispensing of a controlled substance.12 4. revocation
or suspension of a provider's license to provide health care by a state
authority or the surrender of a license while a formal disciplinary
proceeding is pending.13 5. exclusion or suspension
under federal or state health care program. The term
"suspension" here should not be confused with the situation
where Medicare adjusts ongoing payments to a provider to recover a
prior overpayment. This provision applies to other federal and state
health programs, such as CHAMPUS and health programs run through the
Department of Veterans Affairs.14 6. claims for
excessive charges or unnecessary services and failure of certain
organizations to furnish medically necessary services.15 This
intends to restrain price discrimination (i.e., when the
provider charges substantially higher rates to the government than
to the public. However, this provision is infrequently invoked
because of how billing is actually conducted in the health care
industry).16 Health care entities have their regular
rates for goods and services, but Medicare has set its own rates that it
will pay for all goods and services, and those rates may be
significantly lower than a health care business's
"regular" rates. Health care providers will also enter
into contracts with health plans or other large purchasers of health
care goods or services, setting rates for each of those entities.
Thus, the "regular" rate may only apply to those without
health insurance (including Medicaid and Medicare) or the infrequent
visitor to the facility who is there on an emergency basis. Because
of this complicated billing system, the federal government rarely,
if ever, invokes this basis for a permissive exclusion.17

7. providers that have (a) submitted or caused to be
submitted false or fraudulent claims to Medicare or other state or
federal health care programs, or (b) offered, paid, solicited or
received kickbacks in return for the referral of Medicare or
Medicaid patients.18 8. a provider that is controlled
by an individual, for example the CEO or owner of a health care
business, who has been sanctioned under the Medicare
Act.19 9. failure to disclose required information. This
allows exclusion of a provider if that provider refuses to cooperate
with a government request for information, for example, about
ownership or control of the business, the billing practices, or the
provision of health care services.20 10. failure to
supply requested information on subcontractors and suppliers. This
allows exclusion of a provider if (1) the government requests
information, for example, about ownership or control of the
business, the billing practices, or the provision of health care
services related to a subcontractor or supplier of goods or services
to the Medicare provider, and (2) the provider refuses to
cooperate.21 11. failure to supply payment information.
This is intended to make payment records available to the government
in order to confirm payment amount and determine when payments are
due.22 12. failure to grant immediate access. This
provides for exclusion where the government has sought to inspect or
visit a facility and access is denied.23 13. failure
to take corrective action. After an inspection of a facility that
finds deficiencies, the facility is required to follow certain
administrative procedures and create a corrective plan. If this
corrective action does not occur, then the health care business may
be excluded.24 14. default on health education loan
or scholarship obligations by individuals who have received
government educational loans and failed to pay those loans when they
came due.25 15. individuals controlling a sanctioned
entity. Just as an entity can be excluded if controlled by a
sanctioned individual, an individual can be excluded if he or she is
in control of a health care business that itself is sanctioned by
Medicare.26 </blockquote>In addition to these grounds
for which exclusion may be imposed, the OIG has published four
guidelines that are used to guide its discretion in imposing a
permissive exclusion against providers under §1128(b)(7) of the
Medicare Act (the provision dealing with fraud against the Medicare or
Medicaid programs or conduct related to kickbacks): (a) the degree of
misconduct, (b) the provider's response to the alleged fraud, (c) the
provider's willingness to accept imposition of a compliance program to
avoid future problems and (d) the financial stability of the
provider.27 Thus, §362(b)(28) exempts from the
automatic stay OIG's mandatory and permissive exclusion
determinations. After a determination to exclude is made, however, the
provider is entitled to 30 days' notice,28 the right to a
hearing and judicial review.29 While the appeal is pending,
the exclusion is effective, and the appeal is usually limited to whether
the underlying acts actually occurred and whether the length of the
exclusion is reasonable. If the underlying acts are proven, the OIG's
decision to exclude is not subject to appeal. Amendment Makes
Virtually No Change to Existing Status The addition of
§362(b)(28) makes exclusions exempt from the automatic stay.
However, despite the dire predictions of commentators, this merely makes
express what was probably the common perception before passage of the
Act. Previously, most practitioners and judges had thought that
exclusions from the Medicare program were already exempt from the
automatic stay pursuant to §362(b)(4), which exempts police or
regulatory acts by governmental entities from operations of the
automatic stay.30 For example, the bankruptcy court in

Psychotherapy and Counseling Ctr. commented that the
government's right to exclude a health care business from
participation in the Medicare program "would clearly represent an
exercise of police or regulatory power."31 That the
OIG's determination to exclude a provider could be exempt from the
automatic stay under §362(b)(4) is sensible. To determine whether
§362 (b)(4) is applicable, bankruptcy courts employ two tests:
the "public policy test" and the "pecuniary purpose
test."32 These tests were developed based on
statements of two of the sponsors of the bill, who stated that the
statute was intended to be read narrowly to avoid governmental actions
seeking to assert pecuniary interests rather than enforcing substantive
policy.33 Under the public-policy test, the bankruptcy
court has to determine whether the governmental unit is attempting to
enforce its policy or regulatory power or rather is merely
adjudicating private pecuniary interests. Under the pecuniary-purpose
test, a bankruptcy court has to determine whether the government action
relates primarily to the protection of the governmental unit's
pecuniary interest in the debtor's estate. Government proceedings
intended to safeguard what is merely a pecuniary interest in the
debtor's estate are subject to the stay. For example, in In re
Rusnak,34 the bankruptcy court held that a Medicare
exclusion based solely on a debtor's failure to pay an educational loan
and not based on any fraud was not exempt from the automatic stay
under §362(b)(4) because its purpose was to protect the
government's pecuniary interest, rather than to promote a public
purpose. In other cases, the federal government has conceded that if
the proposed Medicare exclusion were based on a "desire to
protect its pecuniary advantage," §362(b)(4) would not
apply.35 Even though pecuniary interests are implicated by
choosing to exclude a health care business in bankruptcy, if the
purpose of the exclusion is the substantive protection of patients or
prevention of fraud, the exclusion will likely be considered exempt
from the automatic stay. On the other hand, if the exclusion is based
solely on failure to meet financial obligations, like educational loans,
the bankruptcy court will be more likely to find that the exclusion is
intended to protect a pecuniary purpose. Very few of the grounds
for exclusion relate to pecuniary interest at all. Moreover, given the
government's interest in protecting the integrity of the Medicare
program and Medicare's patients, the courts have no difficulty in
concluding that acts to exclude providers are based on issues relating
to the public interest, rather than on adjudication of private
rights.36 Thus, as a practical matter, §362(b)(28)
simply makes explicit what most courts and practitioners thought was
already the state of the law under §362(b)(4). To the extent it
changes the rules for debtors who had failed to repay educational loans,
like in Rusnak, those will only affect individual cases. In any
event, this issue rarely arises in bankruptcy cases. Although thousands
of Medicare providers may be excluded at any time, there are very few
reported bankruptcy decisions on exclusions. The majority of the case
law regarding Medicare issues in bankruptcy cases deals with
reimbursement of Medicare funds, including suspensions of payments,
rather than an exclusion of Medicare providers.37 Thus, as
a practical matter, entities facing exclusion have only infrequently
tried to contest that exclusion in bankruptcy court and §362(b)(28)
will, at best, be used sparingly. What the Law Does Not Do

Some commentators have interpreted §362(b)(28) as changing
the way that HHS can exclude health care businesses from participation
in Medicare. One law firm blog said that "CMS may now exclude any
health care business from federally funded programs." Of course,
the government can exclude providers, but the blog entry suggests that
this is a new power derived from the Act. As explained above, most
practitioners and courts already thought exclusions were exempt from
the automatic stay. Moreover, the blog entry suggests that the
OIG38 can exclude without regard for the bankruptcy court.
This is untrue for at least two reasons. First, exclusion decisions
are subject to administrative appeals and appellate
review.39 While that review is limited,40 it
suggests that an exclusion decision could be reviewed by a bankruptcy
court for at least the same statutory grounds available to other
review authorities.41 Second, debtors facing exclusion can
still seek to have the bankruptcy court impose a temporary injunction
under §105, even if the automatic stay does not
apply.42 Third, exclusion solely on the basis that a debtor
has failed to repay a dischargeable debt would likely violate
§525(a).43 Thus, the OIG cannot act without any regard
for the bankruptcy court, despite the new exception to the automatic
stay. At least one commentator has suggested that §362(b)(28)
affects the existing controversy over whether Medicare's efforts to
adjust post-petition payments to recover prior overpayments is an act
of setoff (and, therefore, subject to the automatic stay) or a
recoupment (and, therefore, not subject to the automatic stay). This
is not the case. The statute itself has no language addressing the
issues that courts consider when deciding whether Medicare's adjustments
constitute a recoupment or setoff. Conceptually, payments subject to
recoupment are post-petition payments that arise out of the same
transaction as some pre-petition obligation. Recoupment is not subject
to the stay because it would be inequitable to allow the debtor to
take the benefits of the transaction without the burdens. Setoff, on
the other hand, occurs where payments arise out of different
transactions. A creditor's right to setoff is subject to the automatic
stay. Thus, the issue bankruptcy courts grapple with is whether the
Medicare payments arise under a single transaction or, because of how
those payments are structured, arise annually out of different
transactions. Because of Medicare's position as the largest single
payor for medical services in the nation, this issue can frequently be
the deciding factor in a Medicare provider's ability to
reorganize.44 Making clear that the Secretary's
exclusionary powers are exempt from the stay offers no guidance
regarding the recoupment versus setoff issue. None of the grounds
discussed in the Medicare statutes for exclusion relate to a failure
by a health care provider to repay prior overpayments, and they
certainly do not discuss any issues related to how a bankruptcy court
would evaluate whether the Medicare payment procedures create a single
transaction for recoupment purposes. The implicit question is whether
the amendment provides some indirect leverage to the government so
that it will be able to compel debtors to allow the adjustments by
threatening to exclude them from participating in Medicare, thereby
jeopardizing their reorganization efforts. This amendment does not
seem to aid this type of coercion. Moreover, to the extent that the
government began to stray from its statutory grounds to exclude a
provider and sought to do so based on a failure to voluntarily repay
prior overpayments, presumably bankruptcy courts could react by applying
the same tests that have been used in evaluating conduct under
§362(b)(4)—i.e., is the exclusion an effort by the
government merely to protect its own pecuniary interest? In courts
that had held Medicare exclusions exempt from the automatic stay under
§362(b)(4), some debtors had been able to obtain injunctions under
§105 to stay the exclusion.45 The legislative history
suggests, and cases have held, that debtors can obtain discretionary
stays to enjoin acts exempted from the automatic stay.46 An
example of this is Richmond Paramedical Services
Inc.,47 where the bankruptcy court, in an effort to
preserve the going-concern value of the debtor's assets, granted a
temporary injunction under §105 against a valid exclusion pending
the sale of the debtor's assets. However, one commentator has
suggested that "[u]nder the amendment, injunctions [against
exclusions by the government] are less likely." How passage of
§362(b)(28) would affect a bankruptcy court's determination as to
imposing an injunction under §105 is hard to discern in the
language of the amendment. Exemption from the automatic stay does not
mean that a creditor's acts can not be stayed—it only means that
the stay must be imposed, if at all, upon motion by the debtor and
consideration of the facts by the bankruptcy court. In order for the
bankruptcy court to grant a §105 injunction, the debtor must
satisfy the traditional elements for a preliminary injunction, which
are usually (1) irreparable harm to the debtor, (2) likelihood of
success on the merits (in this case, with regard to reorganization),
(3) balance of harm to the creditor and debtor and (4) public
interest.48 Bankruptcy courts that have imposed injunctions
under §105, presumably, have reached the conclusion compelled by
the amendment: The automatic stay does not apply to exclusions. If the
automatic stay applied, an injunction under §105 would not be
necessary. If a debtor is able to convince the bankruptcy court to
impose a discretionary injunction when the exclusion was exempt from the
stay under §362(b)(4), it suggests that the debtor could also
convince the bankruptcy court when the exclusion is exempt under
§362(b)(28). The further evidence of Congress' specific concern
and intention to allow these exclusions to take place is likely to
inform the court's analysis of how to use its discretion when deciding
a §105 motion. That being said, there is simply nothing in the
language of §362(b)(28) to alter or affect a bankruptcy court's
analysis of the four-part test traditionally used to decide whether to
impose an injunction under §105. Conclusion Section
362(b)(28) does little to alter the status of exclusions before the
amendment. Moreover, it neither expands the rights of the OIG to exclude
providers, nor eliminates the bankruptcy court's power to address an
exclusion. Despite all the dire predictions of doom occasioned by the
enactment of §362(b)(28), it is far from clear that it will have
any significant impact on health care restructuring practice. So calm
down, Chicken Little: The sky is not falling. <blockquote>

<blockquote><hr> </blockquote></blockquote><h3>Footnotes</h3> 1 Pub.
L. 109-8, enacted Apr. 19, 2005; signed into law on Apr. 20, 2005.
Most provisions, including this one, went into effect on Oct. 17, 2005.
2 All references to "sections" herein are to sections
of the Bankruptcy Code, 11 U.S.C. §§101-1330, as amended.
3 11 U.S.C. §362(b)(28). 4 "The Sky is
Falling," also known as "Chicken Little," "Chicken
Licken" or "Henny Penny," is an old fable about a
chicken who believes the sky is falling. The phrase has also become used
to indicate a hysterical or mistaken belief that disaster is imminent.
According to Wikipedia.org (last visited on June 16, 2006), the story
may have its origins in the Jataka, a body of folklore and mythic
literature, associated with Theravada Buddhist tradition as written in
the Pali language. 5 11 U.S.C. §362(b)(28). 6
McKessy, Ana-Marie, "Exclusion from the Medicare Program: What Does
It Mean for O&P and How Likely Is It?,"
www.ppsv.com/issues/medicare.htm (Power Pyles Sutter & Verville PC
1999). 7 The Medicare program covers 42.5 million beneficiaries
and spent approximately $330 billion in 2005. 8 42 U.S.C.
§1320a-7(a). 9 42 U.S.C. §1320a-7(b). 10 42
U.S.C. §1320a-7(b)(1). 11 42 U.S.C. §1320a-7(b)(2).

12 42 U.S.C. §1320a-7(b)(3). 13 42 U.S.C.
§1320a-7(b)(4). 14 42 U.S.C. §1320a-7(b)(5). 15
42 U.S.C. §1320a-7(b)(6). 16 There are continuing
discussions about how to amend this provision in order to define
"excessive charges" and make the provision more effective.
See 68 Fed. Reg. 53939-45 (Sept. 15, 2003). 17 Telephonic
interview with Patric Hooper, health law attorney, Hooper Lundy &
Bookman, Los Angeles, on June 16, 2006. 18 42 U.S.C.
§1320a-7(b)(7). 19 42 U.S.C. §1320a-7(b)(8). 20
42 U.S.C. §1320a-7(b)(9). 21 42 U.S.C. §1320a-7(b)(10).
22 42 U.S.C. §1320a-7(b)(11). 23 42 U.S.C.
§1320a-7(b)(12). 24 42 U.S.C. §1320a-7(b)(13).

25 42 U.S.C. §1320a-7(b)(14). 26 42 U.S.C.
§1320a-7(b)(15). 27 "Criteria for Implementing
Permissive Exclusion Authority under §1128(b)(7) of the Social
Security Act," Federal Register, Vol. 62, No. 247, at
67392 (Dec. 24, 1997). 28 42 U.S.C.S. 1320a-7(c)(2). 29 42
U.S.C.S. 1320a-7(f). 30 See, e.g., In re
Orthotic Ctr. Inc., 193 B.R. 832 (N.D. Ohio 1996); In re Univ.
Nursing Care Ctr. Inc., No. 92-00199 (Bankr. N.D. Fla. Jan. 16,
1996); see, generally, In re Moss, 270 B.R. 333
(Bankr. W.D.N.Y. 2001) (court in chapter 13 case held debtor's
pre-petition exclusion from Medicare program that continued
post-petition did not violate the automatic stay.). 31 In re
Psychotherapy and Counseling Ctr., 195 B.R. 522, 529-30 (Bankr. D.
D.C. 1996) (court enforced a pre-petition settlement agreement between
HHS and debtor that barred HHS from excluding the debtor from
participation in the Medicare program). 32 Psychotherapy and
Counseling Ctr., 195 B.R. at 527-28. 33 Id. at 528
(quoting 124 Cong. Rec. H. 11092, H 11093 (Sept. 28, 1978);
S17409 (Oct. 6, 1978) (remarks of Rep. Edwards and Sen. DeConcini)).

34 184 B.R. 459 (Bankr. E.D. Pa. 1995). 35 See
Psychotherapy and Counseling Ctr., 195 B.R. at 525; accord,
Medicar Ambulance Co. Inc. v. Shalala (In re Medicar
Ambulance Co. Inc.), 166 B.R. 918, 926-27 (Bankr. N.D. Cal. 1994)
(discussing pecuniary purpose test in context of a Medicare suspension
of payments to provider). 36 That said, it should be recognized
that there are serious questions about the validity of the
"public interests/private rights" test. See Cordy,
Karen, "Public Interest and Private Rights—A Simpler Theory
of Regulatory Action," Am. Bankr. Instit. J. (June 2003).
37 HHS v. James, 256 B.R. 479,481 (W.D. Ky. 2000).

38 OIG is the actual agency, not CMS, with authority to exclude
providers. 39 42 U.S.C.S. 1320a-7 (c)(2) and (f). 40
See, e.g., In re Durrell A. Chappell, HHS Departmental Appeals Board,
Civil Remedies Division, CR108 (Nov. 8, 1990), available at
www.hhs.gov/dab/decisions/cr108.html (administrative law judge finds
that exclusion for conviction for Medicaid related fraud is a
"police or regulatory act" to "prevent or stop a present
or immediate danger to the public" of fraud against the Medicaid
program, and therefore exempt from the automatic stay under
§362(b)(4)). 41 Whether debtors in bankruptcy must exhaust
administrative remedies prior to the bankruptcy court taking
jurisdiction is controversial. Maizel, Samuel R., "Anatomy of a
Health Care Insolvency Case: Issues and Recent Amendments,"
prepared for Commercial L. and Bankr. Section of Am. Bar Ass'n. of San
Francisco (June 13, 2006). 42 But see, e.g., In re 1820-1838
Amsterdam Equities, Inc., 191 B.R. 18, 21-22 (S.D.N.Y. 1996);
In re First Alliance Mortgage Co., 264 B.R. 634, 651-56 (C.D.
Cal. 2001) (noting that, while use of §105(a) was possible under
the case law, the appropriate circumstances for its use were highly
circumscribed and it should not be used merely to avoid an unfavorable
result in litigation). 43 Section 525(a) prohibits governmental
entities from discriminating against debtors on the basis of
discharged debts. 11 U.S.C. §525(a) ("a governmental unit
may not deny, revoke, suspend or refuse to renew a license, permit,
charter, franchise or other similar grant to, condition such a grant
to, discriminate with respect to such a grant against...a person that
is or has been a debtor under [the Bankruptcy Code] or...has not paid
a debt that is dischargeable in the case under [the Bankruptcy Code]
or that was discharged under the Bankruptcy Act"). 44 For
more on the issue of whether Medicare's rights are properly
characterized as setoff or recoupment, see Maizel, Samuel R., "An
Issue that Just Won't Go Away," ABI Journal, Vol. XXIII,
No. 6, at 34 (Jul./Aug. 2004); Maizel, Samuel R., "Medicare's
Recoupment Rights Get More Confusing," ABI Journal, Vol.
XVI, No. 7 (Sep. 1997). 45 See, e.g., In re Hosp. Staffing
Servs., Inc., No. 98-21899-BKC-RBR, Adv. Pro. No. 98-2151-BKC-RBR
A (Bankr. S.D. Fla. May 15, 1998); In re Community Hospice
Inc., No. 93-11993-PHX-SSC, Adv. Pro. No. 93-1158 (Bankr. D. Ariz.
Dec. 6, 1993); Richmond Paramedical Serv. Inc. v. United States.,
94 B.R. 881 (Bankr. E.D. Va. 1988), aff'd. in part, 1989 WL 149150
(E.D. Va. May 17, 1989), but remanded for consideration of sovereign
immunity issues. 46 In re King Mem'l Hosp., 4 B.R. 704,
719 (Bankr. S.D. Fla. 1980). For more on obtaining injunctive relief
in health care businesses cases, see Maizel, Samuel R. and
Waltz, Judith, "Injunctive Relief In Health Care
Insolvencies," 24 Cal. Bankr. J. No. 3 (1998). 47