Health care businesses are seeking bankruptcy relief in increasing numbers.[1] Often, company assets are sold pursuant to § 363 of the Bankruptcy Code.[2] Such sales benefit not only the debtor’s creditors, but also the community — providing for the continuation of medical care, especially in rural areas where health care options are limited. Beyond the normal bankruptcy sale issues, many federal and state regulatory issues arise. This article summarizes some of the routine issues in health care business sales.
What Is a “Health Care Business”?
Section 101(27A) of the Code defines a “health care business” as one that is either public or private (whether profit or nonprofit) that primarily engages in offering to the general public facilities and services for the diagnosis or treatment of medical conditions and “surgical, drug treatment, psychiatric, or obstetric care.” Subpart B provides a nonexclusive list of examples of health care businesses, including hospitals (general or specialized), hospice facilities, home health agencies, nursing facilities, assisted living facilities and homes for the aged.
Assumption and Assignment of Executory Contracts and Unexpired Leases
One benefit of a § 363 sale is that the purchaser can purchase only those debtor contracts and leases that the purchaser wishes to retain, subject to satisfying § 365. The purchaser will often choose to include unexpired facility and/or equipment leases. Furthermore, if the purchaser wishes to retain the debtor’s electronic patient medical records,[3] it may require the debtor to assume and assign cloud-based hosting or licensing agreements to the extent permitted by applicable law. Records of a patient’s care and the related financial records contain protected health information under the Health Insurance Portability and Accountability Act (HIPAA). Accordingly, the purchaser must assess whether the debtor’s systems meet minimal HIPAA privacy and security requirements. Payor agreements with insurers are also typically purchased. Since payors and insurers can conduct post-payment audits for pre-acquisition claims, it is advisable to have access to all patient records, especially if the purchaser is retaining the debtor’s provider agreement/number.
The decision to assume other kinds of executory contracts can be complicated, and in some contexts might be limited. For example, physician agreements might be deemed to be nonassignable personal services agreements under § 365(c). Court decisions also are not uniform on whether the provider agreement/number is an executory contract that can be assumed and assigned under § 365, although most courts have found them to be.[4] Even when assumption and assignment occurs, any default must be cured — which may include overpayment liability or penalties.
Alternatively, the purchaser may dispense with seeking assumption and assignment through the sale process and instead may apply for approval as a new provider. This, too, has its challenges, as delays may ensue, which could adversely and significantly affect cash flow and profitability for many months.[5] Additionally, for some industry segments such as home health care, the government has instituted a moratorium on the issuance of new provider agreements — so the purchaser would be bound to assume the existing provider number.
Regulatory Issues
If a provider agreement/number is to be assumed and assigned, affirmative consent must be obtained from DHHS through the change of ownership process.[6] In addition to federal regulatory approval, many states have change-of-ownership and/or certificate-of-need (CON) statutes or regulations that might have to be satisfied. Hence, it is important to assess whether a transfer of the CON is permissible or will be regarded as a forfeiture of the CON — thereby requiring the submission of a new CON application and presenting other legal hurdles.
Depending on the kind of health care business, other regulatory approvals may be required. Examples include radiation machines (and related radioactive materials), pharmaceutical permits and laboratory certifications. Sales of the assets of nonprofit businesses to for-profit entities could require various state notifications and/or approvals. In the context of a troubled provider who is subject to a corporate integrity agreement (CIA) with the Office of the Inspector General (OIG), it is important to review the terms of the CIA, which typically requires advance notification of a bankruptcy and approval of a sale or transfer. In most cases, the CIA must be assumed by the new owner, although in some rare circumstances the OIG will waive this requirement. This greatly impacts operations and administrative costs going forward.
Successor Liability
As a general proposition, purchasers under § 363 take free and clear of liens and other interests. For example, in In re Christ Hospital[7] the court held that certain economic tort and unfair-competition claims asserted against the purchaser of Christ Hospital were “interests” under § 363(f) of the Code, therefore the purchaser was not subject to them. However, this protection may be more limited in certain instances, particularly where a provider agreement has been assumed and assigned. In such instances, the purchaser remains liable for Stark, Anti-Kickback Statute and False Claims Act issues,[8] overpayments (including penalties), and possibly other liabilities that accrued during the chapter 11 case and prior to the sale, for which the government may be able to assert the equitable doctrine of recoupment.
Conclusion
As the health care industry seeks to adjust to ongoing economic and political challenges, some health care businesses will not be able to survive absent bankruptcy relief. This provides opportunities for purchasers who can successfully navigate the interplay between bankruptcy and health care law.
[1] As of Sept. 15, 2017, at least 22 such business had filed for bankruptcy relief. See www.beckershospitalreview.com/finance/20-healthcare-bankruptcies-so-far….
[2] Sales may also be conducted in connection with a chapter 11 plan of reorganization or liquidation. See 11 U.S.C. § 1123(b)(4).
[3] Section 101(40A) defines “patient” as “any individual who obtains or receives services from a health care business.” Section 101(40B) defines “patient records” as “any record relating to a patient, including a written document or a record recorded in a magnetic, optical, or other form of electronic medium.” Section 351 of the Code provides a procedure for disposal of such records if there are insufficient funds to store the records — a procedure that can be quite expensive.
[4] See, e.g., In re Bayou Shores SNF LLC, 525 B.R. 160 (Bankr. M.D. Fla. 2014) (Medicare agreement held to be executory contract assumable as part of confirmed plan); see also In re University Med. Center, 973 F.2d 1065, 1075 n.13 (3d Cir. 1992); In re Vitalsigns Homecare Inc., 396 B.R. 232, 239 (Bankr. D. Mass. 2008); In re Heffernan Memorial Hosp. Dist., 192 B.R. 228, 231 (Bankr. S.D. Cal. 1996). But see In re BDK Health Mgmt., 1998 Bankr. LEXIS 2031 (Bankr. M.D. Fla. Nov. 16, 1998) (holding that because Medicare provider agreement was not executory contract, debtor could sell agreement free and clear of liens pursuant to § 363(f) without the need to cure defaults under agreement).
[5] The Centers for Medicare & Medicaid Services (CMS) is part of the Department of Health and Human Services (DHHS) that administers various programs, including Medicare and Medicaid. See www.cms.gov/About-CMS/About-CMS.html. CMS Policy Memorandum of September 6, 2013, relegates to last priority status providers that refuse to accept assignment of an existing provider agreement.
[6] 42 C.F.R. § 489.1, et seq.
[7] 502 B.R. 158 (Bankr. D.N.J. 2013).
[8] Failure to timely refund overpayments could render the overpayments a “Reverse False Claim” violation of the False Claims Act, the financial penalties for which could track through to a purchaser.