A significant portion of the revenue of many health care providers is dependent upon payments made by governmental health care programs such as Medicare and Medicaid. Payments under the Medicare program, for example, are made based primarily on the provider’s future estimates of costs, and are later subject to a “true-up” when the actual costs are known.1 As a result of the true-up, the provider may have been over- or underpaid at the time of the prospective payment. If the provider was overpaid, the government is entitled to be reimbursed, which could occur through a cash payment, but usually occurs through setoff of present and future payments owed to the provider. In a distressed situation, where maximizing present cash flow is critical, the setoff of current and future payments against previous overpayments can cripple a health care debtor and frequently contributes to the decision to file for bankruptcy.
In the case of Medicare over payments, the Department of Health and Human Services (HHS) has vigorously argued that the automatic stay of §362(a),2 which might otherwise prohibit any post-petition collection efforts, does not apply when HHS offsets post-petition prospective payments because such offsets constitute recoupment of the debtor’s pre-petition overpayments.3 Many health care debtors resisted, and continue to resist, the recoupment argument with equal vigor.
Prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,4 HHS also threatened to “exclude” 5 overpaid providers from government health care programs as a means to extract a consensual agreement to repay or otherwise settle the debtor’s over payment liability in order to buttress their collection efforts. HHS argued that the post-petition exclusion of the debtor did not violate the stay because of the so-called “police powers” exception of subsection (b)(4) of §362. Fortunately, many courts correctly recognized that the government’s exclusion efforts were thinly disguised collection efforts rather than efforts to protect the public health, safety or welfare. In re Psychotherapy & Counseling Ctr. Inc., 195 B.R. 522 (Bankr. D. D.C. 1996) (effort to exclude the debtor from participation in Medicare and Medicaid programs violated the stay because it was a disguised attempt to enforce collection of settlement under the False Claims Act); In re Rusnak, 184 B.R. 459 (Bankr. E.D. Pa. 1995) (HHS' efforts to exclude a debtor-podiatrist from participating in the Medicaid program violated the stay because it was actually an effort to collect the debtor’s defaulted Health Education Assistance Loans).
Among the many changes made by BAPCPA, §1106 adds a new subsection (b)(28) to §362 of the Bankruptcy Code, which reads as follows:
(b) The filing of a petition under §§301, 302 or 303 of this title, or of an application under §5(a)(3) of the Securities Investor Protection Act of 1970, does not operate as a stay—
(28) under subsection (a), 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 (as defined in §1128B(f) of the Social Security Act pursuant to title XI or XVIII of such Act).
Section 1128B(f) of the Social Security Act (codified at 42 U.S.C. §1320a-7b(f)) defines a health care program as (i) any plan or program that provides health benefits, whether through insurance or otherwise, that is funded directly, in whole or in part, by the federal government, or (ii) any state health care program as defined in §1320a-7(h) of title 42. Section 1320a-7(h), in turn, defines a state health care program very broadly as any Medicaid program and any other state health care program that receives federal funding or assistance. Given the pervasive nature of federal health care funding, HHS’ exclusion remedy has a broad reach.
Some commentators and practitioners have initially concluded that the intent of §362(b)(28) is to make it harder for the recipients of federal health care funding to avoid repayment obligations by declaring bankruptcy and that the effect of the new section will be to undermine contrary case law and tilt the leverage toward HHS in its battle to recover over payments from health care debtors. However, a closer look at §362(b)(28), the nonbankruptcy law applicable to the exclusion remedy, and the practical ramifications of exclusion, may call such conclusions into question.
Initially, it must be noted that subsection (b)(28) does not speak directly to the recoupment/set off issue. The new exception simply states that it is not a violation of the stay if HHS excludes a health care provider from programs such as Medicare and Medicaid. Congress could have, but did not amend the law to state expressly that the stay does not apply to HHS’ offset of pre-petition overpayments against post-petition current payments. Thus, the addition of subsection (b)(28) should have very little or no effect in those jurisdictions where courts already permit HHS to recoup. As noted, the most recent trend in the case law suggests that a majority of courts are permitting the government to recoup. In those jurisdictions, HHS does not need the additional remedy of exclusion in order to offset post-petition payments. At most, §362(b)(28) may affect a health care debtor in those jurisdictions where the recoupment issue has not yet been decided, or in the Third Circuit, which has a circuit court level decision (University Medical Center) denying the government the use of recoupment.
Debtors have argued that the remedy of exclusion, which necessarily requires the termination of the debtor’s provider agreement, violates §525(a) of the Code, irrespective of the applicability of the automatic stay, because it constitutes a denial or revocation of a governmental license, permit or franchise solely on account of the filing of bankruptcy. Some pre-BAPCPA courts have agreed that §525(a) prohibits an attempt by the government to terminate a provider agreement.6 BAPCPA does not amend §525(a).
Regardless of the applicability of §525(a), nonbankruptcy law only permits HHS to exclude a provider if specified grounds exist.7 Exclusion is not a discretionary remedy. The addition of §362(b)(28) does not change the grounds that must exist before HHS can terminate a provider agreement; it merely states that if exclusion is otherwise authorized, HHS does not violate the stay by the post-petition pursuit of that remedy. The grounds for exclusion under nonbankruptcy law generally fit within three categories: (i) failure to comply with health care program requirements, (ii) failure to comply with certain reporting obligations and (iii) past exclusion from participation because of fraudulent conduct.8 The filing of bankruptcy is not one of the enumerated grounds. In addition, the history of the exclusion regulations confirms that the mere filing of bankruptcy proceedings will not automatically result in termination.9 The current regulations do authorize termination or nonrenewal in cases where the provider cannot demonstrate satisfactory assurances of compliance with Medicare participation requirements.10 A provider's bankruptcy may have some relevance on the provider's ability to meet those requirements.11 In any event, if exclusion is not available under nonbankruptcy law, HHS would have no remedy or leverage under §362(b)(28).
For many health care debtors, the termination of its provider agreement would have a severe effect on cash flow and might lead to the liquidation of the provider. The actual use of the exclusion remedy might backfire on HHS because if the debtor liquidates, there will be no post-petition payments available to offset. Exclusion would actually harm HHS. Similarly, from a public relations and political standpoint, the shuttering of certain health care debtors, e.g., tertiary care hospitals, as a result of the actions of HHS, can impose a heavy toll on the decision-makers at HHS and outweigh any benefit. Thus, unless HHS actually intends for the debtor to shut down and liquidate (a decision that is usually made over the course of time in conjunction with the debtor’s local regulators and communicated to the provider), HHS’ threat of exclusion may be viewed as a mere bluff. Savvy debtors may be willing to call HHS’ bluff and effectively ignore the apparent power conferred by §362(b)(28).
Finally, the addition of subsection (b)(28) should be viewed in the larger context of the life of the health care provider. Unless it is liquidating, a debtor-provider is hoping that there is life after bankruptcy. If the debtor has committed acts constituting grounds for exclusion, nothing contained in the Bankruptcy Code, either before or after BAPCPA, changes that conclusion. Prior to BAPCPA, the government had to wait until the day after the effective date of the plan of reorganization before commencing the exclusion process.12 After BAPCPA, the government can begin the process immediately. The pre-BAPCPA debtor could wait and deal with the government during the bankruptcy case, whereas the post-BAPCPA debtor probably needs to commence negotiations with the government before filing. The only difference is timing, not ultimate result. Apart from timing differences, the substantive remedial task facing the pre- and post-BAPCPA provider, which is at risk for exclusion, will essentially be identical. If debtors view §362(b)(28) as simply accelerating the timetable in which they must deal with that risk, there may be little substantive difference in pre- versus post-BAPCPA practice.
Despite the fact that a number of commentators have pronounced that the addition of §362(b)(28) constitutes a radical increase in the power and leverage of the government in a health care bankruptcy case, particularly in connection with the government’s ability to be reimbursed from a provider on account of its over payment liability, a closer look at the scope and applicability of the new subsection, the nonbankruptcy law governing the remedy of exclusion and the practical ramifications of actually terminating the debtor’s provider agreement suggests that the question of whether or not the balance of power has shifted, remains open to speculation.
1 The true-up occurs when the provider submits a so-called “cost report” to Medicare.
2 11 U.S.C. §362(a).
3 Recoupment is a case law exception to the stay that is recognized by virtually all jurisdictions. Generally, courts allow recoupment if the pre- and post-petition events are deemed to be part of a single transaction on the theory that there is no separate post-petition attempt to collect a pre-petition debt. In the case of a health care provider, the question is whether or not the pre-petition payment and the post-petition offset constitute a single transaction under the provider agreement. In In re University Medical Center, 973 F.2d 1065 (3d Cir. 1992), the court held that the post-petition offset did not constitute a single transaction under the provider agreement between HHS and the provider; therefore, recoupment was not applicable. However, a number of more recent decisions have held that the withholding of post-petition payments by HHS does constitute recoupment under the pre-petition provider agreement. See, e.g., In re Slater Health Center Inc., 294 B.R. 423 (Bankr. D. R.I. 2003), rev'd., 306 B.R. 20 (D. R.I. 2004), aff'd. 398 F.3d 98 (1st Cir. 2005); In re Holyoke Nursing Home Inc., 273 B.R. 305 (D. Mass. 2002), aff'd. in unpublished opinion (D. Mass.), aff'd. 372 F.3d 1 (1st Cir. 2004); TLC Hospitals Inc. v. HHS, 224 F.3d 1008 (9th Cir. 2000); U.S. v. Consumer Health Healthcare Services of America, 108 F.3d 390 (D.C. Cir. 1997).
4 Pub. L. 109-8, 119 Stat. 23 (BAPCPA).
5 Exclusion is the death knell for many health care providers because it terminates the debtor’s provider agreement and prevents the debtor from receiving any future payments under governmental health care reimbursement programs.
6 See In re Sun Healthcare Group Inc., 2002 WL 2018868 (9-04-02); In re Berkelhammer, 279 B.R. 660, 671 (Bankr. S.D.N.Y. 2002); In re St. Mary's Hospital, 89 B.R. 503 (Bankr. E.D. Pa. 1988) (provider cannot be compelled to pay overpayments to intermediary as condition of assumption of provider contract); but see In re Southern Institute for Treatment and Evaluation, 217 B.R. 962, 965 (Bankr. S.D. Fla. 1998) (HHS did not violate §525(a) by recouping overpayment through withholding current Medicare reimbursement payments).
7 See 42 U.S.C.A. §1395cc(b)(2); 42 C.F.R. §§489.12 - 489.54.
8 42 U.S.C. §1320a-7 (Exclusion of Certain Individuals and Entities from Participation in Medicare and State Health Care Programs) provides for both mandatory exclusion and permissive exclusion. Grounds for mandatory exclusion are (1) conviction of program-related crimes, (2) conviction relating to patient abuse, (3) felony conviction relating to health care fraud and (4) felony conviction relating to controlled substances. Grounds for permissive exclusion are (1) conviction relating to fraud, (2) conviction relating to obstruction of an investigation, (3) misdemeanor conviction relating to controlled substances, (4) license revocation or suspension, (5) previous exclusion or suspension under federal or state health care program, (6) claims for excessive charges or unnecessary services and failure of certain organizations to furnish medically necessary services, (7) fraud, kickbacks and other prohibited activities, (8) failure to disclose required information, (9) failure to supply requested information regarding subcontractors and suppliers, (10) failure to supply payment information, (11) failure to grant immediate access, (12) failure to take corrective action and (13) default on health education loan or scholarship obligations.
9 Under the former regulations governing decisions to issue new provider agreements and renew existing agreements, providers were required to submit statements that they had not been adjudicated bankrupt and were not then the subject of pending bankruptcy proceedings. The regulations further provided that HCFA would not enter into provider agreements with entities that were the subject of bankruptcy proceedings, but that HCFA would not terminate the provider agreement of an existing entity that filed for bankruptcy. See 42 C.F.R. §§489.11 - 12 (1987). HCFA deleted those regulations in 1987 on the grounds that §525 of the Bankruptcy Code prohibits denial of a federal license solely because of bankruptcy. See 52 Fed. Reg. 48127 (Dec. 18, 1987).
10 42 C.F.R. §§489.12(a)(3), 489.53(a)(1).
11 Past pronouncements of HCFA (now CMS) suggest that it will consider bankruptcy relevant to the ability to comply with Medicare requirements. See 52 Fed. Reg. 48127 (Dec. 18, 1987).
12 It is very doubtful that a bankruptcy court would approve a plan that attempts to permanently enjoin the government from ever exercising the exclusion remedy after the effective date of the plan.