The lifeblood for many hospitals is the prompt reimbursement by Medicare and Medicaid programs for services provided; this is particularly true for nonprofit providers.[1] As a result, the ability to compel reimbursement payments from the Centers for Medicare and Medicaid Services (CMS) or local and state Medicaid providers through the bankruptcy court has emerged as a significant issue for health care providers in financial distress.[2] In a recent decision, True Health Diagnostics LLC v. Azar, et al. (In re THG Holdings LLC),[3] the U.S. Bankruptcy Court for the District of Delaware enforced the automatic stay and ordered the federal authority to release all Medicare payments withheld post-petition and continue to make payments.
The outcome of this case will likely have a significant impact on health care providers as they consider protections available to continue to receive reimbursements.
The True Health Opinion
True Health represents an attempt by a debtor to compel post-petition reimbursements from CMS through the operation of the automatic stay, notwithstanding the government’s assertion that the “police power exception” permitted suspension of post-petition Medicare payments.
Prior to the petition date, CMS informed True Health Diagnostics, LLC that it had suspended True Health’s Medicare payments based on allegedly credible allegations of fraud. CMS subsequently issued overpayment determinations to True Health.
On July 30, 2019, True Health filed for chapter 11 bankruptcy protection, initiated an adversary proceeding against representatives of both the U.S. Department of Health and Human Services and CMS (together, the “defendants”), and filed a motion to enforce the automatic stay and compel post-petition Medicare reimbursements.
In addition to challenging jurisdiction on the grounds that § 405(h) bars bankruptcy courts from exercising jurisdiction over Medicare claims that must be channeled through the administrative process, the defendants asserted that Medicare payments were not property of the debtor’s estate under § 541 of the Bankruptcy Code and that withholding such payments constituted an exercise of CMS’s police or regulatory power. The defendants further asserted that True Health had not shown irreparable harm, that the defendants’ interest in protecting the Medicare system outweighs any harm to True Health, and that enforcing the automatic stay would to serve the public interest. The bankruptcy court rejected each of the defendants’ arguments in turn.
At the outset, the bankruptcy court disagreed with the defendants’ assertion that the matter was inextricably intertwined with pre-petition fiscal reimbursement determinations, finding that it had subject-matter jurisdiction because the “narrow” issue before the bankruptcy court was whether the defendants violated the automatic stay by continuing to withhold Medicare payments for post-petition medical tests based on alleged pre-petition overpayments.
Next, the bankruptcy court concluded that the post-petition Medicare reimbursement payments were property of True Health’s estate and that the defendants’ actions violated the automatic stay.
Distinguishing the defendants’ precedent, which did not address this precise issue of whether Medicare payments were property of a bankruptcy estate under § 541, the bankruptcy court explained that post-petition Medicare reimbursements were “indisputably property of the estate,” as they were received in the ordinary course of business in exchange for its services as a health care provider and — while the payments were being escrowed pending overpayment determinations — they were merely postponed.
The bankruptcy court then determined that the automatic stay applied and the government’s actions did not fall within the “police power exception” to the stay either under the pecuniary interest or public policy tests. Specifically, the bankruptcy court concluded that there was no evidence that the post-petition Medicare payments had been withheld for any purpose other than protecting the government’s pecuniary interest in property of the estate over the interests of other unsecured creditors (particularly given that there was no evidence of post-petition fraud) or that the defendants acted in an effort to enforce the public interest.
Accordingly, the bankruptcy court determined that True Health had established the requirements necessary for the automatic stay and noted that — even if it were necessary to establish the preliminary-injunction factors in order to enjoin the defendants’ conduct — True Health would have done so under that burden as well. Specifically with regard to the public-interest prong of the preliminary-injunction standard, the bankruptcy court noted the negative impact of liquidation on both employment and patient care.
Appellate Posture
On Sept. 6, 2019, the defendants filed a motion in the district court seeking to stay the court’s order pending appeal, and subsequently filed a notice of appeal in the bankruptcy court and district court, seeking review of the court’s Order Enforcing the Automatic Stay. True Health moved to dismiss, arguing that the Order was interlocutory and the defendants failed to seek leave of court. On March 27, 2020, the district court granted the motion without oral argument, and the appeal was dismissed. Specifically, the district court deemed it premature to accept an appeal of whether the defendants’ actions fit within the police power exception before the bankruptcy court has had the opportunity to develop the factual record, and observed that it would be more practical to permit the bankruptcy court to conclude the adversary proceeding before considering any appeal.
Conclusion
Governmental entities must consider policy and the impact of litigation strategy broadly, and therefore do not make decisions as private actors would. Accordingly, litigation with such counterparties presents a unique set of challenges and difficulties, and the government’s litigation strategy may ultimately lead to shut-downs of debtor health care providers in situations where a strategy pursued by a private actor making case-by-case decisions would not.[4] As a result, the outcome of True Health will have implications for litigation with the government, as well as agency application of its regulatory and police power.
[1] Frank A. Oswald is a partner and Minta Nester is a senior associate at Togut, Segal & Segal LLP, a restructuring boutique in New York City.
[2] See In re Bayou Shores SNF, 828 F.3d 1297 (11th Cir. 2016) (holding that bankruptcy court lacked subject-matter jurisdiction over Medicare or Medicaid disputes without prior exhaustion of administrative remedies).
[3] Adv. Proc. No. 19-50280 (JTD) (Bankr. D. Del.) (“True Health”).
[4] See, e.g., In re Our Lady of Mercy Med. Ctr., Case No. 07-10609 (REG) (Bankr. S.D.N.Y) [Docket No. 679] (government argued purchaser of provider agreement was successor under common law).