Health care businesses are seeking bankruptcy relief in increasing numbers. Often, company assets are sold pursuant to § 363 of the Bankruptcy Code. 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, 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.

A recent decision from a Texas bankruptcy court provides an important roadmap for health care debtors seeking to bind the Centers for Medicare and Medicaid Services (CMS) to confirmed chapter 11 plans. CMS is the federal agency that administers the Medicare program and, in cooperation with the various states, the Medicaid program.

In La Fuente Home Health Services Inc., v. Burwell (In re La Fuente Home Health Services Inc.), the bankruptcy court made two noteworthy rulings. First, the court determined that it had subject-matter jurisdiction to enforce provisions of a plan preventing CMS from exercising recoupment rights, regardless of whether the court had jurisdiction to modify the claim in the first place. Second, it denied summary judgment to the agency, which argued that the debtor could not obtain injunctive relief enforcing the plan because there was insufficient evidence regarding service of process prior to plan confirmation.

In so ruling, the court side-stepped a jurisdictional imbroglio over whether 42 U.S.C. § 405 requires the exhaustion of administrative remedies before a bankruptcy court can exercise jurisdiction over disputes involving Medicare. 

With the continuing uncertainty in health care markets, many health care providers (or those that represent health care providers) need to consider potential reorganization pitfalls. Since many of these providers (if not all) are Medicare participants, one important aspect of any reorganization strategy will be determining the role that the federal government will play. Specifically, it is important for providers to know what the government can and cannot do as it relates to Medicare reimbursements and its ability to recoup or set off previous Medicare overpayments.

Typically, a Medicare provider submits its reimbursement request to an intermediary, which in turn reviews and pays estimated reimbursements to the provider. The intermediary then performs an annual audit to reconcile the balance of payments; the audit is then used by the government to either remit any underpayments or alert the provider to overpayments. If the audit reveals overpayments, the government (1) enters into an agreement setting out the method by which the provider can return the overpayments over time or (2) deducts the overpayments from future reimbursements.