Medicaid, Medicare provider agreements in bankruptcy

Barry F. Rosen and Lawrence D. Coppel
BridgeTower Media Newswires

Under applicable law, when a health care provider assigns a Medicare or Medicaid provider agreement as part of the health care provider’s sale of assets, the purchaser of those assets will have to assume liability for the amounts owed to the government by the previous owner, such as overpayments and civil monetary penalties.

For that reason, health care providers with liabilities to the government find it difficult to sell their Medicaid and/or Medicare provider agreements and related assets, or the amount to be paid for their assets is reduced by purchasers to account for the inherited liability.

However, if the same sale of assets takes place in a bankruptcy case, a recent decision (later vacated as part of a settlement) held that a Medicaid provider agreement, and by implication also a Medicare provider agreement, may be sold “free and clear” of the inherited liability under the Bankruptcy Code. In re Verity Health System of California, 606 B.R. 843 (Bankr. C.D. Cal. 2019).

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The Verity Health case

Verity Health System of California filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Central District of California. Thereafter, Verity asked for approval of a sale of substantially all assets of four hospitals, including the hospitals’ provider agreements.

Verity requested that the bankruptcy court approve the sale under Bankruptcy Code §363(f) which permits assets to be sold free and clear of liens, claims and other interests, provided certain conditions are satisfied.

The bankruptcy court approved the sale over the objection of the California Department of Health Care Services.  DHCS argued that Verity’s Medicaid provider agreements should not be assigned free and clear of the claims of DHCS, because a provider agreement is an “executory contract”, meaning a contract in which there are unperformed material obligations by both parties, and because Bankruptcy Code §§365 (b) and (f) provide that an executory contract may not be assigned unless it is first assumed by a debtor with all defaults under the contract being promptly cured.

If a governmental provider agreement is an executory contract, then any amount owed by the provider to a governmental agency, such as DHCS, would need to be paid before the provider agreement could be assigned. In fact, DHCS claimed that more than $55 million must be paid before the hospitals’ Medicaid provider agreements could be assigned.

The bankruptcy court ruled, however, that a provider agreement is a “statutory entitlement,” akin to a license, that may be sold free and clear of all claims. Central to the court’s conclusion was the finding that a governmental provider agreement is not a contract at all. Instead, a provider’s right to be reimbursed for services is dictated by law, not contract.

In addition, the court found that, even if the provider agreement were a contract, it was not an “executory” contract since it imposed no obligations on DHCS, and the only obligations imposed on the hospitals were obligations already required to be performed by law.

While the bankruptcy court noted that its finding that governmental provider agreements are not contracts was contrary to several bankruptcy court decisions from other jurisdictions, the court found those decisions to be “unpersuasive” because none of them discussed whether a governmental provider agreement is a statutory entitlement as opposed to a contract.

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Why is it significant?

The Verity decision was vacated several months later under a settlement reached between Verity and DHCS.  2019 WL 7288754 (Bankr. C.D. Cal. December 9, 2019). Nevertheless, the bankruptcy court’s legal basis for its decision, if followed by other courts, opens the door for the sale of governmental provider agreements and related assets by providers in bankruptcy for more than would be paid outside of bankruptcy due to the provider’s liability to the government.

The primary beneficiary of such an outcome will be the provider’s creditors who will stand to realize more on their claims than would be the case if the provider’s obligations to the government must be paid in order for provider agreements to be assigned.

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Barry F. Rosen is the chairman & CEO of the law firm of Gordon Feinblatt LLC, heads the firm’s health care practice group and can be reached at 410-576-4224 or brosen@gfrlaw.com. Lawrence D. Coppel is enior counsel in the firm’s bankruptcy & restructuring practice group and he can be reached at 410-576-4238 or  lcoppel@gfrlaw.com.