The intersection between the Medicare and Medicaid regulatory regimes on the one hand and bankruptcy proceedings on the other continues to be an interesting, often highly contested, source of bankruptcy litigation. In an article in 2016, The health insurance provider’s agreement: is it a contract or not? And why does anyone care?, Bus 71. Right. 1207 (2016), Samuel Maizel and I discussed the crucial issue of whether vendor agreements are properly considered an enforceable contract, subject to the treatment requirements of Bankruptcy Code § 365 and required support of any potentially large overpayment liabilities, or whether it should be considered a legal right that a debtor is permitted to sell outright and clear under Section 363 of the Bankruptcy Code. not a contract at all. Since our article, at least two bankruptcy courts have come to the same conclusion. See In re Center City Healthcare LLC, Case No. 19-11466 (Bankr. D. Del. September 10, 2019) (File No. 681); In re Verity Health System of California Inc., Case No. 2:18-nk-20151 (Bankr. CD Cal. September 26, 2019) (File No. 3146). Although both rulings were later reversed due to the settlement (Verity) and failed sale (Center City), they represent potential progress on a critical issue for health care debtors.
Another complex issue in which the characterization and interpretation of Medicare and Medicaid provider agreements plays a role is whether the government’s deduction of provider liability from outstanding payments to the provider constitutes set-off or clawback. . Generally, “compensation” refers to the ability of a creditor to set off against a debt to the debtor an amount owed by the debtor on a separate obligation between the same parties, while “recovery” refers to a deduction or reimbursement of an amount of a debt to the debtor resulting from the same transaction. The consequences of the distinction are significant: if the overpayment is considered set-off, then (i) the automatic stay applies to prevent set-off after the petition and (ii) Section 553 of the Bankruptcy Code does not only authorizes offsetting of pre-petition obligations against the prior petition. complaints. If the overpayment is considered a recovery, however, the stay does not prevent the government from recovering Medicare or Medicaid overpayments from post-bankruptcy reimbursements and the government is permitted to recover an overpayment. pre-petition from a post-petition claim. Courts have developed two tests for determining whether obligations arise from a single transaction (and thus the salvage doctrine applies): (1) the “logical connection test”, a broad and flexible approach that defines a single transaction as including many events as long as they have a logical relationship; and (2) the “integrated transaction” test, which is a narrower test that requires that the obligations arise from a single integrated transaction such that it would be unfair for the debtor to enjoy the benefits of that transaction without fulfilling its obligations.
In a recent hospital case in which Mr. Maisel represented the debtors, the Ninth Circuit’s opinion provides guidance on the dividing line between compensation and recovery. See Gardens Regional Hospital. and Med. Center Liquidating Trust v. California (In re Gardens Regional Hosp. and Med. Center, Inc.), 975 F.3d 926 (9th Cir. 2020). Garden Regional was concerned about whether the state could recover two of the debtor’s obligations – (i) hospital quality assurance (“HQA”) fees and (ii) fee-for-service obligations – from state payments to the debtor for additional HQA payments under the state Medicaid program, Medi-Cal. The bankruptcy court, while citing our Business Journal in a footnote, found that whether the vendor agreement was a contract or a license, the fees and liability arose out of the same transaction or same occurrence. Gardens Regional, 569 BR 788, 799 (Bankr. CD Cal. 2017).
The Ninth Circuit confirmed in part and reversed in part. The court agreed that HQA’s unpaid fees had the necessary logical relationship to HQA’s additional payments to characterize them as arising from the same transaction for purposes of recovery. With respect to fee-for-service obligations, however, the Ninth Circuit concluded that there was no logical relationship. In that decision, the Court found that to be considered a recovery, the deduction of costs must be based on ties beyond the mere assertion of a legal right to make the deduction. 975 F.3d at 939. Moreover, the mention of such a right in a contract, without more, does not establish that the deduction is in fact a recovery. Identifier. 940. The mere fact that the two countervailing obligations were somehow anchored in the parties’ contract is not, in itself, sufficient to establish the required legal relationship. Identifier.
While the long-term impact of Garden Regional and other recent health care cases remains to be seen, they give health care bankruptcy practitioners advice on critical and recurring issues — and perhaps hope They say that health care debtors will be able to get relief from bankruptcy over the objection of government payors.
Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 288