Health-Care Cases

On its face, the statute grants HHS a power that was not stated previously. However, whether or not it practically provides HHS with either more rights or nothing new remains to be seen. At least one commentator has indicated that the provision has not really provided HHS with anything new because it always had a police power exemption from the stay to exclude a participant under Bankruptcy Code ' 362(b)(4) and the term “exclusion” is a limited term of art under Medicare law that would not apply to payment defaults. See Samuel R. Maizel & Rachel Caplan, Chicken Little Comes to Roost in Bankruptcy, 25-Aug. Am. Bankr. Inst. J. 22 (July/Aug. 2006).

Other commentators argue that the provision clarifies ' if not actually creates ' a police type exception for HHS and effectively gives HHS added leverage to force a debtor to make various structural changes and payments of prepetition amounts. That is, because HHS now has an automatic stay exception to “exclude” the debtor from Medicare, it can wield this power to gain payment of amounts owed to it. See, e.g., Harold L. Kaplan & Timothy R. Casey, Recoupment in Health Care Bankruptcies: A Shrinking Issue?, 26-Oct. Am. Bankr. Inst. J. 16, 59 (Oct. 2007).

Given that statutory additions are presumed to be non-duplicative of existing provisions, and that at least one published decision held that certain actions by HHS action do not necessarily fall within the exception of 362(b)(4), see, e.g., In re Rusnak, 184 B.R. 459 (Bankr. E.D. Pa. 1995), superseded by statute on other grounds, it appears, at minimum, that the new provision clarifies HHS's ability to exclude a debtor from Medicare without violating the automatic stay. Naturally, however, this raises the issue of whether HHS will seek to employ such program exclusion without first receiving bankruptcy court approval.

A broader and potentially more troubling issue is whether the new ' 362(b)(28) provides HHS with leverage to effectuate structural changes at the debtor's business or payment to HHS of amounts owed to it under Medicare. Many health-care entities, including urban and rural hospitals, are highly dependant on federal Medicare receivables. Delay in receiving payment on such receivables, or exclusion from participation in the Medicare program, can be the death knell to such health-care debtors. Historically, there has been a split among some jurisdictions as to whether Medicare's efforts to withhold postpetition payments due to unpaid prepetition amounts constitutes to a setoff subject to the automatic stay, or recoupment that is not subject to the stay. Compare Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065 (3d Cir. 1992) (violation of stay), superseded by statute on other grounds, with Sims v. U.S. Dept. of Health and Human Svcs. (In re TLC Hosps. Inc.), 224 F.3d 1008 (9th Cir. 2000) (no violation of stay), and United States v. Consumer Health Care Svcs. Of Am., 108 F.3d 390 (D.C. Cir. 1997) (no violation of stay); see also Kaplan & Casey, supra, at 57-58.

'Exclusion'

In light of BAPCPA, HHS may attempt to avoid the setoff/stay argument by threatening “exclusion,” knowing (or at least counting on) a debtor may agree to payment of past-due Medicare amounts to avoid exclusion. While such an action might appear to constitute an indirect improper setoff, there is pre-BAPCA authority holding that it does not. See N.Y. Therapeutic Techs., Inc. v. Shalala (In re The Orthotic Ctr., Inc.), 193 B.R. 832, 835 (N.D. Ohio 1996) (no violation of stay per ' 362(b)(4)); but see Rusnak, 184 B.R. at 464-66 (collection nature of exclusion has “nothing to do with the police or regulatory functions of HHS”). However, a different result might be warranted if HHS's underlying grounds to exclude were improper or without basis. This, in turn, might depend on the meaning of “exclude.” Compare 11 U.S.C. ' 525(a) (government may not discriminate against a debtor for failure to pay a debt) and Maizel & Caplan, supra (“exclusion” is a defined term under Medicare that does not include nonpayment as basis) with Psychotherapy & Counseling Ctr., 195 B.R. at 528-29 (exclusion may be either contractual or statutory but 362(b)(4) does not permit “government agencies to enforce contractual rights against debtors without first seeking relief from the automatic stay” (citation omitted) (emphasis in original)). Published legislative history, albeit scant, suggests that the provision may have been designed to provide HHS with such leverage.

BAPCA and Exclusion

BAPCPA was introduced by Sen. Charles E. Grassley (R-IA), who earlier had proposed the Home Health Integrity Preservation Act of 1999 to, among other things, “reform bankruptcy rules to make it harder for all Medicare providers ' to avoid penalties and repayment obligations by declaring bankruptcy.” 145 Cong. Rec. S756 (daily ed. Jan. 20, 1999) (statement of Sen. Grassley).

At bottom, Bankruptcy Code ' 362(b)(28) creates issues for a health-care business debtor that remain unresolved. Thus, in addition to understanding existing law concerning issues of setoff and recoupment, counsel may need to develop a grasp on the right of HHS to “exclude” a debtor from the Medicare program, a right that is acknowledged by BAPCPA, but expressly governed by non-bankruptcy law. See 42 U.S.C.
' 1320a-7. Counsel must learn what “exclusion” may include. See Id. One needs to understand the different grounds for mandatory and permissive exclusion as well as the difference between exclusion and termination, and be prepared to argue successfully that the debtor should not be stripped of its rights under the Medicare program. See 42 U.S.C. ” 1320a-7, 1395cc(b)(2). If counsel fails to advocate on this point entirely, either itself or through specialized counsel, it may have to work harder to convince lenders and potential acquirers that the business is still more valuable as a going concern without the assurance of future Medicare reimbursements. See generally Timothy M. Lupinacci et al., The Changing Face of Health Care Bankruptcies, 2006 No. 04 Norton Bankr. L. Adviser 2 (Apr. 2006).

Transferring Patients

What if you need to shut down a facility? Would you know how to transfer the patients?

When a health-care facility closes, the health-care debtor in possession must “use all reasonable and best efforts” to transfer its patients from that closing facility to another facility that is “appropriate” (i.e., nearby, with similar services, and with reasonable quality of care). 11 U.S.C. ' 704(a)(12). Although BAPCPA creates a duty for the health care debtor in possession to transfer a patient and establishes certain requirements related thereto (such as the type of facility to which patients can be transferred and notice that must be provided), BAPCPA does not regulate the actual transfer of patients. 11 U.S.C. ” 704(a)(12), 1106(a)(1), 1107(a).

Some states have regulations on patient transfer, but there is no consistency regarding how a closing health care facility should transfer its patients and who is responsible for the transfer. See, e.g., American Bankruptcy Institute, ABI Health Care Insolvency Manual, 108 (2d Ed. 2005) (“Depending on the applicable law, transfer arrangements may be the primary responsibility of the patient's family, the facility or a particular state agency”). Thus, counsel must know the applicable regulations in order to advise the debtor regarding compliance.

Protecting Patient Records

Under new Bankruptcy Code ' 351, the debtor health care business must satisfy detailed requirements for the retention and disposal of health-care records. See 11 U.S.C. ' 351. The health-care debtor must arrange for commercial storage of patient records pursuant to federal and/or state regulations (as applicable to the facility) or, if it lacks the funds to do so, take appropriate steps to provide notice that records will no longer be stored and how they may be claimed before they are destroyed; and such notice must take certain precautions in confidentiality. Id.; Fed. Interim R. Bankr. P. 6011.

Although BAPCPA preempts otherwise applicable federal and state storage rules if the debtor cannot afford compliance, a debtor must comply with federal or state regulations if it can afford to do so. State statutes and agencies often impose more stringent requirements for the retention and destruction of documents, and record keeping requirements vary from state to state. See generally ABI, supra, at 108. Counsel must be cognizant of the numerous and distinct requirements. Counsel should also consider issues of potentially direct liability if he or she is deemed to qualify as the debtor's “business associate” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. No. 104-191. See generally Sarah B. Foster, Sometimes a Little Information Is a Dangerous Thing, On the Other Hand, Having No Information Can Get You Blindsided, available at 041207 ABI-CLE 419.

Non-Bankruptcy Regulations

Counsel must also understand the cost of compliance with non-bankruptcy regulations in order to calculate whether the debtor can afford it. This in turn raises certain questions, including whether storage expenses would be entitled to the same administrative priority as costs incurred to close a facility under
' 351 pursuant to ' 503(b)(8)(A) or as “the actual, necessary costs and expenses of preserving the estate” under ' ' 503(b)(1)(A). See also 3 Collier on Bankruptcy 351.04[1], at 351-10 (this may be the “most reasonable view”).

BAPCPA's Definitions

Further, counsel must be careful given BAPCPA's definitions of “patient records” and “patients.” The term “patient records” is drafted to include any “record recorded in a magnetic, optical, or other form of electronic medium,” seemingly regardless of whether it relates to a patient or has a health-care nature, plus “any written document relating to a patient,” again regardless of whether it has a health-care nature. See 11 U.S.C. ' 101(40A); 3 Collier on Bankruptcy 351.02, at 351-5. “Patient” refers to “any individual who obtains or receives services” ' not just medical services ' “from a health care business.” See 11 U.S.C. ' 101(40B).

Thus, the practitioner advising a health-care debtor must have knowledge of the debtor's business and the applicable regulations governing its business records in order to advise the debtor how to comply appropriately and to protect itself from liability through association.

What Are the Rules of Sale/Transfer?

If the health-care debtor is a non-profit entity, BAPCPA requires that any sale or transfer of its assets comply with non-bankruptcy law regulating such transfers. Specifically, a tax-exempt debtor may transfer its assets to a non-exempt business “only under the same conditions as would apply if the debtor had not filed a case under” the Bankruptcy Code. 11 U.S.C. ' 541(f); see also I.R.C. ' 501(a), (c)(3). Similarly, a debtor in possession “that is not ' moneyed, business, or commercial” may sell its assets during the case or transfer its assets pursuant to a plan of reorganization “only in accordance with applicable nonbankruptcy law.” 11 U.S.C. ” 363(d)(1), 1129(a)(16). Although not written into the text of the Bankruptcy Code, BAPCPA now appears to support the standing of the attorney general of the state in which the debtor was incorporated or conducted business to be involved in any section 363(d) proceedings, introducing yet another party in interest. See Daniel A. Demarco and Nancy A. Valentine, Health Care Hazards and Eleemosynary Elocutions, 24-OCT Am. Bankr. Inst. J. (Oct. 2005) (citing BAPCPA
' 1221(d)).

The recent Supreme Court decision in Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326 (2008), added a further wrinkle. In Piccadilly, the Supreme Court held that asset sales and transfers are only exempt from transfer taxes under Bankruptcy Code ' 1146(a) when they are made pursuant to a plan “that has been confirmed.” Id. at 2339. Previously, many circuits had held that such tax advantage could be obtained in sales that occurred prior to plan confirmation.

Thus, given the new rules of sale under both BAPCPA and Piccadilly, sales of many healthcare entities and assets will be more challenging. In response, counsel will need an even greater understanding of health care in order to structure a recovery plan that is beneficial to the debtor, its creditors, and potential buyers.

Conclusion

In addition to the usual professional risks and responsibilities that are part and parcel of debtor representation, representation of a health-care debtor under BAPCPA brings along additional risk for someone who is not adequately prepared for the challenges. In the worst case, failure to advise the client properly may expose the debtor, and counsel, to liability.

Sam J. Alberts is a partner in the Washington, DC, office of White & Case LLP and a member of the firm's Financial Restructuring & Insolvency practice. Malka S. Resnicoff is an associate in the firm. Acknowledgement is also given to Jacqueline Burke, a student at American University Washington College of Law and a 2008 summer associate at the firm, for her contributions to this article.

In Part One of this article, the authors discussed the issues of whether the Debtor is a “health-care business,” if an ombudsman must be appointed, and if you should seek to prevent it. This month, the authors discuss the question, “What if HHS seeks to affect Medicare reimbursements or exclude the Debtor from a federal health-care program?”

Upon the filing of a bankruptcy case, an automatic stay is created that prevents creditors and parties in interest from taking various actions without court authority. Historically, health-care debtors were generally protected from most actions taken against them absent motion for relief from the automatic stay. BAPCPA created a wrinkle to this issue by adding Bankruptcy Code ' 362(b)(28), which creates a specific exception to the automatic stay for the Secretary of Health and Human Services (HHS) to “exclude” the debtor “from participation in the medicare program or any other Federal health care program.”

More Power for HHS?

On its face, the statute grants HHS a power that was not stated previously. However, whether or not it practically provides HHS with either more rights or nothing new remains to be seen. At least one commentator has indicated that the provision has not really provided HHS with anything new because it always had a police power exemption from the stay to exclude a participant under Bankruptcy Code ' 362(b)(4) and the term “exclusion” is a limited term of art under Medicare law that would not apply to payment defaults. See Samuel R. Maizel & Rachel Caplan, Chicken Little Comes to Roost in Bankruptcy, 25-Aug. Am. Bankr. Inst. J. 22 (July/Aug. 2006).

Other commentators argue that the provision clarifies ' if not actually creates ' a police type exception for HHS and effectively gives HHS added leverage to force a debtor to make various structural changes and payments of prepetition amounts. That is, because HHS now has an automatic stay exception to “exclude” the debtor from Medicare, it can wield this power to gain payment of amounts owed to it. See, e.g., Harold L. Kaplan & Timothy R. Casey, Recoupment in Health Care Bankruptcies: A Shrinking Issue?, 26-Oct. Am. Bankr. Inst. J. 16, 59 (Oct. 2007).

Given that statutory additions are presumed to be non-duplicative of existing provisions, and that at least one published decision held that certain actions by HHS action do not necessarily fall within the exception of 362(b)(4), see, e.g., In re Rusnak, 184 B.R. 459 (Bankr. E.D. Pa. 1995), superseded by statute on other grounds, it appears, at minimum, that the new provision clarifies HHS's ability to exclude a debtor from Medicare without violating the automatic stay. Naturally, however, this raises the issue of whether HHS will seek to employ such program exclusion without first receiving bankruptcy court approval.

A broader and potentially more troubling issue is whether the new ' 362(b)(28) provides HHS with leverage to effectuate structural changes at the debtor's business or payment to HHS of amounts owed to it under Medicare. Many health-care entities, including urban and rural hospitals, are highly dependant on federal Medicare receivables. Delay in receiving payment on such receivables, or exclusion from participation in the Medicare program, can be the death knell to such health-care debtors. Historically, there has been a split among some jurisdictions as to whether Medicare's efforts to withhold postpetition payments due to unpaid prepetition amounts constitutes to a setoff subject to the automatic stay, or recoupment that is not subject to the stay. Compare Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d 1065 (3d Cir. 1992) (violation of stay), superseded by statute on other grounds, with Sims v. U.S. Dept. of Health and Human Svcs. (In re TLC Hosps. Inc. ), 224 F.3d 1008 (9th Cir. 2000) (no violation of stay), and United States v. Consumer Health Care Svcs. Of Am. , 108 F.3d 390 (D.C. Cir. 1997) (no violation of stay); see also Kaplan & Casey, supra , at 57-58.

'Exclusion'

In light of BAPCPA, HHS may attempt to avoid the setoff/stay argument by threatening “exclusion,” knowing (or at least counting on) a debtor may agree to payment of past-due Medicare amounts to avoid exclusion. While such an action might appear to constitute an indirect improper setoff, there is pre-BAPCA authority holding that it does not. See N.Y. Therapeutic Techs., Inc. v. Shalala (In re The Orthotic Ctr., Inc.), 193 B.R. 832, 835 (N.D. Ohio 1996) (no violation of stay per ' 362(b)(4)); but see Rusnak, 184 B.R. at 464-66 (collection nature of exclusion has “nothing to do with the police or regulatory functions of HHS”). However, a different result might be warranted if HHS's underlying grounds to exclude were improper or without basis. This, in turn, might depend on the meaning of “exclude.” Compare 11 U.S.C. ' 525(a) (government may not discriminate against a debtor for failure to pay a debt) and Maizel & Caplan, supra (“exclusion” is a defined term under Medicare that does not include nonpayment as basis) with Psychotherapy & Counseling Ctr., 195 B.R. at 528-29 (exclusion may be either contractual or statutory but 362(b)(4) does not permit “government agencies to enforce contractual rights against debtors without first seeking relief from the automatic stay” (citation omitted) (emphasis in original)). Published legislative history, albeit scant, suggests that the provision may have been designed to provide HHS with such leverage.

BAPCA and Exclusion

BAPCPA was introduced by Sen. Charles E. Grassley (R-IA), who earlier had proposed the Home Health Integrity Preservation Act of 1999 to, among other things, “reform bankruptcy rules to make it harder for all Medicare providers ' to avoid penalties and repayment obligations by declaring bankruptcy.” 145 Cong. Rec. S756 (daily ed. Jan. 20, 1999) (statement of Sen. Grassley).

At bottom, Bankruptcy Code ' 362(b)(28) creates issues for a health-care business debtor that remain unresolved. Thus, in addition to understanding existing law concerning issues of setoff and recoupment, counsel may need to develop a grasp on the right of HHS to “exclude” a debtor from the Medicare program, a right that is acknowledged by BAPCPA, but expressly governed by non-bankruptcy law. See 42 U.S.C.
' 1320a-7. Counsel must learn what “exclusion” may include. See Id. One needs to understand the different grounds for mandatory and permissive exclusion as well as the difference between exclusion and termination, and be prepared to argue successfully that the debtor should not be stripped of its rights under the Medicare program. See 42 U.S.C. ” 1320a-7, 1395cc(b)(2). If counsel fails to advocate on this point entirely, either itself or through specialized counsel, it may have to work harder to convince lenders and potential acquirers that the business is still more valuable as a going concern without the assurance of future Medicare reimbursements. See generally Timothy M. Lupinacci et al., The Changing Face of Health Care Bankruptcies, 2006 No. 04 Norton Bankr. L. Adviser 2 (Apr. 2006).

Transferring Patients

What if you need to shut down a facility? Would you know how to transfer the patients?

When a health-care facility closes, the health-care debtor in possession must “use all reasonable and best efforts” to transfer its patients from that closing facility to another facility that is “appropriate” (i.e., nearby, with similar services, and with reasonable quality of care). 11 U.S.C. ' 704(a)(12). Although BAPCPA creates a duty for the health care debtor in possession to transfer a patient and establishes certain requirements related thereto (such as the type of facility to which patients can be transferred and notice that must be provided), BAPCPA does not regulate the actual transfer of patients. 11 U.S.C. ” 704(a)(12), 1106(a)(1), 1107(a).

Some states have regulations on patient transfer, but there is no consistency regarding how a closing health care facility should transfer its patients and who is responsible for the transfer. See, e.g., American Bankruptcy Institute, ABI Health Care Insolvency Manual, 108 (2d Ed. 2005) (“Depending on the applicable law, transfer arrangements may be the primary responsibility of the patient's family, the facility or a particular state agency”). Thus, counsel must know the applicable regulations in order to advise the debtor regarding compliance.

Protecting Patient Records

Under new Bankruptcy Code ' 351, the debtor health care business must satisfy detailed requirements for the retention and disposal of health-care records. See 11 U.S.C. ' 351. The health-care debtor must arrange for commercial storage of patient records pursuant to federal and/or state regulations (as applicable to the facility) or, if it lacks the funds to do so, take appropriate steps to provide notice that records will no longer be stored and how they may be claimed before they are destroyed; and such notice must take certain precautions in confidentiality. Id.; Fed. Interim R. Bankr. P. 6011.

Although BAPCPA preempts otherwise applicable federal and state storage rules if the debtor cannot afford compliance, a debtor must comply with federal or state regulations if it can afford to do so. State statutes and agencies often impose more stringent requirements for the retention and destruction of documents, and record keeping requirements vary from state to state. See generally ABI, supra, at 108. Counsel must be cognizant of the numerous and distinct requirements. Counsel should also consider issues of potentially direct liability if he or she is deemed to qualify as the debtor's “business associate” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. No. 104-191. See generally Sarah B. Foster, Sometimes a Little Information Is a Dangerous Thing, On the Other Hand, Having No Information Can Get You Blindsided, available at 041207 ABI-CLE 419.

Non-Bankruptcy Regulations

Counsel must also understand the cost of compliance with non-bankruptcy regulations in order to calculate whether the debtor can afford it. This in turn raises certain questions, including whether storage expenses would be entitled to the same administrative priority as costs incurred to close a facility under
' 351 pursuant to ' 503(b)(8)(A) or as “the actual, necessary costs and expenses of preserving the estate” under ' ' 503(b)(1)(A). See also 3 Collier on Bankruptcy 351.04[1], at 351-10 (this may be the “most reasonable view”).

BAPCPA's Definitions

Further, counsel must be careful given BAPCPA's definitions of “patient records” and “patients.” The term “patient records” is drafted to include any “record recorded in a magnetic, optical, or other form of electronic medium,” seemingly regardless of whether it relates to a patient or has a health-care nature, plus “any written document relating to a patient,” again regardless of whether it has a health-care nature. See 11 U.S.C. ' 101(40A); 3 Collier on Bankruptcy 351.02, at 351-5. “Patient” refers to “any individual who obtains or receives services” ' not just medical services ' “from a health care business.” See 11 U.S.C. ' 101(40B).

Thus, the practitioner advising a health-care debtor must have knowledge of the debtor's business and the applicable regulations governing its business records in order to advise the debtor how to comply appropriately and to protect itself from liability through association.

What Are the Rules of Sale/Transfer?

If the health-care debtor is a non-profit entity, BAPCPA requires that any sale or transfer of its assets comply with non-bankruptcy law regulating such transfers. Specifically, a tax-exempt debtor may transfer its assets to a non-exempt business “only under the same conditions as would apply if the debtor had not filed a case under” the Bankruptcy Code. 11 U.S.C. ' 541(f); see also I.R.C. ' 501(a), (c)(3). Similarly, a debtor in possession “that is not ' moneyed, business, or commercial” may sell its assets during the case or transfer its assets pursuant to a plan of reorganization “only in accordance with applicable nonbankruptcy law.” 11 U.S.C. ” 363(d)(1), 1129(a)(16). Although not written into the text of the Bankruptcy Code, BAPCPA now appears to support the standing of the attorney general of the state in which the debtor was incorporated or conducted business to be involved in any section 363(d) proceedings, introducing yet another party in interest. See Daniel A. Demarco and Nancy A. Valentine, Health Care Hazards and Eleemosynary Elocutions, 24-OCT Am. Bankr. Inst. J. (Oct. 2005) (citing BAPCPA
' 1221(d)).

The recent Supreme Court decision in Florida Department of Revenue v. Piccadilly Cafeterias, Inc. , 128 S. Ct. 2326 (2008), added a further wrinkle. In Piccadilly, the Supreme Court held that asset sales and transfers are only exempt from transfer taxes under Bankruptcy Code ' 1146(a) when they are made pursuant to a plan “that has been confirmed.” Id. at 2339. Previously, many circuits had held that such tax advantage could be obtained in sales that occurred prior to plan confirmation.

Thus, given the new rules of sale under both BAPCPA and Piccadilly, sales of many healthcare entities and assets will be more challenging. In response, counsel will need an even greater understanding of health care in order to structure a recovery plan that is beneficial to the debtor, its creditors, and potential buyers.

Conclusion

In addition to the usual professional risks and responsibilities that are part and parcel of debtor representation, representation of a health-care debtor under BAPCPA brings along additional risk for someone who is not adequately prepared for the challenges. In the worst case, failure to advise the client properly may expose the debtor, and counsel, to liability.

Sam J. Alberts is a partner in the Washington, DC, office of White & Case LLP and a member of the firm's Financial Restructuring & Insolvency practice. Malka S. Resnicoff is an associate in the firm. Acknowledgement is also given to Jacqueline Burke, a student at American University Washington College of Law and a 2008 summer associate at the firm, for her contributions to this article.