Hospital Asset Sales: Some Background and Recent Anecdotal Experience in New Jersey on Assigning HHS Provider Agreements/National Provider Identifiers
Written by: Warren J. Martin, Jr., Esq.
Porzio, Bromberg & Newman, PC; Morristown, New Jersey
In three recent New Jersey chapter 11 hospital sales, the unsettled legal issues associated with attempts to assign a hospital’s HHS provider agreement and/or its National Provider Identifier (NPI) without assigning the liabilities stemming from those agreements and NPIs were either avoided or postponed, rather than litigated. The particular exigencies surrounding each of those hospital sales and the interests of each of the buyers in those cases steered the transactions clear of the uncertain waters. The author proposes one possible solution to help buyers purchase assets rather than liabilities and to aid sales of operating hospitals for good value.
By way of background, Medicare operates on a prospective payment system, or PPS. Essentially, a hospital receives “estimated” monthly payments in connection with services it provides to Medicare patients. Under the PPS system, a hospital always faces the risk of future offset or recoupment by HHS for prior overpayments. Such a recoupment could vaporize a hospital’s entire cash flow overnight, since HHS can reduce or eliminate future payments in order to reimburse itself for past overpayments. To eliminate this risk, a hospital acquirer may consider applying for new provider agreements and NPIs as opposed to assuming existing ones. The process to obtain a new NPI, however, can be lengthy. Thus, where a hospital’s assets are to be sold in a 363 sale and the buyer proposes to continue the hospital’s operations, time is saved, and there is significant benefit in the form of continuing cash flow when a provider agreement/NPI can be transferred to a buyer, rather than terminated.
The law as to the assignability of provider agreements and NPIs and whether or not such assignment saddles a buyer with liability for prior overpayments is still developing. For example, outside of the bankruptcy context, HHS has argued, and the courts have held, that “[u]pon joining the Medicare program…the hospitals received a statutory entitlement, not a contractual right.” Memorial Hospital v. Heckler, 706 F.2d 1130, 1136 (11th Cir. 1983); see also Hollander v. Brezenoff, 787 F.2d 834, 839 (2d Cir. 1986) (“[A]lthough the relationship may be effectuated by means of a provider contract, all rights to reimbursement arise under the applicable statutes…”); Germantown Hospital & Medical Center v. Heckler, 590 F.Supp. 24, 30-31 (D. Pa. 1983), aff’d sub nom, Germantown Hospital & Medical Center v. Schweiker, 738 F. 2d 631 (3d Cir. 1984) (same).
Despite this case law, within the bankruptcy context, both debtor providers and HHS have generally accepted the relationship as being contractual in nature. In re University Medical Center, 973 F.2d 1065, 1075 n. 13 (3d Cir. 1992) (Medicare provider agreement “easily fits” within the definition of executory contract); see also In re Monsour Medical Center, 11 B.R. 1014 (W.D. Pa. 1981); In re Heffernan Memorial Hospital, 192 B.R. 228, 231 n. 4 (Bankr. S.D. Cal. 1996); In re St. Johns Home Health Agency, 173 B.R. 238, 242 n. 1 (Bankr. S.D. Fla. 1994). In one unpublished bankruptcy decision, however, the court did appear to follow the circuit-level authority cited in the previous paragraph, holding that the provider number and agreement were not executory contracts, but rather statutory entitlements. In re BDK Health Mgmt. (BDK), 1998 Bankr LEXIS 2031, *17-19 (Bankr. D. Fla. 1998). HHS has not championed this decision before other bankruptcy courts, however, most likely because the BDK court went on to permit assignment of the provider number to the asset buyer over HHS’ objection, free and clear of HHS’ recoupment claims, with such claims to attach to proceeds. The BDK court went so far as to order an injunction of sorts: “After consummation of the sale to Buyers, neither HCFA (now known as CMS), HHS, nor any of their fiscal intermediaries may assert any claims, rights, liens, encumbrances or interests in and to the state and federal provider numbers.” Id. at *20.
The contrary position (as to assigning provider agreements free and clear of liens and claims) is expressed in University Medical Center, in which the Third Circuit, in dicta, held that when a provider agreement is assumed (which is necessary for assignment under §365), HHS is “able to recoup the overpayments” from prior periods. University Medical Center, 973 F.2d at 1082 n.20. This dicta contrasts somewhat with the court’s main holding in the case, which prohibited HHS from recouping overcharges from prior periods against a debtor-in-possession who has not yet assumed a provider agreement. The result of all of this appears to be a general acceptance among bankruptcy practitioners and bankruptcy courts (although not seriously tested) that provider agreements/NPIs are executory contracts that, when assumed and assigned, will require a buyer to be responsible for prior overpayments made to the seller.
In the three recent New Jersey hospital bankruptcy cases referenced above, Passaic Beth Israel Hospital (PBI), Barnert Memorial Hospital and Bayonne Medical Center (BMC), HHS objected to sale motions filed by each of the debtors, arguing that the NPIs could not be assigned without preservation of HHS recoupment rights. In PBI and Barnert, the issues were resolved simply, as PBI was purchased by another non-profit hospital that did not acquire PBI’s NPI: It was able to use its own pre-existing NPI. Similarly, in Barnert, the successful bidder did not require the assignment of the debtor’s NPI, as it did not intend to continue acute care at the facility. One unsuccessful bidder in Barnert did wish to assume Barnert’s NPIs “free and clear” of HHS’ offset and recoupment rights, but as that bidder was not the winning bidder, the issue never came before the court. In BMC, the debtor had previously entered into a reimbursement agreement with HHS to resolve a prior overpayment issue. At the BMC sale, the buyer took the unusual approach of assuming the provider agreement under Medicare law, rather than under §365. Thus, there was no formal “assumption and assignment” under §365. Given the 363 Order in the BMC case, but no 365 relief, it is unclear what the respective rights and liabilities of HHS and the buyer will be going forward in this situation.
One possible way for a buyer to avoid recoupment liability in this environment of uncertainty, and to foster sales of operating hospitals, would be for a buyer to (1) postpone the closing, (2) apply for its own provider number and (3) “manage” the debtor’s assets/collect its Medicare receivables for a fee until such time as it receives its own provider number, at which time the debtor could reject its executory contract with HHS and close with the buyer. Since this approach would remove uncertainty for the buyer, it could cause substantially more value for the assets of a bankrupt hospital, which would be paid by a buyer.