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 are reduced to account for the inherited liability.
However, if the same sale of assets takes place in a bankruptcy case, a recent decision has 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.
Verity Health System of California (Verity) 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 a particular section of the Bankruptcy Code that provides that assets may 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). DHCS argued that Verity’s Medicaid provider agreements should not be assigned free and clear of money owed to DHCS, because a provider agreement is an executory contract, meaning a contract in which there are unperformed material obligations by both parties, and because a different section of the Bankruptcy Code provides 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.
The Verity decision opens the door for the sale of governmental provider agreements and related assets by providers who have been unable to sell their assets, or sell them for fair market value, due to the provider’s liability to the government.
While the decision is not binding on other courts, if the decision is followed elsewhere, health providers will have the option of selling their assets in a bankruptcy case free and clear of the government liability, which should result in a greater price being paid than would be obtained outside of bankruptcy.
Lawrence D. Coppel
(410) 576-4238 • email@example.com