Don’t Count on the Bankruptcy Code to Preserve Payments from CMS While Closing or Repurposing a Hospital

The Case

On November 29, 2016, the U.S. Court of Appeals for the First Circuit held that a chapter 11 filing does not stop CMS from terminating a hospital’s participation in the Medicare program once the hospital no longer accepts inpatients, even though the hospital intends to continue to provide otherwise compensable services during its closure process. The First Circuit held that CMS’ termination of the hospital’s provider agreement was an exercise of “police and regulatory power,” exempted from the Bankruptcy Code’s automatic stay, and CMS did not discriminate against the debtor hospital in violation of the Bankruptcy Code. Parkview Adventist Med. Ctr. v. United States, 2016 U.S. App. LEXIS 21311 (1st Cir. Nov. 29, 2016).

The Impact

Revenue that a hospital debtor might have expected to earn under the Medicare and Medicaid programs to fund shut down or repurposing costs may not be available if the hospital ceases to provide any services required for Medicare eligibility during the course of its transition, even in bankruptcy.

The Competing Policies

Enterprises often undertake the effort to liquidate or significantly modify their operations under the protection of chapter 11 of the Bankruptcy Code. Indeed, the Bankruptcy Code provides a debtor with substantial power over estate property to accomplish its liquidation or restructuring and maximize value, including power to reject executory contracts, shut down operations and sell assets. It also stays (enjoins) most acts against a debtor to provide time for these powers to be exercised.

In contrast, the Medicare statute reflects, in the words of the First Circuit, “a strong public policy interest in seeing that Medicare-program dollars are not spent on institutions that fail to meet qualification standards.”

Acknowledging that Parkview “is an important case resting at the intersection of the Bankruptcy Code and Medicare law,” the First Circuit came down squarely on the Medicare side of the road on the facts of this case.

The Facts

The facts of Parkview can be boiled down to the following:

• Parkview, a hospital located in Maine, decided it could not continue to operate. It adopted a closure plan that involved immediately terminating inpatient services, promptly transferring patients, and continuing some outpatient services for a limited period while it completed the shutdown of all operations.
• Parkview advised CMS of its closure plan, filed for chapter 11 and immediately (i) stopped providing inpatient services and (ii) started transferring inpatients to another institution.
• Three days after the chapter 11 case started, CMS terminated Parkview’s ability to participate in the Medicare program, contending that failing to provide inpatient services made Parkview ineligible for Medicare funding because it was no longer a hospital under applicable Medicare law. Ultimately, the state of Maine also terminated Parkview’s participation in the Medicaid program.
• Parkview challenged CMS’ action as violations of the Bankruptcy Code’s automatic stay and the Bankruptcy Code’s prohibition against government agencies discriminating against a debtor based on its financial condition or bankruptcy filing.

CMS contended, among other things, that the Bankruptcy Court lacked jurisdiction over termination of Parkview’s provider agreement and that CMS’ decision to terminate the agreement was (i) an exercise of “police and regulatory power,” exempt from the restrictions of the Bankruptcy Code’s automatic stay and (ii) not prohibited discrimination against Parkview.

The Court’s Decision

Consistent with a majority of courts, the Bankruptcy and District Courts in Maine concluded that they lacked jurisdiction to decide whether CMS properly terminated Parkview’s participation in the Medicare program because that decision first had to be adjudicated through the administrative review process at CMS. They also found that CMS had not violated the automatic stay or improperly discriminated against Parkview. (This dispute over jurisdiction has been discussed by my colleague, Dania Slim, in her LinkedIn post entitled “Medicare Provider Agreements in Bankruptcy: Executory Contracts or Assets that Can Be Sold Free and Clear (or Effectively Neither).” I recommend you read her post if you haven’t already done so.)

The First Circuit, however, refused to engage in the jurisdictional debate. Instead, it assumed it had jurisdiction and decided the dispute in favor of CMS on the merits. (“Rather than add our voice to the circuit split on this difficult issue, we choose to resolve this case on narrower grounds evident from the record.”)

It found that the Bankruptcy Code’s “police and regulatory” exception to the automatic stay squarely applied to permit CMS to terminate Parkview’s Medicare program participation once Parkview stopped providing inpatient services and no longer satisfied the Medicare law standard for a hospital. In reaching this conclusion, the First Circuit concluded that the exception is not limited to government action that addresses “a threat to . . . health or safety.” The exception also preserves “CMS’s ability to enforce generally the Medicare statute’s carefully articulated regulatory scheme.” And, in this case, “[r]eimbursing Parkview pursuant to the Provider Agreement after it had taken actions to disqualify itself from the Medicare program, rendering it unable to provide services required that program, would have been a waste of public money.”

Having decided that CMS terminated Parkview’s provider agreement because it was no longer an eligible hospital, the First Circuit easily dispatched Parkview’s claim of improper discrimination. As noted above, government agencies are prohibited from discriminating against debtors based on their financial condition or bankruptcy filing. Because CMS did not terminate for these reasons, the First Circuit concluded, it did not discriminate.

Lessons Learned

It is nearly impossible to close or substantially repurpose a hospital overnight. As a result, a closure or repurposing plan will often involve a staged shut down of services, both for the health and safety of patients and for continued, albeit reduced, revenue generation during the process. Parkview stands for the proposition, however, that once services that are necessary to be a hospital stop being offered, CMS is able to terminate a hospital’s participation in the Medicare program notwithstanding the automatic stay of the Bankruptcy Code. Consequently, staging the shutdown of services could deprive a hospital of needed revenue to effectuate a safe closure or repurposing.

In light of this risk, hospitals faced with the need to close or substantially change service offerings need to consider (i) whether something other than a staged suspension of services that would result in disqualification from the Medicare program is possible, and (ii) if not, whether (a) alternative financing or sufficient cash is available or (b) CMS will provide some accommodation. Filing for chapter 11 may not provide either the time or the continued access to Medicare funding to cover necessary costs.

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