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California has all kinds of healthcare
industry related entities, including hospitals, ambulatory surgical
centers, medical groups, durable medical equipment suppliers, long term
care facilities, and skilled nursing facilities, to name but a few. All
are candidates for a receivership. Skilled nursing facilities are
frequently the subject of receiverships, both for financial reasons and
for quality of care issues. A receivership for quality of care issues is
likely to be imposed by a governmental regulatory agency, while a
receivership for financial reasons could be imposed by a regulatory agency
or a secured creditor. A discussion of two kinds of receivership entities
– hospitals and skilled nursing facilities – follows.
California contains 1,219 certified
Medicare and Medicaid nursing homes. Of these, only 8% operate within a
hospital setting; approximately 69% are not for profit institutions, 19%
are for profit and the rest are government owned. In California, nursing
homes are considered health care facilities and as such are licensed and
scrutinized by the California Department of Health Services. As medical
facilities they are allowed to provide services that cannot be dispensed
in assisted-living or board and care homes. Typically, these services
involve managing complex and potentially serious medical problems such as
infections, wound care, IV therapy, and coma care.
There are approximately 450 hospitals in
California, of which approximately 390 are general acute care (“GAC”)
hospitals. These GAC hospitals saw 46 million outpatients and discharged
3.5 million inpatients in 2010. While most of the GAC revenue comes from
private payor sources, approximately 30% of the GAC net patient revenue
comes from the Medicare program, while another 20% comes from the Medi-cal
program. Of the GACs, 22% had negative total margins and 34% had negative
operating margins in 2010.
1. Checklist of Regulatory Entities
Skilled nursing facilities and hospitals are heavily regulated entities,
and receivers must be careful that they do not run afoul of the regulatory
agencies, both state and federal, that oversee the healthcare facility.
The list of the potential regulatory agencies that a receiver might have
to deal with in the receivership of a skilled nursing facility or a
hospital includes 46 California agencies and 11 Federal regulators.
2. Continued Operations Issues
One of the most significant issues is whether the appointment of a
receiver is considered a “Change of Ownership” event (“CHOW”) for license
purposes, or participation in the Medicare and or Medi-Cal programs.1
A CHOW is usually defined as occurring when the person/entity with
ultimate responsibility for the skilled nursing facility or hospital
changes. This is a complicated analysis, but if the former owner has
“relinquished all authority and responsibility for the organization” a
CHOW has usually occurred. This may impact the Medicare Certification of
Participation, and require a new survey and the filing of a final cost
report. There are also issues of liability for Medicare and Medi-Cal
overpayments that may automatically accrue to the “new” operator.
3. HIPPA
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
has two main parts: (a) the Privacy Rule provides for the privacy of an
individual's personally identifiable health information, and (b) the
Security Rule establishes standards for the privacy of electronic health
information. HIPAA protects consumers from having their health information
unnecessarily disclosed. The United States Department of Health & Human
Services' Office for Civil Rights enforces HIPAA rules. HIPAA requires
compliance by health care providers (including doctors, hospitals, and
nursing homes), and health plans (insurance companies, HMOs, company
health plans, Medicare and Medicaid). These are referred to as "covered
entities" under HIPAA regulations, meaning they are covered by the law,
and receivers are certainly covered. Violations of the HIPPA rules can
result in serious penalties.
4. Management of Media/Public
Relations
Receivers should create or obtain a list of community agencies, donors and
support organizations, schools and other public programs and other
individuals or organizations that should receive notice of the facility
closing. Additionally, the patients and the families/representatives of
the patients should be kept informed of the closing process and all issues
related to the transfer of the patients to other facilities.
5. Accounts Receivables Collections
Receivers must be aware of the well-recognized rights of Medicare and Medi-Cal
to recoup any overpayments from ongoing payments. Sometimes this can occur
many years after the overpayment occurred. The United States has a long
recognized right to recoup federal monies erroneously paid out. See,
e.g., Bechtel v. PBGC, 781 F.2d 906, 907 (D.C. Cir. 1986) (United
States has inherent right to recoup past overpayments by adjusting the
levels of ongoing payments). This right has been held to apply to Medicare
overpayments to providers of good and services. See, e.g., Sims v.
U.S. Dept. of Health & Human Servs. (In re TLC Hospitals, Inc.), 224
F.3d 1008, 1012 (9th Cir. 2000) ("We conclude that, under this specialized
and continuous system of estimated payments and subsequent adjustments,
HHS's overpayments and its underpayments in a subsequent fiscal year were
parts of the same transaction for purposes of recoupment."). Additionally,
the United States is one party for mutuality purposes and can setoff
claims held by different agencies. See, e.g., In re HAL, Inc., 122
F.3d 851 (9th Cir. 1997), aff’g, 196 B.R. 159 (B.A.P. 9th Cir.
1996) (“[F]ederal government agencies, with the exception of those acting
in a distinctly private capacity, are a single entity for purposes of
setoff under § 553.”). Medicare and Medi-Cal could setoff ongoing payments
to recover tax obligations.
6. Unique Issues in a Wind Down
There are two options available to a receiver when tasked with closing a
hospital: (a) a voluntary suspension of the license or (b) cancellation of
the license. To preserve value, it is almost always better to suspend the
license rather than cancel it.
Voluntary suspension. A receiver may
request, usually with 30 days’ notice, that the California Department of
Health Services put the license into suspense. The license can be
suspended for up to one year (although there are examples of a second
one-year period being granted). However, the suspension results in the
facility being decertified for participation in the Medicare and Medi-Cal
programs, so if you seek to have the suspension lifted, the facility will
still have to undergo a re-certification by the Medicare and Medi-Cal
programs. The license expires at the end of the 12 months unless the
facility has been reinstated with the 12 months.
Cancellation of License. A receiver may
request to DHS that the license be surrendered, again with 30 days’
notice. A cancelled license may be reinstated within 12 months by an
application process, but the licensee must submit a new application and
comply with all current code standards. This last issue is important
because seismic retrofit obligations are a serious and sometimes
insurmountable issue for a hospital or skilled nursing facility. If the
license is merely suspended, current seismic standards are not applied to
the facility, whereas, if the license is cancelled, to re-open the
facility will have to comply with current seismic standards.
Patient Records. Storage of patient
records is a significant logistical and financial issue in the shutdown of
a skilled nursing facility or a hospital. California law requires that an
entity maintain patient records for at least seven years, and for minors,
it is at least 7 years or at least one year after the minor has reached
18. Medicare requires that medical records be maintained for at least 5
years. Medi-Cal requires that records be maintained for 3 years from the
date of service. In some circumstances medical records may have to be
stored for more than two decades! If a hospital ceases operations, DHS
requires that it be notified within 48 hours of the arrangements made to
preserve the records and make them available to former patients.
Notification to Other Healthcare
Entities. A receiver for a hospital or skilled nursing facility must
notify agencies that have issued it licenses and other permits of the
cancellation of those licenses or permits. For example, if the hospital
has an emergency service, it must give 90-day notice to Department of
Health Services, as well as to the local government agency responsible for
health services, and to all managed care and other health plans that
contract with the hospital, and provide 90-day notice to the public.
Additionally, CalTrans has to be notified to remove highway and other
signs directing people to the hospital. Additionally, local law
enforcement agencies, ambulance companies and any other organizations or
entities that have referred patients to the facility in the past should be
notified of the closing.
Skilled Nursing Facilities Issues. In
the event of the closure of a skilled nursing facility, the following
obligations are imposed on the party responsible for the closure by the
California Health and Safety Code: (a) a medical assessment of the
residents must be conducted by the medical director or a resident
attending physician, (b) an assessment of the social and physical
functioning of the residents must be conducted by the nursing staff and
the activity director, (c) an evaluation must be made of the relocation
needs of each resident, (d) if 10 or more skilled nursing facility
patients are being transferred, a relocation plan must be submitted to the
Department Health Services and to the State Long Term Care Ombudsman at
least 15 days prior to any notice of the relocation being conveyed to the
residents, (e) once Department Health Services has approved the plan, it
must be conveyed to the residents or their representatives, including
notice of alternative facilities, (f) the facility must make arrangements
for future medical care and services (i.e, coordinate for the transfer to
another facility), and (g) not actually transfer the patients without
their consent for at least 60 days after notice.
Pharmacy Obligations. The receiver must
give notice of the closure of a pharmacy licensed facility to the
California Board of Pharmacy, including notice of intent to transfer or
sell any dangerous drugs, devices or hypodermics inventory. All
prescriptions as well as any other medical records maintained by the
pharmacy must be transferred to another Board-licensed entity and
maintained there for at least 3 years. Also, the Federal Drug Enforcement
Administration should be notified.
Laboratory Obligations. The receiver
must give notice to the Division of Laboratory Science, Laboratory Field
Services Branch of Department Health Services within 30 days of closing a
laboratory, and records must be maintained for at least 3 years from the
date of testing, examination or purchase.
Radiology/Nuclear Medicine Permits.
Notice should be provided no less than 30 days before closure to the
Radiologic Health Branch of Department Health Services of the facility
closure, and it will provide guidance on the security and disposal of
radioactive materials.
Facility Notices. A receiver should
notify the Office of Statewide Health planning and Development (“OSHPD”)
within 30 days of the hospital’s closure. The notice requirements are
fairly extensive.
Medicare, Medi-Cal, and Other Payors. If
the facility participates in the Medicare program, it must provide at
least 6 months’ notice of its intent to terminate participation (and the
termination date should be on the first of a month). The receiver must
also give the public at least 15 days’ notice of the proposed termination.
The receiver is also responsible for filing a closing cost report. A
receiver of a facility that participates in the Medi-Cal program must
provide at least 35 days’ notice of the closure of the facility. Finally,
the receiver must review all the contracts with health plans, etc… to
become aware of obligations regarding termination, transfer of patient
records, and other terms. The receiver should notify the Joint Commission
on Accreditation of Healthcare Organizations as well.
Note that this discussion above is only
with respect to unique issues in healthcare entities, and receivers should
not ignore that they must also look at revenue bond and other financial
obligations of the facility with respect to closing issues, and, of
course, be aware of employment and labor issues that arise in the
connection of the closing of any business, including but not limited to
the federal and state WARN Acts, etc.
1 The federal guidelines for a what constitutes
a "change of ownership" are found at 42 C.F.R. 489.18 and differ by the
type of business involved: (a) in the case of a partnership, the removal,
addition, or substitution of a partner, unless the partners expressly
agree otherwise, as permitted by applicable State law, constitutes change
of ownership; (b) transfer of title and property from an unincorporated
sole proprietorship to another party constitutes change of ownership; (c)
the merger of the provider corporation into another corporation, or the
consolidation of two or more corporations, resulting in the creation of a
new corporation constitutes change of ownership (transfer of corporate
stock or the merger of another corporation into the provider corporation
does not constitute change of ownership); and (d) the lease of all or part
of a provider facility constitutes change of ownership of the leased
portion.
* Samuel R. Maizel is a Los Angeles partner in Dentons’
Restructuring, Insolvency and Bankruptcy group. His practice includes
bankruptcy and receivership matters and financial restructuring in- and
out-of-court in all industries, but he leads the firm's healthcare
industry restructuring efforts nationwide. Sam has also been involved in
Chapter 9 cases involving local hospital districts and other governmental
units and is a respected lecturer, presenter and author.
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