only recognizes a court order when
it comes to making payment directly
to a lender. This further complicates
matters in healthcare finance.
When healthcare companies are sold,
Medicare also becomes a major issue
that can create delays and confusion.
A buyer of a healthcare facility
generally must decide whether to take
assignment of the existing Medicare
provider agreement or to apply for a
new provider agreement of its own.
The problem with that is that acquiring
a new Medicare provider agreement
often takes three to six months after
the completion of an acquisition, and
the revenue that would have been
generated during the application period
is not just delayed, it is lost forever
because federal provider agreements
generally are not retroactive. As
a result, buyers often choose to
assume the provider agreement.
Doing so, however, can result in huge
potential liabilities for the buyer.
Billing Codes, Payment Delays
Closely intertwined with unique
payment structures for healthcare
companies are highly complex
billing requirements for providers.
For example, providers must populate
their bills with specific codes relating
to procedures and diagnoses to get
paid by third-party payors. Certain
codes result in higher payments under
Medicare, Medicaid, and insurance
contracts; other codes for similar
services result in lower payments.
Coding presents opportunities for
providers to be overpaid by reporting
an improper, higher paying code. This
practice, known as upcoding, can result
in massive liabilities for a provider
under federal fraud and abuse laws
that apply to the healthcare industry.
In a complex financial coding system,
mistakes happen frequently, yet
liability for repayment of amounts (and
penalties) can attach, even when there
is no intent to defraud. The government
frequently audits healthcare providers,
and auditors are highly incentivized
to find errors—inadvertent or
not—as their compensation may
be based on the amount of fraud
and abuse that they ferret out.
Fraud and abuse are huge issues
for the industry at present, and the
government is highly focused on it.
This is not only a policy issue for the
government, but also an economic one.
The federal government in fiscal 2011
recovered $4.1 billion from healthcare
fraud and abuse enforcement.
If the government is owed funds by a
struggling healthcare company, it has
the ultimate weapon for recovering
payment—recoupment against future
amounts owed to the healthcare
provider. Disputes frequently arise in
bankruptcy proceedings over whether
government application of payments to
amounts owed by providers constitutes
recoupment or an impermissible
setoff requiring court permission. 5
The government’s biggest hammer is
the potential to exclude a provider from
the Medicare and Medicaid programs
based on alleged fraud and abuse. Many
providers—hospitals, senior living
facilities, physicians, etc.—cannot
afford to stay in business without the
cash flow available from Medicare and
Medicaid, so the result is that they are
forced to settle. Even minor infractions,
whether from payment issues, AKS, or
Stark, can result in huge settlements.
Fraud and abuse risks, overpayment
liabilities, and payment delay issues
create some of the most difficult
healthcare transaction problems,
especially in insolvency scenarios.
This article presents just a few of
the many overlapping regulatory
schemes that infect the healthcare
industry. Numerous others abound:
state malpractice law, nonprofit
law (many healthcare providers
are nonprofits), state licensure
requirements for healthcare facilities,
state insurance regulations, and,
in some cases, oversight by the
Nuclear Regulatory Commission
(for healthcare devices that have
radioactive components, for example).
Insolvency is already a highly complex
area. When the struggling company is in
the healthcare industry, the complexity
can take on exponential proportions. J
1 At speaking engagements, the author often
promises to bestow a crisp $10 bill upon the
first audience member who can name any
area of healthcare that is not highly regulated.
The best answer to date goes to a well-known
bankruptcy judge, who answered “the black
market.” While terrifically clever, the answer
didn’t win the $10 because the black market
is “regulated,” by, well, federal prison.
2 973 F.2d 1065 (harmonizing interests under the
Medicare Act and the U. S. Bankruptcy Code,
and noting that "Congress has repeatedly
expressed its legislative determination that the
trustee [or debtor-in-possession] is not to have
carte blanche to ignore non-bankruptcy law").
See also In re United Health System, Inc., 1997
U. S. Dist. LEXIS 5090 (D. N. J. 1997).
3 Chad Eckhardt and Charles Johnson, “Affinity
Health Plan – Failure to Erase Photocopier
Memory Results in $1.2 Million HIPAA
Settlement,” Frost Brown Todd Legal Update
(Aug. 28, 2013), available at frostbrowntodd.
com/ resources-1614.html; Erin McCann,
“HIPAA Breach Is Bad News For 729,000,”
Healthcare I T News (Oct. 23, 2013), available
See also “Stolen Thumb Drive Sets HIPAA
Precendent,” Polsinelli Shughart Legal Update
(Jan. 2014), available at sftp.polsinelli.com/
4 See 42 U. S.C. Sections 1395g(c),
1395u(b)( 6), and 1396a(a)( 32).
5 See, e.g., “The Interplay Between Medicare
and Medicaid and Bankruptcy,” ABI
Health Care Insolvency Manual at 191-
98 (Am. Bankr. Instit., 3d. Ed. 2012).
Bobby Guy is an attorney with the law firm of
Frost Brown Todd LLC in Nashville, Tennessee,
and specializes in fixing, buying, and selling
struggling companies. He is the co-founder of the
FBT/TrBK Distress Indices ( distressindex.com), and
is certified as a specialist in business bankruptcy
by the American Board of Certification. He can be
reached at 615-251-5557 or email@example.com.
Certain portions of this article were excerpted
from a paper presented by the author at the
Southeastern Bankruptcy Law Institute in Atlanta
in 2014 (“Healthcare in Crisis”). The author
wishes to thank the SBLI for its permission in
allowing the reprinting of those excerpts.