Distressed Health Care Providers—Key Restructuring Issues for 2026

Bankruptcy can change the balance of power in a dispute with Medicare and Medicaid in a significant way. Augie Curtis, Counsel, Offit Kurman, and Samuel Maizel, Partner, Dentons, discuss key restructuring issues related to distressed Medicare and Medicaid providers. They cover issues related to jurisdiction, Medicare and Medicaid provider agreements during bankruptcy, offset and recoupment, and suspension of Medicare and Medicaid payments. Augie and Samuel spoke about this topic at AHLA’s 2026 Institute on Medicare and Medicaid Payment Issues in Baltimore, MD. 

Watch this episode: https://www.youtube.com/watch?v=pyuAlhcZPFQ

Learn more about AHLA’s 2026 Institute on Medicare and Medicaid Payment Issues: https://www.americanhealthlaw.org/medicaremedicaid

Learn more about AHLA’s 2026 Medicare and Medicaid eProgram: https://educate.americanhealthlaw.org/local/catalog/view/product.php?productid=1759 

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Transcript

SPEAKER_00 0:04

This episode of AHLA Speaking of Health Law is brought to you by AHLA members and donors like you. For more information, visit americanhealthlaw.org.

SPEAKER_02 0:17

Okay, well, um hello everyone, and thank you for joining our podcast today. Um this is a podcast that is uh being done by myself, Augie Curtis, and Samuel Mazell. Um we are doing this podcast to follow up on the um enjoyable, lively conversation that Sam and I had at the presentation we did at the AHLA conference in Baltimore earlier this year on March 18th. Um Sam, uh I'll let Sam court say I couldn't presume to introduce Sam, I'll let Sam introduce himself, but I will say in advance that he's one of the uh one of the leading uh attorneys in this field, in the field of Medicare, and particularly Medicare insolvency and restructuring. That is the restructuring of entities that um receive Medicare benefits and that uh interact with Medicare uh at a at a large level. Sam has been doing this for many years. He's well known in the private bar to the government. He's he's he's really one of the authorities, and it's a privilege for me to be on this podcast and to present with him. Um I, uh Augie Curtis, uh, have been doing this myself for about 25 or 30 years, uh, both in the private sector and with the government. I, like Sam, uh worked for quite a while in the Department of Justice, in a section of the Department of Justice called the corporate financial litigation section, that uh dealt with um essentially represented agencies in bankruptcy. And a very large percentage of what we did, uh, what I did, and I believe Sam did as well, was to represent the government in Medicare-related bankruptcies, that is, bankruptcies by hospitals and uh and other Medicare providers who had uh very frequently uh significant open issues with the government with the Medicare program. So both of us have seen this uh environment uh over the uh over many years from from both sides. And I think um both of us and and and and and Sam particularly have had a chance to uh be a part of the development of the law, uh, understand the most really the most significant issues that perennially plague these uh situations and that that that providers perennially have to deal with with the government. And so I hope we can provide you with uh with some useful analysis and information of some of those issues. So with that, I'll turn it over to Sam and uh and let him introduce himself and uh and and maybe kick us off on our first subject.

SPEAKER_01 3:08

Great. Thanks, Augie. So my name is Sam Mazel, I'm with Denton's US LLP, I'm resident in the Los Angeles office, and I direct our distressed healthcare efforts nationally. And as Augie said, I uh write and speak on bankruptcy and restructuring issues related to health care frequently and have been doing this for about 30 years. First at the U.S. Department of Justice. Augie had the same job I did years later because I'm old. Um and we had the opportunity to litigate these issues we're about to talk about against each other for years before Augie went back into the private sector. So look, I mean, one of the this is an important issue for health lawyers in the American Health Lawyers Association, and it's important because bankruptcy can change the balance of power in the dispute with Medicare and Medicaid in a significant way. We're gonna talk about the weaknesses and the strengths of arguments. Um you know, I don't want to make believe it's some magic bean that gets you out of all the issues you'd like to get out of. But in many ways, uh restructuring and the bankruptcy code does provide uh a way to rebalance the dispute with Medicare and Medicaid. Um, you know, in Medicare and Medicaid disputes, normally you have exhaustion of administrative remedies as a bar before you can even get in front of a judge. Um, if you get in front of a federal judge, uh it seems that uh they might be more predisposed to agree with a government lawyer than a bankruptcy judge is. So, in lots of respects, government lawyers find the forum a bit unfavorable. Uh, you know, outside of bankruptcy, Medicare has recruitment rights, which are virtually unassailable. You know, we're not gonna make believe that bankruptcy changes this as much as we'd like it to, but it does provide some arguments. It also provides some arguments with regard to suspensions for allegations of fraud and um and really provide some significant leverage in the sale or transfer of a Medicare, Medicaid provider agreement with term in terms of the transfer of the of the provider agreement and successor liability that would normally follow it. So um, you know, that that's why this is important. I'll I'll turn it back over to Augie, and Augie can start talking about jurisdiction. And there is an important update we want to talk about even since March when we did the program at the Medicare and Medicaid reimbursement conference. But I'll let Augie start.

SPEAKER_02 5:52

Sure. Um, talking about jurisdiction. Jurisdiction is a very uh difficult subject for the bankruptcy courts over Medicare disputes. Outside of bankruptcy, uh many people probably know this already, but there is a significant limitation on the ability of courts to review uh bankruptcy disputes. Uh, in a way, it's it's almost a blanket restriction. There's a section of the Social Security Act, which was adopted into the Medicare Act, which is really kind of part of the Social Security Act, um, which essentially restricts jurisdiction dramatically over um over Medicare-related disputes. So if you have a fight over, you know, whether you owe the government money or whether you should be suspended or any of these kinds of issues, you essentially can't get into the federal court when you're outside of bankruptcy until A, you've exhausted administrative remedies and B, in a lot of cases, at all, because there is a blanket provision that says that this is Section 405 H of the bankruptcy code, that basically says that you can't get a review at all of a large percentage or a large swath of bankrupt of Medicare-related decisions. So as uh Sam mentioned, there is sort of a mechanism for getting into the federal district court after you've gone through administrative um proceedings, but those are extremely favorable to the government when you get to the court. Uh the uh the the court is uh not only are they sort of tend to follow what the government has done, but you're just reviewing an administrative decision. And the legal standard for doing that is is extremely hard to overturn. It's a very deferential standard. So just built into it, you have a very hard time winning any of those kinds of disputes. So you can't get into the federal district court to sue the government uh in almost any cases, and the only time you get into the federal court uh is to sort of review what the administrative courts have already done. Um some courts in the bankruptcy, there's a big split on this, but have decided that that rule doesn't apply when the company with the dispute, the provider with the dispute, files a bankruptcy case. And there's a very naughty uh statutory issue, which probably we shouldn't go into in excruciating detail, but basically says that the statute that deprives these people of the companies of or courts of jurisdiction um doesn't mention bankruptcy jurisdiction. And so um that so when somebody files bankruptcy, well, the bankruptcy court has jurisdiction, unlike these other courts. Uh as I said, there's a very complicated background for whether that is uh really the case or not. The statutory history is very uh murky, and courts have disagreed. Um in some courts, uh notably the Fifth Circuit, I would say is one that's very significant due to the number of bankruptcy cases that are filed in the Fifth Circuit, particularly in Texas. Uh some courts have said no, bankruptcy jurisdiction does exist. So you come to the bankruptcy court, and you can't, the government can't just say this court has no jurisdiction to decide any any Medicare disputes. Um and that's a case called Enri Benjamin, which has been applied by other Fifth Circuit uh uh opinions um afterwards, but it basically depri it basically deprives the government of that argument. So in theory, you should be able to come to the court and say, um, we want you, bankruptcy judge, to resolve the question of whether we owe the government $12 million or, you know, et cetera, that sort of that sort of thing. And the government can't keep you out of court. Uh that rule is also pretty much applicable in the Ninth Circuit, so California, Oregon, et cetera. Uh it is maybe are maybe applicable in the Third Circuit, although there's some question about that. The other circuits, though, it's not applicable, particularly the 11th, or probably not applicable. The 11th is the only one where it is absolutely not applicable. You cannot get jurisdiction using these arguments in the 11th circuit. Uh, some other circuits probably you can't either. So in any case, the the the jurisdictional problem has been percolating for years. I personally think the Supreme Court ought to deal with it, but um we'll see if they ever take that up. They got lots of other things to do. But the um the Fifth Circuit is where the interesting sort of uh percolation is going on. And I think um that I've been involved in some of those arguments before I uh left DOJ. Uh Sam has certainly been involved in them. Uh but the question there is whether that jurisdictional rule means that everything can be decided in the bankruptcy court, or whether a separate part of that same statute means that you still have to exhaust administrative remedies if there's an administrative process to be gone through. In other words, if you have a dispute which has to be, which outside of bankruptcy would require you to go through the administrative courts, uh, and that typically is going to be disputes over overpayments and that sort of thing, a monetary dispute, which very often do go through those courts. If you have that uh kind of an administrative right or administrative obligation outside of bankruptcy, then the bankruptcy courts ought to stay back and let that administrative process work itself out before they take any kind of jurisdiction over a dispute. Now, as Sam will tell you, I am sure, with steam coming out of his ears, the problem with that is that that takes you about uh half of your lifetime to go through. Uh the administrative courts are notorious in Medicare for taking forever. And in chapter 11, who has the time to spend five years deciding in an administrative court whether they owe the government money or not? You don't, you don't, the bankruptcy courts don't don't move like that. They try to move much faster than that. So the there's been an issue about that. Nobody had really made a decision on it up until a very recent decision, which um uh Sam and I have been just been talking about a little bit uh before the podcast uh in the prospect uh medical group case in the Northern District of Texas. And Judge Jernigan, who reviewed just that argument by the government and decided in the government's favor, uh, said essentially that the Benjamin opinion only deprives the only applies where there's no really no administrative appeal process. Otherwise, you have to go through that administrative appeal, get to the conclusion before the bankruptcy court should weigh in on the results. So um uh I I think it's a significant decision. It it's gonna present some real problems for providers who are trying to seek uh bankruptcy protection and and need to figure out what they owe the government, if they owe the government anything. So I don't know your thoughts on it, Sam, but I think it's uh it's a it's a big knock and it's gonna take some more litigation.

SPEAKER_01 13:31

Yeah, that look, this is an important issue because uh, as Augie described, you know, the administrative process can take years. Uh, and after the first couple steps, the government can recoup monies otherwise payable to the provider during the appeal process. So, and the first couple steps where they can't recoup are basically like asking for reconsideration of the same entity that already stopped your payments or decided against you. So they're very infrequently successful, like never successful. So it's a huge problem. It's a huge problem to have to wait for the administrative process to run its course. Um so this is sort of what you're seeing as a chess game here. You know, for years the government argued with success that the um Medicare bar, so Augie referred to section 405 H of the bankruptcy code, he meant to refer to Section 405H of the Social Security Act, which is incorporated into Medicare. Um, but it but it it has language that bars jurisdiction for federal courts, and you know, there's a long complicated history. The 11th Circuit in INRA Bayou Shores goes into it in excruciating detail. Um the Ninth Circuit has held that the absence of a reference to the bankruptcy jurisdictional grant means that the bar doesn't apply to bankruptcy courts. The third circuit, not so clear in a case called University Medical Center. The um, you know, we thought the Fifth Circuit had ruled in a uh in a positive way for debtors in Benjamin. Now it's not so clear. And so uh right now I would say that the you know the the Judge Jernigan's decision in prospect is not helpful for debtors. It's still there are still issues that can be raised about jurisdiction. So right now I would say Ninth Circuit's very favorable, the third circuit's kind of favorable, the Fifth Circuit's unclear, the 11th Circuit's absolutely dead against it. Um they called the failure to address bankruptcy jurisdiction as a scrivener's error, which nobody apparently has seen fit to correct for about 80 years at this point. Um but so the the issues in flux, but the but certainly in many jurisdictions like California, Texas, and Delaware, all important bankruptcy jurisdictions, there's at least an argument, in some places a very strong argument, that bankruptcy courts do not have to defer to the administrative exhaustion requirement and process before they can take and review a dispute with Medicare. Okay.

SPEAKER_02 16:16

Just to fill in the a couple of couple of thoughts on this too. I think without really talking about the merits of the analysis, this complicated statutory analysis. Um, I think that the bankruptcy courts, this is the first time a bankruptcy court has really looked at this. But I I I kind of feel that the government position is gonna, it's it's not that they can't sustain it, but it's gonna be difficult. And because I think ultimately this will throw a monkey wrench in bankruptcy cases, uh, a big one for for a lot of debtors. Um, you know, and I I I personally have a lot of a lot of sympathy and affinity for government positions being so fresh out of the government, but I think there's no doubt, and even a government lawyer would probably tell you that it's not gonna be an easy uh road for them to get other bankruptcy courts to agree to this. I I think they're just gonna have that they will stick to it, no doubt. But uh but whether other bankruptcy courts agree with the decision is is is in doubt because it means so much. I mean, ultimately uh it will cause huge problems for for certain kinds of debtors and going through bankruptcy, and may in fact make it virtually impossible for them to get through a case. There are there are creative ways to do it, and Sam has done those in a lot of cases. I've seen them on the other side. You can try to estimate a claim, perhaps, to get your plan approved, but that has all kinds of legal hurdles. Um the bankruptcy court can estimate the amount of the claim of the government so that you could get a plan approved, but it creates a there's a whole corn at me. Will the plan be feasible? You don't even know. I mean, will how much will you have to pay the government? Will you get your Medicare resumables, you know, for the next two years or three years? Um so you know, it it's not, it's a it's a it's a minefield and it's a very complicated area, but I I I have to think that in the right case on the right facts, uh, private sector uh company is gonna have um at least a bankruptcy court that's gonna want to try to work this out so they don't have to go through the whole administrative process. Maybe it's by preventing recoupment, I don't know. But can a bankruptcy court do that? Who knows? Um, you know, those are the kind of things that I think uh private sector employ, you know, but Medicare providers will have to argue if they get into this position, um, until the Fifth Circuit reviews the the rule.

SPEAKER_01 18:49

Right. So and and the Fifth Circuit's gonna have to uh clarify this because uh, you know, the way they parse this paragraph is very, I mean, I understand the legal point now, but I I it is as a practical matter difficult. Um okay, so let's let's switch and talk about another issue near and dear to my heart and the Medicare program. So those of you who are health lawyers know that to build Medicare, a hospital, a skilled nursing facility, whatever, provider needs to enter into an agreement called a provider agreement with Medicare. You do the same thing to enter into the Medicaid program. Um these the Medicare provider agreement um outside of bankruptcy for certainly the whole 30, 40 years I've been involved in this field, uh, outside of bankruptcy, the government's argued with virtually uniform success that the Medicare provider agreement is not a contract, uh, but creates a statutory entitlement on behalf of the provider to bill Medicare for treatments provided to Medicare beneficiaries. Um interestingly, inside of bankruptcy for the whole same time period, uh including when I was there in the 90s, uh, we have argued the government argued with virtually uniform success that it wasn't a contract. So in outside of bankruptcy, not a contract, inside of bankruptcy, it was a contract. It was a contract. And the government does that because uh in bankruptcy, a contract to be transferred to a buyer has to be assumed and assigned by the debtor. And in the context of assumption, the the debtor, the seller, the the hospital that's selling its assets, for example, has to cure existing defaults, which means it basically has to pay the government everything it owed, which of course, if it could do that, it probably wouldn't be in bankruptcy in the first place. So it created quite a difficult situation and gave a lot of leverage to the government in the context of negotiating. I mean if you don't know that the bankruptcy, the bankruptcy court rules, you might think, well, maybe that's okay, right? That it's not a contract outside of bankruptcy, but something about filing bankruptcy makes it a contract, that doesn't really work because the rule, Supreme Court precedent, bankruptcy code, says that the bankruptcy code doesn't define property rights, it just adopts whatever property rules exist outside of bankruptcy. It's a case called Butner from the Supreme Court. And then recently, in a in another case, the Supreme Court, more specifically with regard to contracts, uh basically restated the rule as the contracts, which is if it wasn't a contract outside of bankruptcy, it shouldn't be a contract inside of bankruptcy because the property rules don't change. Um and but the government got away with this for a long time because. Their argument was look, we we promise to pay, they promise to perform. It looks like a contract, obligations on both sides. And this um this finally got litigated, honestly, in the context of um, and most debtors for 30 years, I mean, there was only one reported decision out of the text out of a Florida court, uh, holding it wasn't a contract. Um, even though there was controlling circuit court precedent in the third circuit, in the 11th circuit, in the ninth circuit, uh bankruptcy that that it wasn't a contract, bankruptcy courts and bankruptcy practitioners continued to treat it as a contract in bankruptcy. In a case called Inraverity, in the context of disputing a Medicaid provider agreement contra uh transfer, the the bankruptcy court issued a ruling, and then around exactly the same time in a case on the East Coast, uh bankruptcy court addressed the same issue with regard to the Medicare provider agreement, and both held that they weren't contracts. And and they did so in the Medicaid decision in Verity, and I'm mostly familiar with that because it was one of my cases. Um the court went through the fact that outside of bankruptcy courts, the Ninth Circuit had held that both the Medicaid provider agreement and the Medicare provider agreements did not create contractual relationships, that nothing about filing a bankruptcy should transform the agreement into a contract if it wasn't one. And the implication here is huge because inside a bankruptcy, if I'm transferring a contract again, I have to do it under section 365 of the bankruptcy code, which means I have to cure existing defaults, I have to transfer it with its obligations to the buyer. If I can sell the asset under section 363 as a license, effectively, then I can sell it without success or liability. And to transfer a Medicare or Medicaid provider agreement without success or liability is a real change between bankruptcy inside of bankruptcy and outside of bankruptcy. So this is really an area where um, you know, we have we haven't seen a lot of litigation uh since the ruling in Verity, Augie and then after Augie left other lawyers at DOJ have worked to kind of deal with the decision, you know, because look, outside the there are way more decisions outside of bankruptcy where this is important concept. So the government, if it was if it's forced to choose between is it a contract or isn't it a contract, they're gonna stay with the it isn't a contract because the way affects way more much more money outside of bankruptcy than inside of bankruptcy. So now what we've seen in cases in Texas, three major cases, steward, prospect, and uh Genesis that were filed in the last couple of years, three major healthcare bankruptcies, we've seen the government's argument um transform a little bit. So they've they they they haven't officially retreated from the it's a contract position, but they are negotiating on different grounds, arguing more that even if it's a statutory entitlement or government license, you can't transfer it nonetheless without curing existing defaults, basically without without adhering to the requirements, which basically means you have to take success or liability. Augie, am I getting your new strategy correct?

SPEAKER_02 25:48

Yeah, well, I I I should say um it, you know, I'm not with the government, so I'm definitely not speaking for the government strategy, but um, but I I do understand and I think it's public record in at least the Stewart case. I'm not sure if if they publicly took the position in the other two cases yet or at all. But uh in the Stewart case, at least the public position was that the you know, if uh assuming this is a license, a statutory entitlement, then the way you decide under button, really, what the what can be whether that license can be assigned and what is required to assign it is by looking at the statute that created the license. And this is the Medicare Act, and it's the Medicare Act, and it's the accompanying regulations that require the acquisition to be with successor liability. So it's a it's an argument. I don't think it's ever seen the light of day with with the court. Um and you know, there could there certainly is a is a question mark about how courts would treat it, both at the bankruptcy level and higher. Um but I do think that um the government's position on this seems to be highly pragmatic, which is um refreshing uh in some ways. Uh and I think that um what that position essentially derives from is a well, it's an understanding, I think, first of all, that when we talk about success reliability, a lot of times we're not talking about apples and apples. Um, you know, what what a lot of times hospitals are afraid of buying when they buy a provider, if they could buy a provider agreement. Let's say you're gonna take a hospital and sign it over to a new owner and you're they're gonna get the provider agreement. What they really don't want is some of the bad acts kind of liabilities that would that could potentially flow with that agreement. Those liabilities, like FCA type liabilities, other things, could be big, big dollars, right? And and nobody buying a troubled hospital wants to buy uh a huge mess uh in terms of like false claims or some other nefarious activities that the hospital might have been involved in. Um so there's those liabilities, and then there are sort of more what you might call garden variety liabilities, overpayments and underpayments that haven't been adjusted yet. Um but those overpayments and underpayments in the hospital context are adjusted on a yearly basis because in a part A Medicare agreement, the government adjusts those kinds of liabilities through an annual cost report and cost report analysis. And those cost reports, while they the the government unfortunately, as as in other areas, is is slow to do those adjustments, they should essentially on an annual basis more or less be settled. I mean, there's always possibility for revisiting them anywhere but the Third Circuit. But um, that those liabilities should be should be essentially understood within a couple of years after the end of the year. So if the concern of the buying hospital is that they don't want to buy those kind of potential liabilities, it seems like there should be a way to mitigate that risk such that the buying hospital can buy and say, well, we probably won't owe any more than this, or that, or we won't owe anything because there's a mechanism set up to avoid us owing anything. And that mechanism is an escrow type arrangement, uh, which the government crafted in steward, and um which I believe it's applied in prospect and and maybe Genesis 2. Um, but the idea is that based on past history of the Medicare overpayments and underpayments, you can make an educated guess about what the next couple of cost-year reports um that have already, I shouldn't say next, because they've already been done, but they haven't been analyzed yet. But the results of those analyses are likely to be. So uh a hospital that's buying um a Medicare uh agreement, if you know, I hate using those words because uh that's not what the what the government thinks the statute says anyway, but a hospital that's going to acquire one of those, whether it's the selling hospital or the buying hospital, can sort of put into escrow an amount that represents what we think is going to be the potential liability. And those numbers have tended to be rather small, at least in the cases that have been dealt with so far. And the result of that has been that um we were able to put together an agreement which was more or less consistent with our understanding of the statute and regulations, i.e., it followed the chow process, change in ownership process, but at the same time specified the maximum risk that a buyer could face. Uh and most of those buyers say, okay, we can deal with that, $100,000 or $50,000, or it could be more than that, but it's at least it's quantifiable. And that's it. That's the extent of the risk that they can face through that escrow arrangement. Um, it's not a perfect mechanism. Uh there's there are going to be a lot of things, I'm sure, that that have to be dealt with to figure out whether it really works, but that's the idea, uh, the pragmatic idea. Um, as far as those other liabilities are concerned, those bad acts liabilities, um that's always an area of ambiguity, but it's one that I think is traversed mostly because those kind of liabilities really don't flow contractually. They're tort liabilities. They really don't go to the buyer, at least my understanding of the law. Now, the government's never taken a position to the contrary, and I don't want to speak for the government position, but an STA liability as such doesn't flow to the buyer of a of a hospital, and uh, and and even if they acquire the agreement. So, in other words, that's a very long-winded way of saying that there, you know, that this legal issue is highly significant, obviously, and Sam uh has described it uh extremely well, and his firm has litigated it very well. Um it's an important legal issue. Eventually it may need to be traversed, but there's there may be pragmatic ways to to avoid the prospect so that the economics work out. So hospitals that are in trouble can get transferred to people with deeper pockets. Those people can get the hospital working. They don't have to wait two years to try to get a new provider agreement. They can pick it up, we can keep the care going to patients, uh, and all those important social goals can be that bankruptcy courts are very keen in on, can be um can be dealt with. Uh so hopefully the government continues that pragmatic approach and uh it'll help with these kinds of issues without uh too much legal argument. Um may not be necessary.

SPEAKER_01 32:59

I mean, like jurisdiction, this is an area where you know we've made good arguments and the government's come up with responses. And this, as Augie described it, is a really pragmatic approach. What they're saying is look, we don't want to litigate this. So what let's just reach an economic solution that solves the buyer's problem of unknown liability. So if you're five years behind in your cost reports being audited, which is not unpot impossible at all, you know, the buyer doesn't have to worry that they've got five unaudited cost report years, all of which might disclose huge overpayments, so that the purchase price of the hospital wasn't really $100 million, it was really $150 million. Um, and this pragmatic solution the government's offered in Steward was look, let's just pick a number that we can all live with, and that will be your, we will fix your risk for that year. And that escrow can either be fixed for the whole five years or 20%. Sometimes it's 20% of the escrow amount goes back if it's not if it doesn't go to the government, it goes back to the buyer at the end of the first year when the first cost report's audited. There's lots of different ways it can be adjusted, but it gives the buyer some certainty. And and I can tell you it does work. I represented the buyer of a hospital out of the steward case, the escrow amount was fixed at zero in that case, which was a good number. Um, subsequently, there was a suspension of payments because the seller had not filed their closing cost report. So everything was declared an overpayment and they stopped paying the buyer. So we pointed out that the escrow had fixed the liability at zero for the pre-purchased time period, and in fact, the Mac didn't say they were wrong, they just restarted the payments. Um so it does work as a practical matter, and um and we'll you know we'll see what where the case law evolves from there. Um we we're gonna talk quickly about setup and recruitment rights because those of you who work in the Medicare reimbursement field, Medicaid know that their primary way of recovery is they think they've decor declared an overpayment. It could be a garden variety overpayment. You just they just uh you know, they audited your cost report, decided a couple years later that you've been overpaid a hundred dollars, they send you a notice of provider for reimbursement saying, We've decided you owe us a hundred dollars, send us a check, or we'll institute recruitment. You can appeal, but we'll institute recruitment uh and take the hundred dollars out of the stream of payments, uh, which you of course will get back of you when you're appealing. In some cases, that can be huge amounts of money and really uh difficult for the provider to survive the recruitment. So, quick lesson on bankruptcy the bankruptcy code treats setup and recoupment differently. They look kind of like the same thing. Set off is where the offsetting of the mutual obligations arises out of different transactions, recruitment is where the offsetting obligations arise out of the same occurrence, think the same contractor relationship. Um set off is tightly controlled under the bankruptcy code. Section 553 has really significant limits on parties' ability to exercise a right of recruitment set off. Those rights apply to Medicare and Medicaid, those limits. The problem is circuit courts have uniformly said that Medicare's offsetting rights are in fact rights of recruitment, and for reasons which are inexplicable to bankruptcy lawyers, the Supreme Court has long held that recruitment is not subject to the automatic stay in bankruptcy and is is a wild card in bankruptcy. So the government's rights of recruitment are pretty much well respected here, and it is not there's not a lot of ongoing litigation. Um where we see more litigation here is where usually the state state governments have tried to expand on this so they're not offsetting Medicaid fee for service payments against prior overpayments for fee for service. But what they're because there's all these ancillary payment streams, right? There's provider tax taxes. We will use that term. I don't think they really are a tax under the bankruptcy code, but we'll but I think that's the colloquialism. Um, you know, disproportionate share payments. There's a lot of other ways that state Medicaid programs funnel money to hospitals or skilled nursing facilities, and they have tried to assert that the offsetting between fee for service payments and those provider assistance payments are also recruitment. And the two circuit courts have addressed it the seventh and the ninth, and both have held that's a bridge too far. That is set off because they don't arise out of the same statutory rules. Um they're not this they don't they're not recruitment because they don't fall in the same occurrence or transaction rubric. Did I get that right, August?

SPEAKER_02 38:38

I can't speak too much to those state um opinions. The way Sam's described to me sounds as if they are correct, that they're that they're not from the same um from the same essential contract, the same unified set of facts. So I I I think, I mean, I I I have not read those opinions. So I and and of course it's it's not something that I dealt with at the government because we dealt with the Medicare side, not the Medicaid side. Um, but I think Sam's right that the you know that the overriding bankruptcy law is that this is recoupment. Um there is, of course, the Third Circuit's um caveat on on that in in regard to certain kinds of Medicare agreements, and that is hospital Medicare agreements, where the Third Circuit says that because of the cost-year reporting process that I described before, uh recruitment does not apply outside of cost year. So if you owe money from an old year and the government starts taking the money from a later year because of the fact that costs and offset and you know adjustments are supposed to be made on an annual basis, that's not, according to Third Circuit, a recruitment process. That's a that's a setoff. Uh and is subject to those uh to those limitations. With that exception, I think basically the courts have been pretty uniform that any kind of Medicare adjustment essentially under the con under the Medicare agreement, whether it's part A or Part B, uh, is a um is a recoupment, and therefore the government can do it notwithstanding the bankruptcy case. And of course, as Sam mentioned, these are hugely important issues because of the difference in the treatment of set off and recoupment. One of them in particular, that I don't know if Sam mentioned, but I know it's it's really the key is that the the fact that set off cannot be effectuated pre-post, it's called pre-post in bankruptcy world. It means that uh you can't set off an obligation from before the bankruptcy against an obligation after the bankruptcy. So, in other words, if you owe the government before the bankruptcy, the government can't start setting off against that obligation after you file the bankruptcy case. So set off is hugely different in that regard because the government can recoup from those obligations after the bankruptcy is filed. So in a Medicare context, that means the government can hold back your later Medicare receipts, even if you file a bankruptcy, if you owe the government money. And you know, private, private providers have perennially tried to, you know, attack that for obvious reasons, because they they you know, they filed bankruptcy because they couldn't pay their prior prior obligations. And but they can't function. They can't, they can't, they can't get their Medicare receipts to try to reorganize. Um unfortunately for them, and fortunately for the government, I guess, uh the courts have been pretty uniform in saying, you know, that that's recoupment. The Congress intended it to be recoupment and Supreme Court opinions that Sam said uh, you know, cement the fact that it's recoupment. So uh the potential for movement on that seems somewhat limited right now, but uh who knows how things will evolve. Um, but at least uh the current lay of the land is you know, there's not a whole lot can be done about it uh in the bankruptcy context.

SPEAKER_01 42:05

Yeah, I think it leads up. Muggy's point about the third circuit is important because, first of all, lots of companies are incorporated in Delaware. Delaware's in the third circuit. So if this is the issue for your provider and they are incorporated in Delaware, even if they don't do business there under the bankruptcy code, even if the only connection they have with Delaware is they're incorporated in Delaware, they can still file bankruptcy in Delaware. And the Third Circuit ruling is important because, as a practical matter, certainly on fee-for-service overpayments, the government's hardly ever you know offsetting within the same cost report year.

SPEAKER_02 42:48

Absolutely.

SPEAKER_01 42:49

It's almost always a couple-year lag where they're offsetting alleged overpayments that occurred two or three years ago from this year's stream of payments. That means in the Third Circuit that would be subject to the automatic stay. So there is a huge it is a huge issue if you can get jurisdiction in in Delaware, Third Circuit, Philadelphia, Delaware. Um before we wrap up, we we want to talk about suspension of Medicare and Medicaid payments. So those of you in the industry, you understand that particularly if there's a credible allegation of fraud, and the word credible being in quotation marks because it doesn't take a lot to meet the standard of a credible allegation of fraud under the program guidelines for the False Claims Act. Uh the government and the fiscal intermediaries, the MACs and the UPICs, they can suspend payments while they investigate. And and sometimes in my experience the it's you know, shoot first and and ask questions later. So you'll see a 100% suspension of payments to a provider that's 90% dependent on Medicare while they figure out whether there's fraud or not. And the bankruptcy courts can provide a helpful alternative here. So in cases like Barrago, we had a threatened suspension in this in the Southern District of California at San Diego. We had a threatened suspension by the Medicaid program in California called Medi-Cal. Um, they threatened to suspend payments to a federally qualified healthcare system based on credible allegations of fraud, a fraud, a fraud investigation. The provider had actually conceded the fraud years before. They'd been in discussions for years, and and there wasn't really any argument there was ongoing fraud. The program that the fraud had, and and you know, everybody conceded there had been fraud on both sides. The the board had been completely replaced, the officers had been completely replaced, the program that had been allegedly billing fraudulently had been completely stopped, ceased operations. So there wasn't any real allegation of ongoing fraud. Uh, but the government was frustrated, the state government was frustrated by the pace of negotiations and decided they were just going to stop paying. Um, we filed the bankruptcy case. We got a and they litigated it as an exemption to the automatic state because the automatic stay in bankruptcy stops any efforts to exercise control over property of the state, which could include the stream of payments from Medicaid. Um, it any act to collect on a prepetition debt is stayed by statute. Um there is an exception for police or regulatory acts under section 362 B4 of the bankruptcy code. And the state argued that this was a police or regulatory act, which facially is not a terrible argument. There is a gloss on that provision, which basically says, look, it police or regulatory wasn't meant to just to cover where the government is just acting to protect its pecuniary interests. If the government's just acting to collect money, that isn't what the exception was intended to apply uh to cover. So um we were able to get a federal court order stopping the state from the suspension of payments before it ever went into effect. Um and and interestingly enough, in conjunction with that, health plans had been notified the suspension was going to start and had started to move patients. And when we told the state government that we we alerted the provider, the the health plans, that this those patients were, you know, they couldn't they couldn't do that. We vi argued it was also a violation of the automatic stay. And they said, Well, look, we were told by the state that they were going to suspend payments. The state, the judge asked the state what they were gonna do to fix that problem. The state argued that it was a coincidence that after 40 years, the providers, the health plans were moving patients, but it had nothing to do with the suspension, um, which you know didn't really even pass the straight face test. So the court ordered the state to tell the health plans to move the patients back. Um, and we were able to then cut a deal with the government, the state government, and um and sell the assets to a you know a better financially situated operator, um which provide you know preserved health care for 18 clinics in rural California, not insignificant. Um and and we then in cases with Augie on the other side, in cases like CureTech and Global Wound Care, both in Houston with in the wound care space, we were able to negotiate stipulations, file bankruptcy, and then in that context, we're able to negotiate stipulations with the government to get the payments restored, at least in part, to allow the company to have a breathing spell while we negotiated a settlement. In Curatech, we were able to negotiate a settlement with the government that allowed the company to reorganize and emerge from bankruptcy. Um, unfortunately, other issues unrelated to the bankruptcy, uh, primarily a huge change in how Medicare reimbursed the work that uh Global Wound Care did, uh, the company decided to liquidate and is now liquidating in bankruptcy. But but that wasn't related. It was really, you know, I'm not sure that would have happened, wouldn't have happened either way because of the the change. So I know we're up to oh yeah, no, I don't know if you want to add anything to that.

SPEAKER_02 48:58

It's a it's a it's a very naughty, complicated issue. I have a lot of sympathy for the government's situation here uh because of the way that the statute was set up in these issues and the the congressional you know mandate that they that they avoid releasing money when they think there's fraud. So it's it's not I I have some sympathy for what the government's problem is, but there do seem to be cases where um, you know, I think in a bankruptcy context, uh if the unless the government believes that there is a tremendous fraud problem, the government ultimately to an extent wants the debtor to keep functioning, you know, because they eventually, when they get to a deal, they want a functioning debtor to be able to pay that deal. So uh there is some indication in some cases, at least, that the government is interested in making the kind of deals that um were made in curate. And we'll see how that develops.

SPEAKER_01 50:00

Okay, well, we're we we're out of time. Um, we appreciate your attention. And if you have questions, don't hesitate to reach out to Augie or I. Uh and thank you very much.

SPEAKER_02 50:11

Thanks, everybody.

SPEAKER_00 50:17

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