Healthcare Insolvencies: Navigating the Intersection of Medicare, ERISA, HIPAA, AKS, Stark and the Bankruptcy Code

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1 Presenting a live 90-minute webinar with interactive Q&A Healthcare Insolvencies: Navigating the Intersection of Medicare, ERISA, HIPAA, AKS, Stark and the Bankruptcy Code TUESDAY, APRIL 3, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Steven Fleming, PricewaterhouseCoopers, New York Deborah Kovsky-Apap, Partner, Pepper Hamilton, Detroit The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1.

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5 HealthCare Bankruptcy Not Your Average Chapter 11 Deborah Kovsky-Apap, Pepper Hamilton LLP Steven Fleming, PwC April 3, 2018

6 State of the Industry Patient care and reimbursement models are changing Changes to reimbursements Reimbursement models are shifting risk from payors to providers while also changing how and where patients are treated Value based care models, including ACOs, are introducing new reimbursement structures that focus on outcomes for patients (and patient populations) versus the traditional fee for service based structure These models incentivize the lowest cost, highest quality treatments which in many cases take place outside of traditional acute care facilities (e.g. Urgent Care, Outpatient Centers, etc.) Statutory changes, primarily driven by the ACA, continue to pressure reimbursements As costs continue to rise, reimbursements rates aren t keeping pace as a result of across the board sequestration cuts and incremental reimbursement reductions imposed by the BCA and ACA, respectively The increased coverage from the Medicaid expansion program has lead to a higher level of lower margin Medicaid patients, placing pressure on margins Demographic changes and other trends in care purchases are adding additional pressures for providers Cost shifting through High Deductible Plans Penetration of high deductible health plans has expanded over the past ten years, with employers shifting more costs to employees and driving additional cost discretion in care purchases The aging US population will continue to increase the mix of Medicaid patients which will likely lead to continued margin compression for providers Disruption has impacted rural providers most Rural markets represent one of the most challenged sectors With a predominant presence in non-medicaid expansion states, rural providers are facing a patient base with higher uninsured rates, lower income, and higher levels of health disparities. This impact has been amplified by a meaningful decrease to bad debt reimbursements. Additionally, higher paying private pay patients are beginning to seek treatment in newer, regional facilities. 6

7 Shifting models in patient care are disrupting the Post Acute Care sector, and with it skilled nursing providers Disruption in the Post Acute Care Sector The Affordable Care Act has driven the development of new patient care models that redistribute risk, reduce cost and enhance quality. Patient Care Continuum Medicare s fee-for-service post-acute care expenditures These value based care models and site of care initiatives have driven significant changes to the ways in which healthcare services are delivered, contracted, reimbursed and coordinated at each stage across the patient care continuum. Primary Care This has led to the rise of bundled payments, accountable care organizations and utilization management strategies to transition from traditional fee-for-service frameworks to comprehensive patient treatments and outcome-based payment arrangements. Preventative Care Post-acute Care Acute Care As a result, providers are reevaluating where, how and by whom clinical services are delivered. $60.3B The post-acute care (PAC) primarily includes recovery and rehabilitation treatments to patients discharged from short-term acute care hospitals. Home Health $18.4B Skilled Nursing Facility $29.6B Inpatient Rehabilitation $7.5B Long Term Acute Care $4.8B To capitalize on incentives in new payment models, acute care hospitals (ACHs) are seeking better integration with downstream PAC providers to improve coordination across the continuum. Integration allows providers achieve higher payments through reimbursement bonuses and lower readmissions penalties. Higher Acuity Source: MedPAC, A Data Book: Health care spending and the Medicare program, June 2017 Chart 8-2. Growth in Medicare s fee-for-service post-acute care expenditures has slowed since

8 Growing Medicare patients and high deductible plans are lowering margins and increasing bad debt exposure As baby boomers become Medicare eligible, the mix of Medicare patients will increase, compressing margins High deductible plans are increasing bad debt and causing patients to be more selective in treatments 110 Population Aged 65+ (millions) 35% % of Covered Workers Enrolled in High Deductible Plans % 29% 28% 90 25% 24% 80 20% 17% 19% 20% 20% 70 15% 13% 60 10% 8% 8% 50 5% 4% 5% Source: U.S. Census Bureau Source: American Hospital Association 8

9 Providers are participating in ACOs and utilizing more outpatient services in response to policy changes Expansion of ACOs is shifting risks between payors and providers, creating new administrative and operational hurdles for providers to meet standards Value based care models are incentivizing providers to grow into new competencies (e.g. outpatient facilities) to expand across the care continuum 600 Number of ACOs % % Total Revenue 70% % % 55% % 45% % 35% % 25% Outpatient Inpatient Source: Centers for Medicare & Medicaid Services Source: American Hospital Association 9

10 Healthcare Restructuring Overview Key Bankruptcy Concepts: - Automatic stay - Executory contracts - Free and clear sale under 363 Factors Unique to Healthcare Restructurings: - Numerous stakeholders (patients, physicians, community, vendors, regulators) - Government receivables - Medicare/Medicaid - Extensive regulation (provider agreements, CONs, Stark/AKS) Patient Care / Privacy Issues / HIPAA Requirements: - Patient care ombudsman - Patient records - Schedule of creditors, diligence information, bankruptcy litigation 10

11 Medicare Provider Agreements Statutory scheme of estimated payments and recoupments Executory contract or statutory right/license? What is required in order to assume the agreement? vs. 525(a): Hiser v. Blue Cross of Greater Phila., 89 B.R. 503 (Bankr. E.D. Pa. 1988) Can a provider agreement that was terminated pre-petition be assumed under 365? - Maybe: In re Bayou Shores SNF, LLC, 525 B.R. 160 (Bankr. M.D. Fla. 2014) Ability to sell free and clear? - Kinda-sorta-but-not-really: In re Vitalsigns Homecare, Inc., 396 B.R. 232, 241 (Bankr. D. Mass. 2008) Recoupment or setoff? - Each year as a separate, distinct transaction: In re Univ. Med. Ctr., 973 F.2d 1065 (3d Cir. 1992) - Entire payment/recoupment cycle as a single, ongoing, multi-year transaction: In re South Inst. for Treatment & Evaluation, 217 B.R. 962 (Bankr. S.D. Fla. 1998) 11

12 HIPAA / PHI What constitutes PHI? Who is a covered entity? - What about a post-confirmation trust succeeding to the assets and liabilities of a debtor-provider? What is a business associate? - Committee? Other entities in the bankruptcy case? - Business associate agreement To sign or not to sign Terms to include/avoid Using PHI in a bankruptcy case de-identification procedures - 18 categories of information to redact 12

13 ERISA Does an ERISA plan owe fiduciary duties to its members assignees? Obtaining discovery under ERISA vs. obtaining discovery under Bankruptcy Rule 2004 ERISA penalties for non-disclosure - Named plan administrator vs. TPA Causes of action not preempted by ERISA Denial of payment by TPA - Abuse of discretion standard - Conn. Gen. Life Ins. Co. v. Humble Surgical Hosp., L.L.C., 878 F.3d 478 (5th Cir. 2017) 13

14 Anti-Kickback Statute / False Claims Act AKS prohibits giving anything of value in an effort to induce or reward the referral of federal health care program business. See 42 U.S.C. 1320a-7b - Covers both the giver and the recipient - Must be knowing and willful Violation of AKS gives rise to liability under FCA - Mandatory treble damages - Civil monetary penalties of $5500-$11,000 per claim - Low burden of proof preponderance of the evidence Typically a driver of bankruptcy rather than a postpetition issue 14

15 Hospitals on the Auction Block Section 363 of the Bankruptcy Code - Bid procedures / auction process Stalking horse protections Timelines and terms - Credit-bidding by secured creditors Loan-to-own - Role of State Attorney General in approving sale of hospital assets and non-profit/charitable assets - Non-monetary considerations in the non-profit context United Healthcare Systems Southern Regional 15

16 Hospital Tax Districts and Municipal Bonds Municipal Hospital structures can vary significantly, accordingly there is not a one size fits all approach. Some examples include: - Hoboken University Medical Center - Southern Regional Medical Center To the extent authorized by a state, Chapter 9 of the Bankruptcy Code allows municipalities to reorganize their debts in the face of insolvency. Healthcare districts and public hospital authorities contemplating filing for Chapter 9 bankruptcy have to meet certain eligibility requirements. There are typically five main criteria. 1. The hospital/entity must be a municipality. 2. The municipality must be authorized to be a debtor. 3. The municipality must be insolvent. 4. The municipality must show it has a plan of attack. 5. The municipality must have negotiated with creditors before filing. There are often other issues at play, notably, potential implications on tax payers, as well as the potential impact on the municipality s credit rating 16

17 Turnaround for Healthcare Debtors As regulatory forces continue to reshape and transform the sector, the resulting disruption will create opportunities for companies that recognize and address gaps in their business models. Examples of opportunities include: Realignment: Large hospital networks are realigning their acute care operations with post acute care providers through joint ventures or strategic partnerships to better coordinate care across the continuum in an effort to capture payment incentives and minimize penalties. Acquisitions: Acute hospitals are acquiring post-acute care facilities, to build out their treatment capabilities at each phase of the patient care continuum. Divestitures: Some participants are pursuing strategic exits of facilities or markets that do not align with the provider s existing care continuum or new patient criteria. Ultimately, some facilities, particularly in rural markets with suboptimal demographics and limited referral sources, will not likely be viable in the new regulatory environment. Some companies are better positioned to navigate these organizational and operational changes. Larger operators can leverage size and scale advantages that provide access to: Investment capital that can facilitate organizational restructurings Information systems that analyze and model complex data sets Strategic partners to pursue joint ventures or combinations Management teams that have the depth and experience to address these challenges 17