Allegations of fraud and abuse against the Medicare and Medicaid programs are in the public eye, particularly in light of the allegations in the high-profile case of Columbia/HCA Healthcare Corp. In 1995, the Clinton Administration launched Operation Restore Trust (ORT) which is a joint effort involving both the Office of Inspector General (OIG) and Health Care Finance Administration (HCFA). ORT was designed to reduce fraud and abuse committed against the Medicare and Medicaid programs (the "programs"). The initial ORT effort focused on five states that together represent approximately one-third of all program beneficiaries.

In May 1997, Health and Human Services (HHS) Secretary Donna Shalala, announced that the project was a success and cited the following statistics:

1. Every dollar spent produced a $23 or more return.
2. The project identified almost $188 million owed to the federal government.
3. Two-hundred and eighteen fraudulent providers have been excluded from the programs.
4. Seventy-four criminal convictions and 58 civil actions have resulted from ORT.
5. An additional 210 cases were pending as of May 1997.^[1]

Fraud and abuse cases generally start in one of two ways—a government investigation under the False Claims Act (FCA)^[2] or pursuant to the qui tam^[3] provision in the FCA, which permits employees of companies allegedly committing fraud upon the federal government to file suit on behalf of the United States in federal court.

The possible repercussions of fraud and abuse can be extreme. A number of statutes provide the government with different avenues of recovery for funds lost due to fraud and abuse. Those statutes include the FCA, the Social Security Act^[4] (SSA), the Civil Monetary Penalties Law^[5] (CMPL) and the Program Fraud Civil Remedies Act (PFCRA).^[6]

Violations of the FCA can result in a civil penalty of not less than $5,000 and not more than $10,000 per claim, plus three times the amount of damages that the government sustains because of the fraud. Under the CMPL, the penalties can be up to $10,000 per false item or service provided, plus the assessment of up to three times the amount claimed and exclusion from participation in Medicare or Medicaid programs. Under the PFCRA, the penalties include a civil penalty of up to $5,000 for each claim and an additional penalty of up to twice the amount improperly paid.

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...the first order of business should be to replace the management under whose control the fraud was committed.

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The penalties may appear modest. However, in many cases, they add up quickly. For example, large penalties were assessed against National Health Labs ($110 million in 1992), National Medical Enterprises ($324 million in 1994), Caremark ($160 million in 19957), and First American Home Health of Georgia ($225 million in 1996).

Of course, the most severe penalty may be exclusion from the programs. Under the SSA, exclusion is mandatory for program-related convictions such as (1) criminal offenses related to the delivery of an item or item or service under Medicare or Medicaid, (2) criminal offenses in connection with the delivery of health care items or services, or (3) criminal offenses for patient abuse or neglect. The SSA also contains provisions for permissive exclusions.

If allegations of fraud and abuse are made and/or reduced to judgment, counsel for the provider may be interested in whether a chapter 11 reorganization can be a successful mechanism to maintain the provider's payment stream and/or to negotiate an FCA claim against the provider. There are a number of issues that should be considered before filing a chapter 11 petition for a health care entity facing recovery on a false claim action or possible exclusion from the programs.

In a fraud and abuse setting, sometimes the obvious is overlooked. In or out of chapter 11, the first order of business should be to replace the management under whose control the fraud was committed. In determining whether a chapter 11 should be filed, the following are a list of some of the issues that should be considered:

1. Can bankruptcy prevent exclusion of a provider from the programs?
2. If Medicare has excluded the provider from the programs, can filing a bankruptcy "reverse" the exclusion?
3. Can HCFA suspend payments, or can a chapter 11 debtor enjoin HCFA under §105 of the Bankruptcy Code from suspending payments?
4. What is the impact of the §362 automatic stay; are the far-reaching arms of Medicare and Medicaid automatically cut off when a bankruptcy is filed, or are the powers of HCFA, OIG and HHS exempt under the police and regulatory exception?
5. Can the debtor reject the Medicare and Medicaid contracts and force HCFA and the state departments of social services to issue new contracts via the anti-discrimination provision of §525?
6. Procedural issues include: (a) does the bankruptcy court have jurisdiction to address these issues; (b) does the debtor have to exhaust its administrative remedies; and (c) is withdrawal of the reference required?

In fraud and abuse cases, Medicare will typically suspend payments to the provider to recoup the prior overpayments. Therefore, the issue of whether Medicare's suspension of payment violates the automatic stay is very important. HCFA argues the suspension is an exercise of its regulatory powers, which are exempt from the stay under §362(b)(4). However, the majority of courts to date have held that suspension is stayed by the filing and that HCFA is restrained from suspending payment post-petition. Compare In re Allied Home Health Nursing Services Inc., Case No. 96-51232-K (Bankr. W.D. Tex. Apr. 2, 1996) (bankruptcy court granted temporary restraining order against Medicare fraud suspension); In re First American Health Care of Georgia Inc., Adv. Pro. No. 96-2007 (Bankr. S.D. Ga. Feb. 23, 1996) (holding that suspension of Medicare payments violates the stay and enjoining future suspensions notwithstanding criminal conviction of nursing home operators); In re Healthmaster Home Health Care Inc., Case No. 95-10543 (Bankr. S.D. Ga. Apr. 13, 1995) (enjoining Medicare suspension of payments); In re Medicar Ambulance Co. Inc., 166 B.R. 918, 926-27 (Bankr. N.D. Cal. 1994) (HHS fraud suspension violates the stay); In re Community Hospice Inc., Adv. Pro. No. 93-1158 (Bankr. D. Ariz. Dec. 6, 1993) (memorandum decision issuing temporary restraining order which restrained HCFA from terminating provider agreement for standard of care problems); In re Orthotic Ctr. Inc., 193 B.R. 832 (N.D. Ohio 1996) (reversing bankruptcy court, holding that HHS suspension for fraud does not violate the stay); In re University Nursing Care Ctr. Inc., No. 92-00199 (Bankr. N.D. Fla. Jan. 16, 1996) (holding that Medicare suspension is exempt from stay under §362(b)(4)).

Medicare provider agreements require performance on both sides. Accordingly, a majority of courts have held that Medicare provider agreements are executory contracts subject to assumption or rejection pursuant to §365. See, e.g., In re University Medical Ctr., 973 F.2d 1065 (3d Cir. 1992); In re Advanced Professional Home Health Care, 94 B.R. 95 (E.D. Mich. 1988); In re Memorial Hospital, 82 B.R. 478 (W.D. Wis. 1988); In re St. Johns Home Health Agency Inc., 173 B.R. 238 (Bankr. S.D. Fla. 1994).

The minority of jurisdictions in bankruptcy hold that the Medicare relationship is not a contractual one but a statutory entitlement. See In re Kings Terrace Nursing Home and Health Related Facility, 1995 NL65531 (Bankr. S.D.N.Y.).

If the Medicare provider agreement is determined to be an executory contract, the next issue is typically whether the debtor burdened with a FCA allegation, settlement or judgment can reject the contract and force Medicare to enter into a new contract pursuant to §525 of the Bankruptcy Code.

Section 525 is designed to prevent government units from frustrating the fresh start policy of the Bankruptcy Code. Section 525(a) also makes it clear that the government cannot exclude a provider on the sole basis of bankruptcy. Some courts have held that §525(a) bars Medicare from requiring the debtor to repay its pre-petition indebtedness as a condition to assumption of the provider agreement. See, e.g., In re St. Mary's Hospital, 89 B.R. 503 (Bankr. E.D. Pa. 1988). However, to suggest that somehow a provider could use the bankruptcy process to circumvent the repayment of a fraud claim is very different matter.

A continuing question in health care bankruptcy cases is whether the bankruptcy court has jurisdiction over the Medicare claims; related questions are whether the debtor must exhaust all of its administrative remedies prior to the bankruptcy court having jurisdiction, and whether withdrawal to the district court is mandatory.

The bankruptcy court in In re St. John's Home Health Agency, 173 B.R. 238, 242-243 (Bankr. S.D. Fla. 1994) was asked to determine the amount of pre-petition overpayments HCFA made in order to determine the amount necessary to cure the provider agreements. The court held that the debtor must exhaust its administrative remedies before the court could review a finding or decision of the secretary of HHS. However, in University Med. Ctr., supra, 973 F.2d at 1072-73, the court held that a determination should be made as to whether the claim to be adjudicated arises under the Bankruptcy Code or the Medicare statute. In University Med. Ctr., the court retained jurisdiction since there was no dispute as to the amount of the claim.

Finally, as to whether the district court is required to withdraw the reference, the majority of courts hold that withdrawal is mandatory only if substantial and material consideration of a non-bankruptcy federal statute is at issue. Accordingly, when the interplay of the Bankruptcy Code and the Medicare statutes produces unique and complicated issues of first impression, withdrawal may be mandatory.

Footnotes

^[2] 31 U.S.C. §3729(b).[RETURN TO TEXT]

^[3] 31 U.S.C. §3729-3733.[RETURN TO TEXT]

^[4] 42 U.S.C. §1128(a)(1)(C), 1128(b)(1)(14).[RETURN TO TEXT]

^[5] 42 U.S.C. §1320(a-7a).[RETURN TO TEXT]

^[6] 31 U.S.C. §3801-3812.[RETURN TO TEXT]

^[7] See Paul Reidinger, "Fraud Doctors: A Revitalized FCAS Is Proving to Be a New Weapon for Health Care Employees who Blow the Whistle on Rip-Offs," ABA Journal, May 1996 at 51.[RETURN TO TEXT]