On October 1, 2015, the Seventh Circuit Court of Appeals held that Indiana’s post-petition reduction of Medicaid reimbursements to a debtor hospital to collect an unpaid provider fee violated the automatic stay, determining that the debt was a prepetition claim. The court also found that prepetition reductions in reimbursements constituted avoidable preferences. Saint Catherine’s Hospital of Indiana, LLC v. Indiana Family and Social Services Administration, 800 F.3d 312 (7th Cir. 2015).

All states except one (Alaska) have imposed a tax or fee on health care providers to pay for a portion of the non-federal cost of Medicaid. In some states the provider fees are assessed against hospitals; other states also have provider fees for managed care plans, skilled nursing facilities and other types of health care facilities.

In 2011, the Indiana General Assembly adopted a “hospital assessment fee” pursuant to which eligible hospitals were to be assessed for a two-year fee period running from July 1, 2011, to June 20, 2013. The Indiana Family and Social Services Administration (FSSA) established a HAF committee to calculate the appropriate fee based on cost reports and other financial information submitted by hospitals. Collection of the fees was subject to approval of the U.S. Department of Health and Human Services Center for Medicare and Medicaid Services (CMS), which was not received until May 2012.

Saint Catherine’s Hospital of Indiana LLC (“Saint Catherine’s”) was a general acute care facility that was eligible to receive reimbursement for providing care to Medicaid patients. The HAF committee assessed Saint Catherine’s with a fee of approximately $2.2 million. On May 29, 2012, FSSA sent Saint Catherine’s a bill for $1,107,038.51 for the first part of the HAF due in fiscal year 2012, and shortly thereafter, commenced withholdings from its Medicaid reimbursements to Saint Catherine’s in order to recover the debt.

On June 19, 2012, Saint Catherine’s filed a voluntary chapter 11 petition. On July 28, 2012, FSSA invoiced Saint Catherine’s $1,127,296.44 for the balance of the HAF, payable in fiscal year 2013. Saint Catherine’s failed to pay the 2013 HAF, and after July 1, 2013, FSSA began again withholding Medicaid reimbursements.

Saint Catherine’s filed an adversary proceeding in 2013 seeking an injunction against further collection of the HAF and recovery of sums already withheld from Medicaid reimbursements. The bankruptcy court granted Saint Catherine’s motion for summary judgment, ruling that: (1) the prepetition withholdings constituted preference payments that were not subject to the exemption for payments made in the ordinary course of business; (2) all postpetition withholdings were in violation of the automatic stay of 11 U.S.C. § 362(a)(6), which precludes acts to collect, assess or recover a claim against the debtor that arose before the commencement of the case; and (3) FSSA was not entitled to recoup the HAF against Medicaid reimbursements to which Saint Catherine’s was otherwise entitled. On appeal, the district court reversed the bankruptcy court’s holding that the entire amount of the HAF was a prepetition claim, finding instead that the 2013 portion of the assessment arose postpetition and therefore collection did not violate the automatic stay. Indiana Family and Social Services Administration v. Saint Catherine’s Hospital of Indiana, LLC (In re Saint Catherine’s Hospital of Indiana, LLC), 511 B.R. 117 (N.D. Ind. 2014).

In August 2015, the United States Court of Appeals for the Seventh Circuit reversed the district court’s ruling that the 2013 portion of the HAF obligation was a postpetition claim. The Seventh Circuit held that the entire HAF constitutes a prepetition claim subject to the automatic stay, and remanded the proceedings for determination of the amounts owing to Saint Catherine’s. The court applied the “conduct test,” under which the date of a claim is determined by the date of the conduct giving rise to the claim. The court determined that the relevant conduct was Indiana’s enactment of the HAF law, CMS’s approval of that law, and the meeting of the state’s hospital assessment fee committee for the purpose of calculating the fee, all of which occurred before the petition date. The court further noted that “[t]he statute made clear that there was one HAF for one ‘fee period’ and that the entire HAF was set pre-petition.” Saint Catherine’s Hospital, 800 F.3d at 317. The court rejected FSSA’s argument that the HAF should be characterized as a tax assessed separately for 2012 and 2013. The court also was not persuaded by FSSA’s argument that the conduct giving rise to the 2013 HAF was Saint Catherine’s continued operations as an eligible hospital. This fact, in the court’s view, simply made the 2013 portion of the HAF a contingent claim, and did not mean that the underlying claim did not already exist. Finally, the court observed that determining that a claim arose at the earliest point possible will best serve the policy goals underlying the bankruptcy process. Id., 800 F.3d at 317-318.

The takeaway: Medicaid expansion is underway in most states, which means that provider fees will continue to be a source of funds for states to meet their Medicaid budgets. Since state laws differ regarding the imposition and collection of provider fees, insolvency practitioners representing providers that are subject to such fees should closely examine the rules in each state in which the provider operates health care facilities. Although not addressed by the Seventh Circuit, the district court’s holding that the HAF is not subject to recoupment is noteworthy. FSSA argued that the HAF obligation is part of the “lengthy running account of payments that exists between the agency and the state’s hospitals,” and should be treated like Medicaid overpayments that are regularly subject to adjustment by recoupment. Even though the purpose of the HAF is to augment the state’s ability to reimburse providers for Medicaid services, the HAF is a one-time fee based on a provider’s “status” as an acute care hospital, and is not part of a claim-specific overpayment related to services rendered.