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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:

Chapter 11

CENTER CITY HEALTHCARE, LLC d/b/a
HAHNEMANN UNIVERSITY HOSPITAL
et al.,1

Case No. 19-11466 (KG)
(Jointly Administered)

Debtors.

Re: Docket No. 142, 246, 249
Obj. Deadline: August 5, 2019 (4:00 p.m.)

OBJECTION OF THE UNITED STATES
TO DEBTORS’ MOTION FOR ENTRY OF ORDER APPROVING THE SALE OF THE
DEBTORS’ RESIDENT PROGRAM ASSETS FREE AND CLEAR OF ALL LIENS,
CLAIMS, ENCUMBRANCES, AND INTERESTS TO THE STALKING HORSE
BIDDER ON THE TERMS OF THE STALKING HORSE BID AS SET FORTH IN THE
STALKING HORSE SALE AGREEMENT
The United States of America (the “United States”), on behalf of the Department of Health
and Human Services (“HHS”), acting through its designated component, the Centers for Medicare
& Medicaid Services (“CMS”), hereby files this objection to the Debtors’ Motion for Entry of
Order Approving the Sale of the Debtors’ Resident Program Assets Free and Clear of All Liens,
Claims, Encumbrances, and Interests to the Stalking Horse Bidder on the terms of the Stalking
Horse Bid as set forth in the Stalking Horse Sale Agreement. Because the Stalking Horse Sale

The Debtors in these jointly administered cases, along with the last four digits of each Debtor’s
federal tax identification number, are: Center City Healthcare, LLC (3341), Philadelphia
Academic Health System, LLC (8681), St. Christopher’s Healthcare, LLC (8395), Philadelphia
Academic Medical Associates, LLC (8165), HPS of PA, L.L.C. (1617), SCHC Pediatric
Associates, L.L.C. (0527), St. Christopher’s Pediatric Urgent Care Center, L.L.C. (6447), SCHC
Pediatric Anesthesia Associates, L.L.C. (2326), StChris Care at Northeast Pediatrics, L.L.C.
(4056), TPS of PA, L.L.C. (4862), TPS II of PA, L.L.C. (5534), TPS III of PA, L.L.C. (5536),
TPS IV of PA, L.L.C. (5537), and TPS V of PA, L.L.C. (5540). The Debtors’ mailing address is
230 North Broad Street, Philadelphia, Pennsylvania 19102.
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Agreement, Dkt. 246-1, is contrary to law and contravenes CMS regulations, the Court should not
approve the sale.2
While the United States does not oppose the transition of the Hahnemann University
Hospital (“Hahnemann”) residents and fellows to alternative hospitals, the United States objects
to the terms of the proposed sale of “resident program assets” as set forth in the Stalking Horse
Sale Agreement, which improperly attempts to “discharge” monies owed to CMS and seeks to
avoid the successor liability of the Stalking Horse purchaser (“Reading Hospital” or “Tower”)
under the assumed and assigned Medicare Part A Provider Agreement.
The United States also objects to the sale to the extent that it transfers the resident program
assets, Hahnemann’s Medicare Provider Agreement, and Hahnemann’s programs for training
residents to Reading Hospital when Debtors seek to close Hahnemann. Hahnemann’s Provider
Agreement terminates with its closure, making it ineligible to be transferred. The anticipated
transfer of the residency program itself (separate from the provider agreement) must also satisfy
Medicare Program requirements and be approved by HHS.
REGULATORY BACKGROUND
1.

Certain of the Debtors are “providers” of hospital and skilled nursing services under

the Social Security Act, 42 U.S.C. § 1395-1395lll and 42 C.F.R. Chapter IV and CMS policies and
procedures (collectively, the “Medicare Program”). To be eligible to be reimbursed for services
to Medicare beneficiaries, certain Debtors are party to separate Medicare Part A provider
agreements (“Provider Agreements”). 42 U.S.C. § 1395cc; 42 C.F.R. § 400.202 (defining
“provider”). A Provider Agreement is defined as an agreement between CMS and a hospital,

2

Any capitalized term not defined herein shall have the meaning ascribed to the term in the Bid
Procedures Motion.
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skilled nursing facility, home health agency, clinic, outpatient rehabilitation facility, hospice, or
community mental health center. 42 C.F.R. §§ 489.2 and 489.3.
2.

To obtain a Provider Agreement, a new provider must apply for initial certification.

See 42 C.F.R. §§ 488.1, 488.3, 489.1, 489.2 and 489.10. The certification process enables HHS
to determine, inter alia, that the provider is qualified to provide health care services to patients.
See 42 C.F.R. §§ 489.10-.12 (grounds for denying a Provider Agreement); see also 42 C.F.R. Part
418 (health and safety requirements to qualify as a hospice).
3.

As a result, the transfer of a Provider Agreement is strictly limited. Provider

Agreements may be assigned only if there is a “change of ownership.” 42 C.F.R. § 489.18. When
CMS determines that a valid “change of ownership” has occurred, the existing Provider Agreement
is automatically assigned to the new owner. See 42 C.F.R. § 489.18(c); United States v. Vernon
Home Health, Inc., 21 F.3d 693, 696 (5th Cir. 1994). An assigned agreement is subject to all
statutory and regulatory terms under which it originally was issued, including the adjustment of
payments to account for previously made overpayments. Vernon, 21 F.3d at 696 (citing 42 C.F.R.
§ 489.18(a), (d)).
4.

HHS contracts with Medicare Administrative Contractors (“MACs”) to administer

payment to providers for Medicare covered services. MACs make interim payments to providers
in accordance with the Medicare Program and perform the day-to-day administration of Medicare,
e.g., audit and reimbursement activities. 42 U.S.C. § 1395kk-1; 42 C.F.R. §§ 421.400–.404.
5.

At their request, certain of Debtors’ facilities receive Medicare Periodic Interim

Payments (“PIP”). 42 U.S.C. § 1395g(e)(2); 42 C.F.R. § 418.307, 42 C.F.R. § 413.64(h)(2)(v).
The PIP is adjusted to make it consistent with current claim levels, and to determine overpayments
for the current fiscal year. Alternatively, the MAC may adjust payments to assure that total

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payments at the end of the fiscal year approximate, as closely as possible, the reimbursement
determined to be due after review and audit of the provider’s cost report. 42 U.S.C. § 1395g(a);
42 C.F.R. § 413.64(h)(6-7).
6.

Within five months after the end of the cost year, a provider must submit a report

of its costs to verify the actual reimbursements owed to it for the past cost year. 42 C.F.R. §§
413.1, 413.20, 413.24(f); see 42 U.S.C. §§ 1395g and 1395hh (giving the Secretary authority to
require submission of cost reports). Once the cost report is submitted, the MAC audits the cost
report and determines the provider’s actual, rather than estimated, reimbursement amount for the
year, which can result in overpayment or underpayment claims.

42 U.S.C. §§ 1395g;

1395x(v)(1)(A)(ii); 42 C.F.R. § 413.24. Following an audit, providers have various appeal rights,
including judicial review, with respect to the MAC’s determination.

See, e.g., 42 C.F.R.

§ 405.1807; 42 U.S.C. § 1395oo(f)(1).
7.

In addition, by motion of the MAC or the provider, or at the direction of CMS, final

cost report determinations are subject to reopening for up to three years from their issuance in
order to make corrections. 42 C.F.R. § 405.1885.
FACTUAL AND PROCEDURAL BACKGROUND
8.

On July 1, 2019 (the “Petition Date”), the Debtors filed their voluntary petitions for

relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”).
9.

Since before the Petition Date, certain of the Debtors participated in the Medicare

Program as Medicare Part A providers under their Provider Agreements. For purposes of this
objection, Center City Healthcare, LLC d/b/a Hahnemann University Hospital (Part A) has a
Provider Agreement with the United States.

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10.

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In the ordinary course of business, the MACs may determine Medicare

overpayments owed by the Debtors relating to prepetition service dates and postpetition service
dates under the Medicare Program.
11.

On July 19, 2019, Debtors filed the Stalking Horse Sale Agreement (Asset Purchase

Agreement). Dkt. 246-1.
12.

Later that same day, the Court issued an Order establishing bidding procedures for

the potential sale of Hahnemann resident program assets. Dkt. 249.
13.

The Stalking Horse Sale Agreement indicates that Hahnemann’s Medicare

Provider Agreement will be assumed and transferred to Reading Hospital. Stalking Horse Sale
Agreement, Sched. A-1 (IV); see id. at Sched A (defining “Excluded Assets” as including
“Assigned Contracts . . . identified on Schedule A-1”).
14.

The Stalking Horse Sale Agreement does not provide that Reading Hospital will

be required to assume all liabilities relating to the Provider Agreement. Furthermore, the
Stalking Horse Sale Agreement does not specify that any assumption and assignment of the
Provider Agreement must comply with section 365 of the Bankruptcy Code and the Medicare
Program.
15.

Instead, as set forth in the Stalking Horse Sale Agreement, Debtors are not

assuming and assigning all liabilities associated with the Medicare provider agreement. The
Stalking Horse Sale Agreement establishes a $3,000,000 Escrow Amount to “cover [certain]
following losses, damages and expenses,” including a “CMS Discharge Amount.” Stalking
Horse Sale Agreement, Art. III (3.1).
16.

The Stalking Horse Sale Agreement defines the “CMS Discharge Amount” as “a

dollar amount agreed to by and between CMS and the Seller which amount shall be the

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maximum Cure Costs due on account of the Participating Provider Agreement and the maximum
amount which CMS would seek to collect, by offset or otherwise, against the Purchaser on
account of services rendered or amounts previously paid to Seller under the Participating
Provider Agreement.” Stalking Horse Sale Agreement, Art. I (page 4).
17.

CMS has not agreed to any discharge amount or maximum Cure Costs due.

Neither Debtors nor Reading Hospital has contacted the Department of Justice to discuss any
“discharge.”
18.

The Stalking Horse Sale Agreement also states that the Debtors and Reading

Hospital will obtain “Regulatory Approvals,” including from CMS. Stalking Horse Sale
Agreement, Art. VII (7.1(c)). The Agreement states that CMS “shall have consented to the
transactions contemplated by this Agreement.” Id. Neither Debtors nor Reading Hospital has
contacted the Department of Justice to discuss any such regulatory approvals.
19.

The Stalking Horse Sale Agreement also contemplates the assumption of Resident

and Fellow Employment Agreements for those residents and fellows who elect to join Tower
Health. Stalking Horse Sale Agreement, Sched. A-1 (I).
ARGUMENT
20.

The Court should not approve the Stalking Horse Sale Agreement. Under the

Agreement, Debtors improperly seek to transfer the Hahnemann Medicare Provider Agreement in
a manner inconsistent with federal law.
21.

Because Debtors are closing Hahnemann, Hahnemann’s Provider Agreement will

terminate when its business shuts down. 42 C.F.R §§ 489.52(b)(3); 413.79(h). Thus, Debtors may
not assume and assign the Provider Agreement.

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22.

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Even if Debtors could assign the Provider Agreement, under the Stalking Horse

Sale Agreement, Debtors improperly seek to transfer the Hahnemann Provider Agreement in a
manner inconsistent with federal law. A Medicare Provider agreement may only be assumed under
42 C.F.R. § 489.18. The Stalking Horse Sale Agreement does not, however, set forth a valid
change of ownership (CHOW) under section 489.18 because Reading Hospital is not purchasing
all or substantially all of the assets necessary to actually operate Hahnemann. The CMS Discharge
Amount is also contrary to the provision that “the existing provider agreement will automatically
be assigned to the new owner.” 42 C.F.R. § 489.18(c). In particular, the CMS Discharge Amount
limits Reading Hospital’s successor liability and is contrary to CMS’s right to recoup.
23.

The Stalking Horse Sale Agreement fails to state that Reading Hospital assumes all

liabilities, including but not limited to the Overpayment Claims and any unliquidated pre-Closing
overpayment claims, related to the transferred Provider Agreement. Instead, and contrary to law,
the Stalking Horse Sale Agreement includes a CMS Discharge Amount, explicitly and improperly
limiting Reading Hospital’s assumption of liabilities.
24.

If the Debtors seek to transfer the Hahnemann Provider Agreement, they must do

so consistent with applicable federal law, including the Medicare Program as well as the
Bankruptcy Code. As indicated in the Bidding Procedures, “Any assumption and assignment of
the Medicare provider agreements shall be authorized only in accordance with 11 U.S.C. § 365,
all applicable Medicare statutes and regulations, and the Anti-Assignment Act.” Dkt. 249 at ¶ 34.
25.

Specifically, the transfer of the Provider Agreement contemplated in the Stalking

Horse Sale Agreement would violate the requirements of the Medicare Program for transfer of a
provider agreement. The Debtors cannot sell, transfer, assume and/or assign the Hahnemann
Provider Agreement to the Successful Bidder without providing that the purchaser will assume

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liability for any pre-Closing Medicare overpayments (including those determined after any
closing) and any successor liability claims. See United States v. Vernon Home Health, Inc., 21
F.3d 693, 696 (5th Cir. 1994) (purchaser “accept[ed] the automatic assignment of the provider
agreement,” making it jointly and severally liable with seller for overpayments, pursuant to the
Medicare Program, including at 42 C.F.R. § 489.18(d)). Therefore, Reading Hospital must agree
to assume liabilities for any pre-closing Medicare overpayments, including any previously
determined and any determined in the future. Under the terms of the Stalking Horse Sale
Agreement, Reading Hospital is not fully assuming those liabilities.
26.

Moreover, under binding precedent in the Third Circuit, the Provider Agreement is

treated as an executory contract that may only assumed and assigned pursuant to section 365 of
the Bankruptcy Code. University Med. Ctr. v. Sullivan (In re University Med. Ctr.), 973 F.2d
1065, 1075 (3d Cir. 1992). If the Debtors assume and assign the Provider Agreement to Reading
Hospital, the Debtors must fully cure the defaults associated with the Provider Agreement, and
Reading Hospital must assume all of the burdens along with the benefits arising from assignment
of the Provider Agreement. See 11 U.S.C. § 365(a), (b); University Med. Ctr., 973 F.2d at 1075
(holding that “[a]ssumption of the executory contract requires the debtor to accept its burdens as
well as permitting the debtor to profit from its benefits,” and specifically referring to a provider
agreement); 42 C.F.R. § 489.18(d) (“An assigned agreement is subject to all applicable statutes
and regulations and to the terms and conditions under which it was originally issued”); Vernon
Home Health, Inc., 21 F.3d at 696 (new owner that accepted assignment of Medicare provider
agreement was liable for overpayments of prior owner); Deerbrook Pavilion, LLC v. Shalala, 235
F.3d 1100, 1103 (8th Cir. 2000) (new owner of a skilled nursing facility was liable for penalties
assessed on the basis of the former owner’s actions); Eagle Healthcare, Inc. v. Sebelius, 969 F.

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Supp. 2d 38, 40 (D.D.C. 2013) (“An assigned Provider Agreement is subject to all of the terms
and conditions under which it was originally issued.”). See also In re Charter Behavioral Health
Sys., LLC, 45 Fed. Appx. 150, 151, 2002 WL 2004651, *1 n.1 (3d Cir. June 3, 2002) (observing
that “[i]f the new owner elects to take an assignment of the existing Medicare Provider Agreement,
it receives an uninterrupted stream of Medicare payments but assumes successor liability for
overpayments and civil monetary penalties asserted by the Government against the previous
owner”) (emphasis added) (citing 42 C.F.R. § 489.18(d); Deerbrook Pavilion, LLC, 235 F.3d at
1103-05; Vernon, 21 F.3d at 696).
27.

Moreover, the Anti-Assignment Act, and thus section 365(c)(1) of the Bankruptcy

Code, preclude the Debtors from assuming and/or assigning their Provider Agreement with the
United States to the purchaser without the consent of the United States. See, e.g., In re West
Electronics, Inc., 852 F.2d 79, 83-84 (3d Cir. 1988) (Anti-Assignment act precludes debtors from
obtaining a legally cognizable interest in executory contract where the other party to the contract,
the United States, refused to consent to the assignment of the contract.). The United States will
not consent to transfer of any Provider Agreement unless Reading Hospital would be subject to all
the burdens of the Provider Agreement in compliance with the Medicare Program.
28.

Because the Stalking Horse Sale Agreement suggests that Reading Hospital is not

acquiring the Provider Agreement in order to provide services, but merely in order to collect
reimbursements earned by the Debtors before the transfer, the purchase is not likely to satisfy the
Assignment of Claims Act, 31 U.S.C. § 3727, which strictly limits assignment of the authorization
to receive payment on claims against the United States. Even if a claim is successfully assigned
consistent with Assignment of Claims Act, any payments made by the United States are subject to

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reduction or setoff (with the exception of certain unique circumstances inapplicable here). 31
U.S.C. § 3727(d)).
29.

In addition, the CMS Discharge Amount is one of several types of costs or liabilities

that the Stalking Horse Sale Agreement limits to the $3 million cap for the Escrow Amount.
Stalking Horse Sale Agreement, Art. III (3.1) (identifying “Permitted Escrow Withdrawals” as “(a)
the Tail Coverage Costs, (b) the CMS Discharge Amount, as and when liquidated, (c) the Cure
Costs not paid on the Closing Date and not included in the CMS Discharge Amount, and (d) the
Losses payable to a Purchaser Indemnified Party.”). Depending on the amount of those costs or
liabilities, if the sale to Reading Hospital is approved, CMS may only recover a fraction of
Hahnemann’s overpayments from the Escrow Amount.
30.

The Stalking Horse Sale Agreement is also contrary to law in contemplating that

Debtors may assume and assign Resident and Fellow Employment Agreements for those residents
and fellows who elect to join Tower Health. See Stalking Horse Sale Agreement, Sched. A-1 (I).
The applicable statute (42 USC § 1395ww(h)(4)(H)) and regulation (42 CFR § 413.79(h)) do not
contemplate that a hospital chain can absorb one hospital’s residency slots and distribute those
slots amongst its affiliated hospitals. Instead, only a “preference” is given to hospitals that are
members of the same affiliated group for purposes of receiving temporary funding. Id. The fact
that Debtors and Tower apparently entered into an affiliation agreement as of July 1, 2019, Stalking
Horse Sale Agreement, Sched. A-1 (V), does not alter that conclusion. Under § 413.79(f)(2),
“[e]ach hospital in the Medicare GME affiliated group must have a shared rotational arrangement
. . . with at least one other hospital within the Medicare GME affiliated group, and all of the
hospitals within the Medicare GME affiliated group must be connected by a series of such shared
rotational arrangements.” See also § 413.79(f)(5) (“If the Medicare GME affiliation agreement

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terminates for any reason, the FTE cap of each hospital in the Medicare GME affiliated group will
revert to the individual hospital's pre-affiliation FTE cap that is determined under the provisions
of paragraph (c) of this section.”). If Hahnemann closes, it will not have a shared rotational
arrangement with Tower.
31.

In communications with counsel for Debtors and for Tower, and at the July 19,

2019 hearing on the bid procedures for this potential sale, the United States has expressed its
concerns with and objection to the sale as contemplated. However, counsel for Debtors and/or
Tower have not subsequently communicated with the undersigned regarding the potential sale.
CONCLUSION
For the foregoing reasons, the Court should not approve the Sale to the Stalking Horse
Bidder on the terms of the Stalking Horse Bid as set forth in the Stalking Horse Sale Agreement.

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Respectfully submitted

JOSEPH H. HUNT
Assistant Attorney General
DAVID C. WEISS
United States Attorney
ELLEN SLIGHTS
Assistant United States Attorney
/s/ Marc S Sacks
RUTH A. HARVEY
MARGARET M. NEWELL
MARC S. SACKS
Department of Justice
Commercial Litigation Branch,
Civil Division
P.O. Box 875, Ben Franklin Station
Washington, DC 20044-0875
Tel. (202) 307-1104
Fax (202) 514-9163
marcus.s.sacks@usdoj.gov
ATTORNEYS FOR THE UNITED STATES

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CERTIFICATE OF SERVICE
I hereby certify that on this 5th day of August 2019, I caused a true and correct copy
of the foregoing objection to be served via electronic mail upon all parties receiving electronic
notice under the Court’s CM/ECF system.

s/ Marc S Sacks
MARC S. SACKS

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