Hahnemann bankruptcy has a high-stakes showdown set for Wednesday

A major showdown in the bankruptcy of Hahnemann University Hospital and St. Christopher’s Hospital for Children is slated for Wednesday afternoon, when a judge in Wilmington will be asked to approve the sale of Hahnemann’s medical residency programs to a consortium of six Philadelphia-area health systems for $55 million.

The unexpectedly high price is potentially a “game-changer” for the bankruptcy, Mark Minuti, the bankrupt hospitals’ lead lawyer, with Saul Ewing Arnstein & Lehr LLP, said in court on Aug. 19. The children’s hospital will be subject to a separate sale process this month.

But federal regulators at the Centers for Medicare and Medicaid Services (CMS) want the judge to block the proposed sale, which would ultimately redistribute Hahnemann’s 570 residency slots to the coalition members, saying it “is contrary to law and contravenes CMS regulations.”

If the judge rules in favor of CMS, that could force Hahnemann’s parent company to find a new strategy to begin paying off creditors. Also at risk for the Philadelphia region, a health-care hub, is the loss of hundreds of highly sought doctors-in-training paid for by Medicare.

Previous attempts to resolve CMS’s objection have failed, but a deal could still be struck before Wednesday’s hearing.

The legal arguments that will be hashed out Wednesday get into the weeds of bankruptcy law and Medicare statutes — described by a federal judge as “among the most completely impenetrable texts within human experience” in a document cited by Hahnemann’s lawyers.

CMS has a two-part objection to the sale, which technically involves Hahnemann’s Medicare provider number and its one-page Medicare provider agreement. The residency program is part of the Medicare agreement.

First, CMS objected to a $3 million limit on the amount it could recoup for potential overpayments to Hahnemann since Jan. 11, 2018, when California investment banker Joel Freedman bought Hahnemann and St. Christopher’s for $170 million from Tenet Healthcare Corp.

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The second aspect is more complicated. CMS argued that the deal should be rejected because it is not a valid change of ownership involving “substantially all of the assets necessary to actually operate Hahnemann.” In the case of a valid ownership change, the Medicare agreement would automatically transfer. Here, the Medicare agreement has been severed, under the sale terms, from the Hahnemann location.

The agreement terminates with Hahnemann’s closure and can’t be sold, CMS argued.

CMS is in a strong position legally and from public policy and public health perspectives, said Katharine Van Tassel, a visiting professor of law at Case Western Reserve University in Cleveland.

The proposed sale of Hahnemann’s Medicare provider agreement would blaze a path for troubled providers to walk away from obligations to CMS. “It puts the risk of failure onto the shoulders of CMS as opposed to on the shoulders of owners of the entities,” Van Tassel said.

“In terms of public health, what we want is the residency slots to be dispersed by CMS based upon the needs of the community,” she said. If the Hahnemann deal were allowed to go through, she could imagine an extreme circumstance in which hospitals in California could buy up all of the nation’s residency positions.

Despite her skepticism of the proposed sale of Hahnemann’s residency program, Van Tassel gave the parties “bonus points for creativity” and said there was a glimmer of hope in Hahnemann’s argument that the provider agreement is property that can be sold regardless of CMS’s position.

Normally, when a teaching hospital closes, CMS redistributes the residency positions to other hospitals. Under that scenario, the residency positions could leave the Philadelphia region unless CMS decided to keep them in the region. Under the proposed sale, the residency positions would ultimately stay in the region after the current residents, many of whom have scattered to other parts of the country, complete their training.

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In addition to its legal arguments, Hahnemann’s lawyers, in a filing last week, attempted to justify the unprecedented sale from a practical perspective, by asserting that consortium members have already taken on the bulk of the patients that Hahnemann cared for before it stopped admitting inpatients in July.

“Without the formality of an acquisition, the consortium has already assumed critical components of the legacy Hahnemann operations,” the filing said. “Upon approval of this sale, the consortium will, for all practical purposes and in all material ways, have assumed responsibility for Hahnemann patient care and graduate medical education programs.”

Einstein Healthcare Network, Jefferson Health, and Temple University Health System, the three consortium members with hospitals closest to Hahnemann, say they have hired 249 former Hahnemann University Hospital employees and 182 of the more than 550 doctors-in-training who were orphaned by the hospital’s closure. That means that in some cases, the same doctors and nurses could be caring for former Hahnemann patients in a new setting.

Another consortium member, Main Line Health, has hired 68 people from Hahnemann, with 17 additional offers in process, and has welcomed 29 orphaned residents. Cooper University Health Care has hired 75 and taken on 46 residents. Christiana Care Health System, the final member of the coalition, said it hired 18 people from Hahnemann. It has seven residents.

Hahnemann, which has had operating losses for at least 15 straight years, employed 2,500.

It’s not clear whether arguments that consortium members have already virtually taken on Hahnemann’s business at their own locations will have any influence on U.S. Bankruptcy Judge Kevin Gross’s decision Wednesday.

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The same goes for the sideline presence of KPC Health, a Santa Ana, Calif., hospital operator that told the court in a filing Thursday that it would like to participate in an alternate sale process for both Hahnemann and St. Christopher’s and wants to reopen Hahnemann. KPC, which already owns seven hospitals in Southern California and has a pending deal to buy four more out of bankruptcy in its home state for $611 million, also said it was ready to provide a loan to Hahnemann’s parent company to extend the sale process.

“I don’t think the fact that someone wants to make a going-concern offer would directly affect” the judge’s decision, said David Skeel, a bankruptcy expert at the University of Pennsylvania Law School. “The core decision is going to be: Is CMS right about this, or are they wrong?”