HHS, CMS Object to Ownership Transfers in Orianna Bankruptcy

The Department of Health and Human Services (HHS) filed an objection to Orianna Health Systems’ bankruptcy plan, bringing the case into unsettled legal terrain.

U.S. Attorney Erin Nealy Cox this week argued that HHS and the Centers for Medicare & Medicaid Services (CMS) have the ultimate control over the legal issues surrounding the transfer of Medicare provider agreements, not a bankruptcy court — and that Orianna can’t expect a new operator to assume control over the properties without also dealing with its existing liabilities.

“CMS contends that the debtors and the new operator are trying to have their cake and eat it, too,” George R. Mesires, leader of the Senior Housing and Care practice at law firm Faegre Baker Daniels LLP, told Skilled Nursing News.

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Orianna, which along with its affiliates operates 43 skilled nursing centers with 4,500 beds, initially revealed its bankruptcy plan last month after falling behind on rent payments to landlord Omega Healthcare Investors (NYSE: OHI). Under the proposal, 23 of Orianna’s 42 Omega-leased properties would be transferred to new operators, with the remainder to be sold under a restructuring plan approved by a bankruptcy court.

But under the terms of those agreements, the operators would not be on the hook for any liabilities that the facilities accrued prior to the closing. Nealy Cox and the government argue that such a deal is impossible under law regarding the transfer of Medicare agreements, which  do not start over from zero once a new owner takes over.

That means CMS would expect the right to pursue civil monetary penalties or the return of overpayments incurred under the old regime from the new owners as well.

“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,” Nealy Cox wrote in the government’s objection.

HHS and CMS also reject the idea that a bankruptcy court can oversee the transfer of Medicare provider agreements at all, Mesires said, with Nealy Cox asserting that only those agencies can determine the value of potential cure amounts associated with those agreements — a dispute that has no clear answer through legal precedent.

“The law here is unsettled,” he told SNN. “There is a split among circuit courts as to whether bankruptcy courts can exercise jurisdiction over Medicare provider agreements without the holder first exhausting administrative remedies with CMS.”

But because the legal disagreement surrounds money and not patient care, it’s likely that the parties can work together to reach a resolution and keep the bankruptcy on track.

“I expect the debtors, new operator, and CMS will be able to negotiate a commercial resolution to resolve CMS’ objection such that it won’t pose a significant roadblock to the debtor’s reorganization plans,” Mesires said.

Orianna is identified in the court documents by the name of a holding company, 4 West Holding, Inc. Westlaw Practitioner Insights and Reuters initially reported the filing Tuesday night.

The U.S. Bankruptcy Court for the Northern District of Texas will hear the objection to Orianna’s plan on April 16, Mesires said.

Written by Alex Spanko

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