State Can't Collect Medicaid Fee After Hospital's Ch. 11

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By Diane Davis

Sept. 1 — A Hospital Assessment Fee (HAF) required to be paid by a hospital that later filed for bankruptcy as part of an Indiana program to increase Medicaid reimbursements to eligible hospitals is a pre-petition claim subject to the automatic stay in bankruptcy, the Seventh Circuit held.

Reversing and remanding the case for further proceedings, Judge Ann Claire Williams of the U.S. Court of Appeals for the Seventh Circuit concluded that all of the conduct that could have given rise to the 2013 HAF occurred before the debtor's bankruptcy petition was filed. As a result, the HAF claim was subject to the automatic stay under Bankruptcy Code Section 362, which bars any “act to collect debts from a debtor who is under the protection of the bankruptcy court,” the court said.

Adopts ‘Conduct Test.'

The appeals court adopted the “conduct test” rather than the “accrual theory” test for purposes of classifying Indiana Family and Social Services Administration's (FSSA) claim as a pre- or post-petition claim. Under this approach, the date of a claim is determined by the date of the conduct giving rise to the claim, the court said.

In this case, the 2013 HAF was assessed based on the activities reflected in St. Catherine Hospital's cost reports from May 1, 2010, to April 30, 2011, and other financial information on file as of Feb. 28, 2012, the court said. These activities occurred before St. Catherine filed for Chapter 11 bankruptcy reorganization, the court said.

Assessment Levied on Hospitals

Debtor St. Catherine Hospital is an acute care facility that treats Medicare and Medicaid patients. The hospital receives reimbursement from state and federal governments for its treatment of Medicaid patients.

In 2011, Indiana adopted Section 281 of Public Law 229-2011, which requires an assessment to be levied on eligible Indiana hospitals to create a fund from which the state would reimburse those hospitals for their treatment of Medicaid patients.

FSSA determined that the debtor owed $1.1 million for fiscal year 2012, and roughly the same amount for FY 2013. FSSA sent St. Catherine the bill for FY 2012 on May 29, 2012, and then began withholding Medicaid reimbursements from the hospital to recover the amount owed.

Withholdings Continue After Bankruptcy

St. Catherine filed a Chapter 11 petition June 19, 2012. After that date, FSSA continued its withholding of reimbursements to satisfy St. Catherine's 2012 HAF debt.

After July 1, 2013, FSSA began withholding Medicaid reimbursements for St. Catherine's 2013 HAF debt. FSSA withheld a total of $989,738 in satisfaction of the FY 2013 HAF.

St. Catherine filed an adversary complaint in bankruptcy court seeking an injunction against further collection of the HAF and recovery of the amounts withheld by FSSA both before and after its Chapter 11 filing.

Subject to Automatic Stay

The bankruptcy court granted summary judgment in favor of St. Catherine and ruled that the pre-petition withholdings were preference payments and not subject to the exemption for payments made in the ordinary course of business. The court also concluded that both the 2012 and 2013 HAFs were “act[s] to collect, assess, or recover a claim against the debtor that arose before the commencement of the case” and were subject to the automatic stay.

FSSA was ordered to repay St. Catherine the full amount it had withheld.

FSSA appealed, and the district court reversed the bankruptcy court's judgment as to the fee imposed for FY 2013. According to the district court, the 2013 HAF was a post-petition claim.

St. Catherine appealed to the Seventh Circuit, arguing that Indiana's enactment of Section 281 was the “functional equivalent” of a two-year contract between FSSA and the debtor. Under contract law, the HAF liability arose on the date Section 281 was passed or approved by the Center for Medicare and Medicaid Services, the hospital contended.

FSSA, however, contended that Section 281 was “akin to a tax” levied annually on eligible hospitals.

HAF Assessed Before Bankruptcy Filing

The Seventh Circuit rejected both arguments. According to the court, FSSA was aware of its claims against St. Catherine for both FYs 2012 and 2013, which was well before the debtor filed for bankruptcy. The 2013 HAF was assessed based on the activities reflected in St. Catherine's cost reports from May 1, 2010, to April 30, 2011, the court said. These activities, and the passage of Section 281, all occurred before St. Catherine filed for bankruptcy, the court said.

Since all of the conduct that could have given rise to the 2013 HAF occurred pre-petition, the claim is subject to the automatic stay, the appeals court concluded.

Judges William J. Bauer and Joel M. Flaum joined the opinion.

James E. McGhee, III, of Seiller Waterman LLC, Louisville, Ky., represented the appellant/debtor St. Catherine Hospital of Indiana, LLC; Heather Marie Crockett, of the Office of the Attorney General, Indianapolis, Ind., represented the appellee Indiana Family and Social Services Administration.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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