HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

A. Hill Burton Obligations

The Hill Burton program is a federal loan and grant program for construction or modernization of nonprofit and public health care facilities. Recipients of Hill Burton funds obligate themselves to provide uncompensated care for either 20 years or perpetually, to provide community service, including participation in Medicare and Medicaid, and to complete certain compliance reporting. The government may recover grant funds used for the construction or modernization of a facility if the facility is, within 20 years after completion of construction or modernization, (a) sold or transferred to an entity which is not qualified for a grant or not approved as a transferee by the state agency, or (2) ceases to be a public or other non-profit hospital, out-patient facility,

facility for long term care or rehabilitation facility. A "transfer" occurs when the facility is conveyed to another entity through lease, merger, bankruptcy, foreclosure or other arrangement.

The transferor of a hospital that is sold or transferred, or the owner of a facility which ceases to be a public or other non-profit facility, must notify the Secretary of Health and Human Services not later than 10 days of the date of the sale transfer or change. The government is entitled to recover that amount bearing the same ratio to the then value of so much of the facility as constituted an approved project (or projects) as the amount of federal participation bore to the cost of the construction or modernization under such project. Under certain circumstances, the Secretary may waive the government's recovery rights. The government may recover from either the transferor or the transferee, or in the case of a facility which has ceased to be public or non-profit, the owners of the facility. Regardless of the government's failure to participate in a bankruptcy proceeding, the government may recover from a transferee and any subsequent transferee.

With respect to Hill Burton loans and loan guaranties, the government is entitled to recover from the applicant the amounts paid by the government. It is unclear whether the government has the right to recover funds paid under a loan guaranty from a transferee or owner.

B. Licenses and Regulatory Approvals

A health care provider is a highly regulated entity that is subject to state licensure rules and must hold a number of permits. A notice and approval process is typically required for a transfer of these licenses and permits. A purchaser of a health care provider should obtain a list of all licenses and permits the debtor holds in connection with its operations. Attention should be paid to the following: (1) requirements for transfer of a state license, including ancillary licenses for non-hospital services; (2) change of ownership notice requirements for government provider provider agreements; (3) requirements for notification to the Joint Commission on Accreditation of Health Care Organizations; (4) requirements for transfer of Drug Enforcement Administration registration; (5) requirements for the transfer of pharmacy permits, Federal Drug Administration Blood Bank registration and the like; (6) special requirements for drug and alcohol programs; (7) necessary local and federal environmental compliance requirements; (8) compliance with regulations regarding radiation machines and radioactive materials; and (9) compliance with certificate of need laws, to the extent such laws remain in effect.

The United Healthcare Systems, Inc. case addresses the difficult issues created by the sometimes conflicting roles of state regulatory authorities and the Bankruptcy Court. United Healthcare System, Inc. ("United") operated the Children's Hospital of New Jersey. United notified the New Jersey Commissioner of Health and Senior Services (the "Commissioner") that it was on the verge of closing down. Wanting to preserve United's pediatric care services for the public welfare, the Commissioner gave United $3 million to cover expenses, instructed it to transfer its critical pediatric care services and issued a moratorium on the hiring of United's medical staff.

In response to a request for proposals ("RFPs") for sale of the assets approved by the Commissioner,