Bankruptcy judge approves $55 million sale of Hahnemann residency program

The hospital plans to close its doors Friday. Its owner has been wrangling with the federal government for weeks over the residency program was an asset.

Hahnemann University Hospital. (Emma Lee/WHYY)

Hahnemann University Hospital. (Emma Lee/WHYY)

The owner of Hahnemann University Hospital can sell its medical residency program to a consortium of six local health systems led by Thomas Jefferson University Hospitals, a judge has ruled, in a blow to the federal government.

U.S. Bankruptcy Judge Kevin Gross announced his decision from the bench in Wilmington on Thursday afternoon.

Gross said the controversial sale, which was opposed by the federal Centers for Medicare and Medicaid Services, was one of those cases that “cause a judge to lie awake at night.”

Nevertheless, the sale at auction last month of more than 550 residency slots for $55 million met the statutory requirements and could proceed, Gross ruled.

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Noting the federal government’s strenuous and persistent argument that the residency program was not an asset Hahnemann could sell, Gross would not let the hospital and the consortium close the deal Friday, as the parties had hoped to do, but gave the government seven days to appeal.

Jefferson combined forces with three Philadelphia systems — Einstein Healthcare Network, Temple University Health System and Main Line Health — and Cooper University Health Care in Camden and Christiana Care Health System in Wilmington to win the final bid in a lengthy auction process.

Hahnemann’s owner had initially reached an agreement to sell its residency slots for $7.5 million to Tower Health, which has six area hospitals in Philadelphia’s suburbs, Chestnut Hill, and Reading. Tower was outbid during the auction process, however.

Gross said in court Thursday that the $55 million sale figure “is in the court’s view a stunning success for debtors.”

While Hahnemann, a hospital that served many of Philadelphia’s poor residents, is closing, its owner is selling St. Christopher’s Children’s Hospital, which it has said is profitable.

The bankruptcy petition was filed on June 30, about 18 months after Tenet Healthcare Corp, sold Hahnemann and St. Christopher’s to an entity formed by California investment banker Joel Freedman for $170 million.

A source familiar with the position of Hahneman’s creditors told WHYY Thursday after Gross ruled that they are pleased that the sale can go forward and debts can start to be satisfied,

Many worry, however, that such a decision could open the door to hospital systems bundling and selling off valuable residency programs as a commodity.

U.S. Justice Department attorney Marc Sacks had argued in court Wednesday that in the Affordable Care Act, Congress laid out the process for redistributing medical residency slots when a hospital closes.

It outlines a system for prioritizing hospitals interested in acquiring residents and awards the slots to them, free of charge, through a public bidding process. Sacks said this has happened 14 times since 2010, and that Jefferson had participated in the bidding process.

“If Hahnemann is closing, Congress has said what happens to its residency slots,” Sacks said.

The ruling came just one day before Hahnemann has pledged to close its doors forever.

The hospital hasn’t provided in-patient care since late July, and its emergency care ceased in August. But in court Wednesday an official said there were still about 80 employees in roles such as helping former patients find medical services elsewhere and transferring medical records – at a cost of 8 million to $10 million every two weeks in borrowed financing.

Gross told some 50 lawyers and others crowded into his courtroom Thursday that the “emotionally charged matters” affect the “delivery of health care in the city of Philadelphia,” especially to the needy.

He also noted that many people have been put through “great pain by this debacle” but praised the consortium for “having stepped into the breach” to buy the residency programs.

Justice Department attorney Sacks took issue Thursday with some points in the judge’s order, suggesting that an appeal was likely.

“We believe there is significant irreparable injury for this transaction going forward,” he told Gross, saying it had “nationwide” implications.

Assets, or not?

During Wednesday’s lengthy hearing, Sacks had also argued that the residency slots are not assets in their own right — they’re simply the right for a hospital to receive Medicare money.

“What this transaction is is the right to have these 500-plus permanent residency slots going forward,” Sacks told the judge. “They’re not purchasing Hahnemann’s equipment, patients, staff, or medical records.”

Attorney Mark Minuti, who represents Hahnemann owner American Academic Health Systems, disputed that point.

He pointed to a different statute of the U.S. Bankruptcy Code that interprets the programs as an asset.

Sacks added that even if Judge Gross deemed the hospital still open, federal regulations stipulate that a Medicare provider number can be transferred only with a change of ownership.

He argued that because only the residency programs were being transferred and not all of Hahnemann’s operations, that did not constitute a change in ownership.

Minuti argued that, effectively, the consortium of six hospitals had in fact already taken on the operations of Hahnemann.

“They have our doctors, they have our patients, all at nearby locations,” Minuti told the judge.

In his ruling Thursday, Gross said he was satisfied that there had been “no cessation of business” at Hahnemann.

Laurence Merlis, executive vice president for strategic partnerships at Jefferson, testified Wednesday that the consortium has hired 265 of Hahnemann’s former residents and more than 400 staff members who worked there, with 200 more in various stages of employment.

Minuti had also argued there was nothing in the statute specifying how many assets needed to be transferred from one hospital to another to constitute a change in ownership.

“Clearly, the government would prefer that there be some handcuffs on how this works,” Minuti said Wednesday. “But where is the line? There is nothing stipulating how many of your assets you have to sell.”

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