Bankruptcy judge to decide the future of Hahnemann Hospital’s residency slots

Hahnemann University Hospital will be back in federal bankruptcy court Wednesday morning, where a judge will rule on whether the sale of its residency programs can go forward.

Although most of the more than 550 residents displaced by Hahnemann’s closure have already found new positions, the ruling will affect the future of the programs.

The residency slots were sold for $55 million at an auction last month to a group of six local health systems, led by Thomas Jefferson University Hospitals. But the federal government opposes the sale.

Feds say sale of residency programs is illegal

After the hospital’s owner declared bankruptcy in early July, American Academic Health System’s first priority was to start selling of its assets to pay back its creditors. (Its most valuable asset, the profitable St. Christopher’s Children’s Hospital, is slated to remain open, but be sold at auction later this month.)

Scott Victor, investment banker for Academic American CEO Joel Freedman, ran the auction for the residency programs. He called the winning price a “game-changer for the bankruptcy estate,” implying it will make a much larger dent in paying off the company’s debts.

The federal government argues the sale of the residency programs is illegal.

Residency programs are funded and regulated by the Centers for Medicaid and Medicare Services (CMS). That federal agency filed court documents objecting to the sale of the residency programs back when it looked like they might be sold to Reading-based Tower Health. Tower was outbid at auction by the group of six: Jefferson, Temple University Health System, Albert Einstein Health Network, Main Line Health, Christiana Care Health System in Delaware, and The Cooper Health Systems in New Jersey.

CMS argues that Hahnemann’s assigned Medicare provider number — which allows the hospital to be reimbursed for Medicare services including the residency programs — is attached to the hospital and cannot be transferred unless the hospital changes ownership.

“Hahnemann’s Provider Agreement terminates with its closure, making it ineligible to be transferred,” wrote Justice Department attorney Marc Sacks in the court filing.

Although it doesn’t officially close until Sept. 6, Hahnemann has ended most of its operations.

CMS says any new provider applying for a residency program must be approved by that agency, and this arrangement would violate the regulatory law that gives the federal government oversight over the training programs.

Bankruptcy judge expected to rule

Until now, Judge Kevin Gross has ordered the debtors to work out any outstanding issues before their court date, prompting many hearings to be postponed and rescheduled, including Wednesday’s upcoming hearing which had been scheduled for Aug. 19, but was pushed back at CMS’ request.

This time, it seems Gross will need to take a side.

American Academic responded to CMS’s objection in a court filing last Thursday, suggesting the parties had not come to an agreement. In the filing, lawyers for American Academic argued that going through with the sale would keep the doctors-in-training programs in Philadelphia. They said the consortium had hired nearly 300 of Hahnemann’s 583 residents, and noted the geographic proximity of Jefferson, Temple, and Einstein to Hahnemnann, making them the logical choices for patients who had been served there.

“Without the formality of an acquisition, the Consortium has already assumed critical components of the legacy Hahnemann operations,” the debtors argued.

In the filing, lawyers for the debtors urged the judge to overrule CMS’s objection and approve the sale of the residency programs.

“CMS’ Objection is based on a myopic interpretation of Medicare regulations,” they wrote, arguing that the transfer of the residency programs effectively counts as a change of ownership.

The apparent failure on the part of the debtors to negotiate an agreement with the federal government ahead of Wednesday’s hearing has emboldened those who have always opposed Hahnemann’s closure.

The Pennsylvania Association of Staff Nurses and Allied Professionals, which represented 800 nurses at Hahnemann, has maintained that selling the residency programs would be the hospital’s death knell. The union has filed objections to the sale in court and appealed to local and state politicians to block the sale and reopen the hospital.

A group of four state senators wrote a letter to Gov. Tom Wolf on Tuesday, urging him to require the the hospital reopen as an acute care facility. State Sen. Sharif Street of Philadelphia said he thought it was still the government’s job to do everything it could to save the safety-net hospital.

“I don’t think it’s at all appropriate to say, ‘Well, the owners of this hospital weren’t getting the return on the investment that they wanted, therefore they should just be able to shut it down because they think they can make more money a different way,’” he said.

Two entities have expressed interest in buying all of the hospital’s assets and keeping it running. One of them, California-based KPC Global, participated in the auction for the residency programs, but was outbid. In a court filing, they requested an alternative process, that would allow for their offer to be considered: purchase all the hospital’s assets for $60 million and run it as an ongoing concern.

“Should the objections and impediments to the present sale not be overcome, KPC believes it is in the interest of all parties to be ready to pivot promptly to reopen and expand the sale process to include substantially all assets of Hahnemann Hospital,” wrote attorneys for KPC.

In its court filing, KPC Group said it also intended to bid on St. Christopher’s and attempt to buy the real estate, not included in the bankruptcy, that Hahnemann sits on.

If Judge Gross rules the sale to the Jefferson group is legal, it’s unlikely the outside offers will carry much weight. If he rules in favor of CMS and the residency programs cannot be sold as an asset on their own, it may very well be back to the drawing board.