A recent decision in the Northern District of Texas provides helpful guidance for health care corporations looking to limit their potential successor liability for Medicare fraud and overpayments. On August 4, 2014, U.S. District Court Judge Barbara M.G. Lynn issued an order dismissing, with prejudice, the successor liability claims asserted by a qui tam "relator" against two companies that had purchased the equity of a for profit hospice provider.

According to pleadings filed in the case, the stock of Vista Hospice Care, Inc. ("Vista") was acquired in March 2008 by Odyssey Healthcare, Inc. ("Odyssey"). Odyssey's stock was subsequently acquired by Gentiva Health Services, Inc. ("Gentiva"). The relator, an ex–employee of Vista, alleged that Vista pursued a practice of certifying patients for hospice care who were not eligible and provided kickbacks to referral sources and patients, and sought successor liability against Odyssey and Gentiva.

Successor liability with regard to Medicare providers is usually asserted where there is a change in ownership for a provider facility. The party acquiring the provider number of the selling entity also acquires successor liability for any program overpayments. A change in ownership will result in an automatic assignment of the existing provider agreement, subject to any existing plan of correction or other program obligations, to the new owner. Therefore, if a Medicare provider is subject to current sanctions or penalties for Medicare fraud, and undergoes a change in ownership, the provider agreement is automatically assigned and the sanctions or penalties are assessed against the successor corporation.

Medicare regulations stipulate that a "change in ownership" involves the merger of the provider corporation into another corporation or the consolidation of two or more corporations resulting in the creation of a new corporation. However, the mere transfer of corporate stock or the merger of another corporation into the provider corporation expressly does not constitute a change of ownership of the surviving provider corporation. The Vista case simply involved the transfer of corporate stock, so the Medicare statute did not impose successor liability.

Without the ability to hold Odyssey/Gentiva liable under federal law, the Relator was forced to rely on common law principles of successor liability.  The court noted the "traditional rule is that successor corporation does not take on liabilities of predecessor corporation unless successor expressly or impliedly agrees to assume liabilities of predecessor, transaction is considered a de facto merger, successor is considered a 'mere continuation' of predecessor, or transaction was fraudulent." In this case, Relator could not prove any of those theories. Thus, the common law test for successor liability was not satisfied and Relator's claim was dismissed.

Finally, the judge examined successor liability under Texas law. She noted the Texas test is even more stringent than federal common law, because it requires that a successor that purchases corporate assets must expressly assume the predecessor's liabilities. In this case, Odyssey did not acquire Vista's assets, nor did either Odyssey or Gentiva assume Vista's liabilities. Therefore, any state common law claim also failed.

Health care provider or facility acquisitions always should be carefully structured to protect (so far as possible) the acquiring party from potential successor liability. Odyssey and Gentiva saved themselves from Medicare liability because they did not participate in a defined "change of ownership" for Vista. Furthermore, by only purchasing the stock of Vista and maintaining Vista as an operating entity, Odyssey and Gentiva avoided potential liability under the federal and state common law.

If you or your company is involved in the purchase of a health care provider or facility, you should carefully analyze and understand the key regulations and strategies for properly structuring that transaction.