Health-Care Cases

One of the first issues that may need to be confronted in a health-care bankruptcy case is whether the debtor at issue constitutes a “health-care business.” Falling within this definition triggers additional issues under the Bankruptcy Code that may further complicate the case.

BAPCPA added “health-care business” as a defined term under Bankruptcy Code ' 101(27A). The definition sets forth what the term “means” (basically, any entity offering services or facilities to the public for diagnosis, treatment, or other health-related care) as well as examples of what the term “includes” (e.g., hospitals, acute and long-term care facilities, hospice, home health agencies and similar health care institutions). 11 U.S.C. ' 101(27A). Although the definition includes several examples of entities that may constitute a “health-care business,” there is significant room for debate as to whether or not a particular debtor falls within the definition.

In fact, just because a debtor operates in the health-care market does not mean it necessarily constitutes a “health-care business” for bankruptcy purposes. For example, in In re Medical Associates of Pinellas, L.L.C., 360 B.R. 356 (Bankr. M.D. Fla. 2007), the court dissected Bankruptcy Code ' 101(27A) and ruled that to qualify as a “health-care business”: 1) the debtor must be a private or public entity; 2) that is primarily engaged in offering to the general public facilities and services; 3) for diagnosis or treatment of injury, deformity or disease; and 4) for surgical care, drug treatment, psychiatric care or obstetric care. Id. at 359. The court went on to hold that the debtor at issue ' a facility that primarily offered administrative support, as well as ancillary laboratory support, to a group of doctors and did not deal with the general public ' did not constitute a “health-care business.” Id. at 359-61. Similarly, in In re Banes, 355 B.R. 532 (Bankr. M.D.N.C. 2006), the court held that an outpatient dental practice was not a “health-care business” because it did not provide patients with shelter and sustenance in addition to medical treatment. Id. at 535. Moreover, the court found that the statute is written in the present tense and the debtor no longer engaged in the practice of dentistry. Id. In In re 7-Hills Radiology, LLC, 350 B.R. 902 (Bankr. D. Nev. 2006), a radiology facility that only offered its services and facilities to referring physicians and not the general public was held not to be a “health-care business.” Id. at 904-06.

In contrast, in In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007), despite the debtor's indication on its petition that the nature of its business was “other” rather than “health-care business,” the Office of the United States Trustee moved for the appointment of a patient care ombudsman (whose role is described in the next section). Id. at 756. As a threshold matter, the court held that the debtor, a state-licensed child placing and caring agency, constituted a “health-care business” because, among other things, it operated primarily through referrals but was also accessible by the public, and it provided medically supervised treatment, which the court found was sufficient to satisfy the Pinellas definition even without involving pharmacological treatment. Id. at 758. Similarly, in In re William L. Saber, M.D., 369 B.R. 631 (Bankr. D. Colo. 2007), the debtor indicated on its petition that it was a “health-care business,” but then argued against such a finding during the case. Id. at 635. The court ruled against it, holding that as a single-owner/physician medical practice that provided plastic and reconstructive surgery to the public, it was a “health-care business.” Id. at 636-37 (distinguishing language in Pinellas that the examples in section 101(27A)(B) “appear to contemplate something more than a doctor's office,” 360 B.R. at 361). In In re Valley Health Systems, 381 B.R. 756 (Bankr. C.D. Cal. 2008), the court found that the Chapter 9 debtor, a local health-care district that owned and operated three acute-care hospitals and one skilled nursing facility providing health and medical services to the general public, did constitute a “health-care business.” Id. at 760-61.

Thus, a practitioner involved in such a case must not only understand how this provision has been interpreted but enough health care case law and business to address the matter in the particular case at hand. All the remaining challenges presented below apply to a health care debtor that constitutes a “health-care business.”

Ombudsman

Under BAPCPA, a new party in interest, the “patient care ombudsman,” was created for health care businesses. 11 U.S.C. ' 333. In fact, a health care business debtor is presumed to need a patient care ombudsman to monitor the quality of patient care during the case and represent patients' interests. As counsel, you may be called upon to determine whether such a person is needed, and at what cost.

Under new Bankruptcy Code ' 333, a court must order the appointment of a patient care ombudsman as a “professional person” (i.e., paid for by the debtor) within 30 days of the bankruptcy filing unless it determines that an ombudsman is not necessary to protect the debtor's patients under the specific facts or circumstances of the case. 11 U.S.C. ' 333; Fed. Interim R. Bankr. P. 2007.2(a)(1). Even if the court decides not to appoint an ombudsman in the first instance, it may later appoint one upon finding that such appointment has become necessary to protect the debtor's patients. Fed. Interim R. Bankr. P. 2007.2(b). This provision originates from Congressional concerns about the fairness of the bankruptcy process to patients, declines in quality of care during bankruptcy cases, and how patients are transferred from the bankrupt organization to another hospital. See Kevin A. Spainhour, Statutory Quixotics, 24 Emory Bankr. Dev. J. 193, 194-95 (2008) (citing 144 Cong. Rec. 5892 (1998) (statement of Sen. Grassley)).

BAPCPA does not expressly provide when appointment of a patient care ombudsman is necessary. However, courts have recognized factors to consider in determining or declining to appoint an ombudsman. For example, in In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007), the court set forth the following nine non-exclusive factors it considered in making its determination to appoint an ombudsman: 1) the cause of the bankruptcy; 2) the presence and role of licensing or supervising entities; 3) the debtor's past history of patient care; 4) the ability of the patients to protect their rights; 5) the level of dependency of the patients on the facility; 6) the likelihood of tension between the interests of the patients and the debtor; 7) the potential injury to the patients if the debtor drastically reduced its level of patient care; 8) the presence and sufficiency of internal safeguards to ensure appropriate level of care; and 9) the impact of the cost of an ombudsman on the likelihood of a successful reorganization. Id. at 758. In Valley Health Systems, the court declined to appoint a patient-care ombudsman using the Alternate Family Care factors and four additional factors: (w) the high quality of the debtor's existing patient care; (x) the debtor's financial ability to maintain high quality of patient care; (y) the existence of an internal ombudsman program to protect the rights of patients; and/or (z) the level of monitoring and oversight by federal, state, local or professional association programs that renders the services of an ombudsman redundant. 381 B.R. at 761.

Potential disadvantages to an ombudsman include cost and unneeded intrusion if patients would be otherwise protected during the case. However, the absence of a patient care ombudsman may push the burden of patient care onto the debtor and debtor's counsel. For example, in Saber, the court found the appointment of an ombudsman unnecessary based largely on being “satisfied the Debtor has sufficient procedures in place to enable it to continue to protect the privacy of its patients.” 369 B.R. at 638.

In short, a practitioner entering such a health care case must have a firm grasp of a debtor's capabilities to self-regulate and whether or not a patient care ombudsman is appropriate. This requires an understanding of the heath care business at hand, as well as its regulatory and economic demands.

Next month, we will discuss what to do if HHS seeks to affect Medicare reimbursements or exclusion of the debtor from a federal health care program.

Sam J. Alberts is a partner in the Washington, DC, office of White & Case LLP and a member of the firm's Financial Restructuring & Insolvency practice. He is a co-author of the ABI Health Care Insolvency Manual (2d Ed. 2005). Malka S. Resnicoff is an associate in the same office and a member of the firm's Financial Restructuring & Insolvency practice. Acknowledgment is also given to Jacqueline Burke, a student at American University Washington College of Law and a 2008 summer associate at the firm, for her contributions to this article.

Health'care-industry bankruptcy cases are unique in complexity and sensitivity. Hospitals, nursing homes and doctor provider groups, among just a few health industry types, are heavily regulated, can be an area's largest employer, and provide critical, life-saving services. As such, health-care bankruptcy cases are financially and legally multifaceted, and may contain political dynamics often unseen in other types of bankruptcies.

In 2005 Congress added additional wrinkles to health-care cases through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The effects of BAPCPA are still being tested. While this article addresses some of the important issues raised in the wake of BAPCPA and how some courts have confronted them, no article ' let alone this one ' can address all nuances. As such, persons uninitiated to the ways of health care bankruptcy cases would be wise to read well beyond this article and, if faced with such a case, consider retaining counsel who has experience.

Is the Debtor a Health-Care Business?

One of the first issues that may need to be confronted in a health-care bankruptcy case is whether the debtor at issue constitutes a “health-care business.” Falling within this definition triggers additional issues under the Bankruptcy Code that may further complicate the case.

BAPCPA added “health-care business” as a defined term under Bankruptcy Code ' 101(27A). The definition sets forth what the term “means” (basically, any entity offering services or facilities to the public for diagnosis, treatment, or other health-related care) as well as examples of what the term “includes” (e.g., hospitals, acute and long-term care facilities, hospice, home health agencies and similar health care institutions). 11 U.S.C. ' 101(27A). Although the definition includes several examples of entities that may constitute a “health-care business,” there is significant room for debate as to whether or not a particular debtor falls within the definition.

In fact, just because a debtor operates in the health-care market does not mean it necessarily constitutes a “health-care business” for bankruptcy purposes. For example, in In re Medical Associates of Pinellas, L.L.C., 360 B.R. 356 (Bankr. M.D. Fla. 2007), the court dissected Bankruptcy Code ' 101(27A) and ruled that to qualify as a “health-care business”: 1) the debtor must be a private or public entity; 2) that is primarily engaged in offering to the general public facilities and services; 3) for diagnosis or treatment of injury, deformity or disease; and 4) for surgical care, drug treatment, psychiatric care or obstetric care. Id. at 359. The court went on to hold that the debtor at issue ' a facility that primarily offered administrative support, as well as ancillary laboratory support, to a group of doctors and did not deal with the general public ' did not constitute a “health-care business.” Id. at 359-61. Similarly, in In re Banes, 355 B.R. 532 (Bankr. M.D.N.C. 2006), the court held that an outpatient dental practice was not a “health-care business” because it did not provide patients with shelter and sustenance in addition to medical treatment. Id. at 535. Moreover, the court found that the statute is written in the present tense and the debtor no longer engaged in the practice of dentistry. Id. In In re 7-Hills Radiology, LLC, 350 B.R. 902 (Bankr. D. Nev. 2006), a radiology facility that only offered its services and facilities to referring physicians and not the general public was held not to be a “health-care business.” Id. at 904-06.

In contrast, in In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007), despite the debtor's indication on its petition that the nature of its business was “other” rather than “health-care business,” the Office of the United States Trustee moved for the appointment of a patient care ombudsman (whose role is described in the next section). Id. at 756. As a threshold matter, the court held that the debtor, a state-licensed child placing and caring agency, constituted a “health-care business” because, among other things, it operated primarily through referrals but was also accessible by the public, and it provided medically supervised treatment, which the court found was sufficient to satisfy the Pinellas definition even without involving pharmacological treatment. Id. at 758. Similarly, in In re William L. Saber, M.D., 369 B.R. 631 (Bankr. D. Colo. 2007), the debtor indicated on its petition that it was a “health-care business,” but then argued against such a finding during the case. Id. at 635. The court ruled against it, holding that as a single-owner/physician medical practice that provided plastic and reconstructive surgery to the public, it was a “health-care business.” Id. at 636-37 (distinguishing language in Pinellas that the examples in section 101(27A)(B) “appear to contemplate something more than a doctor's office,” 360 B.R. at 361). In In re Valley Health Systems, 381 B.R. 756 (Bankr. C.D. Cal. 2008), the court found that the Chapter 9 debtor, a local health-care district that owned and operated three acute-care hospitals and one skilled nursing facility providing health and medical services to the general public, did constitute a “health-care business.” Id. at 760-61.

Thus, a practitioner involved in such a case must not only understand how this provision has been interpreted but enough health care case law and business to address the matter in the particular case at hand. All the remaining challenges presented below apply to a health care debtor that constitutes a “health-care business.”

Ombudsman

Under BAPCPA, a new party in interest, the “patient care ombudsman,” was created for health care businesses. 11 U.S.C. ' 333. In fact, a health care business debtor is presumed to need a patient care ombudsman to monitor the quality of patient care during the case and represent patients' interests. As counsel, you may be called upon to determine whether such a person is needed, and at what cost.

Under new Bankruptcy Code ' 333, a court must order the appointment of a patient care ombudsman as a “professional person” (i.e., paid for by the debtor) within 30 days of the bankruptcy filing unless it determines that an ombudsman is not necessary to protect the debtor's patients under the specific facts or circumstances of the case. 11 U.S.C. ' 333; Fed. Interim R. Bankr. P. 2007.2(a)(1). Even if the court decides not to appoint an ombudsman in the first instance, it may later appoint one upon finding that such appointment has become necessary to protect the debtor's patients. Fed. Interim R. Bankr. P. 2007.2(b). This provision originates from Congressional concerns about the fairness of the bankruptcy process to patients, declines in quality of care during bankruptcy cases, and how patients are transferred from the bankrupt organization to another hospital. See Kevin A. Spainhour, Statutory Quixotics, 24 Emory Bankr. Dev. J. 193, 194-95 (2008) (citing 144 Cong. Rec. 5892 (1998) (statement of Sen. Grassley)).

BAPCPA does not expressly provide when appointment of a patient care ombudsman is necessary. However, courts have recognized factors to consider in determining or declining to appoint an ombudsman. For example, in In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007), the court set forth the following nine non-exclusive factors it considered in making its determination to appoint an ombudsman: 1) the cause of the bankruptcy; 2) the presence and role of licensing or supervising entities; 3) the debtor's past history of patient care; 4) the ability of the patients to protect their rights; 5) the level of dependency of the patients on the facility; 6) the likelihood of tension between the interests of the patients and the debtor; 7) the potential injury to the patients if the debtor drastically reduced its level of patient care; 8) the presence and sufficiency of internal safeguards to ensure appropriate level of care; and 9) the impact of the cost of an ombudsman on the likelihood of a successful reorganization. Id. at 758. In Valley Health Systems, the court declined to appoint a patient-care ombudsman using the Alternate Family Care factors and four additional factors: (w) the high quality of the debtor's existing patient care; (x) the debtor's financial ability to maintain high quality of patient care; (y) the existence of an internal ombudsman program to protect the rights of patients; and/or (z) the level of monitoring and oversight by federal, state, local or professional association programs that renders the services of an ombudsman redundant. 381 B.R. at 761.

Potential disadvantages to an ombudsman include cost and unneeded intrusion if patients would be otherwise protected during the case. However, the absence of a patient care ombudsman may push the burden of patient care onto the debtor and debtor's counsel. For example, in Saber, the court found the appointment of an ombudsman unnecessary based largely on being “satisfied the Debtor has sufficient procedures in place to enable it to continue to protect the privacy of its patients.” 369 B.R. at 638.

In short, a practitioner entering such a health care case must have a firm grasp of a debtor's capabilities to self-regulate and whether or not a patient care ombudsman is appropriate. This requires an understanding of the heath care business at hand, as well as its regulatory and economic demands.

Next month, we will discuss what to do if HHS seeks to affect Medicare reimbursements or exclusion of the debtor from a federal health care program.

Sam J. Alberts is a partner in the Washington, DC, office of White & Case LLP and a member of the firm's Financial Restructuring & Insolvency practice. He is a co-author of the ABI Health Care Insolvency Manual (2d Ed. 2005). Malka S. Resnicoff is an associate in the same office and a member of the firm's Financial Restructuring & Insolvency practice. Acknowledgment is also given to Jacqueline Burke, a student at American University Washington College of Law and a 2008 summer associate at the firm, for her contributions to this article.