The Patient Care Ombudsman: Controlling Costs

Growing Concern over Compensation Costs

Once retained, Bankruptcy Code ' 330 authorizes bankruptcy courts to order the compensation and reimbursement of PCOs from the debtor's estate. A growing number of critics maintain that health care facilities, already struggling beneath the weight of impending insolvency, often cannot bear the burden of this additional financial strain. The debtor in In re Moshannon Valley Citizens, Inc. articulated this fear, arguing that “the additional expenses to the Hospital that would accompany the appointment of a PCO ' would adversely affect the Hospital and its patients.” No. 06-00095 (Bankr. M.D. Pa. March 22, 2006). In denying the appointment, the court in that case similarly stressed the undue financial strain that employment of a PCO would place on the hospital.

Adding to the concern that the appointment of a POC creates an unnecessary drain of the debtor's assets are the increasing requests from ombudsmen to retain professionals. While nothing in ' 330 expressly provides that a PCO may hire its own professionals, as mentioned, the Code does allow for the reimbursement of “actual, necessary” expenses. Bankruptcy courts have generally held that fees and expenses associated with professionals hired by a PCO may properly fall within the meaning of this provision.

Attorneys are the most commonly requested professionals, as PCOs are often unfamiliar with bankruptcy proceedings and therefore require legal assistance and advice to effectively navigate the judicial process. As the court in In re Renaissance Hospital noted, not every otherwise suitable PCO candidate possesses the requisite legal expertise to prepare and file motions and appear in court. See 399 B.R. 442, 448 (Bankr. N.D. Tex. 2008). Congress, therefore, “must have anticipated that an ombudsman would, on occasion, have to have the assistance of counsel.” Id. Moreover, while many health care facilities have in-house legal staffing available to the PCO, the unique role of the PCO as patient advocate further substantiates its need for independent counsel. As the bankruptcy court in the recent case of In re Synergy Hematology-Oncology Med. Assocs. explained, “a patient care ombudsman's duties may differ substantially from the interest of any of the parties in interest ' [c]onsequently, a patient care ombudsman should not be required to rely on counsel for the debtor or a committee for legal advice or legal services.” 433 B.R. 316, 319 (Bankr. C.D. Cal. 2009). Numerous courts have adopted this logic and have granted requests to employ counsel, at the expense of the estate.

The employment of a PCO and its associated professionals in a bankruptcy case unavoidably increases the administrative expenses of an already financially troubled facility. The substantial interest in the debtor's successful reorganization, as emphasized by the Alternate Family Care court, has fueled growing trepidation over the potential scope of the costs attendant to the PCO's appointment. However, such heightened concern over the PCO's expense is plainly unwarranted if the array of procedural and practical safeguards provided by the Bankruptcy Code to control costs are effectively utilized.

Safeguarding Against Excessive Expense

To start, the Bankruptcy Code, as amended by the BAPCPA, provides a clear statutory safeguard against excessive fees. Pursuant to ' 330, “the court may award to ' an ombudsman appointed under section 333 ' a reasonable compensation for actual, necessary services rendered ' and reimbursement for actual, necessary expenses.” 11 U.S.C. ' 330(a)(1)(A),(B) (emphasis added). In evaluating the reasonableness of costs, ' 330 instructs courts to consider factors such as time spent on the services, the rates charged, the reasonableness of the time spent in relation to the complexity or importance of the task and the customary rates charged by similarly skilled professionals in similar cases. See 11 U.S.C. ' 330(a)(3)(A),(B),(D). Additionally, the Code explicitly directs courts to deny compensation for any unnecessary or duplicative services. See 11 U.S.C. ' 330(a)(4)(A).

With this statutory check, the compensation requested by the PCO is therefore not automatically determinative of the actual cost to the estate. This Code provision mandates judicial oversight of the functions of the PCO and empowers all parties in interest to challenge and potentially block any proposed compensation that is not reflective of the PCO's true contribution to patient services.

While ' 330 provides an avenue for relief against excessive fees, as many practitioners understand, attempting to control costs by objecting to fee applications is an ineffective way to obtain meaningful reduction in the fees and expenses of the PCO and his professionals.

A Better Approach

As costs-curbing efforts post-appointment are often ineffective, the better approach is preemptive action. If a PCO is thought to be unnecessary to continued patient welfare under the specific facts of the case, the debtor should file a first-day motion under ' 333 requesting that the appointment be excused. Alternatively, the debtor should request that if the motion is denied, the fees recoverable by the PCO and any retained professionals should be limited and/or capped. As a creditors' committee is generally not formed in the first days of the bankruptcy case, the burden initially rests with the debtor, the DIP lenders and other parties in interest to address PCO costs at the outset.

Parties to a Chapter 11 proceeding have a wide degree of latitude to tailor the amount of recoverable fees well before the PCO is retained. Health care debtors, lenders and creditors' committees may include provisions in DIP budgets limiting the fees of PCOs. For example, in the jointly administered Renaissance Hospital cases, the debtors, with support from the creditors' committee, sought approval of a DIP financing agreement containing a clear budget line-item for the appointed PCO. Specifically, the budget associated with the DIP Agreement allowed for $5,000 per week for the PCO. The debtors believed this amount to be appropriate “giving due consideration to the size of the Cases, the state of the Debtors' operations, and the financial constraints of the Budget.” In re Renaissance Hosp., No. 08-43775 (Bankr. N.D. Tex. Oct. 23, 2008). Such budget items should be negotiated in connection with the interim DIP budgets prior to appointment of a PCO and revisited in connection with the final DIP budgets to ensure that all associated expenses remain predictable and manageable by the estate.

Similar restraints may also be placed on the allowable fees of the professionals retained by the PCOs. In In re Bayonne Medical Center, the court entered an order allowing the PCO to retain attorneys, but also capped the compensation of such professionals. No. 07-15195 (Bankr. D.N.J. Aug. 16, 2007). The court recognized the PCO's need for attorneys to assist with filing its bi-monthly report and provided for an allowance of $2,000 in fees to the PCO's attorneys for reporting months, while prohibiting the payment of any PCO legal fees in non-reporting months.

Beyond capping recoverable fees, there is yet another option for cost control available to debtors providing long-term health care services. Pursuant to ' 333, the U.S. Trustee in such cases has the option of appointing the State Long-Term Care Ombudsman to serve as the PCO. The position of the State Ombudsman was originally created through the Older Americans Act of 1965, as a means to improve patient care in nursing facilities. Today, the duties ascribed to the State Ombudsman are far more extensive and well-defined than those of a typical PCO. The directives of the State Ombudsman include, but are not limited to, identifying, investigating and resolving patient complaints, ensuring that such complaints are timely addressed by the appropriate governmental representative, conducting routine visits of facilities and working closely with social services, regulatory, advocacy, policy-making, law enforcement, and other organizations with the goal of improving long-term care. Since the State Ombudsman is compensated directly through state and federal funding, and her fee applications, when filed, have sought modest compensation, such a professional may be engaged with little effect on the estate.

Still further, perhaps the strongest safeguard against unnecessary spending is the fact that the appointment of a PCO is not an irrevocable act. As noted by the bankruptcy court in In re North Shore-Oncology Assocs, P.C., throughout the entire course of the bankruptcy proceeding, the appointment of a PCO may be reviewed and even revoked if circumstances warrant such action. See 400 B.R. 7, 13 (Bankr. E.D.N.Y. 2008). Bankruptcy Rule 2007.2 explicitly provides that “[o]n motion of the United States trustee or a party in interest, the court may terminate the appointment of a patient care ombudsman if the court finds that the appointment is not necessary to protect patients.” Fed. R. Bankr. P. 2007.2(d). Therefore, if a hospital can adequately demonstrate that its financial difficulties have not adversely affected patient care, the PCO and its related expenses may in fact be eliminated in their entirety.

Conclusion

While such safeguards should assuage fears of excessive financial drain, the expense associated with PCOs remains a point of contention among bankruptcy practitioners. Admittedly, the safeguards discussed above, while available, are not automatic. As a result, costs of PCOs can too often become financial burdens to the estate. The onus is therefore on debtors, lenders, creditors' committees and other parties in interest to take the initiative. By proactively pursuing these cost-controlling measures, parties can effectively minimize unnecessary expense while ensuring that patients remain protected.

Martin G. Bunin ([email protected]) is a partner in Alston & Bird's Bankruptcy, Reorganization and Workouts Group, resident in the firm's New York office. His experience includes the representation of unsecured creditors' committees with emphasis on creditors' committees in Chapter 11 cases filed by hospitals and other health care businesses, manufacturers, service businesses and owners of real estate. Nadjia I. Bailey ([email protected]) is an associate in the firm's New York office and a member of the Bankruptcy, Workouts & Reorganization Group.

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) gave patients of insolvent health care facilities a clear voice in bankruptcy proceedings by creating a new role in bankruptcy cases ' the Patient Care Ombudsman (“PCO”). Bankruptcy Code ' 333 requires bankruptcy courts to appoint a PCO “to monitor the quality of patient care and to represent the interests of the patients,” which may include interviewing patients and physicians, conducting on-site inspections, monitoring services provided and reviewing patient records. See 11 U.S.C. ' 333(b). Every 60 days following appointment, the PCO is required to report its findings to the court in writing or at a hearing. Importantly, the PCO is also required to warn the court immediately if patient care significantly declines or is materially compromised in any way.

The appointment of the PCO, which must occur within 30 days of a Chapter 7, 9 or 11 bankruptcy petition date, is mandatory in all cases involving health care facilities, unless “the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case.” 11 U.S.C. ' 333(a)(1) (emphasis added).

While the language of ' 333 is clearly indicative of Congress' presumption for appointment in most cases, the statute undeniably affords courts a degree of discretion regarding the employment of a PCO. In evaluating whether a PCO is necessary in a health care bankruptcy case, courts typically weigh the totality of the circumstances and analyze the facts of the particular case through the framework established in In re Alternate Family Care. See 377 B.R. 754 (Bankr. S.D. Fla. 2007). The bankruptcy court in that case articulated nine factors for consideration, including: 1) the cause of the bankruptcy; 2) the presence and role of licensing or supervising entities; 3) the debtor's history of patient care; 4) the patients' ability to protect their rights; 5) the patients' dependence on the facility; 6) the likelihood of tension between the interests of patients and of the debtor; 7) the potential injury to patients if the debtor were to reduce its level of patient care drastically; 8) the presence of sufficient internal safeguards to ensure appropriate levels of care; and 9) most controversially, the impact of the cost of a PCO on the likelihood of successful reorganization. See id. at 758. The inclusion of cost as an increasingly important factor in PCO appointment has become a hotly contested issue.

Growing Concern over Compensation Costs

Once retained, Bankruptcy Code ' 330 authorizes bankruptcy courts to order the compensation and reimbursement of PCOs from the debtor's estate. A growing number of critics maintain that health care facilities, already struggling beneath the weight of impending insolvency, often cannot bear the burden of this additional financial strain. The debtor in In re Moshannon Valley Citizens, Inc. articulated this fear, arguing that “the additional expenses to the Hospital that would accompany the appointment of a PCO ' would adversely affect the Hospital and its patients.” No. 06-00095 (Bankr. M.D. Pa. March 22, 2006). In denying the appointment, the court in that case similarly stressed the undue financial strain that employment of a PCO would place on the hospital.

Adding to the concern that the appointment of a POC creates an unnecessary drain of the debtor's assets are the increasing requests from ombudsmen to retain professionals. While nothing in ' 330 expressly provides that a PCO may hire its own professionals, as mentioned, the Code does allow for the reimbursement of “actual, necessary” expenses. Bankruptcy courts have generally held that fees and expenses associated with professionals hired by a PCO may properly fall within the meaning of this provision.

Attorneys are the most commonly requested professionals, as PCOs are often unfamiliar with bankruptcy proceedings and therefore require legal assistance and advice to effectively navigate the judicial process. As the court in In re Renaissance Hospital noted, not every otherwise suitable PCO candidate possesses the requisite legal expertise to prepare and file motions and appear in court. See 399 B.R. 442, 448 (Bankr. N.D. Tex. 2008). Congress, therefore, “must have anticipated that an ombudsman would, on occasion, have to have the assistance of counsel.” Id. Moreover, while many health care facilities have in-house legal staffing available to the PCO, the unique role of the PCO as patient advocate further substantiates its need for independent counsel. As the bankruptcy court in the recent case of In re Synergy Hematology-Oncology Med. Assocs. explained, “a patient care ombudsman's duties may differ substantially from the interest of any of the parties in interest ' [c]onsequently, a patient care ombudsman should not be required to rely on counsel for the debtor or a committee for legal advice or legal services.” 433 B.R. 316, 319 (Bankr. C.D. Cal. 2009). Numerous courts have adopted this logic and have granted requests to employ counsel, at the expense of the estate.

The employment of a PCO and its associated professionals in a bankruptcy case unavoidably increases the administrative expenses of an already financially troubled facility. The substantial interest in the debtor's successful reorganization, as emphasized by the Alternate Family Care court, has fueled growing trepidation over the potential scope of the costs attendant to the PCO's appointment. However, such heightened concern over the PCO's expense is plainly unwarranted if the array of procedural and practical safeguards provided by the Bankruptcy Code to control costs are effectively utilized.

Safeguarding Against Excessive Expense

To start, the Bankruptcy Code, as amended by the BAPCPA, provides a clear statutory safeguard against excessive fees. Pursuant to ' 330, “the court may award to ' an ombudsman appointed under section 333 ' a reasonable compensation for actual, necessary services rendered ' and reimbursement for actual, necessary expenses.” 11 U.S.C. ' 330(a)(1)(A),(B) (emphasis added). In evaluating the reasonableness of costs, ' 330 instructs courts to consider factors such as time spent on the services, the rates charged, the reasonableness of the time spent in relation to the complexity or importance of the task and the customary rates charged by similarly skilled professionals in similar cases. See 11 U.S.C. ' 330(a)(3)(A),(B),(D). Additionally, the Code explicitly directs courts to deny compensation for any unnecessary or duplicative services. See 11 U.S.C. ' 330(a)(4)(A).

With this statutory check, the compensation requested by the PCO is therefore not automatically determinative of the actual cost to the estate. This Code provision mandates judicial oversight of the functions of the PCO and empowers all parties in interest to challenge and potentially block any proposed compensation that is not reflective of the PCO's true contribution to patient services.

While ' 330 provides an avenue for relief against excessive fees, as many practitioners understand, attempting to control costs by objecting to fee applications is an ineffective way to obtain meaningful reduction in the fees and expenses of the PCO and his professionals.

A Better Approach

As costs-curbing efforts post-appointment are often ineffective, the better approach is preemptive action. If a PCO is thought to be unnecessary to continued patient welfare under the specific facts of the case, the debtor should file a first-day motion under ' 333 requesting that the appointment be excused. Alternatively, the debtor should request that if the motion is denied, the fees recoverable by the PCO and any retained professionals should be limited and/or capped. As a creditors' committee is generally not formed in the first days of the bankruptcy case, the burden initially rests with the debtor, the DIP lenders and other parties in interest to address PCO costs at the outset.

Parties to a Chapter 11 proceeding have a wide degree of latitude to tailor the amount of recoverable fees well before the PCO is retained. Health care debtors, lenders and creditors' committees may include provisions in DIP budgets limiting the fees of PCOs. For example, in the jointly administered Renaissance Hospital cases, the debtors, with support from the creditors' committee, sought approval of a DIP financing agreement containing a clear budget line-item for the appointed PCO. Specifically, the budget associated with the DIP Agreement allowed for $5,000 per week for the PCO. The debtors believed this amount to be appropriate “giving due consideration to the size of the Cases, the state of the Debtors' operations, and the financial constraints of the Budget.” In re Renaissance Hosp., No. 08-43775 (Bankr. N.D. Tex. Oct. 23, 2008). Such budget items should be negotiated in connection with the interim DIP budgets prior to appointment of a PCO and revisited in connection with the final DIP budgets to ensure that all associated expenses remain predictable and manageable by the estate.

Similar restraints may also be placed on the allowable fees of the professionals retained by the PCOs. In In re Bayonne Medical Center, the court entered an order allowing the PCO to retain attorneys, but also capped the compensation of such professionals. No. 07-15195 (Bankr. D.N.J. Aug. 16, 2007). The court recognized the PCO's need for attorneys to assist with filing its bi-monthly report and provided for an allowance of $2,000 in fees to the PCO's attorneys for reporting months, while prohibiting the payment of any PCO legal fees in non-reporting months.

Beyond capping recoverable fees, there is yet another option for cost control available to debtors providing long-term health care services. Pursuant to ' 333, the U.S. Trustee in such cases has the option of appointing the State Long-Term Care Ombudsman to serve as the PCO. The position of the State Ombudsman was originally created through the Older Americans Act of 1965, as a means to improve patient care in nursing facilities. Today, the duties ascribed to the State Ombudsman are far more extensive and well-defined than those of a typical PCO. The directives of the State Ombudsman include, but are not limited to, identifying, investigating and resolving patient complaints, ensuring that such complaints are timely addressed by the appropriate governmental representative, conducting routine visits of facilities and working closely with social services, regulatory, advocacy, policy-making, law enforcement, and other organizations with the goal of improving long-term care. Since the State Ombudsman is compensated directly through state and federal funding, and her fee applications, when filed, have sought modest compensation, such a professional may be engaged with little effect on the estate.

Still further, perhaps the strongest safeguard against unnecessary spending is the fact that the appointment of a PCO is not an irrevocable act. As noted by the bankruptcy court in In re North Shore-Oncology Assocs, P.C., throughout the entire course of the bankruptcy proceeding, the appointment of a PCO may be reviewed and even revoked if circumstances warrant such action. See 400 B.R. 7, 13 (Bankr. E.D.N.Y. 2008). Bankruptcy Rule 2007.2 explicitly provides that “[o]n motion of the United States trustee or a party in interest, the court may terminate the appointment of a patient care ombudsman if the court finds that the appointment is not necessary to protect patients.” Fed. R. Bankr. P. 2007.2(d). Therefore, if a hospital can adequately demonstrate that its financial difficulties have not adversely affected patient care, the PCO and its related expenses may in fact be eliminated in their entirety.

Conclusion

While such safeguards should assuage fears of excessive financial drain, the expense associated with PCOs remains a point of contention among bankruptcy practitioners. Admittedly, the safeguards discussed above, while available, are not automatic. As a result, costs of PCOs can too often become financial burdens to the estate. The onus is therefore on debtors, lenders, creditors' committees and other parties in interest to take the initiative. By proactively pursuing these cost-controlling measures, parties can effectively minimize unnecessary expense while ensuring that patients remain protected.

Martin G. Bunin ([email protected]) is a partner in Alston & Bird's Bankruptcy, Reorganization and Workouts Group, resident in the firm's New York office. His experience includes the representation of unsecured creditors' committees with emphasis on creditors' committees in Chapter 11 cases filed by hospitals and other health care businesses, manufacturers, service businesses and owners of real estate. Nadjia I. Bailey ([email protected]) is an associate in the firm's New York office and a member of the Bankruptcy, Workouts & Reorganization Group.