HEALTHCARE AND BANKRUPTCY: COST SAVING ALTERNATIVES TO THE APPOINTMENT OF A PATIENT CARE OMBUDSMAN

According to industry leaders, COVID-19 related staffing shortages at medical facilities have turned into a full-blown crisis as hundreds of positions at medical facilities have remained vacant. As a result, medical facilities are denying admissions because they can’t staff enough to take on new patients.

Increased government aid to keep medical facilities open and operational may not be forthcoming as many industry experts oppose increased government financial assistance absent a clear understanding of how the increased funding would be used. In the past, government financial aid has been given to medical facilities that have repeatedly been cited for health violations, insufficient care, or worse. Some industry analysts have suggested that future COVID-19 financial relief be conditioned on improved management, reporting and oversight, and quality of care at medical facilities.

These conditions create a perfect storm for increased medical facility bankruptcies. Making matters worse, any health care facility bankruptcy is a dauntingly complex and expensive process. To even have a chance at successfully emerging from bankruptcy, a medical facility must maintain, and in most cases, increase its patient census, keep its medical staff during an existential crisis, and avoid incurring additional expenses while also trying to improve its overall quality of care.

Not all medical and medical-related businesses are considered a “health care business” under the Bankruptcy Code. See 11 U.S.C. § 101(27A). A debtor is only considered a health care business if (1) it is a public or private entity; (2) it is primarily engaged in offering facilities and services to the general public; (3) its facilities and services are offered to the public for diagnosis or treatment of injury, deformity, or disease; and (4) its facilities and services are offered to the public for surgical care, drug treatment, psychiatric care, or obstetric care. See In re Med. Assocs. of Pinellas, L.L.C., 360 B.R. 356, 359 (Bankr. M.D. Fla. 2007) (debtor was not a health care business because it only provided administrative support to a group of physicians and their practices, with any services to the public only ancillary to that primary function); see also In re Banes, 355 B.R. 532, 534–535 (Bankr. M.D.N.C. 2006) (finding that “the Debtor’s dental practice does not provide patients with shelter and sustenance in addition to medical treatment, and is plainly not within the range of health care businesses anticipated by the statute.”).

Unfortunately for a debtor that is considered a health care business, a significant bankruptcy-related expense it may have to incur is the statutorily-required appointment of a patient care ombudsman (“PCO”) pursuant to Bankruptcy Code. 11 U.S.C. § 333(a)(1) states that if a debtor is a health care business, the Court shall order not later than 30 days after the commencement of the case, the appointment of an ombudsman to monitor the quality of patient care and to represent the interests of the patients of the healthcare business 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.

Like other professionals, a PCO is paid by the debtor during the bankruptcy. Therefore, a medical facility is faced with the equally unenviable choice of either agreeing to have a PCO appointed to monitor and report on the quality of care at the medical facility or objecting to an order by arguing a PCO is not necessary under the specific facts of the case.

The good news is that in the past, many bankruptcy courts throughout the country have found self-reporting by the debtor to be an acceptable alternative to the appointment of a PCO. See In re The Clare at Water Tower, Case No. 11-46151 (SPS) (Bankr. N.D. Ill. Dec. 7, 2011); In re Barnwell Cty. Hosp., No. 11-06207-DD, 2011 WL 5443025, at *5 (Bankr. D.S.C. Nov. 8, 2011) (finding the appointment of a patient care ombudsman unnecessary for the protection of patients based on, inter alia, “substantial monitoring by a variety of federal and state regulatory agencies”); In re Hingham Campus, LLC, Case No. 11-33912 (Bankr. N.D. Tex. July 28, 2011); In re Alternate Fam. Care, 377 B.R. 754, 761 (Bankr. S.D. Fla. 2007) (excusing the appointment of a patient care ombudsman where the debtor was subject to a “tremendous amount of supervision and oversight from… state and private entities”).

A self-reporting process can be just as effective and informative as the appointment of a PCO at far less cost, benefiting the medical facility’s creditors and increasing the likelihood of a successful reorganization, which is the ultimate goal of any bankruptcy. Typically, self-reporting requires the debtor to file regular verified reports detailing: (i) the number of staff members and the standing of any licenses held by staff members; (ii) any life-safety issues or complaints made by patients, residents, or families of patients or residents concerning the care provided by the staff; (iii) any increases or decreases in staffing numbers; (iv) the measures taken by the debtor to continue to secure patient records consistent with the Health Insurance Portability and Accountability Act (“HIPAA”); (v) accounts payable and capital expenses; (vi) any post-petition litigation or administrative actions; and (vii) the status of its proposed plan of reorganization. The report would be filed with the Court and submitted to the United States Trustee and any other counsel of record that requests a copy, and the appropriate state and federal oversight agencies.

Given the difficulties in navigating even a simple business reorganization through a bankruptcy, cost savings in health care insolvency cases will be critical, so Courts (and creditors) may look favorably to alternative mechanisms to provide the same level of oversight using existing medical facility staff.

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