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Impact of the New Bankruptcy Law on Health Care Bankruptcies

Much of the commentary on the pending bankruptcy legislation has focused on consumer bankruptcies. However, several provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, S. 256 (the “Act”), are specifically targeted to health care bankruptcies. If it becomes law, as is widely expected, the legislation will provide an exception to the automatic stay for government action to suspend a debtor from participation in the Medicare program or any other federal health care program. Additionally, the legislation would place new burdens on health care debtors by providing procedures for disposing of patient records, closing of a facility and transferring patients. The legislation also provides for the appointment of a patient advocate ombudsman. However, the amendments also have the salutary effect of recognizing patients as an important constituency in any health care bankruptcy.

  1. Health Care Business is Now Defined

    For the first time, the Act attempts to create a Bankruptcy Code definition of a health care business. Section 1101 of the Act provides that a health care business:

    1. means any public or private entity (without regard to whether that entity is organized for profit or not-for-profit) that is primarily engaged in offering to the general public facilities and services for—
      1. the diagnosis or treatment of injury, deformity, or disease; and
      2. surgical, drug treatment, psychiatric, or obstetric care; and
    2. includes—
      1. any—
        1. general or specialized hospital;
        2. ancillary ambulatory, emergency, or surgical treatment facility;
        3. hospice;
        4. home health agency; and
        5. other health care institution that is similar to an entity referred to in subclause (I), (II), (III), or (IV); and
      2. any long-term care facility, including any—
        1. skilled nursing facility;
        2. intermediate care facility;
        3. assisted living facility;
        4. home for the aged;
        5. domiciliary care facility; and
        6. health care institution that is related to a facility referred to in subclause (I), (II), (III), (IV), or (V), if that institution is primarily engaged in offering room, board, laundry, or personal assistance with activities of daily living and incidentals to activities of daily living.

  2. Health and Human Services Exception from the Automatic Stay

    Section 1106 of the Act provides a new exception to the automatic stay by adding to the list of stay exceptions under Bankruptcy Code §362 the following:

    1. under subsection (a), of the exclusion by the Secretary of Health and Human Services of the debtor from participation in the Medicare program or any other Federal health care program (as defined in Section 1128B(f) of the Social Security Act pursuant to Title XI or XVIII of such Act).

    It appears that the primary intent of the amendment is to allow the Department of Health and Human Services expanded debt collection powers against a health care debtor. The provision appears to be derived from a bill introduced by Sens. Charles Grassley (R–Iowa) and John Breaux (D–La.) in the 106th Congress, called the “Home Health Integrity Preservation Act of 1999,” which sought to modify the Social Security Act. Sen. Grassley—who also sponsored the new bankruptcy bill—stated that the purpose of the 1999 Act was “to make it harder for all Medicare providers, not just home health agencies, to avoid penalties and repayment obligations by declaring bankruptcy.” 145 Cong. Rec. S750, S756 (daily ed. Jan. 20, 1999) (statement of Sen. Grassley).

  3. Restrictions on Health Care Debtors and Trustees/Protection of Patient Interests

    Sections 1102 through 1105 of the Act place a greater burden on trustees and debtors-in-possession in health care bankruptcies. These provisions came out of one of the failed predecessors to the current legislation, known as the “Business Bankruptcy Reform Act, S. 1914.” Senate Bill 1914 was developed, inter alia, in response to the increasing number of failures within the health care industry and sought to protect the interests of current and former patients of a reorganizing or liquidating health care business. See Nancy A. Peterman, Intensive Care: Protecting Patients’ Rights in Health Care Bankruptcies, 17 Am. Bankr. Inst. J. 10 (1998) (analyzing Senate Bill 1914 and concluding that its provisions were critical to protecting the rights of patients in health care bankruptcies).

    1. Disposal of Patient Records

      Section 1102 of the proposed legislation adds a new §351 to the Bankruptcy Code, containing specific provisions for the disposal of patient records in a bankruptcy case. The new section provides:

      If a health care business commences a case under chapter 7, 9, or 11, and the trustee does not have a sufficient amount of funds to pay for the storage of patient records in the manner required under applicable federal or state law, the following requirements shall apply:

      1. The trustee shall—
        1. promptly publish notice, in one or more appropriate newspapers, that if patient records are not claimed by the patient or an insurance provider (if applicable law permits the insurance provider to make that claim) by the date that is 365 days after the date of that notification, the trustee will destroy the patient records; and
        2. during the first 180 days of the 365-day period described in subparagraph (A), promptly attempt to notify directly each patient that is the subject of the patient records and appropriate insurance carrier concerning the patient records by mailing to the most recent known address of that patient, or a family member or contact person for that patient, and to the appropriate insurance carrier an appropriate notice regarding the claiming or disposing of patient records.
      2. If, after providing the notification under paragraph (1), patient records are not claimed during the 365-day period described under that paragraph, the trustee shall mail, by certified mail, at the end of such 365-day period a written request to each appropriate federal agency to request permission from that agency to deposit the patient records with that agency, except that no federal agency is required to accept patient records under this paragraph.
      3. If, following the 365-day period described in paragraph (2) and after providing the notification under paragraph (1), patient records are not claimed by a patient or insurance provider, or request is not granted by a federal agency to deposit such records with that agency, the trustee shall destroy those records by—
        1. if the records are written, shredding or burning the records; or
        2. if the records are magnetic, optical, or other electronic records, by otherwise destroying those records so that those records cannot be retrieved.

    2. Administrative Expense Claims

      Section 1103 of the Act modifies §503(b) of the Bankruptcy Code to add, as a new administrative expense, the actual and necessary costs and expenses of closing a health care business, including the required manner for disposing of patient records and transferring of patients:

      1. the actual, necessary costs and expenses of closing a health care business incurred by a trustee or by a federal agency (as defined in Section 551(1) of Title 5) or a department or agency of a state or political subdivision thereof, including any cost or expense incurred—
        1. in disposing of patient records in accordance with Section 351; or
        2. in connection with transferring patients from the health care business that is in the process of being closed to another health care business…

    3. Appointment of Ombudsman as Patient Advocate

      Section 1104 of the Act adds a new §333 to the Code and requires the appointment of an ombudsman within 30 days of the commencement of any health care bankruptcy case, to act as a patient advocate. The appointment is not required if the court finds that it is not necessary for the protection of patients under the specific facts of the case. The duties of the ombudsman are to monitor the quality of patient care and report to the court every 60 days regarding the quality of patient care. If the ombudsman believes that the quality of patient care is declining significantly or is otherwise being materially compromised, he or she must report to the court immediately upon making that determination. The ombudsman maintains any information relating to patients as confidential and may not review confidential patient records without court approval and restrictions. Compensation is to be at the expense of the estate pursuant to an insertion in §330(a)(1) of the Code. The new Code section reads:

      §333. Appointment of patient care ombudsman

        1. If the debtor in a case under chapter 7, 9, or 11 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 health care 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.
          1. If the court orders the appointment of an ombudsman under paragraph (1), the United States Trustee shall appoint one disinterested person (other than the United States Trustee) to serve as such ombudsman.
          2. If the debtor is a health care business that provides long-term care, then the United States Trustee may appoint the State Long-term Care Ombudsman appointed under the Older Americans Act of 1965 for the state in which the case is which the case is pending to serve as the ombudsman required by paragraph (1).
          3. If the United States Trustee does not appoint a State Long-Term Ombudsman under subparagraph (B), the court shall notify the State Long-term Care Ombudsman appointed under the Older Americans Act of 1965 for the state in which the case is pending, of the name and address of the person who is appointed under subparagraph (A).
      2. An ombudsman appointed under subsection (a) shall—
        1. monitor the quality of patient care provided to patients of the debtor, to the extent necessary under the circumstances, including interviewing patients and physicians;
        2. not later than 60 days after the date of appointment, and not less frequently than at 60-day intervals thereafter, report to the court after notice to the parties in interest, at a hearing or in writing, regarding the quality of patient care provided to patients of the debtor; and
        3. if such ombudsman determines that the quality of patient care provided to patients of the debtor is declining significantly or is otherwise being materially compromised, file with the court a motion or written report, with notice to the parties in interest immediately upon making such determination.
        1. An ombudsman appointed under subsection (a) shall maintain any information obtained by such ombudsman under this section that relates to patients (including information relating to patient records) as confidential information. Such ombudsman may not review confidential patient records unless the court approves such review in advance and imposes restrictions on such ombudsman to protect the confidentiality of such records.
        2. An ombudsman appointed under subsection (a)(2)(B) shall have access to patient records consistent with authority of such ombudsman under the Older Americans Act of 1965 and under non-federal laws governing the State Long-term Care Ombudsman program.

    4. Duty to Transfer Patients

      Section 1105 of the Act adds to the duties of a trustee or debtor-in-possession a requirement to use all “reasonable and best efforts” to transfer patients from a health care business debtor that is closed, to a health care business or other entity in the same general vicinity that provides substantially similar services and maintains a reasonable quality of care. Section 1105 provides:

      1. IN GENERAL.—Section 704(a) of Title 11, United States Code, as amended by Sections 102, 219, and 446, is amended by adding at the end the following:
        1. use all reasonable and best efforts to transfer patients from a health care business that is in the process of being closed to an appropriate health care business that—
          1. is in the vicinity of the health care business that is closing;
          2. provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and
          3. maintains a reasonable quality of care.

Conclusion

Although the primary focus of the debate over the proposed bankruptcy legislation has been on consumer bankruptcy, there are plenty of changes in store affecting health care bankruptcies. Patients’ rights proponents may laud the protections Title IX of S. 256 provides, while trustees and debtors-in-possession may be concerned over the burdensome nature of the new law. Counsel for health care trustees and debtors will need to learn the details of the new provisions, as the amendments take effect for cases commenced 180 days after the date of enactment.

Committees
Health Care