The 2005 amendments to the Bankruptcy Code have been the source of much controversy. The “patient care ombudsman,” a new position created in health care bankruptcies, however, is one addition that has received little attention in the press. Congress added the position in the newly-codified §333 of the Code. While not utilized in many cases to date, the position creates an employment opportunity for turnaround professionals, as well as a new challenge for professionals representing other parties. Bankruptcy professionals should consider the impact, expense and potential resource the ombudsman position presents to them and their clients.
What Is an Ombudsman?
The patient care ombudsman is a new professional role, applicable in health care bankruptcies filed under chapters 7, 9 or 11 of the Code. The ombudsman position is based on a recent state law model, with some states having created a government office in recent years to oversee patient care issues and intervene in patient crises or, sometimes, care disputes. The patient care ombudsman in a bankruptcy case will be a professional appointed to aid the court.
When is an ombudsman appointed?
Within 30 days after the filing of a health care bankruptcy, the bankruptcy court must order the appointment of an ombudsman. The appointment is mandatory, unless the court makes a specific finding that the appointment is not necessary for the protection of patients under the specific facts of the case.
What Cases Will Involve Appointment of an Ombudsman?
Health care bankruptcies only. A health care bankruptcy is one that is filed by a company primarily engaged in offering public facilities and services to the general public for diagnosis or treatment of injury or disease, or surgical, drug, psychiatric or obstetric care. Health care bankruptcies include hospitals, ambulatory and surgical care facilities, long-term care facilities, assisted living facilities, home health agencies, hospices and related businesses; they probably do not include physician practice management companies (e.g., PhyCor), or service providers like emergency room staffing companies (e.g., PhyAmerica), which do not offer facilities. There appears to be some inconsistency in the statute on the definition, however home health care companies, for example, are specifically included in the list of health care businesses, although they do not usually operate facilities.
Because of the importance of patient care, there was some speculation in 2005 that the U.S. Trustee’s Office would begin requesting the appointment of an ombudsman in some health care cases that predated the effective date of the bankruptcy amendments, and to which the ombudsman provision would therefore not apply. This does not appear to have happened. It is possible that, where circumstances warrant, the U.S. Trustee may request permissive appointment of an ombudsman in future health care cases that do not technically fit within the definition of a health care bankruptcy.
How Is the Ombudsman Appointed?
The U.S. Trustee appoints the ombudsman, who, like other professionals, must be a disinterested person. If the debtor provides long-term care, the U.S. Trustee may, but is not required to, appoint the state long-term care ombudsman designated under the Older Americans Act of 1965 for the state where the case is pending.
What Is the Ombudsman's Role?
The ombudsman is responsible for monitoring the quality of patient care and representing the interest of the patients of the health care debtor, including interviewing patients and physicians. The ombudsman reports to the court every 60 days, at a hearing or in writing, regarding the quality of patient care provided. If the ombudsman determines that the quality of patient care is declining or materially compromised, the ombudsman shall file a motion or written report with the court. The ombudsman is required to maintain any patient information as confidential.
Who Will Be a Candidate for Appointment to the Ombudsman Position?
Ideal candidates will be consultants and advisors that have health care bankruptcy experience, and that have operational experience dealing with quality of care and delivery issues for their clients. This is a new professional opportunity for advisors who do not win the primary role advising the committee or debtor in a bankruptcy case, and it may be a significant opportunity for financial advisors as long as they have demonstrated operational expertise. Other likely candidates for the ombudsman position include individuals with experience working under the state law ombudsman and regulatory schemes. This includes nursing home receivers, although some of these individuals may lack experience in the bankruptcy realm. Consultants with hospital management experience, or hospital certification and planning experience, would also be ideal.
Under the Bankruptcy Code, the ombudsman can be either an individual or a firm. The U.S. Trustee’s office, when appointing chapter 7 or chapter 11 trustees, generally prefers to appoint individuals rather than firms as a matter of policy, and it is likely the U.S. Trustee will continue this same practice for the ombudsman position.
What Issues Are Likely to Arise with the Ombudsman Position?
There are several to be considered:
1. Compensation. Compensation and retention is probably best handled by filing an application for employment of the ombudsman, with compensation to be spelled out in the application like for other professionals of the estate. The Bankruptcy Code does not provide for a specific level of compensation as it does for some other professionals, like trustees. The application for employment gives the ombudsman the opportunity to set some of the other parameters of employment as well. Acceptance of appointment without specified parameters and the protections discussed further below would present significant risks to the would-be ombudsman.
To date, in the few cases where an ombudsman has been appointed (all of which were relatively small cases), it appears the proposed ombudsmen have accepted the positions without retention applications or liability protection. In large cases, and especially mega-cases, it seems unlikely many individuals or firms will be willing to accept an ombudsman appointment in the absence of some protections.
2. Liability: Based on the high level of medical malpractice liability problems in many states, it is important that the ombudsman attempt to obtain a retention order stating that the ombudsman will only be liable for intentionally and deliberately wrongful acts, and that the ombudsman has exculpation in all other instances. This is the same standard often applied to members of creditors committees, and sometimes to trustees. See In re PWS Holding Corp., 228 F.3d 224 (3d Cir. Del. 2000) (committee members only liable for intentionally wrongful or ultra vires acts); Dodson v. Huff (In re Smyth), 207 F.3d 758 (5th Cir. Tex. 2000) (adopting gross negligence and intentionally wrongful acts standard for bankruptcy trustees); Radwan, Theresa J.P. “Trustees in Trouble: Holding Bankruptcy Trustees Personally Liable for Professional Negligence,” 35 Conn. L. Rev. 525 (Winter 2003). As another possibility, the ombudsman could attempt to get a determination of quasi-judicial immunity, as is often applied to examiners appointed in bankruptcy cases. See, e.g.,Gumport, Leonard J. “The Bankruptcy Examiner,” 20 Cal. Bankr. J. 71, 128 (1992). In the absence of some sort of protective language in the retention order, it is unclear what standard of liability will apply.
Ideally, the ombudsman would also obtain language in the order providing that the estate will indemnify the ombudsman from all claims, other than intentionally wrongful acts or gross negligence, although the ability of an ombudsman as a court-appointed professional to obtain such protection, which is sometimes given to the debtor’s chosen financial professionals, is questionable. The retention order should further provide that any claims or suits against the ombudsman related to its work in the bankruptcy case must be brought in the bankruptcy court, as the exclusive venue, since the ombudsman is an official of this court. Someone considering the ombudsman role may also want to consider retaining liability insurance of his or her own.
3. Access to lawyers and accountants. There is a likelihood an ombudsman will need counsel, and possibly other consulting services, for certain functions. Thus, it is important that an ombudsman request either in its application, or after retention, the right to employ attorneys and advisors to the extent necessary, and that any attorneys or advisors to the ombudsman be retained under separate employment applications with the court and paid like other professionals by the estate. Counsel for the ombudsman should be attuned to obtaining exculpation (and, if possible, a release) for the ombudsman, in any plan of reorganization, similar to what other parties often receive.
4. Likely resistance to appointment in short-term bankruptcies. Even though a case may qualify as a health care bankruptcy, should an ombudsman be appointed where the entire case is geared toward a sale of substantially all of the assets in 90-180 days? In at least one recent case, the court declined to appoint an ombudsman because the hospital was shutting down and had moved all of its patients. It remains to be seen how courts and the U.S. Trustee will view the ombudsman role in cases where there are short-term operations leading up to an anticipated quick sale.
5. Advocacy. What advocacy role should an ombudsman play? The ombudsman position was created to help protect the interest of patients in a health care bankruptcy, and it remains to be seen how broad will be the reach of an ombudsman’s advocacy role. The ombudsman has express powers only to report to the court on patient care, and to file a motion or report if patient care if declining significantly or materially compromised. What if one proposed plan of reorganization materially compromises patient safety as opposed to another? What if the margins in the cash collateral budget are so thin they can be argued to materially compromise patient safety? It seems logical that in some instances, the ombudsman may be asked by parties for advance consultation on such issues, to ensure that the ombudsman will not later take the position with the court that the proposed action compromises patient safety. Will the ombudsman object to certain actions at bankruptcy hearings, on the ground that the action will materially compromise patient safety? This seems logical, although under the literal language of the statute it is unclear whether the ombudsman will have this power.
6. Privacy. The health care field is rife with privacy statutes and regulations, and privacy will likely be an issue of major contention for an ombudsman. Section 333 of the Code takes this into account, providing that an ombudsman will only be allowed access to confidential patient records upon entry of a court order, which will also provide restrictions on the use of the information and provide for maintenance of confidentiality. The ombudsman will also be interviewing patients, however, and likely learning confidential medical information in this way as well. In its bi-monthly reports, the ombudsman will need to be careful to maintain all patient confidentiality, while striking the balance of providing support for its positions on patient care to allow the court to make a proper evaluation. It remains to be seen whether some of the reports may be subject to being filed under seal, although it seems that the intention of the statute is to ensure transparency in the process, which would suggest that reports should be publicly available.
7. Cost. The additional administrative cost of the ombudsman position is likely to be a point of significant contention in each appointment. Courts have the ability to forego appointment of an ombudsman where they find that appointment is unnecessary for protection of patients; will it become standard for courts to find appointment of an ombudsman unnecessary in smaller cases, where there appear to be inadequate assets to pay the ombudsman, or where the appointment will significantly tax the estate? Further, the interplay between the additional administrative expense of an ombudsman, and the resulting deterioration of the secured creditor’s collateral position, will be interesting to watch. Will secured creditors consent to a carve-out for the costs of the ombudsman? The authors can think of a few past cases where secured creditors would have overwhelmingly supported appointment of an ombudsman, in order to get information about and insure the continued quality of patient care at the facilities which comprised their collateral. In other cases, however, secured lenders may not feel so much at risk, and thus so generous.