Is the Ombudsman for You: 7 Hills Radiology and the Application of 11 U.S.C. §333

Newly incorporated into the Bankruptcy Code[2] as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),[3] 11 U.S.C. §333 requires the appointment of a patient care ombudsman within 30 days of the petition date in any Chapter 7, 9 or 11 case filed by a “health care business”.[4]  BAPCPA defined “health care business”:  a public or private entity, profit or nonprofit, that primarily offers facilities and services to the general public for “the diagnosis or treatment of injury, deformity, or disease” and “surgical, drug treatment, psychiatric, or obstetric care.”[5]  The definition specifically includes hospitals; ancillary ambulatory, emergency or surgical treatment facilities; hospices; home health agencies; other similar entities; and long-term care facilities or health care institutions affiliated with long-term care facilities.[6]

Both before and after the Oct. 17, 2005, effective date of BAPCPA, authors speculated about the application and effect of the requirement for a patient care ombudsman.[7]  However, two years after BAPCPA’s effective date, published case law, beginning with the bankruptcy case of In re 7-Hills Radiology and continuing with cases relying on its reasoning, is beginning to show that the patient care ombudsman may not be a mandatory part of every bankruptcy case involving aspects of the health care industry.

In re 7-Hills Radiology appears to be the earliest published case to interpret section §333 of the Bankruptcy Code.[8]  This chapter 11 case involved a radiological facility that tested patients referred by treating physicians and returned the test results and records to the referring physician for review with the patient and retention.[9]  In response to the court’s show cause order regarding the debtor’s potential status as a health care business,[10] the debtor argued that it did not comprise a health care business under 11 U.S.C. §101(27A) because it did not offer facilities and services to the general public, but only provided tests upon referral.[11]

Judge Markell agreed with the debtor’s argument, finding that the restriction of the debtor’s “business to referring physicians takes it out of the definition of health care business.”[12]  The court supported this conclusion by applying the judicial canon of “noscitur a sociis, or roughly, ‘it is known from its associates’” to the remainder of the definition of a health care business.[13]  In other words, the court found that §101(27A)(B)’s list of examples of businesses comprising health care businesses restricts classification as health care business to businesses that not only provide services to the general public, but also that “had some form of direct and ongoing contact with patients to the point of providing them shelter and sustenance in addition to medical treatment.”[14]  Thus, the court declined to appoint a patient care ombudsman because the debtor was not a business of that type.[15]

Subsequent decisions rely upon 7-Hills Radiology for their reasoning.  For example, In re Anne C. Banes, D.D.S. P.L.L.C.,[16] which was published only a few months after 7-Hills Radiology, referenced the prior case in its statutory analysis.[17] In Banes, a defunct dental practice that lacked any active patients, filed a chapter 7 case, and the bankruptcy administrator moved the court to appoint an ombudsman.[18]  The court began its analysis by looking at 11 U.S.C. §101(27A)’s definition of health care business and determining that the canons of statutory interpretation required the statute’s subsections to be read in the conjunctive so that every subsection had to be satisfied as a precondition to the appointment of an ombudsman.[19]  Thus, relying upon 7-Hills Radiology’s explanation that a health care business needed to provide both housing and treatment, the court found that an outpatient dental practice was “fundamentally different” from the types of  facilities described in section 101(27A)(B) of the Bankruptcy Code and “plainly not within the range of health care businesses anticipated by the statute.”[20]

In Banes, the court also found that even if the dental practice had been a health care business, the present tense wording of §101(27A)(A) only required an ombudsman if the debtor “is primarily engaged in offering” services, as opposed to previously offering services.[21]  The court determined that 11 U.S.C. §333(b) supported this finding because the duties it enumerated for an ombudsman all pertained to continuing patient care, which would be unnecessary for a defunct business.[22]  Finally, the court determined that even if the practice was a health care business, the facts of the case militated against the appointment of an ombudsman because the debtor had stopped operating, had offered records to former patients, had involved state licensing authorities in the termination of the practice, and lacked funds to pay an ombudsman.[23]  As a result, the court denied the motion requesting the appointment of an ombudsman.[24]

Similarly, In re Medical Associates of Pinellas [25] cited 7-Hills Radiology to decide that the debtor in question was not a health care business.[26]  In Medical Associates, the debtor did not see patients, but rather provided centralized administrative assistance to doctors for billing, insurance, and financial services, as well as laboratory support and shared equipment.[27]  The debtor did not advertise for patients, and the doctors that used the debtor’s services did business in their own names.[28]  On this basis, the court found that, as in 7-Hills Radiology, the debtor’s primary business did not consist of offering facilities and services to the general public.[29]  The Medical Associates court buttressed its finding by explaining that the debtor did not did not provide both facilities or services for the diagnosis of injury or disease required under §101(27A)(i) of the Bankruptcy Code and the types of care required under §101(27A)(ii).[30]  The court agreed with 7-Hills Radiology’s analysis regarding the types of businesses that satisfied the statutory definition to conclude that an administrative support facility like the debtor did not comprise a health care business.[31]

Interestingly, the Medical Associates decision went on to consider whether an ombudsman would be required if the debtor was a health care business.[32] Relying on Banes, the judge found that there would be no need to appoint a person to oversee patient care when the debtor had ceased doing business.[33]  Indeed, the court reasoned that it would be almost impossible for an ombudsman to carry out her statutory duties because the debtor’s member physicians were retaining their own records and providing patient care and the expense of an ombudsman would not advance the chapter 11 case.[34]

The most recent decision involving 11 U.S.C. §333 surveyed all of the published case law to date (and one unpublished case)[35] to reach its conclusion that a patient care ombudsman was unnecessary.  In re William L. Saber, M.D., P.C.[36] involved a solo plastic surgery practitioner who did routine surgeries at his office and more complex procedures at hospitals or outpatient surgery centers, maintained medical records as per state law and medical board requirements, and filed a chapter 11 case because an employee had a state court judgment against the debtor.[37]  After reviewing the case law discussed above, the court found that the debtor was a health care business because the business comprised a private for-profit entity offering facilities and services for the treatment of deformity and disease to the general public in a surgical treatment facility under §101(27A)(A-B) of the Code.[38]

However, the court in Saber determined that §333(a)(1) of the Code does not require the appointment of a patient care ombudsman when “not necessary for the protection of patients under the specific facts of the case.”[39]  The court looked at the particular facts of the case to find that the debtor adequately secured and maintained its records, projected positive cash flow during the case to avoid any detriment to patient care or privacy during the case, and that the debtor’s treating physician was in good standing.[40]  Thus, viewing these facts in light of the court’s concern that the expenses associated with an ombudsman could interfere with the debtor’s ability to reorganize, the court concluded that the debtor would be able to protect patient privacy without an ombudsman.[41]

In light of the detailed analysis contained in the case law to date, practitioners may wish to review and rely upon 7-Hills Radiology and the cases following that decision for insight and support in situations where an ombudsman appears to be either optional under the statute or unwarranted under the circumstances.  Interestingly, none of the published cases to date resulted in the appointment of an ombudsman.  Perhaps this provides an early indication that sightings of the patient care ombudsman will be less frequent than expected; perhaps this means only that courts deem it more difficult to determine when an ombudsman is unnecessary than when an ombudsman must be appointed.  However, the bankruptcy bar looks forward to finding out.