Health care bankruptcies are more than a battle over money and control of a company, because they potentially place the health of a debtor’s patients in danger if handled incorrectly. Health care cases present a risk that people without representation in the bankruptcy case could be seriously injured or unnecessarily lose their lives. This risk is particularly acute when the patient group is vulnerable or has few alternative options for care, such as for nursing homes and rural hospitals. Because of this reality, health care bankruptcies impose a distinct calculus and burden on the U.S. Trustee and state and municipal entities, making it more likely that these actors will participate in the case.(2)

A Different Approach from the Standard Bankruptcy Case

From the U.S. Trustee’s perspective, health care bankruptcies are approached differently from the case’s opening days. In a typical chapter 11 case, the U.S. Trustee has a mostly administrative function and is focused on facilitating the process of the bankruptcy filing and preserving the status quo for the unsecured creditors until a committee has been formed. This role makes sense because the majority of bankruptcy cases revolve around paying money to creditors and resolving financial disputes: There, the parties with a significant financial stake in the outcome typically hire experienced and sophisticated counsel, while those that choose not to participate generally abstain because their claims have little value.

However, health care bankruptcies are more than financial disputes: They impose life-and-death consequences on the public at large, whose interests are frequently not otherwise represented before the bankruptcy court. Thus, the U.S. Trustee and other state and federal entities typically take a more active posture in order to fill this void. For the U.S. Trustee in particular, this role often begins through an effort to gain an understanding of the debtor’s facilities and investigate potential issues affecting patient care.

A portion of this burden is due to the statutory scheme. Section 333 of the Bankruptcy Code requires the court to appoint a patient care ombudsman within 30 days of the commencement of the bankruptcy case unless the court determines that the appointment is not necessary for the protection of patients. Since the statutory default is the appointment of an ombudsman, the provision suggests that debtor’s counsel should file a motion arguing that the appointment is unnecessary if that is the debtor’s view. However, as a practical matter, debtor’s counsel does not always file such motions.(3) Even when those motions have been filed, the bankruptcy court still typically looks to the U.S. Trustee to provide its recommendation on whether the appointment is necessary. The U.S. Trustee is also expected to set out a neutral and independent assessment of the relevant facts in order to assist the court in reaching a considered determination on the issue.

The U.S. Trustee and Cooperation with Other Government Actors

To aid its assessment, the U.S. Trustee typically will seek early information from the debtor regarding its health care facility. This information will include the services they provide, the history of their care, and any existing framework for supervising and protecting patient care.

While the decision regarding whether to appoint an ombudsman is left to the bankruptcy court’s discretion, courts generally consider nine factors:

  1. the cause of the bankruptcy;
  2. the presence and role of licensing or supervising entities;
  3. the debtor’s past history of patient care;
  4. the ability of patients to protect their rights;
  5. the level of dependency of the patients on the facility;
  6. the likelihood of tensions between the interests of the patients and the debtor;
  7. the potential injury to the patients if the debtor drastically reduced its level of patient care;
  8. the presence and sufficiency of internal safeguards to ensure appropriate levels of care; and
  9. the impact of the cost of an ombudsman on the likelihood of a successful reorganization.(4)

Unsurprisingly, the U.S. Trustee will generally focus on these factors as well in attempting to understand the debtor’s health care situation and advise the bankruptcy judge regarding whether a patient care ombudsman appointment is appropriate.(5)

In addition, many states have long-term-care ombudsmen or health care ombudsmen that regulate and periodically audit health care facilities. As a result, there are often publicly available sources of information regarding past audits of the debtor’s facilities and reports made by state agencies. For many facilities, these reports provide a history of care issues that have been discovered in these facilities, ranging from minor to serious issues. While it can be difficult for U.S. Trustees, as non-health care professionals, to determine the seriousness of these issues, these records still provide a history of care issues. Plus, the U.S. Trustee’s function is not to decide the seriousness of health care issues, but to discover and report the information it finds to the court so that the bankruptcy judge can decide whether a patient care ombudsman makes sense in the context of the bankruptcy.

The U.S. Trustee will often also contact state regulatory agencies to gain their perspectives on the debtor’s facilities to gain an understanding of the findings in the public record. More importantly, the state regulatory officials will have a long history with the debtor’s facilities and expertise regarding the industry as a whole. This can make them an important resource for the U.S. Trustee and other interested government entities to gain an understanding regarding the existence of significant care issues. In exchange, the state regulators may also benefit from the U.S. Trustee’s knowledge of bankruptcy law and procedure. Particularly, if the facility is large or the community underserved, the state might have an interest in appearing in the case and presenting the bankruptcy court with its concerns regarding the bankruptcy and the facility’s future.(6)

When a health care facility fails, states and localities might find themselves bearing the burden of resolving the financial and human costs of a closure. Health care bankruptcies have the potential to strain state and local resources due to disruptions in the medical community serviced by the debtor. When a medical facility files for bankruptcy, the debtor often hopes to continue to serve patients after restructuring its finances, or it hopes to sell its assets to another entity that can provide patient care. However, those goals are frequently not achieved.(7)

If and when a hospital shuts down, patients need to be moved to new facilities and the community needs to find a replacement source for health care services. This is particularly true in rural communities, which have seen a significant increase in hospital closures in the past few years.(8) When no other financial resources are available, local governments might end up absorbing these costs.

Advising a Health Care Debtor Client

A health care debtor comes into the bankruptcy case with more information than any other party about its business, historical performance and challenges. As a result, the debtor is often the first source of information to which government entities, the court and creditors turn for information. Debtor’s counsel should foresee that questions about potential care issues and the appointment of an ombudsman will arise.

The U.S. Trustee will likely ask for information from the debtor, and the U.S. Trustee might also question the debtor’s management at the first meeting of creditors regarding the debtor’s quality of care, inspection history and similar topics to the extent that the appointment of an ombudsman remains an issue in the case. Debtor’s counsel should anticipate these issues and prepare their client to answer questions when these topics arise.

The appointment of an ombudsman can be beneficial for debtors. Not only does the ombudsman provide assurance to the court that a professional is monitoring patient care and representing an otherwise-unrepresented constituency in the bankruptcy case, but the ombudsman helps move the case forward by allowing the parties to move past potential care issues in order to focus on the substantive business problems that need to be addressed by the bankruptcy.

The patient care ombudsman can also provide value on business issues. If the case is moving toward an asset sale, the existence of an ombudsman can give the buyer or secured lenders comfort and avoid or reduce due-diligence expenses. Similarly, if the case is moving toward a plan, the ombudsman’s testimony can give the court comfort regarding the debtor’s ability to provide competent care going forward and aid in plan confirmation.(9)

If the debtor believes that the case is not appropriate for an ombudsman, it is helpful for the debtor to take that position early and explain why. This is particularly true if the services that the debtor provides do not require the patients to remain at the facility or if the patients otherwise have readily accessible alternative sources of care, which are often the most important factors in making the determination of whether to appoint a patient care ombudsman.

Ultimately, while there might be costs and burdens in ensuring that patient care is addressed, the sooner patient care issues are removed, the more the bankruptcy case will look like a typical one from both the government’s and practitioners’ perspectives. Remedying these concerns allows the case to run more efficiently and puts the debtor in a better position to achieve its substantive financial objectives in the bankruptcy case.