Even during good times, many healthcare providers operate in a capital intensive environment where operating margins are low but debts and regulatory pressures are high. During hard times, low-flying healthcare organizations encounter economic turbulence that forces them into bankruptcy. Once in bankruptcy, healthcare entities are then exposed to recently enacted laws that single them out for special attention.

At least two problems unique to healthcare can force a weak provider into bankruptcy. The first is that providers depend on payments predominantly made by the federal and state governments (through the Medicaid and Medicare programs). Government agencies can be notoriously unreliable payment makers. They are beyond the reach of the usual tools used to compel payment, including law suits. Financial unpredictability increases the cost of capital for healthcare providers. Government agencies also enjoy unique setoff rights that allow them to unilaterally withhold payments based on mere allegations of a countervailing debt owed to them. Setoff can take place before the government’s claim is fully investigated or proven.

The second special problem is that healthcare providers live and die based on their connections and reputations inside the local community. If the local community does not support the provider, or does not believe the provider provides quality service, the provider’s business is doomed. Events that harm a provider’s reputation cause damage that may not be reparable in time for the entity to recover and survive.

Once inside the bankruptcy environment, healthcare providers will find that Congress has made special preparations. These laws generally make going bankrupt, which is already a costly prospect, all the more expensive for healthcare providers. For example, Section 333 of the Bankruptcy Code creates an ombudsmen to look out for the interest of patients in a healthcare bankruptcy case. Section 351 creates a system for dealing with medical records where the economic muscle to maintain them properly no longer exists. Section 704 controls how patients may be transferred from a bankrupt healthcare entity to a solvent one.

Given the difficult economic climate, healthcare providers and those service providers that work with healthcare providers should be aware of these special considerations.