United States: Bankruptcy Amendments Affect the Health Care Industry

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Amendments") is now law and became effective in most instances in bankruptcy cases filed on or after October 17, 2005. These Amendments are the most significant changes to the Bankruptcy Code in more than a decade. Much of the publicity related to the Amendments has related to the extensive changes that will affect consumers. However, there are also numerous changes that affect business cases, including those in the health care industry. This article will briefly discuss important components of the new law involving sales of non-profit health care providers, patient information, patient transfer and other provisions.

The Amendments add "health care business," "patient," and "patient records" as definitions under the Bankruptcy Code. These definitions are intended to cover a broad range of health care institutions. For example, health care business includes a variety of hospitals, treatment facilities, hospices, home health agencies, long-term care facilities and similar "institutions."

Many nonprofit health care businesses were formed under the state law statutes related to charities and nonprofit organizations. Under the old system, when a health care business filed under the United States Bankruptcy Code, a dispute would arise as to whether the state court or bankruptcy court would have jurisdiction over such matters as the sale of the health care provider’s assets. States would seek to invoke jurisdiction to ensure compliance with state laws and regulations. Recognizing this interest, the Amendments make a sale of assets of a nonprofit debtor subject to "nonbankruptcy law that governs the transfer of property" of not-for-profit entities. Further, property of a not-for-profit entity that is tax-exempt under Internal Revenue Code § 501(c)(3) can only be transferred to another § 501(c)(3) entity, or "under the same conditions as would apply" if the seller were not a debtor in bankruptcy.

These changes are also intended to give state regulators, including state attorneys general, much greater power to enforce state law restrictions or conditions on the transfer of assets from nonprofits.

Many new requirements are designed to protect the interests of patients of reorganizing or liquidating health care businesses.

The Amendments contain specific provisions for the disposal of patient records in a health care bankruptcy case, including rigorous notice requirements on a health care debtor prior to its disposal of patient records.

Debtors are required to use all "reasonable and best efforts" to transfer patients from a health care business debtor that is closing to another health care facility in the general vicinity that provides substantially similar services and maintains a reasonable quality of care.

Complying with the procedures for disposing of patient records and transferring patients will be given a new priority administrative expense claim against the estate for related costs and expenses.

A patient ombudsman must be appointed within 30 days after the filing of any health care case to act as a patient advocate. The only exception to this rule is if the court makes a specific determination that it is not necessary for the protection of patients under the specific facts of the case. The duties of the patient 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 is to be compensated by the bankruptcy estate.

The Amendments add a new exception to the automatic stay that is imposed upon a bankruptcy filing. This allows government action to suspend a debtor from participation in the Medicare program or any other federal health care program. This exception gives the Department of Health and Human Services expanded powers against a health care debtor.

The Amendments significantly affect health care providers seeking bankruptcy protection, particularly with regard to sales of non-profit providers, patient information, patient transfer and other provisions. Healthcare providers should be cognizant of the impact of the Amendments prior to filing for bankruptcy protection.

This article is presented for informational purposes only and is not intended to constitute legal advice.