United States: 10 Things You Need To Know About Health Care Bankruptcies In 2017

The coming year will likely continue to be a tumultuous year for health care providers, suppliers, and payers, as they adapt to meet new challenges and market forces, particularly in light of the open questions as to the viability and continued existence of the Affordable Care Act (ACA) and recent comments made by members of the incoming Trump administration. The following are 10 things to watch in 2017 that may impact the number and progression of health care bankruptcies in 2017.

Changing and Challenging Reimbursement Landscape

Health care systems are struggling to adapt to value-based purchasing, which requires a shift from volume-based payments as well as structural changes to reimbursements and even impacts how clinical care is provided. A large driver of declining reimbursements is Medicare, which has begun to tie traditional Medicare payments to quality, outcomes, and value through alternative payment models. Financial resources are further stretched as Medicare enrollments are projected to continue to increase as the population ages. Medicare has already achieved its initial milestone of tying 30 percent of all traditional Medicare payments to quality or value through alternative payment models by 2016. This trend is expected to continue as Medicare plans to increase this level to 50 percent by 2018. While these changed approaches are still relatively new and providers and suppliers continue to adapt, this trend has negatively impacted margins on some Medicare business. Health care businesses that rely heavily on Medicare will need to be nimble in adapting their business model in 2017. Some may find that bankruptcy offers appealing options, either in filings or in acquisitions of distressed entities.

Uncertain Future of the Affordable Care Act

With the forthcoming Trump administration, it is likely that there will be a broad effort to roll back the ACA, either in whole or in part. Exactly what impact this will have on profitability for health care providers and suppliers remains to be seen, but any large impact on the current model will certainly send reverberations throughout the market and may cause distress to health care providers (who may have to treat patients who have no coverage) as well as to patients who may have trouble obtaining other coverage. The ability for health care providers to be reimbursed through insurance providers also may decrease in 2017, as several large insurance companies weigh whether to continue to participate in the health care exchanges.

Acquisitions of Distressed Health Care Assets

Health care providers and suppliers in bankruptcy may offer an interesting opportunity for expansion to health systems that are seeking to enter a new geographic location, increase their market segment, or take advantage of economies of scale. Health care systems that have been unable to adapt quickly enough to the structural changes ushered in by the ACA and other changes, or with unhealthy cash flows, may find that bankruptcy is the most cost-effective way to market and sell their assets through a process provided by 11 U.S.C. § 363, whereby a debtor may sell some or all of its assets "free and clear" with approval of the bankruptcy court. The market for health care assets will likely continue to be filled with interested buyers looking to expand into both new and existing markets.

Jurisdiction and Administrative Finality in Bankruptcy Matters

Health care providers engaged in a dispute with Medicare or Medicaid regarding the status of their provider agreements will have additional reasons to negotiate and work closely with the programs' administrative process in 2017. Two cases in 2016 demonstrate that the United States is actively taking measures to channel all issues dealing with the Medicare or Medicaid program through the administrative process established for such disputes. Outside of bankruptcy proceedings, a Medicare or Medicaid provider must exhaust the program's administrative process before a federal court may determine a dispute involving the provider's agreements. However, two cases, In re Bayou Shores SNF, LLC and In re Nurses' Registry & Home Health Corp., respectively raised issues of whether the automatic stay affects the termination of a provider agreement or requires ongoing reimbursements where there is an issue of overpayment. Ultimately, in In re Bayou Shores, the Eleventh Circuit held that the bankruptcy court lacked jurisdiction to stay the termination of a provider agreement. Interestingly, in Nurses' Registry, the bankruptcy court for the Eastern District of Kentucky initially held that it had jurisdiction and ordered Medicare to make payments that were withheld, but later vacated this order following a settlement and upon joint motion of the debtor and United States. With these two cases providing persuasive authority for other courts, it is unlikely that the argument for bankruptcy jurisdiction will be at issue in 2017 the way it was in 2016.

Government Deals and Prepackaged Reorganization Plans

We will likely continue to see settlements with the United States government that include prepackaged bankruptcy plans. An example of this type of settlement was seen in the bankruptcy filing of Millennium Health, LLC, one of the nation's largest drug-testing laboratories. Millennium agreed to pay more than $200 million in settling allegations that it violated the False Claims Act for billing Medicare and Medicaid for medically unnecessary testing. The Department of Justice was Millennium's largest unsecured creditor, and the plan provided for its lenders to become the new owners.

Health Information and Technology Continues to Create Costs and Risks

The focus on care management and enhanced quality capabilities may require investment in additional personnel and technology that may be beyond what smaller health systems can afford. Delivering high-quality clinical care is impossible without the support of strategic and integrated IT systems. However, this same technology creates privacy and security risks and requires substantial investment. Despite past government subsidies, implementing electronic health records may increase costs and decrease income for health providers and suppliers in the short term. Additionally, maintaining compliance with regulations like the Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act is becoming increasingly complex as health care providers retain and provide more information electronically and are subject to audits, potential fines, and increased risks from hackers. We may see increasing appointments of ombudsman to oversee the privacy and security of patient information throughout the bankruptcy process in 2017.

Health Care-Related Debt Continues to Be a Major Factor in Consumer Bankruptcies

The ACA helped to reduce the number of people without insurance, however, many Americans still lack insurance and many of the plans available do not provide robust coverage. The resulting medical debt has been a major cause of consumer bankruptcies. This trend is slowing, but health care debt will likely continue to feature prominently in consumer bankruptcies in 2017. If an "Obamacare" coverage option is eliminated, consumer bankruptcies related to the costs of health care may increase.

Cost of Care

Hospitals have faced increased expenses as they hire more employees and invest in technology, which may lead to expenses outpacing revenue for some hospitals. The costs of employees and supplies will be an additional factor to watch in 2017, as other financial pressures mount on distressed health care providers. Ultimately, the cost of care in combination with decreasing reimbursements and difficulties in collecting accounts receivable may continue the increasing health care bankruptcy filings in 2017.

Increasing Cost of Drug Prescriptions

Over the past two years, insurance reimbursements from pharmacy benefit management corporations have not kept up with the increasing cost of prescription drugs. This has led to losses that are better offset by larger pharmacies and will lead to increasing consolidation in the market. Large purchasers have pushed back against increasing drug costs, but as yet an effective approach to control costs but continue to provide adequate drug coverage and availability has not been identified. For example, California recently proposed to cap pharmaceutical pricing for certain populations, but the proposition ultimately failed. The continued focus on rising prescription prices suggests that further methods to cut these costs will continue to be a contentious topic and could lead to further consolidation, acquisition, and structural changes in the pharmaceutical industry. Providers will be impacted as they continue to conduct their own negotiations with vendors and attempt to control their own costs associated with necessary drugs.

Nursing Home Distress on the Rise

The nursing home industry also faces pressure, which may increase financial distress for nursing homes in 2017, as the industry faces stagnant Medicaid rates and a shrinking number of nursing-home residents. While there is still investment in skilled nursing facilities, some market participants are trimming their exposure and selling assets. Additionally, a ban on mandatory arbitration clauses for nursing homes may result in a rise of litigation exposure and costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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