Chapter 22: Treatment of Hospitals and Health Care Businesses in Chapter 11

Adam C. Rogoff

Kramer Levin Naftalis & Frankel, New York

Chapter 22 provides an overview of issues that arise in hospital and other health care bankruptcies. Many of these topics are also applicable to not-for-profit corporations generally, and a number of the matters discussed (e.g., the automatic stay, property of the estate) arise in other types of bankruptcy proceedings. Yet the focus of this chapter is upon the health care nuances that are important to consider.

The health care system in the United States has been and continues to undergo dramatic changes and, at times, financial crisis, as serious efforts have been made to overhaul and equalize the availability of health care coverage. A confluence of events including the economic downturn, the increase in the uninsured population, increased (and potentially unreimbursed) costs of providing medical care, competition from outpatient services, and difficulty in securing private or government financing have led to an increase in health care bankruptcies.

As health care services evolve with the availability of newer technology, the method in which hospital and other health care services are provided has changed significantly. Hospitals have been adversely impacted by competition from private doctors and other outpatient facilities and clinics providing care outside of a hospital setting that previously could be obtained only in a hospital. As such, many services are now being provided on an outpatient basis through ambulatory surgical centers and other clinics that were once done on an inpatient basis, with a resultant decrease in hospital admissions and revenues. In addition, with more intense pressure from insurance companies on reimbursement rates, together with more advancing technologies, lengths of patient stay have been reduced, with follow-up care being provided on an outpatient basis. Accordingly, intense competition exists among hospitals and other health care providers for certain profitable services now being offered in greater numbers on an outpatient basis.

At the same time, reimbursements from federal and state government sponsored Medicare and Medicaid programs have remained flat or declined. In certain states (such as New York State) economic constraints upon state budgets have resulted in reductions in available Medicaid reimbursement rates. Similarly, managed-care plans have utilized their bargaining power to keep reimbursement rates low. These government and private insurer revenues often constitute an essential part of the funding for a hospital or other health care provider. While these revenues suffer reductions, the costs of medical equipment and technology continue to increase, as does the cost of medical malpractice insurance.

Hospital, nursing home, and other health care bankruptcies often apply the same principles as other types of corporations, as they are, after all, still businesses. However, the "business" of health care also differs from a traditional for-profit corporation in that (i) many health care institutions are not-for-profit companies-a status that invokes special requirements under applicable nonbankruptcy law and the Bankruptcy Code-and (ii) most importantly, the success or failure of a hospital or other health care provider significantly impacts the community it serves and patients. Without doubt, these issues are often both emotionally and politically charged as people may rally together to investigate the alternatives to the potential closure of a hospital.

The typical chapter 11 case often focuses on the financial or operational restructuring of a business. Monetary concerns-whether asset values or claims issues-can govern the case. However, professionals in hospital and other health care bankruptcies must keep their focus on patient care, first and foremost. Literally, lives may be at stake-a fact that should not be a secondary consideration to the economic "business" issues. Maintenance of high quality patient care permeates throughout a bankruptcy case and is often the very basis for the relief sought through the bankruptcy courts. While the common bankruptcy principle of maximizing the value of assets and the estate for the benefit of creditors is still important, the parties in interest must also constantly consider the impact of business decisions upon the availability and quality of patient care. This essential "health care mission"-consistent with a not-for-profit director's duty of obedience-may result in decisions that differ from those made in a typical commercial business bankruptcy.

Moreover, hospital and health care bankruptcy cases must carefully navigate the state and federal laws governing the business and patient rights. It is self-evident that hospitals and other health care providers are subject to myriad state laws and regulations that can impact health and safety concerns. These concerns govern not only the operation of a hospital and other health care service providers but also issues affecting the ability and timing on any potential transfer of services and assets. These issues can involve (i) state agency approval of the issuance of a "Certificate of Need" (for example, by the applicable department of health) for transfer of health care services and assets or (ii) outright restrictions on who can be a proper transferee. In the chapter 11 cases of many commercial businesses, it is easy for bankruptcy professionals to default to the Bankruptcy Code as the "Rule Book." But beware that doing so in a hospital or other health care bankruptcy case would be like a tourist wandering into the Himalayas without a Sherpa to guide him safely back. A seasoned health care specialist is a must-have on the team of necessary professionals to guide the course of the chapter 11 case. 

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The Collier Guide to Chapter 11: Key Topics and Selected Industries is the latest addition to the Collier line of bankruptcy products from LexisNexis. Written by over 20 bankruptcy lawyers from leading firms, the Guide takes an in-depth look at the key topics involved in current chapter 11 practice and the special issues that arise in selected industries. It fills the gap between the Code-based coverage of Collier on Bankruptcy and the more general topical approach of the Collier Bankruptcy Practice Guide. Visit the LexisNexis Book Store to learn more.   

Collier Guide to Chapter 11 authors will be participating in a free CLE accredited webinar on Oct. 19, beginning at 2 pm ET. During the webinar, you will hear highlights from the new publication that will cover topics including issues affecting reorganizations for the retail industry, treatment of hospitals and health care businesses in Chapter 11 and Debtor-in-Possession (DIP) financing in the aftermath of the credit crisis.

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