Impact of the New Bankruptcy Legislation on Health Care Businesses



On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Included in this new legislation are new provisions that create procedures for the destruction of patient records, the transfer of patients during the liquidation of a health care business, the monitoring of patient care, and the termination of participation in federal programs.

Destruction of Patient Records

The 2005 Amendments create a procedure for a health care business to dispose of patient records when it commences a bankruptcy case and it does not have sufficient funds to pay for the storage of the records in a manner required under applicable federal or state law.  In those instances, the debtor or trustee, if one has been appointed, is required to do the following:

  1. Promptly publish notice in one or more appropriate newspapers stating that patient records at the business must be claimed by the patient or the insurance provider within one year after the date of notification or the records will be destroyed; and,
  2. During the first six months following the date of the notice, the debtor must promptly attempt to notify directly each patient and appropriate insurance carrier by mailing a notice regarding the claiming or disposing of patient records to the most recent known address of that patient or a family member or contact person.

If the patient records are not claimed after the one year notification period, the debtor shall mail by certified mail a written request to each appropriate federal agency to request permission from that agency to deposit the patient records with that agency.  No federal agency is required to accept the patient records.  If no agency accepts, the debtor may proceed with the destruction of the records by shredding or burning the records if they are written, or by otherwise destroying them so they cannot be retrieved if the records are magnetic, optical or stored by other electronic means.

Liquidation of a Health Care Business

In a Chapter 7 liquidation, the amendments add a new duty for the trustee appointed to liquidate a health care business.  The trustee must: (i) use all reasonable and best efforts to transfer patients to an appropriate health care business that is in the vicinity of the business that is closing, (ii) provide the patient with services that are substantially similar to those provided by the health care business that is being closed, and (iii) maintain a reasonable quality of care.  One wonders why such legislation was necessary since it had seemed that any trustee would strive to accomplish these tasks.  The problem is generally one of money.  How is the trustee supposed to accomplish this if the estate does not have sufficient revenues?  In order to help pay for these costs, the new legislation added a new administrative expense category for the actual, necessary costs and expenses of closing a health care business, including the disposing of patient records and the transferring of patients to another health care business.  The problem remains, however, that if the estate does not have funds, the existence of a priority claim provides little benefit.

Patient Care

Within 30 days after the commencement of a bankruptcy case of a health care business, the court must order the appointment of an ombudsman to monitor the quality of patient care and to represent the interests of the patients of the health care business, unless the court finds that the ombudsman is not necessary for the protection of patients under the specific facts of that case.  The actual appointment of the ombudsman is actually made by the U.S. Trustee in each federal district.  If the debtor is a health care business that provides long-term care, the U.S. Trustee may appoint the State Long-Term Care Ombudsman appointed under the Older Americans Act of 1965 in the state in which the case is pending.  If the State Long-Term Care Ombudsman is not appointed, the court must still notify the State Long-Term Care Ombudsman of the name and address of the person who is appointed.

The ombudsman appointed in such cases shall (i) monitor the quality of patient care provided to patients of the debtor, including interviewing patients and physicians, (ii) not later than 60 days after appointment of the ombudsman, and not less frequently than 60 days interval thereafter, report to the court regarding the quality of patient care provided to the patients of the debtor, and (iii) file with the court a motion or written report if the ombudsman determines that the quality of patient care provided to patients of the debtor is declining significantly or is otherwise being materially compromised.  The ombudsman must keep confidential any information obtained in the course of his duties that relates to patients and may not review such records unless the court approves such review in advance and imposes restrictions to protect the confidentiality of the records.

Termination of Medicare Participation

Perhaps the most significant amendment was the creation of a new exception to the automatic stay for any action by the Secretary of Health and Human Services to exclude a debtor from participation in the Medicare program or any other federal health care program under the Social Security Act.   This exception will eliminate the ability of a debtor to benefit from the automatic stay upon the filing of a bankruptcy case and maintain its participation in a federal program pending the completion of the bankruptcy case.  Without the continued participation in many federal programs, many health care businesses will find little value in seeking to reorganize. 

A health care business is defined by the 2005 Amendments to mean any public or private entity, whether for profit or not-for-profit, that is primarily engaged in offering to the general public facilities and services for diagnosis or treatment of injury, deformity or disease and surgical, drug treatment, psychiatric or obstetric care.  It specifically includes any general or specialized hospital, ancillary ambulatory, emergency or surgical treatment facility, hospice, home health agency, or any long-term care facility.  Included under the definition of long-term care facility are any skilled nursing facility, intermediate care facility, assisted living facility, home for the aged, domestic care facility and any health care institution related to any of the above facilities such as an institution that is primarily engaged in offering room, board, laundry or personal assistance with activities of daily living and incidentals to the activities of daily living.

The above described amendments will become effective for cases filed on or after October 17, 2005.  Since the language of the amendments are new, undoubtedly there will be uncertainty in the courts as to the application of these provisions to a particular set of facts.  Thus, you should consult counsel to be sure you understand your rights.  If you have any issues that involve these matters and need any assistance, please let us know.