United States: The Effects of the New Bankruptcy Amendments on the Health Care Industry

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("Amendments"), which becomes effective in most instances in bankruptcy cases filed on or after October 17, contains numerous changes that impact cases arising in the health care industry.

These Amendments, which effect the most significant revisions to the Bankruptcy Code in more than a decade, contain new requirements concerning the sales of nonprofit health care providers, retention of patient information and patient transfers.

The Amendments also add "health care business," "patient" and "patient records" definitions to the definitional section Bankruptcy Code §101. These definitions cover a broad range of health care institutions. For example, the definition for health care business includes 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 covering charities and nonprofit organizations. When a health care business would file under the U.S. Bankruptcy Code, a dispute often would arise as to whether the state court or bankruptcy court had jurisdiction over matters such as the sale of the health care provider’s assets. States seek to invoke jurisdiction to ensure compliance with state laws and regulations.

The Bankruptcy Act makes 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-forprofit entity that is tax exempt under Internal Revenue Code §501(c)(3) only can 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 intended to give state regulators, including state attorneys general, greater power to enforce state law restrictions and limitations on the transfer of assets from nonprofits.

The Amendments contain many new requirements to protect the interests of patients of reorganizing or liquidating health care businesses.

The law provides specific provisions for the disposal of patient records in a health care bankruptcy case, including rigorous notice requirements before a health care debtor can dispose of patient records. Debtors are required to use "reasonable and best efforts" to transfer patients from a health care business debtor that is closing to another health care facility in the vicinity that provides substantially similar services and maintains a reasonable quality of care. Complying with the procedures for disposing of patient records and transferring of patients will be given a new priority administrative-expense claim against the estate for related costs and expenses.

Further, a patient ombudsman must be appointed within 30 days of the filing of any health care case to act as a patient advocate. The only exception is if the court makes a determination that such an appointment is not necessary in a specific 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 care. If the ombudsman believes the quality of care is declining or otherwise being compromised, he or she must report to the court immediately. The ombudsman is to be compensated by the bankruptcy estate.

The Amendments also 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, thereby providing the Department of Health and Human Services expanded powers against a health care debtor.

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