The Impact of Health Care Business Bankruptcies on Patient Care

October 13, 2010

(Published in the Healthcare Review, October 2010)

The Appointment of the Patient Care Ombudsman

Health care businesses are just as susceptible to financial stress as are other businesses in these challenging economic times.  Managing the burden of ever-increasing health care costs is as critical to the financial vitality of businesses in the health care industry as it is to consumers.  It is therefore not surprising to see an increase in the number and visibility of health care business bankruptcies, giving rise to an obvious question:  As health care providers become more vulnerable to the risk of bankruptcy, what is the impact of those bankruptcy cases on patient care?   

Congress saw fit to address that question when it overhauled the United States Bankruptcy Code (the “Code”) in 2005, by making several modifications to the Code that have had a significant and, in some cases, controversial effect on health care business bankruptcies.  Not least among those changes is the appointment of a patient care ombudsman within 30 days after a health care business declares bankruptcy.  Specifically, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BACPA”) modified Section 333 of the Code to require that the United States Trustee appoint a patient care ombudsman “…to monitor the quality of patient care and to represent the interests of the patients of the health care business.”

At first blush, a regulation designed for the purpose of monitoring the quality of patient care and serving as an advocate for patients when a health care provider files for bankruptcy relief seems both laudable and practical.  It is reasonable to anticipate that the bankruptcy of a health care business is likely to have a negative impact upon patient care, necessitating the oversight of a “disinterested” person charged with the responsibility of reporting to the court every 60 days “regarding the quality of patient care at the health care business involved.”  However, as one might expect when there are changes to the law, good intentions and the interpretation of law often times diverge.  A deeper look into the provision reveals some of the weaknesses in its application.

One pitfall lies in the definition of the term “health care business”.  According to the Code, a “health care business” is a public or private entity primarily engaged in offering public facilities and services for the “diagnosis or treatment of injury, deformity, or disease…and surgical, drug treatment, psychiatric, or obstetric care”, including hospitals, ambulatory, emergency and surgical facilities, hospice and home health agencies, and long-term care facilities.  However, a problem arises in determining what is not a “health care business”, thus creating an opportunity for bankrupt medical businesses to successfully avoid the appointment of a patient care ombudsman by arguing that they do not fall within the scope of the statutory definition.  Examples include a business that provided radiological and x-ray services only on a referral basis, a dental practice that did not provide housing to its patients, and a business that provided administrative services to physicians, such as billing, insurance, human resources, and related financial services. 

Another available loophole is the language of the Code that mandates the appointment of a patient care ombudsman “…unless the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case”, thereby giving the court broad discretion on a case-by-case basis.  Factors that the bankruptcy court may consider in that regard include the cause of the bankruptcy, the existence of other sources of supervision and internal safeguards, the bankrupt party’s past history of patient care, the ability of patients to protect their own rights, the degree of dependency of the patients on the facility, the likelihood of tension between the interests of the patients and the bankrupt party, and the potential risk of harm if the level of patient care is diminished.  In one case, the court held that a patient care ombudsman was not required because the bankruptcy was precipitated by the debtor’s tax problems rather than any issues associated with patient care or privacy.  In another, it was determined that the bankruptcy was caused by a fire, and was “not related to patient care in any way.”  Yet another stated that an ombudsman was not necessary because the physician was in “good standing in his profession” and had an excellent history of patient care.

Another major factor is the cost associated with the appointment of a patient care ombudsman.  The bankrupt health care business is already confronting significant, and perhaps ultimate, financial issues, and the conduct of bankruptcy cases is an expensive process.  Add to that the fact that it is the business’s responsibility to compensate the ombudsman, and it is easy to understand that debtors have successfully argued that they cannot bear the added financial burden of employing yet an other expensive professional.  As one judge put it in ruling that a patient care ombudsman was an unnecessary expense, “…the cost of an ombudsman would be a waste of scarce financial resources and would merely add another layer of bureaucracy to an already heavily regulated and supervised company.”

The role of the patient care ombudsman is crucial in protecting patients and assuring that the care they receive is not detrimentally affected by the bankruptcy of their health care provider.  Congress was right to implement legislation addressing the impact of health care business bankruptcies on the quality of patient care.  It is now up to the courts to support the good intentions of Congress by narrowing the available exceptions to the Code.      
Larry Plavnick is a member of the Corporate Department of the McLane Law Firm. He can be reached at (781)904-2693 or at  The McLane Law Firm is one of New England’s premier full-service law firms with more than 90 attorneys in four offices spread throughout Massachusetts and New Hampshire.