When a healthcare provider declares bankruptcy, a trustee may be appointed to represent creditors' interests. But trustees have no fiduciary duty to do what's best for patients. In many cases, creditors' and patients' interests don't mesh, healthcare attorneys say.
"It's a disaster waiting to happen," says Keith Shapiro, vice president of education for the American Bankruptcy Institute, an Alexandria, Va.-based organization specializing in insolvency research and education.
He and colleague Nancy Peterman, both of Chicago-based Holleb & Coff, recently phoned state regulators to find out what patient protections may exist in the event of a healthcare bankruptcy. State laws and regulations fall far short of adequately protecting patients, they say.
For example, states have all kinds of recommendations and requirements for the orderly shutdown of a facility, Shapiro notes. But few states have laws to protect patients should a facility close its doors suddenly, he says.
That worries Sen. Charles Grassley (R-Iowa) who, as chairman of the Senate Judiciary Committee's subcommittee for administrative oversight and the courts, believes healthcare bankruptcy is an area ripe for abuse. As competitive pressures push more healthcare providers to the financial brink, Grassley fears patients will suffer.
In one of the most egregious cases highlighted during a June 1 subcommittee hearing in Washington, patients of a bankrupt nursing home, Reseda (Calif.) Care Center, were caught in the middle of a failed attempt to sell the facility. When sale talks collapsed, patients reportedly were rushed to other facilities. Some were transferred without family members' knowledge.
Grassley has introduced a bankruptcy reform bill, S. 1914, that addresses such abuses by creating a process for transferring patients. Trustees would have to "use all reasonable and best efforts" to transfer patients to an appropriate healthcare facility in the vicinity.
The bill also requires the bankruptcy court to appoint an ombudsman to monitor patient care at a facility that is liquidating assets or restructuring. The ombudsman would report back to the court on any problems with the quality of care provided.
Furthermore, the measure creates a process for disposing of patient records of a facility that is closing. If a trustee doesn't have the money to pay for sufficient storage, appropriate federal and state agencies would be asked to store the records. If those agencies refuse to take the records, the trustee must give former patients an opportunity to claim their records before the documents are destroyed.
The bill mandates that any costs associated with trustees' new responsibilities be covered by the debtor's estate.
Grassley's staff became interested in provider bankruptcies after receiving a copy of the Health Care Insolvency Manual, a primer on healthcare and bankruptcy law. The ABI's Health Care Insolvency Committee developed the manual to bring healthcare and bankruptcy professionals up to speed on what has become a growing area of concern.
The ABI doesn't tabulate data on the number of healthcare providers filing for bankruptcy each year. But attorneys in the field report a rise in the number of cases they've seen in the past two to three years. Many involve small rural and inner-city urban hospitals that have been squeezed by reductions in governmental reimbursements and increased competition.
Recent financial analyses show that, overall, the hospital industry is more profitable than ever. But a new study commissioned by the American Hospital Association bolsters the case for writing new mandates into the federal Bankruptcy Code. The study by Thomas Prince, a professor of health services management, accounting and information systems at Northwestern University's J.L. Kellogg Graduate School of Management, found nearly one-third of the nation's hospitals are financially distressed.
In the most dire situation, a provider may pursue a Chapter 7 liquidation of assets. In such cases, a court-appointed trustee works with the debtor to recover as much as possible for creditors.
More commonly, troubled healthcare providers file under Chapter 11 of the Bankruptcy Code. The debtor usually remains in possession of the assets while it works with creditors to restructure its debt and reorganize the business. In some cases, a trustee may be appointed to oversee the process.
These days, debt-ridden healthcare providers are filing Chapter 11 as a prelude to being acquired by stronger providers in their markets, attorneys say (Jan. 12, p. 22.). A recent example is New York Flushing Hospital Medical Center in the Queens borough of New York City (June 8, p. 16). Instead of reorganizing on its own, Flushing plans to merge into New York Hospital Medical Center of Queens.
It's unclear whether Grassley's bankruptcy reform bill will make it into law as is. The bill is broad, covering all types of bankruptcies and industries. Provider and trustee representatives give the healthcare provisions mixed reviews.
"I think that overall it will assist and provide guidance to trustees in complying with their fiduciary duties," says Deborah Fish, an attorney with Allard & Fish in Detroit whose firm specializes in insolvency matters.
But Fish raises two concerns.
One is the issue of adequate funding. A bankrupt estate may not have enough money to cover mandated expenses, such as notifying patients of their right to claim medical records.
The other is immunity. Without specific immunity from lawsuits, trustees could be liable for any death or trauma caused in the course of transferring patients to another facility.
The Health Insurance Association of America, which testified at the recent hearing on Grassley's bill, opposes federal reforms. Charles "Chip" Kahn, the association's chief operating officer and president-designate, says most state solvency requirements provide significant protection of health plan enrollees. Any reforms should take place at the state level, he says.
The AHA has yet to submit its comments on the proposal.
The ABI's Shapiro argues in favor of codifying patient protections at the federal level.
"The bottom line here is that this legislation sends a message out that we're not going to put the health and safety of current and former patients at the end of the line behind the financial concerns of creditors," he says. "Some things are more important than dollars and cents."