Good for Patients, Bad for Creditors: The Disparate Treatment of Healthcare Businesses

In most businesses entering bankruptcy, great care is taken to balance the rights of debtors and creditors.  However, in distressed healthcare-related businesses, debtor and creditor rights need to be balanced against the needs of the patients.  The results can mean a shortage of funds left to pay creditor claims.  With manufacturing businesses, the machines can be stopped and the employees laid off while creditor claims are sorted out.  In a hospital, nursing facility, and other care organizations, stopping the machines and laying off the staff is simply not an option.  Patients that require care will not stop requiring care because a facility ran out of money.

Distressed healthcare businesses are subject to special treatment under the bankruptcy code.  Due to their nature as the essential provider of care to their patients and because the displaced patients from a sudden shuttering of a healthcare business would represent a public health emergency, the court can appoint an individual known as  a Patient Care Ombudsman (“PCO”) to advocate for the rights of patients in a distressed healthcare facility.  The PCO “monitor[s] the quality of patient care and to represent the interests of the patients of the health care business.” PCOs are also entitled to seek compensation from the remaining assets of the business in a bankruptcy estate in the same manner as other professionals appointed with court authorization.

With long term care facilities such as nursing homes, the court can appoint the State Long-Term Care Ombudsman (“SLTCO”) as PCO to assist in protecting the health, safety, welfare, and rights of residents.  The SLTCO represents the interests of residents before governmental agencies, and seeking administrative, legal, and other remedies to protect their health, safety, welfare, and rights.  Because a PCO’s duties are to advocate for patients’ welfare, it follows that a PCO may urge the court to require the debtor to take measures that may deplete the bankruptcy estate and/or diminish creditors’ recoveries.

Even if a PCO or the SLTCO is not appointed to provide for patients, the remaining assets of the business might still be used for patients before creditors in some cases because the duty to provide for the care of and transfer of patients from a distressed healthcare business extends also to a Debtor in possession.  A debtor in possession health care business must “use all reasonable and best efforts to transfer patients…to an appropriate health care business that (A) is in the vicinity of the health care business that is closing; (B) provides the patient with services that are substantially similar to those provided by the health care business that is in the process of being closed; and (C) maintains a reasonable quality of care.”  All costs incurred in connection with such transfer of patients receive priority.

Given special treatment healthcare business receive, it is easy to see how the full value of any possible bankruptcy estate could be consumed by a PCO, SLTCO, or a debtor in possession while providing for the care patients during the early stages of cases.

Creditors should work with counsel to assess customers and clients to determine which, if any, customers qualify as healthcare businesses and structure their contracts accordingly.  In which case, creditors should carefully watch and manage their accounts receivables – staying aware of how far behind the healthcare business might be.  At the first sign of trouble, creditors should work with the healthcare business to try to restructure outside of bankruptcy in order to avoid extra costs that may come with a PCO, SLTCO, or transfer.  Further creditors should not be afraid to allow potential transfers of rights to operate and assignments to benefit creditors.  By working with a distressed healthcare business instead of against it, creditors may find opportunities to protect their financial interests.   Most importantly, creditors should think long and hard and talk with their counsel before considering an involuntary bankruptcy liquidation.

In the bankruptcy of healthcare businesses, the patients’ situation dictates the creditors’ situation.  Because patient safety and continued care are paramount, the rights of unsecured creditors may be very limited.  Should a distressed healthcare business end up in bankruptcy, it is likely to be the unsecured creditors, who have not recognized and accounted for the peculiar nature of healthcare businesses, left out in the cold.

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