3 Special Issues in Healthcare Restructurings

2020 Saw Increased Healthcare Provider Bankruptcies. What Should Companies & Restructuring Professionals Know Moving Forward?

Healthcare providers face many pressures, including costs associated with regulatory compliance and necessary technological and infrastructure investments. Congress’ repeated attempts to reform healthcare legislation have long created uncertainties for the healthcare industry.

A PwC report predicts that throughout 2021, healthcare will be among retail, oil and gas and hospitality as the sectors most likely to face restructurings. The COVID-19 pandemic has led to increased healthcare bankruptcy activity due to cancellation of elective procedures and imbalances in supply and demand. It’s important to understand that healthcare restructurings can have unique challenges, which will be discussed below.

Healthcare Providers Still Face These Special Issues

Among the many factors impacting healthcare providers is the shift to bundled payments for insurance reimbursements. Under the Affordable Care Act in 2013, the Center for Medicare and Medicaid Innovation began implementing a bundled payment system for Medicare. Bundled payment systems have become more popular in the private sector as well due to their potential to reduce costs and improve quality of care.

In a bundled payment system, the payer (generally Medicare, Medicaid, or private insurance) reimburses a healthcare provider based on a fixed amount for all the expected services for a particular condition rather than paying separately for each provided service. The fixed reimbursement is based on the average cost of the services normally required for the condition and the average length of stay. In a bundled payment system, healthcare businesses assume the financial risk that the cost of the services they provide will exceed the actual reimbursement received, resulting in a loss.

Similar to other businesses, private and public healthcare providers may file a petition for relief under the Bankruptcy Code to restructure their debts. However, the Bankruptcy Code has several specific provisions that apply only to “healthcare businesses”, creating unique implications for healthcare restructurings. The Bankruptcy Code broadly defines “healthcare businesses” as any public or private entity that is primarily engaged in providing medical services, including:

• General hospitals
• Emergency medical treatment facilities
• Hospice
• Home health agency
• Long-term care facilities¹

This article discusses three areas relevant to healthcare restructuring under the Bankruptcy Code:

1. Use of chapter 9 for public healthcare restructurings
2. Appointment of the patient care ombudsman
3. Bankruptcy treatment of Medicare and Medicaid provider agreements

1. Public Healthcare Restructurings Under Chapter 9

While distressed private and public healthcare providers may restructure under chapter 11 of the Bankruptcy Code, some public hospitals and health care districts may also be eligible to restructure under chapter 9, the chapter of the Bankruptcy Code that permits municipalities to reorganize their debts. Although similar to chapter 11, the eligibility requirements under chapter 9 are stricter, and the restructuring process under chapter 9 offers some distinct advantages for restructuring.

To be eligible to file under chapter 9, a healthcare provider must meet the five eligibility criteria provided in section 109(c) of the Bankruptcy Code.

1. The provider must be a municipality, i.e., a public arm of the state.
2. The provider must be specifically authorized by state law or by governmental officer to be a debtor under chapter 9.
3. The provider must be insolvent.
4. The provider must show that it desires to adjust its debt through the bankruptcy.
5. The provider must have negotiated with its creditors, or must show that negotiation with creditors is impracticable, before filing.

Although the eligibility requirements of chapter 9 are strict, once deemed an eligible chapter 9 debtor, a healthcare business has greater latitude in restructuring its debts and receives more deference from the bankruptcy court than in a chapter 11 case. For example, creditors do not have the option of filing a competing plan of adjustment under chapter 9.

In addition, because one of the purposes of chapter 9 is to allow a public entity to continue offering public services, the plan confirmation requirements are often more flexible for chapter 9 debtors. Accordingly, public healthcare businesses that qualify as chapter 9 debtors may have more success restructuring their debts.

2. Appointment of the Patient Care Ombudsman in Healthcare Restructurings

When a healthcare provider files a petition for relief, section 333 of the Bankruptcy Code provides that the bankruptcy court must appoint an ombudsman within 30 days of the petition date to monitor the quality of patient care and to represent the interests of the patients of the healthcare business. Section 333 was added as part of the 2005 amendments to the Bankruptcy Code, with the intent of providing more protection to patients during bankruptcy proceedings. Once appointed, the ombudsman has 60 days to report to the court regarding the quality of patient care provided by the debtor, and must continue to report every 60 days. A bankruptcy court may decline to appoint an ombudsman if it finds that it is not necessary based on the specific facts of the case.

Courts look at many factors to determine if an ombudsman is necessary, including whether the bankruptcy filing was caused by deficient patient care, whether there are sufficient procedures in place protecting patient privacy, whether the debtor will have sufficient cash flow during the bankruptcy proceedings, and whether the debtor’s doctors are in good standing with state medical boards.

The ombudsman is sometimes viewed as an unnecessary burden on the estate, because the ombudsman is paid by the estate. Additionally, the appointment of one may be unnecessary given the existing regulatory framework applicable to healthcare providers concerning quality of care. In healthcare provider bankruptcies, litigation over the necessity of a patient care ombudsman is common.

3. Treatment of Medicare and Medicaid Provider Agreements in Healthcare Restructurings

Among the most significant assets of a healthcare business are its provider agreements, which include private provider agreements and government provider agreements for Medicare and Medicaid. A provider agreement governs the relationship between Medicare or Medicaid programs and the providers of healthcare goods and services. Many healthcare providers depend almost entirely on Medicare and Medicaid reimbursements for revenue. Unfortunately, even in a bankruptcy case, the Centers for Medicare and Medicaid Services (“CMS”) may exclude a debtor from participation in the Medicare and Medicaid programs or terminate a debtor’s provider agreement.

Exclusion from participation in the Medicare and/or Medicaid programs is an extreme remedy whereby the government may exclude a medical provider from receiving Medicare and Medicaid reimbursements for a minimum period of time, depending on the reason for the exclusion. When a healthcare business faces potential exclusion and files for bankruptcy, the automatic stay will not prevent the government from going forward with the exclusion remedy. Section 362(b)(28) of the Bankruptcy Code provides an express exception to the automatic stay, permitting the government to exclude a medical provider.

The government may also terminate provider agreements with healthcare businesses. The Bankruptcy Code does not expressly allow for termination as an exception to the automatic stay; however, some bankruptcy courts have found that terminating provider agreements is within the police power of CMS, and such action does not violate the automatic stay pursuant to section 362(b)(4).²

Issues of Court Jurisdiction Over Medicare and Medicaid Disputes

A final overarching issue regarding Medicare and Medicaid provider agreements in bankruptcy concerns whether bankruptcy courts have jurisdiction to resolve disputes under the Medicare Act involving overpayment and termination. Section 405(h) of the Social Security Act requires a healthcare business to exhaust its administrative remedies prior to seeking judicial review of a CMS decision. The administrative appeals process can take years, during which time the healthcare business may be without Medicare and Medicaid reimbursements as revenue—inevitably leading to extreme financial distress.

The Federal Circuits disagree as to whether a bankruptcy court has jurisdiction to resolve Medicare and Medicaid disputes prior to exhaustion of administrative remedies. In a 2017 decision, the Eleventh Circuit held in In re Bayou Shores³ that bankruptcy courts lack jurisdiction over Medicare and Medicaid termination claims based on the legislative history of section 405(h) of the Social Security Act, which created a circuit split within the Ninth Circuit. In 2019, the Fifth Circuit joined the controversy and “found that the statute’s plain language was controlling and Congress evinced a clear intent to change the law’s substance based on ‘the actual words of § 405(h)’s third sentence.’” The scope of a bankruptcy court’s authority to resolve disputes between a debtor and CMS regarding the debtor’s provider agreement, thus, remains unclear.

With Continued Uncertainty, Practitioners Must Remain Informed

With the continued uncertainty around legislative healthcare reform and many financial stressors to manage, healthcare businesses under financial distress will likely continue to seek relief in bankruptcy court. Practitioners should therefore be familiar with the unique rules that apply to healthcare businesses in bankruptcy.

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[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Focus on Health Care and The Nuts & Bolts of a Chapter 11 Plan. This is an updated version of an article originally published on September 5, 2017.]

©All Rights Reserved. April, 2021. DailyDAC^TM, LLC

1. See 11 U.S.C. § 101(27A) (2012).
2. See Parkview Adventist Med. Ctr. v. United States, 842 F.3d 757 (1st Cir. 2016).
3. In re Bayou Shores SNF, LLC, 828 F.3d 1297 (11th Cir. 2016), cert. denied sub nom. Bayou Shores SNF, LLC v. Florida Agency for Health Care Admin., 137 S. Ct. 2214 (2017).