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Healthcare Restructurings: An Overview of Important Issues in Healthcare Bankruptcy Proceedings

Healthcare providers face many pressures, including regulatory compliance costs and the costs of necessary technological and infrastructure investments.  Congress’ repeated attempts to reform healthcare legislation this year have created new uncertainties for the healthcare industry. A survey of financial experts and bankruptcy lawyers predicted the healthcare industry would join the retail industry and oil and gas industry as one of the hot areas of restructuring in 2017.[2]

Among the many factors impacting healthcare providers is the shift to bundled payments for insurance reimbursements.  Under the Affordable Care Act, the Center for Medicare and Medicaid Innovation began implementing a bundled payment system for Medicare in 2013.[3] 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 service provided to the patient.  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 defines “healthcare businesses” broadly 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, and long-term care facilities.[4]  This article discusses three areas relevant to restructuring a healthcare business under the Bankruptcy Code: the use of chapter 9 for public healthcare restructurings, the appointment of the patient care ombudsman, and bankruptcy treatment of Medicare and Medicaid provider agreements.

Public Healthcare Restructurings under Chapter 9

While 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.  First, the provider must be a municipality, i.e., a public arm of the state.  Second, the provider must be specifically authorized by state law or by governmental officer to be a debtor under chapter 9. Third, the provider must be insolvent. Fourth, the provider must show that it desires to adjust its debt through the bankruptcy. Finally, the provider must have negotiated with its creditors or must show 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.

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 and the appointment of one may be unnecessary given the existing regulatory framework applicable to healthcare providers concerning quality of care.  In healthcare provider bankruptcy restructurings, litigation over whether a patient care ombudsman should be appointed is common.

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).[5]

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 recent decision, the Eleventh Circuit held in In re Bayou Shores[6] 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.  Bayou Shores filed a petition for a writ of certiorari with the U.S. Supreme Court, which the Court denied on June 5, 2017.   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 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.

[1] Gary W. Marsh is a member of Dentons’ US Restructuring, Insolvency and Bankruptcy practice, and focuses on general commercial litigation and bankruptcy, workouts and debtor/creditor law. He represents creditors and debtors in Chapter 11 reorganization proceedings, out of court restructurings and debtor/creditor litigation. He also represents court appointed receivers, examiners and trustees.

[2] See Emma Orr, Risky Debt Is Moving to Retail and Healthcare, Bloomberg Markets, (Jan. 6, 2017, 10:02 AM).

[3] See Bundled Payments for Care Improvement (BPCI) Initiative: General Information, Cms.gov, https://innovation.cms.gov/initiatives/bundled-payments/ (last updated July 26, 2017).

[4] See 11 U.S.C. § 101(27A) (2012).

[5] See Parkview Adventist Med. Ctr. v. United States, 842 F.3d 757 (1st Cir. 2016).

[6] 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).

About Gary W. Marsh

Gary Marsh focuses on general commercial litigation and bankruptcy, workouts and debtor/creditor law.  He represents creditors and debtors in Chapter 11 reorganization proceedings, out of court restructurings and debtor/creditor tigation.  He also represents court appointed receivers, examiners and trustees. Mr. Marsh has extensive experience in representing creditors in and out of bankruptcy court in enforcing their…

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Gary W. Marsh