Web posted and Copyright © June 1, 1998, American Bankruptcy
Statement Of The American Bankruptcy Institute
before the United States Senate Committee On The Judiciary
Subcommittee On Administrative Oversight And The Courts
Hearing Regarding S. 1914, The Business Bankruptcy Reform
Preserving The Quality Of Patient Care In Health Care Bankruptcies
Keith J. Shapiro
Holleb & Coff
55 East Monroe Street
Chicago, Illinois 60603
Summary Of Key Points In Testimony Of Keith Shapiro, American Bankruptcy Institute
In view of the increasing frequency of health care bankruptcy cases and the
potential risks to innocent patients who involuntarily become involved in these
cases, modifications should be made to the Bankruptcy Code to protect the patients'
rights and to encourage debtors-in-possession and trustees to consider the patients'
interests when administering a health care bankruptcy case. Patients' rights
are severely threatened when a health care facility closes. Namely, the confidentiality
of a patients' records may be threatened; medical records may be destroyed without
notice to current or former the patients, thus jeopardizing a patients' treatment;
or patients may be transferred to inappropriate facilities, facilities that
are a great distance from their families or patients may receive little assistance
in finding a new facility at which to receive treatment. S. 1914 protects current
and former patients by:
Establishing a procedure for disposing of patient records that provides current and former patients with an opportunity to claim their records and, if the records are not claimed, provides a method for disposing of records that maintains their confidentiality.
Requiring debtors and trustees to use their reasonable and best efforts to transfer patients to appropriate facilities in the vicinity.
Ensuring that debtors and trustees will be reimbursed for the expenses incurred in complying with federal and state laws regarding closing a health care business.
Providing patients with a voice in the bankruptcy case through the appointment of an ombudsman to act as the patients' advocate concerning the quality of care being provided.
S. 1914 requires debtors and trustees to act as fiduciaries for patients when closing a health care facility. Without this legislation, debtors and trustees have no express fiduciary duties to patients. They act solely as fiduciaries for creditors who likely will want the estate's assets maximized to ensure the highest possible distribution and will not want the estate's assets expended for the benefit of patients, who are not creditors of the estate.
The health care bankruptcy provisions of S. 1914 are a necessary addition to the Bankruptcy Code. Since S. 1914 was proposed, however, a few concerns have been raised about certain aspects of the health care bankruptcy provisions. As discussed in my testimony, these concerns can be curedby making some minor modifications.
Mr. Chairman and members of the Subcommittee, I am Keith J. Shapiro, a partner with the Chicago, Illinois law firm of Holleb & Coff and Vice President of Education of the American Bankruptcy Institute ("ABI"). I am honored to be invited to appear before you today. It has been a privilege working with the offices of Senators Grassley and Durbin over the past several months in helping to prepare the health care bankruptcy provisions contained in S. 1914. My testimony today will consist solely of my personal views regarding the health care business bankruptcy provisions of S. 1914 which were developed in tandem with Nancy A. Peterman, my colleague at Holleb & Coff, who currently is Co-Chair of the ABI Health Care Insolvency Committee.
As you know, the ABI is a non-partisan, non-profit, research and educational organization founded in 1982 and devoted to issues related to insolvency. With more than 6,000 members comprised of bankruptcy judges, attorneys, accountants, academics, bankers and other professionals, the ABI is the nations leading multi-disciplinary organization on bankruptcy matters. The ABI sponsors educational seminars and programs for insolvency practitioners, conducts research on bankruptcy topics, publishes periodicals on bankruptcy developments in the courts and Congress, and acts as a non-partisan resource to federal policymakers on bankruptcy issues.
In 1995, ABI formed the Health Care Insolvency Committee, and I was the first Chair of that Committee. The Committee was formed in the midst of the debate over possible national health care reform and in the wake of the widespread introduction of managed care. One of the Committee's first projects was to prepare educational materials for health care and bankruptcy professionals thatdiscussed health care insolvencies. Due to an increase in the number of health care insolvencies, many health care and bankruptcy professionals expressed a need for a book discussing bankruptcy laws, health care laws and their interplay. In response to this demand, the Committee wrote the Health Care Insolvency Manual which covers the basics of bankruptcy law for the health care professional and the basics of health care law for the bankruptcy professional. The Manual was published by ABI in 1997 and distributed free of charge as a public service to approximately 30,000 health care and bankruptcy professionals.
The Frequency of Health Care Insolvencies is on the Rise
Managed care completely revolutionized the health care industry and shifted the focus of the health care industry from strict quality of care to efficiencies in the delivery of health care services cite. See, e.g., James E. Eggleston, Patient Advocacy and Consumer Protection Through Union Activism: Protecting Health Care Consumers, Patients and Workers During An Unprecedented Restructuring of the Health Care Industry, 41 St. Louis U.L.J. 925, 926 (1997). As the market dynamics changed, there was a shift from the traditional health care providers - doctors and hospitals - to newer forms of health care delivery systems home health agencies, ambulatory care centers and outpatient facilities.
As many states began reforming their health care systems and managed care became the norm in the health care industry, many health care businesses found themselves vulnerable to increased competition, decreasing profit margins and extinction. In addition, many leveraged healthcare businesses lacked the necessary cash flow to support the junk bond debt undertaken in the 1980s. See Peter R. Roest and Mark D. Folk, Seventeenth Annual Institute on Medicare and Medicaid Payment Issues, Bankruptcies of Health Care Providers (1996).
In response to the market pressures brought on by managed care, the health care industry began consolidating and forming large full service health care delivery systems that could take advantage of the managed care system and profit. [ As reported by one author: A total of 735 of the nation ís hospitals were involved in mergers and acquisitions in 1995. Approximately one in five community hospitals changed hands in the last two years; in 1995, 47% more community hospitals were either acquired or were the subject of merger talks than in 1994. Two hundred twenty-three mergers were made public during the first quarter of 1996, representing an increase of 34% over the previous quarter. Mergers and acquisitions over the past two years also indicate a significant trend toward conversion of not-for-profit hospitals to for- profit operations. An evaluation of 308 hospital mergers in 1994 showed a net gain in for-profit operations of 11,127 beds, and a net loss in not-for-profit operations of 7,603 beds. In all, the number of integrated health care networks rose 69% in the first six months of 1995 to 430 integrated networks, compared to 255 in December 1994 . . . A recent survey predicts that more than 80% of hospitals will be part of an integrated network in five years. James E. Eggleston, Patient Advocacy and Consumer Protection Through Union Activism: Protecting Health Care Consumers, Patients and Workers During An Unprecedented Restructuring of the Health Care Industry , 41 St. Louis U.L.J. 925, 931-32 (1997).] In addition, health care businesses failed or required financial restructuring with increasing frequency. For example, between 1994 and 1995 the total number of failures in the health care industry increased by 10.6%; between 1995 and 1996 the failures increased by 14.3%; and between 1996 and 1997, the failures increased by15.5%. [ See Neil DiBernardo, Business Failure Record 1996 (Final) and 1997 (Preliminary) (The Dun & Bradstreet Corporation 1998).] From my experience, it appears that out-of-court restructurings and bankruptcy cases have not resulted in the reorganization of the health care business, but rather the sale of the business as a going concern or the closure of the business.
Closing A Health Care Facility
If a health care facility fails and must close, federal and state laws provide little guidance regarding closing the health care facility. In preparing for this hearing and in assisting the offices of Senators Grassley and Durbin with S. 1914, Ms. Peterman and I, over several weeks, led a computer and telephonic study of the federal and state laws concerning the closure of health care facilities, including the disposal of patient records and the transfer of patients. In researching state requirements, we telephoned all fifty states and ten randomly selected counties and discussed these issues with representatives of the state and county health departments because many of the closing requirements were not statutory, but rather were "policies" followed by the state and county health departments. This was necessary because many states and counties lacked detailed procedures regarding the closing of a health care facilityparticularly, a health care facility that lacked funds to close its facility over time in an orderly fashion. We have summarized the results of our study in Exhibits A and B which are have been submitted to the Subcommittee. We have compiled data to support our summaries of the information which may prove helpful to the Subcommittee.
With little to no guidance under state or federal laws, problems can occur when a trustee or debtor-in-possession is attempting to liquidate a health care facility or when a health care facilitys attempt to reorganize suddenly fails. One such problem occurred at the Reseda Care Center in California. The Reseda Care Center was a nursing home with 63 residents who ranged in age from 70 to 108. The Center filed for bankruptcy protection on September 5, 1997. The Chapter 7 trustee was appointed and took over the facility on Wednesday, September 24, 1997. According to published reports, the trustee believed that he would sell the facility within a few days to a purchaser who would continue operating the nursing home. Unfortunately, all possible sales apparently fell through and on Friday, September 26, 1997, disaster struck. Rather than seek assistance from the bankruptcy court or the state, the Centers employees reportedly began contacting the residents relatives at approximately 7:00 p.m. to inform them that the facility would close by the end of the evening. The first patients were purportedly transferred by ambulance beginning at 9:00 p.m. to other facilities in the area and the last patient was transported at 7:00 a.m. on Saturday. Many of the residents relatives allegedly were not notified directly but learned of the facility's closure on the evening news. See Exhibit C (Newspaper Articles Regarding the Reseda Care Center).
Health Care Bankruptcy Provisions of S. 1914 Will Protect Patients
S. 1914 proposes amendments to the Bankruptcy Code that will protect the innocent participants in a health care bankruptcy casethe current and former patients. Many of the patients will know nothing about bankruptcy laws, likely will not get notice of the health care facility's bankruptcy case and may be too ill to deal with the issues arising from the bankruptcycase. While the patient-health care business relationship is not a true debtor-creditor relationship, [ Arguably, patients and former patients may have contingent claims against the estate.] this relationship should be addressed by the Bankruptcy Code to ensure that patients' health, safety and privacy needs are protected. The Bankruptcy Code already addresses special interests and issues raised, for example, in municipal bankruptcy cases, railroad bankruptcy cases, commodity broker liquidations and stock broker liquidations. Health care bankruptcy cases are unique and are occurring with greater frequency than railroad, commodity broker or stock broker cases.
The proposed amendments to the Bankruptcy Code also will clearly define the trustees duties in a health care bankruptcy case and the limits of those duties. By giving trustees guidance regarding the discharge of their duties when administering health care bankruptcy cases and making it clear that trustees may be compensated for performing these services, trustees will be encouraged and likely more willing to administer these bankruptcy cases. Without the health care provisions of S. 1914, trustees and debtors have no express duty to patients and may even breach their fiduciary duties to creditors if they attempt to protect the patients' interests to the financial detriment of the creditors.
Section 102Protecting the Health And Confidentiality of Patients When Disposing of Patient Records
Under the Medicare regulations, a health care provider generally must maintain all patient records for at least five years. See, e.g., 42 U.S.C. § 1395cc(a)(1)(I)(ii) (1998); 42 C.F.R. § 482.24(b)(1) (1998). Under state Medicaid programs, similar statutes and regulations require a health care provider to maintain patient records for a period of time. For a patient, it is important that a health care provider maintain his or her records because often a doctor cannot make an accurate diagnosis of the patients health problems without reviewing the past medical history. Furthermore, a patient may have difficulty with insurance companies who will not pay for medical services without appropriate back-up or who will not insure a person without full knowledge of pre-existing health problems.
In bankruptcy cases where a health care facility is being closed, a trustee or debtor in possession may be unable to maintain or store patient records for the required time periods under federal or state law because there may not be sufficient monies available to pay the storage costs. If the health care facility is part of a chain or system of facilities, the trustee may be able to transfer such records to one of the facilities that will remain open. Alternatively, if the trustee is selling the facility, the maintenance, storage and access to patient records can sometimes be negotiated as part of the sale.
If an independent health care facility closes, the trustee will have no choice but to comply with federal and state laws and the trustee's options will be limited. Federal Medicare lawprovides the trustee with no option but to store the records for five years. Some states have other solutions. Under some state laws (e.g., Indiana, Mississippi and Tennessee), the trustee or debtor is able to deposit the patient records with the state department of health which provides an easy solution to the dilemma. In nearly all other states, however, the state department of health is not statutorily required to accept such records. Most states simply will require that a health care facility store all records for time periods ranging from one to twenty-five years. See Exhibit A (Summary of 50 State Survey Regarding Maintenance of Patient Records). Other states appear to have no laws or regulations regarding the storage of records but require the facility to work with the department of health to develop an appropriate plan for closing the health care facility. Obviously, the majority of states only contemplate the orderly closure of a health care facility over a period of time. If a health care facility is insolvent, however, it likely will not have the luxury of developing a plan of closure and methodically carrying out that plan over several months. The health care facility may need to close its doors immediately.
If the trustee cannot pay the storage fees to maintain the patient records for the required time period under applicable state and federal laws, and if no state agency will allow the trustee to deposit the patient records with the agency, such records must be disposed of in some other way. However, according to our study, there does not appear to be any mechanism for the immediate disposal or destruction of the records under state law. Depending upon how the disposal of the records is handled, the patient's ability to access or gain possession of the records may be compromised and the confidentiality of the patient records may be jeopardized. The establishment of appropriate methods of disposal of such records will protect both the health andprivacy rights of current and former patients of the failing health care business. Section 102 of S. 1914 would allow the trustee, after appropriate notice, to dispose of or destroy patient records with appropriate patient protections when the trustee is unable to comply with federal and state record storage laws.
Section 102, by negative implication, initially requires a trustee to comply with federal and state laws regarding storage of patient records where such laws exist and if sufficient funds are available. In addition, if sufficient funds are not available, Section 102 requires the trustee to comply with state laws, where such laws exist, and deposit the patient records with the state if allowed and required. If no such state law provision governs, Section 102 establishes an alternative procedure to allow for the appropriate disposition and destruction of patient records. First, the trustee is required to notify appropriate federal and state agencies to request permission to deposit the records with such agencies. If the federal and state agencies do not claim the patient records within sixty days after being notified by the trustee, then the trustee is required to publish notice in one or more appropriate newspapers informing patients and insurance providers that they may claim the records and that if such records are not claimed, they may be destroyed. In addition, at the same time, the trustee is required to notify patients directly to inform them of the right to claim their records.
If the patient records are not claimed sixty days after publishing notice in the newspaper(s) or within ninety days after mailing notices directly to patients, the trustee is allowed to destroy the records. Even if records are being destroyed, patients will have areasonable expectation that the confidentiality of their patient records will be maintained. Section 102 provides that a trustee or debtor must shred or burn written materials and ensure that no optical, magnetic or other electronic records can be retrieved. These methods of destruction will ensure that no persons obtain any of the information in the confidential patient records.
Section 105Protecting Patient Health When Transporting Patients
When closing a health care business, a critical issue is locating an appropriate new facility for the patients. It is imperative that the patients interests be respected when transferring the patients to minimize any "transfer trauma." See Terri D. Keville, Studies of Transfer Trauma in Nursing Home Patients: How the Legal System Has Failed To See the Whole Picture, 3 Health Matrix 421 (1993). Some studies have revealed that the "involuntary relocation of the elderly from . . . one institution to another might have adverse health effects and even hasten death." Id. at 1.
Currently, there are both federal and state laws regarding the transfer of patients. However, these laws typically contemplate situations where a facility is attempting to transfer a patient because, among other reasons, the patient is unable to pay for his care or the patient is harmful to other residents. For a discussion of such laws, see Kathleen Knepper, Involuntary Transfers and Discharges of Nursing Home Residents Under Federal and State Law, 17 J. Legal Med. 215 (1996). Based upon our studies, when a health care facility closes, a minority of state health departments are required to actually assist patients in locating a new facility. However, according to our 50 state study of the laws and regulations concerning the transfer of patients,most states are not statutorily required to assist with the transfer of patients if a health care facility is closing. See Exhibit B (Summary of 50 State Survey Regarding Transfer of Patients). Rather, under most state laws, it is the responsibility of the closing facility to locate a new facility for the patients.
If a health care facility is closing and fails to transfer the patients to another appropriate facility, the health care facility may be fined, may be prosecuted under the fraud and abuse laws or may be denied a license if applied for in the future. Depending upon the circumstances, none of these sanctions may motivate a financially troubled operator to comply with applicable patient transfer laws.
For a trustee seeking assistance under state law, our survey reveals that state law provides little guidance. Section 105 of S. 1914 imposes a duty on a trustee to use his reasonable and best efforts to transfer patients to another health care business that is in the vicinity of the closing health care facility, that provides the patient with services substantially similar to those provided by the closing health care facility and that maintains a reasonable quality of care for the patient. This section will protect the interests of the patient while providing the trustee with guidance regarding her duty concerning the transfer of patients.
Section 103Ensuring Reimbursement to the Trustee for the Costs of Closing a Health Care Business
When administering a bankruptcy case, trustees often are not reimbursed for expenses incurred if there is no financial benefit to the estate. See, e.g., La Electronica, Inc. v. Capo-Roman (In re La Electronica, Inc.), 995 F.2d 320 (1st Cir. 1993) (economic benefit to estate necessary to qualify for administrative expense priority claim).
In a health care bankruptcy case, a trustee likely will be concerned about whether she will be reimbursed for monies spent in complying with federal and state laws concerning closing of the facility. The monies expended provide no direct benefit to the estate. Further, by acting responsibly and attempting to orderly close the facility, the trustee likely is acting for the benefit of former and current patients. Currently, under the Bankruptcy Code, the trustee only owes a fiduciary duty to creditors and creditors likely receive no benefits when estate monies are spent to store records, dispose of medical waste and transfer patients.
The issue of reimbursement of closing costs was recently addressed by the Ninth Circuit. In Oregon v. Witcosky (In re Allen Care Centers, Inc.), 96 F.3d 1328 (9th Cir. 1996), the State of Oregon asserted a $200,000 administrative expense claim, under section 503(b) of the Bankruptcy Code, for the costs incurred in closing a nursing and residential care facility. Under section 503(b) of the Bankruptcy Code, a person may be granted an administrative expense claim if its actions benefit the estate. In this case, the State of Oregon incurred approximately $200,000 in expenses to close the facility and transfer all patients to other facilities. The Staterequested that it be granted an administrative expense claim in the amount of $200,000 so that it could recover such costs. The State argued that its actions benefited the estate because by closing the facility in accordance with State law and finding appropriate new facilities for the patients, the estate avoided any tort liability to patients. The trustee objected to the States claim and argued that the States actions did not preserve the estate for the benefit of the creditors. The court held that the States actions provided no benefit to the estate.
If the expenses incurred in closing a health care business are not clearly afforded administrative expense status, there is little incentive for debtors or trustees (or creditors) to spend the time and money necessary to properly close a health care business (e.g., transfer patients, dispose of medical waste or dispose of or store patient records). If a trustee does not follow all procedures to properly close the health care business and most importantly to transfer patients to appropriate facilities, the immediate health of the patients may be jeopardized, the confidentiality of the patients records may be jeopardized and the future well-being of past and present patients may be jeopardized if the patients' histories are lost. Section 103 of S. 1914 ensures that any costs and expenses incurred by a fiduciary in responsibly closing a health care facility will be reimbursed by the estate as an administrative priority claim and, therefore, encourages compliance with federal and state laws concerning the shut down of a health care facility.
Section 104 - Appointment of Ombudsman to Act as Patient Advocate
In a health care bankruptcy case, patients often are affected or have concerns about their quality of care during the bankruptcy case. However, the patients have no standing to appear before the bankruptcy court. Quality of patient care in a health care facility is of the utmost importance whether or not the facility is having financial difficulties. In 1978, the Older Americans Act was amended to require each state to establish an ombudsman program to, among other things, monitor the quality of care in nursing homes and investigate any complaints. Older Americans Act of 1965, Pub. L. No. 89-73, 79 Stat. 218. Later, this program was re-named the Long-Term Care Ombudsman Program. This program operates in all fifty states, the District of Columbia and Puerto Rico. See Elizabeth B. Herrington, Strengthening the Older Americans Acts Long-Term Care Protection Provisions: A Call for Further Improvement of Important State Ombudsman Programs, 5 Elder L.J. 321, 334 (1997).
Section 104 of S. 1914 is a natural extension of the concerns which lead to the enactment of the Long-Term Care Ombudsman Program. Section 104 of S. 1914 requires the appointment of an ombudsman within thirty days after the commencement of a bankruptcy case by a health care business. The ombudsman role is extremely limited. The ombudsmans only duty is to monitor the quality of patient care. The ombudsman then reports to the court every sixty days regarding the quality of patient care. In the interim, if any serious matters transpire and the quality of patient care declines significantly or is otherwise materially compromised, the ombudsman may notify the court, by report or motion, with notice to the appropriate parties.
The ombudsman will act as the patients advocate in the bankruptcy case and will give patients a voice during the bankruptcy case of the health care business. Furthermore, the appointment of an ombudsman will provide the bankruptcy court and all parties in interest with invaluable information regarding the quality of patient care to avoid a crisis similar to that encountered at the Reseda Care Center in California
Suggested Modifications to S. 1914
After further consideration and after receiving invaluable input from some of the members of the ABI Health Care Insolvency Committee, I have some additional comments with respect to the provisions of S. 1914 concerning health care businesses:
1. Section 102 of S. 1914 (Disposal of Patient Records) should allow the trustee to abandon the patient records if the trustee lacks sufficient funds to comply with the guidelines established under the Bankruptcy Code for disposing of patient records. This amendment likely would require an amendment to section 554 of the Bankruptcy Code.
2. Section 102 of S. 1914 (Disposal of Patient Records) should allow the courts some flexibility, depending upon the facts and circumstances of the case, to reduce the length of time state and federal agencies have to decide whether to take the patient records, the length of time notice of the possible destruction of patient records must be published in the newspaper and the time period that must pass between mailing notices to patients regarding the possible destruction and the actual destruction of the records. For example, if the trustee has sufficientfunds to store patient records for 60 days and sufficient funds to thereafter destroy the records if they are not claimed, the court should be able to adjust the notice provisions of Section 102 to provide some notice to patients before the records are destroyed.
3. Section 102(a)(2)(B) of S. 1914 (Disposal of Patient Records) should be amended to provide that a trustee only is required to attempt to notify those patients who have received treatment at the health care business within the last two years of the impending destruction of their records. It may be extremely burdensome for a trustee to attempt to notify directly all patients who have patient records at the health care facility, particularly if the health care facility has been operating for decades.
4. Section 102 of S. 1914 (Disposal of Patient Records) should be amended to provide that the trustee only may dispose of the patient records in the manner described in Section 102 after appropriate notice and a hearing. At the hearing, the trustee will be required to demonstrate that she does not have sufficient funds to comply with the federal and state laws governing disposal of records.
5. Section 104 of S. 1914 (Appointment of an Ombudsman) should be amended to provide that the mandatory appointment of an ombudsman may be avoided based upon the facts and circumstances of the case. Depending upon the circumstances of the case or state law programs in place, it may not be necessary for an ombudsman to be appointed. Furthermore, if a health care bankruptcy case is moving quickly toward confirmation of a plan or consummation ofa sale, a court should not slow down the case simply to allow for the appointment of the ombudsman and to receive the ombudsman's input regarding quality of care. By slowing down the case, the chances for a successful reorganization or liquidation may be lost.
6. Section 104 of S. 1914 (Appointment of an Ombudsman) should be amended to explicitly provide that the ombudsman shall be immune from any liabilities associated with the reports submitted to the court.
7. Section 105 of S. 1914 (Duty to Transfer Patients) should be amended to provide that a trustee use all reasonable and best efforts to comply with non-bankruptcy law governing the transfer of patients and, to the extent such laws do not exist, comply with the procedures outlined in Section 105.
The research, analysis and internal debate which led to the preparation of the health care insolvency provisions of S. 1914 would not have been so effectively accomplished without the assistance of my colleagues at Holleb & Coff, including Nicole d'Arcambal, Nicholas J. Lynn and James M. Ellis.
Thank you again for the opportunity to appear before you today.