by: David N. Crapo
Gibbons P.C.; Newark, N.J.
ABI’s Health Care Triage: 2009 conference on June 26, 2009, in Chicago was a great success. Co-sponsored by the Beazley Institute for Health Law and Policy at the Loyola University Chicago Law School, the conference was the first stand-alone health care conference sponsored by ABI. The partnership between Loyola and ABI for the conference proved very fruitful. Indeed, in his welcoming remarks, Larry Springer, the director of the Beazley Institute, welcomed a continued collaboration between ABI and the Beazley Institute. The facility, a 21st Century state-of-the-art courtroom-style educational space, was stunning (not your father’s or mother’s—or even older sibling’s—law school!) and provided a superb venue for the conference.
Health Care Committee Co-chairs Suzanne Koenig and Leslie Berkoff welcomed panelists and attendees representing a broad spectrum of professionals involved in the health care finance industries, some of whom were previously or are now health care professionals. For example, panelist Carol Jendrzey had been a nurse and panelist Nicholas Lynn had been a pharmacist before becoming attorneys. Committee Co-chair Suzanne Koenig is a licensed social worker. The inclusion of these professionals’ experiences in “working in the trenches” of health care at the conference provided invaluable insights for those attendees and in the legal and financial professions who handle health care matters.
After the opening remarks, attendees learned who was still providing financing in health care. In the current tight credit market, those players include commercial banks, financing companies, REITs and, relatively new to the field, regional lenders. HUD remains an active player, providing attractive financing for certain types of funding (i.e., hospitals and skilled-nursing facilities), and Freddie Mac and Fannie Mae are lending in multi-family senior living facilities. However, in dealing with HUD, Fannie Mae and Freddie Mac, one must keep in mind the complications and delays inherent in dealing with a governmental entity. Bonds may be making a recovery, albeit a slow and fragile one.
The next panel addressed distressed investing opportunities remaining in health care. Health Care Committee Listserve Moderator Bobby Guy peppered a star-studded panel with questions about where the deals would come from in the future. There was general agreement that continued health care reimbursement problems—particularly as health care reform efforts move forward—would create such opportunities over the next eighteen months. Indeed, one of the biggest variables in determining where the distressed health care investment opportunities would be will be the form that health care reform ultimately takes. Another big variable will be perceptions of value. One positive result of the current credit crisis is the return of many investors to the concept of actually conducting due diligence in connection with a deal. However, it appears that strategic investors are not yet ready for investment in distressed health care providers, leaving the market to players looking to facilitate the sale of a health care business or facility. Additionally, the market seems to not have an appetite yet for large deals. In the end, none of the panelists were willing to give a firm date for the end of the current downturn. Estimates were between two and five years, with the panelists generally agreeing that recovery will come very slowly.
The conference then turned to health care restructuring out of court. In a kind of role-play, each of the panelists adopted the role of one of the stakeholders in a health care restructuring: lender, labor/union, government, debtor/receiver and unsecured trade creditor. They then addressed the issues raised by such a restructuring from the viewpoint of the role to which they were assigned. There was agreement that a restructuring outside of bankruptcy (e.g., through a state law receivership) can avoid the expense and delay that often bedevil bankruptcy cases. Lenders in particular may find receiverships useful in achieving at least indirect control over a borrower’s finances, while at the same time avoiding vulnerability to claims of overreaching or inequitable conduct. However, the panelists agreed that the benefits of such a restructuring have significant limits. For example, there was general agreement that a state law receivership is not an efficient way to resolve the financial problems of a debtor with a number of different creditor constituencies and/or a large and complex business. Additionally, in contrast to a state court in a receivership proceeding, a bankruptcy court can issue orders that are binding on all of a debtor’s creditors.
Luncheon speaker Dr. Leemore Dafney, a professor of economics at Northwestern University specializing in the health care industry, provided that presentations on the “dismal science” of economics need not be dreary or boring. In a crisp, lively and organized presentation, she addressed the Obama administration’s current health care reform proposals—proposals that, if enacted, will significantly impact the finances of players in the health care industry. Indeed, much of Dr. Dafney’s address was focused on which players in the health care industry will bear the brunt of the financial burden of health care reform (with doctors and insurers expected to bear much of that burden). Dr. Dafney addressed what she believes will be the likely and unlikely outcomes of health reform (e.g., she sees reduced payments to health care providers a more likely result of health care reform than the bundling payments to health care providers for a single treatment episode). She also addressed how much or how little various proposals (e.g., the proposal of government health plan to compete with private plans) are likely to lead to a more efficient health care system.
During the first session after Dr. Dafney’s presentation, the panelists addressed bankruptcy and health care providers. Drawing from their own substantial experience in health care bankruptcies, the panelists focused on issues of particular concern in health care bankruptcies like (1) the appointment (or non-appointment) of a patient care ombudsman (PCO) and the role of the PCO once appointed; (2) the pressing need to incentivize employees to remain in place during the bankruptcy, especially if the goal is to sell or close a health care facility; (3) claims by any employee unions and the need to modify or terminate collective bargaining agreements; (4) complications arising from governmental regulation of or oversight with respect to health care providers (particularly nonprofit health care providers); (5) the concerns and controversies generated by the proposed sale of a health care provider or its assets; and (6) the storage disposition of patient records. Governmental oversight and regulation is of particular concern when the sale or closure of a health care facility is proposed. Regulatory requirements for a sale or closure can be complex, and compliance can be costly and result in delays. Not surprisingly, one panelist noted the wisdom of obtaining the necessary approvals for a sale or closure before the bankruptcy petition is filed. Even the appointment of a PCO potentially complicates the sale of a health care facility in bankruptcy. The PCO’s mandate of ensuring appropriate levels of patient care could easily conflict with the debtor’s obligation to maximize value for creditors. Finally, the panelists noted the costs entailed in properly storing and disposing of health care records. One panelist recommended using a medical archiving company to reduce those costs.
The next panel, whose members had amassed a wide variety of professional experience in the health care industry, focused on the human side of the health care industry’s current financial challenges, particularly as they affect two crucial groups of stakeholders: patients and the people actually providing health care (nurses, aids, social workers, etc.). Indeed, as one panelist demonstrated, the financial challenges facing a health care facility (in her example, an emergency room) can cost a health care professional his or her license. It became clear from the various perspectives presented by the panelist that when a health care facility is facing financial challenges, maintaining communications between the stakeholders is crucial. Management and staff must communicate with each other, and must adequately communicate with patients, residents and clients. Failure of the stakeholders to communicate with each other will only aggravate a difficult situation and can lead to unwelcome—and embarrassing—communications, such as communications by disgruntled skilled nursing facility residents or their families to either the press or government agencies.
Drawing on their own extensive experience with distressed health care providers, the final panel demonstrated where funding for the reorganization or restructuring of a health care provider, or at least a significant distribution to creditors, could be found, despite the tight credit markets. Admittedly, the location of such funding can be very much like pulling a rabbit out of a hat, but it can be done. However, such funding will likely come from the assets of the health care provider itself. Among the potential assets providing a source for funding are: (1) avoidance actions under either state law or the Bankruptcy Code; (2) the recharacterization of debt held by insiders as equity; (3) equitable subordination of insider and outside lender claims; (4) claims under the health care provider’s directors and officers liability policies (this latter source is not as readily available with respect to the directors of nonprofit organizations); and (5) claims against captive insurance companies. Additionally, health care providers themselves often have assets peculiar to their industry that are generally not subject to liens or security interest and can be utilized to fund a restructuring or distribution. Those assets include: (1) “gross receipts” under certain state laws; (2) certificates of need; (3) Medicaid provider agreements; (4) cost report receivables; (5) disproportionate share payment and other governmental entitlements; (6) workers’ compensation refunds; (7) certain contract rights; and (8) funds held by related foundations that could have been used to fund the capital or operating expenses of the health care provider. The panelists agreed that to successfully identify and determine the value of those assets (particularly cost report receivables), retention of professionals with health care expertise is crucial. Such expertise is also imperative in determining the most profitable way of realizing on the assets (e.g., certain receivables should be retained and liquidated by the debtor, trustee, receiver or creditors committee; sales are too cumbersome). In sum, notwithstanding the current credit crunch, a financially troubled health care provider may have valuable assets that can be used to fund a restructuring or distribution.
Following the final session, the conference adjourned to Gibson’s, a famous Chicago watering hole, for a networking function.