Enacted in April and for the most part taking effect on October 17, 2005, the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BACPA”) includes special provisions affecting health care businesses. These provisions do not, however, affect health care businesses that are creditors, but rather, only health care businesses that are debtors filing for bankruptcy relief. The BACPA provisions apply both to situations where a health care business files for bankruptcy and continues to operate its facilities and where it shuts down its facilities.

Frequently Asked Questions

Q. What is a “health care business” ?

A. This term was not previously defined in the Bankruptcy Code. The definition includes all profit and not-for-profit public and private entities that primarily offer, to the general public, facilities and services for (i) diagnosis or treatment of injury, deformity, or disease; and (ii) surgical, drug treatment, psychiatric, or obstetric care. The BACPA provides several examples of entities that are health care businesses. Most notably, those examples include hospices, home health agencies, and long-term care facilities, (long-term care facilities include intermediate care facilities, assisted living facilities, homes for the aged, and domiciliary care facilities).

Q. What are “patient records” ?

A. The BACPA defines “patient” as any individual who obtains or receives services from a health care business and “patient records” as any written document relating to a patient or a record relating to a patient recorded in a magnetic, optical, or other form of electronic medium.

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Q. What happens to patient records when a health care business files for bankruptcy?

A. Under the BACPA, if a health care business files for bankruptcy and does not have sufficient funds to properly store patient records (in a manner consistent with Federal and state laws), the debtor (or a bankruptcy trustee, if one is appointed) has four responsibilities relating to records:

1. Notice by publication: The debtor must publish notice, in one (1) or more appropriate newspapers, stating that if patient records are not claimed by a patient or an insurance provider (if allowed to claim records under applicable law), within 1 year of the notice, the patient records will be destroyed.

2. Notice by mail: Within 180 days of providing notice by publication, the debtor must attempt to notify directly each patient that is the subject of the patient records and appropriate insurance carriers concerning the patient records, by mailing to the most recent known address of that patient, or a family member or contact person for that patient, and to the appropriate insurance carrier an appropriate notice regarding the claiming or disposing of patient records.

3. Request to deposit with Federal agency: If patient records are not claimed within 1 year of the notice by publication, the debtor must mail, by certified mail, a written request to each appropriate Federal agency requesting permission for that agency to deposit the patient records with that agency. No Federal agency is required to accept patient records.

4. Destruction: If no request to deposit with a Federal agency is granted, and no patient records are claimed, the debtor must destroy the records. If the records are written, records must be destroyed by shredding or burning. If the records are magnetic, optical, or other electronic records, records must be destroyed by such means as to ensure that the records cannot be retrieved.

Q. Who pays for disposal of patient records?

A. The Bankruptcy Code prioritizes which claims are paid first by any debtor. The highest priority is given to claims called “administrative expense claims”. The BACPA adds to the list of administrative expense claims costs and expenses incurred in disposing of patient records. Accordingly, disposal costs are paid by the debtor, are considered costs of administering the estate, and are accorded the highest priority.

Q. After a health care business files for bankruptcy, can it be excluded from medicare or other Federal health care programs?

A. Generally, upon a bankruptcy filing, creditors and governmental agencies are prohibited from commencing or continuing actions against the debtor or debtor’s property – this prohibition is called the “automatic stay”. The BACPA creates an exception to the automatic stay that permits the U.S. Department of Health and Human Services (the “HHS”) to exclude a debtor from participation in the medicare program or any other Federal health care program. The HHS can only exclude a debtor, however, if it would be permitted to do so outside of bankruptcy under provisions of the Social Security Act.

Q. If a health care business files for bankruptcy and closes a facility, what happens to the patients?

A. The BACPA imposes a duty on any debtor that closes a health care business facility to properly transfer its patients. In closing a facility, a 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.

Q. If a health care business files for bankruptcy and closes a facility, who pays for the cost of transferring patients?

A. The BACPA adds to the list of administrative expense claims, the costs and expenses of closing a health care business. Included in this group of administrative expense claims are costs and expenses incurred in connection with transferring patients from a health care business that is in the process of being closed to another health care business. Such expenses can be incurred by a debtor (or trustee), or a government entity. Accordingly, the costs of transferring patients are paid by a debtor, are considered costs of administering the estate, and are accorded the highest priority.

Q. If a health care business files for bankruptcy and continues to operate a facility, what happens?

A. When a health care business files for bankruptcy relief and continues to provide patient services, the BACPA requires that a “patient care ombudsman” be appointed “to monitor the quality of patient care and to represent the interests of the patients of the health care business.” Under the BACPA, such ombudsman must be appointed within 30 days of the bankruptcy filing, unless the court finds that the appointment of an ombudsman is not necessary.

Q. If a health care business files for bankruptcy and continues to operate a facility, who will appointed as ombudsman?

A. Generally, the United States trustee (an employee of the U.S. Department of Justice) will select and appoint a disinterested person (a person not affiliated with the debtor) to be the ombudsman. If the health care business provides long-term care, then the United States trustee may appoint the State Long-Term Care Ombudsman appointed under the Older Americans Act of 1965 for the State in which the case is pending to serve as the ombudsman.

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Q. If a health care business files for bankruptcy and continues to operate a facility, what will the ombudsman do?

A. The responsibilities of an ombudsman are: (a) to monitor the quality of patient care provided to patients; (b) to provide periodic reports to the court regarding the quality of patient care provided; (c) if such ombudsman determines that the quality of patient care provided is declining significantly or is otherwise being materially compromised, to file with the court a motion or a written report notifying the court and other parties of that determination; (d) to maintain any information relating to patients as confidential information; and (e) to get prior court approval before reviewing confidential patient records.

Q. If a health care business files for bankruptcy and continues to operate a facility, who will pay the fees and expenses of an ombudsman?

A. The debtor will. The BACPA treats fees and expenses of a patient care ombudsman the same as fees and expenses of other professionals of the debtor and estate (such as attorneys and accountants). Accordingly, an ombudsman must file an application showing that her fees and expenses are “reasonable compensation for actual, necessary services rendered.” If the fees and expenses requested by an ombudsman are permitted by the court, they are accorded the same priority as those of other professionals.

The information contained in this legal alert is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact jmills@kilpatrickstockton.com or your existing firm contact.