Intersection of Healthcare and Bankruptcy

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

As the pandemic marches on, the patient census figures decrease in skilled nursing facilities (“SNFs”) due to significantly higher death rates among the elderly population and a near mass exodus of nurse staffing turning to more lucrative nursing positions in acute care hospitals treating COVID-19 patients. As a result, one might expect that in the absence of more direct and indirect government financial support, SNFs will soon be facing significant financial distress. With over 15,500 SNFs in existence nationally, increased SNF bankruptcies could be right around the corner. The American Health Care Association anticipates that without government aid, at least 1,600 nursing homes could close by the end of 2021.

Unfortunately, this anticipated trend only magnifies the continuing concern that the quality of care delivered in SNFs throughout the country leaves much to be desired. Why is that a concern? Many industry experts are opposed to distributing more federal aid without a better understanding of how and where the money will be deployed. Public records show aid dollars have gone to facilities that have repeatedly been cited for health violations, insufficient care or worse. An investigation by The Washington Post found that hundreds of millions of aid dollars have been sent to facilities sued in recent years for Medicare fraud. “I am both skeptical and concerned about where that money has gone,” says Mike Wasserman, a past president of the California Association of Long-Term Care Medicine. A few analysts have suggested that future COVID-19 financial aid be predicated on improving the quality of care at these facilities.

The Center for Medicare and Medicaid Services (“CMS”) currently has a 5-star quality rating system that calculates an overall star rating for SNFs, with 1-star being the lowest possible score and 5 being the highest based on performance in three types of metrics. These are: (1) the results of state health inspections, (2) staffing ratios, and (3) quality measures. Statistically, there are currently 11 states that have at least 40% of all their nursing homes having low overall ratings, either 1-star or 2-stars. These states are Texas, Louisiana, Oklahoma, Kentucky, Tennessee, North Carolina, West Virginia, Ohio, Pennsylvania, New York and Georgia.

With that in mind, the filing of a SNF bankruptcy can present a daunting task of maintaining patient census, keeping medical staff and avoiding additional expenses while attempting to improve the overall quality of care. Certainly, the appointment of a patient care ombudsman (“PCO”) is one such expense that must be analyzed closely. Pursuant to Bankruptcy Code, Section 333 (a)(1) states, “if a debtor is a health care business, the Court shall order not later than 30 days after the commencement of the case, the appointment of an ombudsman to monitor the quality of patient care and to represent the interests of the patients of the healthcare business unless the Court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case” (emphasis supplied). In a SNF bankruptcy, debtor’s counsel is faced with either accepting a PCO coming into the facility and reviewing the quality of care or alternatively, opposing the order directing the PCO appointment by suggesting that a PCO is not necessary under the specific facts of the case. Such an approach is a risky alternative for the SNF that has a poor CMS star rating. Additionally, if the government begins to dole out additional COVID-19 aid based on the quality of care, a potential life saving injection of cash could be placed at serious risk if the bankruptcy doesn’t have a watchdog monitoring the care being delivered.

An alternative to the appointment of a PCO that many bankruptcy courts throughout the country have found acceptable in the past, is permitting a debtor to self-report. See In re The Clare at Water Tower, Case No. 11-46151 (SPS) (Bankr. N.D. Ill. Dec. 7, 2011) (ruling that the appointment of a patient ombudsman was unnecessary given that the debtor-CCRC agreed to self-report); In re Hingham Campus, LLC, Case No. 11-33912 (Bankr. N.D. Tex. July 28, 2011) (excusing the appointment of a patient care ombudsman for a CCRC where the Debtor agreed to self-report); In re Lincolnshire Campus, LLC, Case No. 10-34176 (Bankr. N.D. Tex. Aug. 19, 2010) (excusing the appointment of a patient care ombudsman for a CCRC where the Debtor agreed to self-report); In re Laredo Urgent Care, PA, Case No. 08-50180 (Bankr. S.D. Tex. July 11, 2008) (finding, among other things, that based upon the specific facts and circumstances of the case and the debtor’s agreement with the Texas Attorney General’s Office to self-report, the appointment of a patient care ombudsman under 11 U.S.C. § 333 is not necessary for the protection of patients).

The mechanism for self-reporting can be as informative and as efficient as the appointment of a PCO and far less costly. Such a self-reporting order would typically require the debtor, within 30 days from the date it is entered, and every 60 days thereafter, at least up until the time of a confirmed plan of reorganization, file with the court a verified affidavit reporting the following information: (1) a report on the number of staff members, their positions and status and standing of any licenses held by staff members and any complaints made by patients, residents or families of patients or residents concerning the care provided by the staff members at the SNF; (2) staff changes report — any increases or decreases in the number of staff members over the 60-day reporting period; (3) patient/resident records — report to the court the measures taken for the debtor to continue to secure the patient and resident records at the SNF’s compliance with HIPAA; (4) vendor reports — report to the court any and all complaints by vendors regarding payment or ordering issues; (5) report all resident complaints that have been submitted to the debtor regarding the quality of care and any special care provided by the SNF to treat the patient; (6) a summary of any report of any post-petition litigation or administrative action; (7) report any plans to close the facility due to the inability to formulate a plan; (8) report any major maintenance work that needs to be done; and (9) report of any life-safety issues. The report then would be submitted and filed with the court and forwarded to the United States Trustee (the bankruptcy process watchdog), the appropriate state Department of Health, the appropriate state agency administrating the Medicaid program, CMS, any counsel of record involving any secured creditor and any family member, resident or patient who specifically requests a copy thereof.

With additional COVID-19 aid remaining uncertain for nursing homes, cost savings in health care insolvency cases will be of paramount importance and the alternative of turning to the clinical staff of the debtor to fulfill the duties usually set aside for a statutory PCO might very well appeal to the court, the economic constituencies in the case, the patients and their families and those state and federal regulatory agencies charged with the responsibility of insuring the safety and well-being of residents of a SNF.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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