Managing Enterprise Risk in a Health Care Bankruptcy: The Role of the Patient Care Ombudsman
This Briefing is brought to you by AHLA’s Enterprise Risk Management Task Force.
- April 15, 2020
- Susan N. Goodman , Pivot Health Law LLC
- David N. Crapo , Gibbons Law
A bankruptcy filing signals a debtor’s significant financial distress. Most debtors seeking bankruptcy protection suffer from limited or erratic cash flow limitations and/or debts exceeding (often significantly) the value of their assets. Health care businesses face additional market-segment pressures that often include changes in regulations, reimbursements, case mix, and/or payer mix. State and federal health care agency recoupments, fines, and/or penalties are also not uncommon.[i] As these various dynamics impact health care margins, planned plant and capital equipment investments are often delayed or cancelled.
As financial pressures further mount, organizations may attempt to reduce costs by targeting non-clinical roles for staff reductions. While organizations attempt to quantify staff utilization efficiency through what are commonly called “productivity metrics,” productivity tools are often hard to apply to non-revenue generating and non-clinical departments that may be required to ensure patient safety and compliance with licensure and reporting requirements. Accordingly, it is not unusual for the risk manager position to be eliminated pre-petition and assigned to a nursing executive and/or to a quality team member who is also tasked with assuming additional duties such as quality data abstraction and education. Further, challenges with key vendors may be a significant part of the financial strain that ultimately results in the petition filing. Examples may include rocky implementation of an electronic health record (EHR) with intra-operability issues that affect operations such as scheduling, patient financial services, or quality data abstracting that is essential not only to risk management, but also to Centers for Medicare & Medicaid Services (CMS)-mandated data reporting.
Once in bankruptcy, a health care debtor faces two potentially inconsistent obligations—the obligation to maximize the value of the bankruptcy estate for the benefit of creditors and the obligation to properly care for patients. To meet the former obligation, financial consultants are often engaged to seek and implement revenue generating and expense reducing strategies to enhance the value of the bankruptcy estate. Doing so indiscriminately, of course, could undermine patient care and safety. A decline in patient care and safety could further trigger complaints by patients, their families, or staff, and subsequent governmental enforcement action. Although the filing of the bankruptcy petition generally stops collection activity,[ii] enforcement activity by government entities is not included.[iii]
A decline in patient care quality could negatively impact census and revenues if the debtor’s reputation suffers and/or staff/clinicians depart as a result of bankruptcy-related concerns. Reorganization efforts can be further jeopardized if potential investors, purchasers, or business partners become unwilling to participate in the debtor’s reorganization effort when risk calculations relative to these various dynamics prove unfavorable. For all these reasons, a health care provider’s bankruptcy filing signals the need for heightened enterprise risk management (ERM) engagement.
ERM and the PCO Role
The Code provides a means for ERM support through the appointment of a Patient Care Ombudsman (PCO).[iv] Appointed by the United States Trustee (UST), the PCO is charged with: (1) monitoring the quality of patient care and safety;[v] (2) representing the interests of the debtor’s patients;[vi] (3) periodically (at least every 60 days) reporting to the bankruptcy court on the quality of patient care and safety;[vii] and (4) reporting (including via motion) on an emergency basis if the PCO becomes aware of a material compromise or a significant decline in the quality of patient care and safety.[viii]
While the Code requires that a PCO shall be appointed in all health care cases,[ix] in most cases the court deems the PCO role unnecessary and excuses appointment. In fact, not long after the Code was updated in 2005 to include the requirement to appoint a PCO in health care cases, [x] a body of bankruptcy case law developed to support excusing the appointment of a PCO.
Two early cases addressing motions to excuse PCO appointment, In re Valley Health System[xi] and In re Alternate Family Care,[xii] are instructive on the ERM components of the PCO role by articulating the factors relevant to the determination whether to excuse PCO appointment. The ERM components of the PCO role, as described in these cases, include (1) a review of any patient care quality and safety issues that arose in the run-up to the bankruptcy filing; (2) an investigation of current medical and non-medical clinical staff levels and training for adequacy, including verification that the debtor and clinical personnel hold necessary licenses and approvals; and, (3) verification of the existence and sufficiency of internal patient safeguards and personnel oversight at the debtor’s facility.
A crucial component of the PCO’s role is to alert the bankruptcy court, the United States Trustees, and other interested parties to any material decline in or substantial compromise of the quality of patient care or safety. The collective experience of the authors, however, includes many examples whereby the PCO was able to proactively bring debtor issues to light to facilitate resolution short of patient impact. Often these interventions happen without being brought to the Court’s attention for patient confidentiality or other reasons. While not exhaustive, some examples include: (1) bringing aging facility issues to the debtor’s attention; (2) identifying critical vendor, equipment, or staff issues potentially threatening the quality of patient care and safety, (3) uncovering missed patient safety, equipment, critical maintenance or calibration needs; (4) addressing procedural lapses; and (5) advocating on behalf of patients and their families.
Proactive ERM engagement also requires the PCO’s sensitivity to the type of patient cared for by the debtor. As case law excusing PCO appointments developed, the courts appeared to deem outpatient clinical settings to have less need for PCO oversight because the patients could simply seek services through a different provider. Their ability to do so, courts reasoned, made them less dependent on a specific provider and less vulnerable to a decline in that provider’s quality of care. By contrast, patients who could not readily move to a different provider were thought to be more dependent or vulnerable to harm from a material decline in or compromise of patient care and safety. For that reason, courts have been more likely to appoint PCOs in residential care settings such as a nursing homes, acute-care hospitals, inpatient rehabilitation facilities, and addiction and/or behavioral health treatment settings. Courts have nevertheless appointed a PCO in outpatient settings based on patient safety concerns or the infeasibility of transferring to another provider.[xiii] In any case, determining the level of patient dependence and vulnerability requires consideration of the potential negative impacts on patient health and safety if a debtor’s financial limitations prevent it from providing necessary services.
ERM Support in Facility Transfer and/or Closure
The PCO role and duties change in transfers or closures of the debtor’s facilities as compared to when the debtor continues operations. In these situations, the PCO’s duties are focused on monitoring the transfer of services to new providers; or, in the case of closure, of patients to new facilities. In the ANKA Behavioral Health[xiv] case in California, for example, the PCO monitored both the transfer of facilities and patients, coordinating with various regulatory agencies during the month-long process. In other case examples, PCOs may have much less notice and/or time between the closure decision and patient transfers.[xv] Yet, in all circumstances, establishing communication and coordination between the PCO and those agencies ultimately engaged in the closure process is critical to patient safety, particularly when resources at the facility are limited or the debtor has delayed in initiating the coordination effort.
ERM Support with Patient Records
The PCO is also often consulted on patient record preservation and access issues. The Code provides a process whereby patient records can be destroyed after a one-year holding period if appropriate notice and other requirements are met.[xvi] Whether the records are destroyed under section 351 of the Code or transferred to a record custodian, the PCO can help identify, and hopefully mitigate, risks and challenges associated with record access, storage, transfer, and/or destruction. The PCO can also assist in identifying the equipment that stores the protected health information for which provision must be made in a sale, transfer, and/or wind-down process.
PCO Cost Considerations
The appointment of a PCO is not without cost. The PCO is entitled to compensation for the services performed. Most courts permit the PCO to retain other professionals who are also entitled to compensation.[xvii] With or without the need for other professionals, the cost of a PCO is regularly cited as a significant factor in debtor motions asking the court to excuse the appointment of the PCO.
Even if the PCO’s duties are performed by a single professional, costs associated with each case may be difficult to anticipate in advance as budgets are typically established based on a “best case” scenario. In challenging cases where the PCO has concerns requiring more frequent site visits, or where locations close, the costs associated with fulfilling the PCO duties can quickly exceed budgeted amounts. Certainly, the authors have had experience with cases that have resulted in partial or complete non-payment for services due to irreversible financial extremis ending in case dismissal or conversion.
The anticipated cost of a PCO can be addressed in the budgets prepared in support of the debtor’s motions for either authorization to use a secured creditor’s cash collateral or approval of post-petition financing. PCO cost can also be addressed in the PCO appointment order by (1) delineating the scope of the PCO’s appointment; (2) setting parameters on the PCO’s retention of additional professionals; (3) establishing parameters for the PCO’s delegation of duties; and (4) establishing the timing and manner of the PCO (and any PCO professionals) compensation.
Conclusion
The distressed health care scenarios leading to a bankruptcy filing magnifies the importance of ERM in health care. While the PCO role is not a substitute for strong quality, compliance, and risk integration before, during, and after the bankruptcy filing, the PCO can often bring a neutral, integrated perspective to help identify and reduce organizational risks that could otherwise lead to patient harm. As we wait as a nation and as a world to understand the ultimate implications of the COVID-19 pandemic, the role of ERM—in health care, and particularly in financially distressed health care—will continue to be of critical importance.
Susan N. Goodman started Pivot Health Law, LLC in 2019 after practicing in a medium-sized Tucson firm for six years. A large part of her healthcare compliance law practice includes serving as a court appointed ombudsman for health care providers during bankruptcy. Susan has served in this capacity in thirty-eight cases nationally. Susan is currently serving as the Vice-Chair of Publications on the AHLA Enterprise Risk Management Task Force.
David N. Crapo works as counsel for Gibbons Law and has extensive experience in bankruptcy, debtor/creditor law, commercial law, and equipment leasing. This experience has also included work in healthcare privacy and healthcare insolvency, including serving as a Patient Care Ombudsman. David has been an active participant in AHLA, currently engaged in the Leadership Development Program with the Enterprise Risk Management Task Force.