New Player at the Health Care Reorganization Table Practical Implications of the Patient Care Ombudsman
Title XI of BAPCPA, §§1101 through 1106, contains the health care provisions (health care amendments), which make several substantive changes to the Bankruptcy Code as it relates to the health care industry.3 One of these important new provisions is the creation of a patient care ombudsman for cases involving health care entities. The implementation of the patient care ombudsman raises numerous questions in the ongoing financing, staffing and managing of a health care bankruptcy. This article reviews implementation of the patient care ombudsman, provides a historical view of the health care amendments that lead to the creation of the patient care ombudsman and considers the practical implications of a patient care ombudsman in health care bankruptcy cases following the effective date.
Health Care Amendments
Section 1101(a) of BAPCPA broadly defines a "health care business" to mean "any public or private entity (regardless of whether that entity is organized for profit or not-for-profit) that is primarily engaged in offering to the general public facilities and services for (1) the diagnosis or treatment of injury, deformity or disease and (2) surgical, drug treatment, psychiatric or obstetric care."4 A "health care business" specifically includes any (1) general or specialized hospital, (2) ancillary ambulatory, emergency or surgical treatment facility, (3) hospice, (4) home health agency and (5) other health care institution similar to any of the foregoing.5 Long-term care facilities, including skilled nursing facilities, intermediate-care facilities, assisted-living facilities and other health care institutions "primarily engaged in offering room, board, laundry or personal assistance with activities of daily living and incidentals to activities of daily living" are expressly included in BAPCPA's definition of "health care businesses."6 A "patient" is defined in §1101(b) of BAPCPA to mean "any individual who obtains or receives services from a health care business."7
Section 1104 of BAPCPA creates the patient care ombudsman by adding §333 to the Code. This section requires the court to appoint a patient care ombudsman "to monitor the quality of patient care and to represent the interests of the patients."8 The court must appoint the patient care ombudsman within 30 days of a chapter 7, 9 or 11 bankruptcy petition date for all "health care business[es]" 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."9 If appointment is ordered by the court, the U.S. Trustee must appoint one disinterested person to serve as the patient care ombudsman.10 The U.S. Trustee may not serve as the patient care ombudsman.11
The concept of a patient care ombudsman is not a new legislative creation. In fact, BAPCPA incorporates references to the Older Americans Act of 196512 to provide guidance on the role of the patient care ombudsman. If the debtor is a health care business that provides long-term care, the U.S. Trustee may appoint the state long-term care ombudsman (the "state ombudsman") provided for under the Older Americans Act of 1965 for the state in which the bankruptcy case is pending to serve as the patient care ombudsman.13 In the event the U.S. Trustee does not appoint the state ombudsman, the court is required to notify the state ombudsman of the name and address of the person appointed as the patient care ombudsman.14
The Older Americans Act of 1965 was amended in 1978 to require each state to establish an ombudsman15 program to improve quality of care in nursing facilities.16 The state ombudsman's duties include identifying, investigating and resolving complaints made by or on behalf of residents and providing services to protect the health, safety, welfare and rights of the residents.17 The state ombudsman must inform residents about the means of obtaining regular and timely access to the services provided through the ombudsman's office18 and must ensure that representatives of the office timely respond to a resident's complaints.19 The state ombudsman represents the interests of residents before governmental agencies and seeks administrative, legal and other remedies to protect the residents.20
The state ombudsman analyzes, comments on and monitors the development and implementation of federal, state and local laws, regulations and other governmental policies and actions that pertain to the health, safety, welfare and rights of residents, including the adequacy of long-term care facilities and services in the state.21 He or she recommends changes in the law and facilitates public comment on laws and regulations.22 The state ombudsman must promote the development of citizen organizations and provide technical support for the development of resident and family councils to protect the well-being and rights of residents23 and carry out such other activities as the assistant secretary for aging determines to be appropriate.24
Theoretically, the state ombudsman "troubleshoots or mediates unresolved problems between residents or their families and a nursing facility."25 He or she receives, investigates and seeks to resolve complaints affecting residents in long-term care facilities; however, they cannot make or change laws, nor independently enforce particular recommendations.26 The state ombudsman serves as "friend, advocate and mediator."27
Criticism of the state ombudsman program is widespread.28 The state ombudsman programs "continue to suffer from problems such as poor staffing, poor use of volunteers and limited authority, accountability and autonomy."29 "The lack of necessary funding is probably the greatest of these barriers."30 Further, if "the ombudsman is not an attorney, which most are not, he or she needs the ready help of competent counsel that is sufficiently experienced in long-term care issues to zealously advocate on behalf of the programs."31 This requires more available state funding and proper training so the ombudsman can anticipate the need for legal services.32
While the stated duties of the state ombudsman are far more comprehensive than the requirements imposed upon the patient care ombudsman, it is foreseeable that courts overseeing the responsibilities and duties of the patient care ombudsman will incorporate the oversight required of the state ombudsman under the Older Americans Act of 1965. As such, the patient care ombudsman likely will face the same obstacles that the state ombudsman programs have dealt with over the past 25 years.
The Role of the Patient Care Ombudsman
BAPCPA specifies that the patient care ombudsman (1) "monitor the quality of patient care provided to patients of the debtor, to the extent necessary under the circumstances, including interviewing patients and physicians;"33 and (2) within 60 days following appointment and continuing at least every 60 days thereafter, report to the court in writing or at a hearing about "the quality of patient care provided to patients of the debtor."34 Section 333(b)(3) states that the patient care ombudsman shall "file with the court a motion or a written report" if the patient care ombudsman determines that "the quality of patient care provided to the patients of the debtor is declining significantly or is otherwise being materially compromised."35 BAPCPA requires that the patient care ombudsman provide notice to parties-in-interest upon making a determination regarding the quality of patient care;36 however, a time limit is not prescribed for filing the motion or written report. Presumably, the patient care ombudsman would file a motion to appoint a trustee or to replace management at the facility in the event of concerns over resident care.
An appointed patient care ombudsman is required to maintain confidential information that relates to patients or patient records.37 Confidential patient records may be reviewed by the patient care ombudsman, but only if the court approves such reviews in advance and imposes restrictions to protect the confidentiality of such records.38 A state ombudsman serving as the patient care ombudsman will have access to patient records consistent with the Older Americans Act of 1965 and nonfederal laws governing the state ombudsman program.39 The health care amendments suggest that the state ombudsman would be the logical candidate for the patient care ombudsman. This raises interesting questions relating to state employees (the state ombudsman) working for the federal bankruptcy court.
An amendment to §330(a)(1) of the Code provides that the court may grant a patient care ombudsman reasonable compensation for actual, necessary services rendered and reimbursement for actual, necessary expenses.40 The ombudsman will require legal counsel, particularly with regard to fulfilling his or her legal obligations under the Code. Presumably, courts will grant a patient care ombudsman reimbursement of reasonable and necessary expenses for professional counsel.
The health care amendments were originally conceived as part of the failed Business Bankruptcy Reform Act of 1998, S. 1914 (1998 Bill). Section 1104 of BAPCPA is essentially the same as §104 of the 1998 Bill with the exception that §1104 added the provision allowing the state ombudsman to serve as the patient care ombudsman. In introducing the 1998 Bill to Congress, Sen. Charles E. Grassley (R-Iowa) stated that "[p]atients [of hospitals, HMOs and nursing homes] are uniquely valuable and Congress needs to take special care to ensure that patients are protected during the bankruptcy process."41 Sen. Grassley went on to explain that the bill allowed bankruptcy judges to appoint patient ombudsmen "to make sure that the bankruptcy process is fair to patients."42
Practical Considerations and Concerns
BAPCPA brings a new player to the table in health care reorganizations in the form of the patient care ombudsman. The Act requires appointment of a patient care ombudsman in all health care bankruptcy cases unless convinced by one of the parties that it is unnecessary. Patient care already is a priority consideration for the bankruptcy judge, creditors' committee, lenders, the U.S. Trustee and the debtor. While there may be some instances in which patient care is not considered a top priority, this is in a minority of cases. As a result, it appears that the patient care ombudsman may add unnecessary cost, expense and bureaucracy.
Under BAPCPA's statutory framework, the patient care ombudsman will hold an administrative priority claim against the estate for his or her costs. This will be another potential drain on lender carve-outs and on general cash flow in an already distressed industry sector. These costs also will take priority over payments to unsecured creditors. Presumably the courts will impose similar reasonableness standards with regard to reimbursement of the patient care ombudsman expenses as are considered with other professions. Otherwise, the court will have little ability to manage an overactive patient care ombudsman and his or her counsel.
The scope and responsibilities of the patient care ombudsman are largely undefined. Theoretically every aspect of a health care facility—resident conditions, staffing, use of cash—is already addressed by state and federal regulatory oversight. The specific role of the patient care ombudsman in state surveys is uncertain. Will state surveyors have to consult the patient care ombudsman? Can the patient care ombudsman make recommendations that exceed the standards and practices of state or federal requirements? What "standard of care" should the patient care ombudsman apply to the particular health care facility? Should the patient care ombudsman focus primarily on current patient care issues (which presumably are addressed by state regulators) or identify future issues that could arise? It appears that the patient care ombudsman will make recommendations to the court; however, his or her findings will not bind the court. As a result, the patient care ombudsman's authority in the case is unclear.
Another issue that will be interesting to follow is other parties' use of the patient care ombudsman's findings. Debtors and committees may use the patient care ombudsman's reports to cram down the value of the facilities. Lenders may use the reports to support change of management at the facilities. Rather than fostering resolution of disputes between the secured parties, the patient care ombudsman's findings likely will become another tool for litigants within the reorganization.
Another interesting dimension of the health care amendments will be the response of health care lenders. Lenders' counsel should add provisions in loan documents and workout agreements requiring that the borrower join with the lender in seeking waiver of the appointment of a patient care ombudsman in any subsequent bankruptcy filing. In addition, health care lenders may consider provisions in loan documents specifying certain agreed-upon consultants to serve as the patient care ombudsman in a bankruptcy filing. Like waivers of the automatic stay, lenders will have to defend these provisions in the courts.
The practical effect of the health care amendments may be the creation of a new pocket industry of patient care ombudsmen who will seek appointment in health care cases. For the patient care ombudsman to be effective, however, the bankruptcy court and the U.S. Trustee's Office will have to ensure they are hiring professionals who have the time, ability, resources and experience to serve the residents. In order for health care reorganization to continue working effectively, the patient care ombudsman will have to be focused on the process. It is not unreasonable to surmise that a patient care ombudsman and his or her professionals would be interested in a variety of issues affecting the bankruptcy—including cash collateral and debtor-in-possession (DIP) financing orders—to ensure the financial stability of the debtor and to preserve resident care. In addition, the patient care ombudsman will be interested in stay-relief motions to the extent that they affect resident care. Similar issues will arise in the context of assumption or rejection of leases and executory contracts. Likewise, resident care issues will be implicated in all disclosure statements and reorganization plans, as well as any §363 sales outside the plan process. Therefore, parties to a health care bankruptcy will have to consider the patient care ombudsman's position on a variety of issues. Any consensual plan will have to address the patient care ombudsman's concerns.
While BAPCPA permits parties to request that the bankruptcy court waive the appointment of the patient care ombudsman, it puts those parties seeking waiver in an awkward position. On one hand, the party will argue that the case cannot support—nor needs—the additional cost overlay of an ombudsman. On the other hand, the whole concept of the ombudsman program is to protect resident care, which is of the utmost importance in these cases. A properly supported motion showing that the debtor, its management company, the lender and/or other parties-in-interest already at the reorganization table have extensive experience in the health care industry and in resident care issues may be necessary to avoid the appointment of the patient care ombudsman. Additionally, the introduction of recent state surveys showing a lack of significant deficiencies in resident care should help promote opposition to the appointment of a patient care ombudsman.
The patient care ombudsman likely will wield a fair amount of power in the bankruptcy case given the presumed importance that bankruptcy judges will have in protecting and preserving resident care, health and welfare. Bankruptcy courts will have to ensure that the patient care ombudsman has significant experience in the health care industry. For the patient care ombudsman concept to work effectively in practice, the position should not be used as a training ground for consultants to learn the industry. Given the broad language of BAPCPA and the reimbursement of actual and necessary expenses incurred, we suspect that the addition of this new player will bring increasing and perhaps unnecessary financial burdens to health care reorganizations.
1 The authors express their appreciation to Ron Downey, Alicia Anderson and Thomas Wainscott for their insight into the practical effects of the patient care ombudsman on health care reorganizations. The views expressed herein, however, remain the sole opinion of the authors. Return to article
2 BAPCPA §1501(a). Section 1501(b) provides that the amendments made by BAPCPA generally do not apply to cases filed before the effective date of BAPCPA. Therefore, unless otherwise noted, the new provisions discussed herein apply only in cases filed on or after Oct. 17, 2005. Return to article
3 Generally, the other provisions of BAPCPA impacting health care entities involve (1) the disposal of patient records (BAPCPA §1102, new 11 U.S.C. §351), (2) the duty to transfer patients (BAPCPA §1105, new 11 U.S.C. §704(a)(12), new 11 U.S.C. §1106(a)(1)), (3) the costs and expenses of closing a health care business (BAPCPA §1103, new 11 U.S.C. §503(b)(8)) and (4) the exception to the automatic stay for the Secretary of Health and Human Services (BAPCPA §1106, new 11 U.S.C. §362(b)(28)). Furthermore, BAPCPA's provisions relating to the transfer of assets by nonprofit corporations (see BAPCPA §1221) and personally identifiable information (see BAPCPA §231) could also reasonably impact health care entities. Return to article
4 11 U.S.C. §101(27A). Return to article
5 Id. Return to article
6 Id. Return to article
7 11 U.S.C. §10l(40A). Return to article
8 BAPCPA §1104(a)(1); 11 U.S.C. §333(a)(1). Return to article
9 BAPCPA §1104(a)(1); 11 U.S.C. §333(a)(1). Return to article
10 BAPCPA §1104(a)(1); 11 U.S.C. §333(a)(2)(A). Return to article
11 Id. Return to article
12 See 42 U.S.C. §3001, et. seq. (note that the Older Americans Act of 1965 is codified in scattered sections of Title 42 of the U.S. Code). Return to article
13 BAPCPA §1104(a)(1); 11 U.S.C. §333(a)(2)(B). Return to article
14 BAPCPA §1104(a)(1); 11 U.S.C. §333(a)(2)(C). Return to article
15 The term "ombudsman" is derived from the Swedish Parliament in 1809 and originally designated an individual to listen to complaints about the government and attempt to resolve the disputes in an impartial manner. See Wiegand, Shirley A., "A Just and Lasting Peace: Supplanting Mediation with the Ombuds Model," 12 Ohio St. J. on Disp. Resol. 95, 98 (1996). Return to article
16 See Herrington, Elizabeth B., "Strengthening the Older Americans Act's Long-term Care Protection Provisions: A Call for Further Improvement of Important State Ombudsman Programs," 5 Elder L.J. 321, 334 (Fall 1997). This article provides a thorough description of the Older Americans Act and the ombudsman programs contemplated thereunder. Return to article
17 42 U.S.C. §3058(g)(a)(3)(A). Return to article
18 42 U.S.C. §3058(g)(a)(3)(C). Return to article
19 42 U.S.C. §3058(g)(a)(3)(D). Return to article
20 42 U.S.C. §3058(g)(a)(3)(E). Return to article
21 42 U.S.C. §3058(g)(a)(3)(G)(i). Return to article
22 42 U.S.C. §3058(g)(a)(3)(G)(ii). Return to article
23 42 U.S.C. §3058(g)(a)(3)(H). Return to article
24 42 U.S.C. §3058(g)(a)(3)(I). Return to article
25 Herrington, supra note 15 at 335. Return to article
26 Id. Return to article
27 Id. at 336. Return to article
28 See, e.g., Id. at 348. Return to article
29 Id. Return to article
30 Id. Return to article
31 Id. at 340. Return to article
32 Id. Return to article
33 BAPCPA §1104(a)(1); 11 U.S.C. §333(b)(1)-(2). Return to article
34 BAPCPA §1104(a)(1); 11 U.S.C. §333(b)(1)-(2). Return to article
35 BAPCPA §1104(a)(1); 11 U.S.C. §333(b)(3). Return to article
36 See Id. Return to article
37 BAPCPA §1104(a)(1); 11 U.S.C. §333(c)(1). Return to article
38 Id. Return to article
39 BAPCPA §1104(a)(1); 11 U.S.C. §333(c)(2). Return to article
40 BAPCPA §1104(b); see 11 U.S.C. §330(a)(1). Return to article
41 105 Cong. Rec. S3129 (daily ed. Apr. 2, 1998) (statement of Sen. Grassley). Return to article
42 Id. Return to article