Since enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the new health care business provisions have been heavily scrutinized. Most of the new health care business provisions are aimed at enhancing the rights of patients in a bankruptcy case involving their health care provider. In a health care bankruptcy case, the patients may not have standing or resources to seek relief from the bankruptcy court. They may not even be aware that their health care provider has filed for bankruptcy. The patient may be physically unable to address and analyze the issues arising in the bankruptcy case.

By far, the most criticized provision is the appointment of a patient care ombudsman—the one provision that clearly provides patients with a voice in the bankruptcy case. See 11 U.S.C. §333. Although appointed in only a handful of cases to date, the ombudsman has been attacked as an additional, unnecessary cost and possibly a hindrance to the administration of the bankruptcy case. The focus has been on how to avoid the appointment of the ombudsman. Rather than attack and avoid, this article will urge you to invite the ombudsman into your case to help you move your bankruptcy case quickly, efficiently and in cooperation with the ombudsman and the other constituents.

The Patient Care Ombudsman¹

Pursuant to §333 of the Bankruptcy Code, an ombudsman is to be appointed within 30 days after the commencement of a bankruptcy case by a health care business2 unless the court finds that, under the specific facts of the case, the appointment of an ombudsman is not necessary for the protection of patients. 11 U.S.C. §333(a)(1). Therefore, an ombudsman may be appointed in every chapter 7, 9 or 11 filed by a health care business.

The ombudsman's job is to monitor the quality of patient care and to represent the interests of the patients³ of the health care business. 11 U.S.C. §333(a)(1). The ombudsman is required to prepare and file a report with the bankruptcy court every 60 days regarding the quality of patient care. 11 U.S.C. §333(b)(2). In the interim, if any serious matters arise and the quality of patient care declines significantly or otherwise is materially compromised, the ombudsman may notify the court, by report or motion, with notice to the appropriate parties. 11 U.S.C. §333(b)(3).

The ombudsman must be disinterested⁴ and is paid by the estate. 11 U.S.C. §§333(a)(2)(A) and 330(a)(1). Presumably, the ombudsman may employ other professionals to help fulfill her responsibilities.

The Office of the U.S. Trustee appoints the ombudsman. 11 U.S.C. §333(a)(2)(A). If the health care business is a long-term care facility, the Office of the U.S. Trustee may appoint the state's 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.⁵ 11 U.S.C. §333(a)(2)(B). Otherwise, the Office of the U.S. Trustee may appoint any other disinterested person. 11 U.S.C. §333(a)(2)(A).

Benefits of the Patient Care Ombudsman

For operators of troubled health care businesses, the appointment of an ombudsman could actually be beneficial and help move the bankruptcy process forward. An ombudsman with appropriate skill could be a valuable ally in accomplishing the goals of the bankruptcy case.

• Another Constituent to Move the Bankruptcy Process Forward. The ombudsman, as the representative of the patients, is another constituent that the health care debtor may approach to seek support on its restructuring efforts, sale efforts or other part of the case. If the debtor and ombudsman have a good working relationship and the debtor is attempting to move the bankruptcy case forward, the ombudsman could be a valuable ally in negotiations and in court. For example, if the debtor is attempting to complete a sale to a more financially viable operator, but the committee is resisting the sale efforts, the ombudsman may be able to help push the sale forward, emphasizing that a sale to a financially viable operator is certainly in the interests of the patients.
• A Contact for Patients and Family. The ombudsman can be a valuable ally in maintaining patients at the facilities. If the ombudsman can explain the bankruptcy process and give patients and family members comfort that the quality of service will continue, the debtor will benefit financially by maintaining its focus instead of spending significant resources attending to the individual concerns of patients and family members as to how the bankruptcy case will impact them. The ombudsman could hold meetings at the facility and have a Web site, office hours and the like to encourage active communications with patients and family members.
• Attending to the Questions and Concerns of the Employees. The ombudsman could also be an effective communicator with the employees by answering questions about the bankruptcy process and quality-of-care issues. The doctors, nurses and staff will be concerned about their ability to continue caring for patients. The ombudsman can alleviate those concerns and explain that their role is specifically to monitor the quality of care.
• Assistance with State and Federal Agencies. Given that most health care businesses are heavily regulated, both state and federal governmental agencies often play a significant role in health care bankruptcy cases. The ombudsman is an independent third party specifically monitoring patient care and, if able to provide a positive report to the government, will likely be of great assistance throughout the case. For example, if the debtor is a nonprofit entity attempting to sell some or all of its assets to a for-profit entity, based on recent changes to the Bankruptcy Code, the attorney general may have a right to approve or reject the transaction. See 11 U.S.C. §§363(d)(1) and 1129(a)(16). The ombudsman may be of assistance with the attorney general given that the ombudsman will be familiar with the debtor's remaining operations and will likely have done due diligence on the buyer. The ombudsman may be able to address concerns raised by the attorney general and assist in the approval process.

There are many other ways in which an ombudsman could be helpful in the bankruptcy case, provided that he or she is involved in the process and working with the debtor toward the successful conclusion of the bankruptcy case. The debtor needs to bring the ombudsman into the process and determine how the ombudsman can assist the debtor.

Why the Critics Are Wrong

To win over the critics, we need to address some of the criticisms raised to §333 and the appointment of an ombudsman. The most repeated criticism of the patient care ombudsman is the additional cost to be incurred by the estate. As noted above, the ombudsman's fees and expenses will be paid by the estate. The ombudsman may seek to employ other professionals, and those professionals would also be paid by the estate. While there is a potential that the cost could be significant, the debtor should work to control the cost.

There are several ways to control the cost. First, the ombudsman could be forced to work in accordance with a budget or an agreed-upon carve-out under a financing or cash collateral order. Secondly, the scope of the work to be performed by the ombudsman should be clearly spelled out. The debtor should meet with the ombudsman, understand the work plan of the ombudsman and assist the ombudsman in carrying out that work plan in the most efficient way possible. In addition, if the debtor owns multiple facilities, the debtor could insist that the ombudsman visit only a handful of those facilities. Finally, the debtor could attempt to put a time limit on the ombudsman's appointment.

Others have raised concerns as to how the ombudsman's reports will be used by the committee or other parties in interest in the bankruptcy case. Some are concerned that the committee or other parties in interest will use the ombudsman's reports for litigation advantages, including as a basis for motions to convert or motions to appoint a trustee or examiner. The debtors may be able to seek a protective order and attempt to limit the use of the report.

Section 333 in Action!

In order to determine whether the ombudsman provisions are as onerous as some fear, we searched the various bankruptcy courts to locate health care business bankruptcy cases filed on or after Oct. 17, 2005, the date of enactment of the BAPCPA. While our search was not exhaustive, we were able to identify 43 bankruptcy cases that appeared to involve health care businesses. Interestingly, 32 of those debtors failed to identify themselves as health care businesses in their petitions, and neither the bankruptcy court nor the Office of the U.S. Trustee (UST) has appointed an ombudsman.

With respect to the other 11 cases, the following occurred:

• The bankruptcy court has set deadlines for the appointment of an ombudsman in five of the 11 cases, but no ombudsman has been appointed by the UST yet.
• In one of the 11 cases, the debtor did not designate itself as a health care business, but the bankruptcy court entered an order to show cause why an ombudsman should not be appointed.

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A debtor is not able to necessarily avoid the appointment of an ombudsman by failing to designate itself as a health care business.

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• In one of the 11 cases, the debtor and the UST entered into a stipulation that the appointment of an ombudsman was premature given that the debtor was no longer providing any health care services and its license was suspended.
• The bankruptcy court has directed the appointment of an ombudsman in two of the 11 cases, and the UST has appointed an ombudsman. In both of these cases, the state's long-term care ombudsman has been appointed. In one of these cases, the debtor did not designate itself as a health care business but ultimately entered into a stipulation with the UST agreeing to the appointment of an ombudsman.
• The bankruptcy court's order directing the appointment of an ombudsman was successfully challenged in one of the 11 cases. In this case, the debtors did not designate themselves as health care businesses. The bankruptcy court, however, entered an order concluding that they were health care businesses, and therefore, absent any finding otherwise, the court was required to appoint an ombudsman. (The debtors filed a motion for reconsideration of the court's order regarding appointment of an ombudsman. Based on the motion for reconsideration, the court entered an order finding that the appointment of an ombudsman was not necessary for the protection of patients under the specific facts of the case and ordered the UST not to appoint an ombudsman.)
• The bankruptcy court's direction to appoint an ombudsman in one of the 11 cases resulted in the debtor amending its petition to remove the designation as a health care business.

No ombudsman has filed a fee application seeking payment of their fees and expenses yet. One ombudsman has filed a report with the bankruptcy court detailing the quality of patient care. This report identified the patient complaints received and the status of their resolution. This report was prepared by one of the state long-term care ombudsmen. It appeared as though this person was simply continuing to perform his duties in accordance with the Older Americans Act of 1965.

Conclusion

The patient care ombudsman was added to the Bankruptcy Code to give patients a voice in the bankruptcy process. The initial reaction of most professionals has been how can we avoid the appointment of an ombudsman. Although we will have to continue watching the trends, bankruptcy courts seem to be ordering the appointment of ombudsman in health care business bankruptcy cases. A debtor is not able to necessarily avoid the appointment of an ombudsman by failing to designate itself as a health care business.

Rather than work to avoid the appointment, which may be inevitable, parties should work with the U.S. Trustee to identify appropriate candidates to serve as the ombudsman, develop roles that the ombudsman can fill to help the bankruptcy process, and most importantly, involve the ombudsman in the case so that they will become a partner working with you to a successful conclusion.

Footnotes

¹ See U.S. Senate Committee on the Judiciary, Subcommittee on Administrative Oversight and the Courts: Hearing Regarding S. 1914, "The Business Bankruptcy Reform Act," 144 Cong. Rec. 564-02, 105th Cong. (2d Session, 1998) (summary of key points in testimony of Keith J. Shapiro, on behalf of the American Bankruptcy Institute).

² See 11 U.S.C. §27(A) (definition of health care business).

³ See 11 U.S.C. §101(40A) (definition of patient).

⁴ See 11 U.S.C. §101(14) (definition of disinterestedness).

⁵ See Lupinacci, Timothy M. and Pruitt, Eric L., "New Player at the Health Care Reorganization Table: Practical Implications of the Patient Care Ombudsman," 24 Am. Bankr. Inst. J. 6 (July/August 2005) (explaining the Older American Act of 1965).