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Protecting Patients Rights in Health Care Bankruptcies

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Over the past several years, the health care industry has become more competitive due to the introduction of managed care and mergers and consolidations within the industry. The combination of managed care and the economies of scale resulting from mergers and consolidations have resulted in dramatic changes. Namely, in the past, the health care industry's primary focus was the patient and the quality of medical care. Now, the industry is primarily focused on delivering health care services in the most efficient and cost-effective manner possible.

Due partly to these changes within the industry, the frequency of failures within the health care industry has increased dramatically over the past several years. Between 1994 and 1995, the total number of failures in the industry increased by 10.6 percent; between 1995 and 1996, the total number of failures in the health care industry increased by 14.3 percent; and between 1996 and 1997, the total number of failures increased by 15.5 percent.1

In response to the increasing number of failures, Congress has developed legislation concerning the reorganization and liquidation of health care businesses. Currently, the Senate is considering S. 1914, which proposes to amend the Bankruptcy Code to protect the interests of current and former patients of a reorganizing or liquidating health care business.

Protecting the Rights of Patients

S. 1914 protects the health, safety and privacy of patients during a health care facility's bankruptcy case. Most importantly, S. 1914 gives patients a voice in the bankruptcy case. Under S. 1914, a patient advocate must be appointed in all health care bankruptcy cases to monitor the quality of patient care.

The bill also clarifies the duties of a trustee2 when closing a health care facility. Based on the proposed amendments to the Bankruptcy Code, a trustee has a duty to current and former patients to properly dispose of patient records and to assist with the orderly transfer of patients when a health care facility closes. To encourage trustees to comply with such provisions, the proposed amendments establish a mechanism that allows the trustee to be paid for any expenses incurred in closing a health care facility.


S. 1914 advances the rights of patients by giving them a voice in the bankruptcy case and by providing appropriate procedures for the disposal of patient records and the transfer of patients when a health care facility closes.

Disposal of Patient Records

Section 102 of S. 1914 establishes a mechanism for disposing of medical records and fills a void under federal and state law. Under federal law, if a health care facility closes, a health care provider generally must maintain all patient records for at least five years.3 State law, however, is not uniform. Some states allow a health care provider to deposit its medical records with the state department of health upon closing the health care facility.4 Most states, however, simply require that a health care facility maintain all medical records for one to 25 years, regardless of their financial condition. In an attempt to accommodate troubled health care facilities, some states require the troubled health care facility to work with the state department of health to develop an acceptable plan for storing and disposing of patient records when the facility closes.

Unfortunately, if a health care facility is in financial crisis and must close immediately, existing federal and state laws generally do not provide an appropriate method for disposing of patient records in a timely manner. If a health care facility is closing, the storage and/or disposal of patient records is of the utmost importance to current and former patients. Often, the patient's ability to access such records will be critical to the patient's ongoing medical treatment. Furthermore, medical records contain sensitive information. Therefore, to the extent that a health care facility stores or disposes of medical records, it is critical that the storage and/or disposal methods maintain the confidentiality of such records.

To remedy the situation, §102 of S. 1914 establishes a procedure whereby a trustee can timely dispose of patient records, while also protecting the interest of patients. Under §102, a trustee is required to comply with any existing federal or state laws concerning the storage and disposal of patient records, if possible. If the trustee is unable to comply with existing federal or state laws, the trustee then is required to notify the appropriate federal and state agencies to request permission to deposit the patient records with such agencies. If the agencies do not claim the patient records within 60 days after being notified by the trustee, then the trustee must publish notice in appropriate newspapers informing patients, insurance providers and any other parties in interest that they may claim their medical records and that if such medical records are not claimed within a certain period of time, the records may be destroyed. In addition, the trustee simultaneously is required to notify patients directly to inform them of the rights to claim their medical records.

If the medical records are not claimed within 60 days after publishing notice in the newspaper or within 90 days after mailing notice directly to patients, the trustee may destroy the records. Under §102, the trustee must shred or burn all written materials contained in the medical records and must ensure that no optical, magnetic or other electronic records can be retrieved. The methods of destruction will ensure the confidentiality of the records.

Clearly, the trustee or debtor will be able to comply with the procedures established under §102 only if sufficient funds are available. Therefore, it may be appropriate to modify §102 to allow the trustee to abandon all medical records in the event that the trustee is unable to comply with federal law, state law or the procedures established under §102.

Transferring Patients

When a health care facility closes, presumably patients are transferred to neighboring facilities that are able to provide appropriate care for the patients. Unfortunately, under current federal and state law, it is not clear that patients will be transferred to appropriate new facilities. When a health care facility closes, state health care departments are required to assist patients in locating a new health care facility only in a minority of states. In most states, the health care facility that is closing must locate appropriate new facilities for the patients.

Section 105 of S. 1914 imposes a duty on trustees to use their reasonable and best efforts to transfer patients to another health care business that is in the vicinity of the closing health care facility, provides the patient with services substantially similar to those provided by the closing health care facility and maintains a reasonable quality of patient care. This section protects the interests of patients while also providing some guidance to trustees concerning their duties in transferring patients.

The Cost of Closing a Health Care Facility

Under the Bankruptcy Code, trustees are fiduciaries to creditors. When properly closing a health care facility by disposing of medical records to ensure confidentiality and transferring patients to new facilities to maintain the quality of patient care, a trustee is acting for the benefit of the current and former patients—not creditors. Trustees, therefore, may be concerned that they will not be reimbursed by the estate for costs incurred in closing a health care facility. See Oregon v. Witcosky In re Allen Care Centers Inc., 96 F.3d 1328 (9th Cir. 1996) (state's actions in closing a health care facility provided no benefit to the estate, and, therefore, the state's request for a $200,000 administrative expense claim was denied).

Under §103 of S. 1914, any costs and expenses incurred by a fiduciary in closing a health care facility will be reimbursed by the estate as an administrative priority claim. Therefore, §103 encourages trustees to comply with federal and state laws concerning closing a health care facility, disposing of patient records and transferring patients.

The Patient Advocate

Patients often are greatly affected by health care bankruptcy cases, but they have no standing or voice in the bankruptcy case. It is imperative that patients be provided a voice in health care bankruptcy cases in the event that the patients' rights are not being protected and patients are not receiving appropriate medical care.

Section 104 of the bill requires the appointment of an ombudsman within 30 days after commencement of a bankruptcy case by a health care business. The ombudsman is required to monitor the quality of patient care and to report to the bankruptcy court every 60 days concerning the quality of patient care. In the interim, if any serious matters arise and the quality of patient care declines significantly or is otherwise materially compromised, the ombudsman may notify the court, by report or motion, with notice to the appropriate parties.

Conclusion

S. 1914 clearly has addressed a void under federal and state law concerning the manner in which a health care facility should be closed. Further, S. 1914 advances the rights of patients by giving them a voice in the bankruptcy case and by providing appropriate procedures for the disposal of patient records and the transfer of patients when a health care facility closes. With the increase in health care industry failures, S. 1914, if enacted, will be critical to protecting the right of patients during the liquidation or reorganization of a health care facility.


Footnotes

1 See Neil DiBernardo, Business Failure Record 1996 (Final) and 1997 (Preliminary) (The Dun & Bradstreet Corp. 1998). (Return to text)

2 The term "trustee" shall also include "debtor-in-possession." (Return to text)

3 See, e.g., 42 U.S.C. §1396cc(a)(1)(I)(ii) (1998); 42 C.F.R. §482.24(b)(1)(1998). (Return to text)

4 For example, Indiana, Mississippi and Tennessee allow a health care facility to deposit medical records with the state department of health when a health care facility closes. (Return to text)



Journal Date: 
Tuesday, September 1, 1998

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