Bankruptcy and a Physician's Practice

The health care industry has not escaped the financial crisis.  Hospitals are especially hit hard, with a number of closings or bankruptcies.  Physicians and their practices are not immune either.  The crisis has led to a reduction or delay in payment from some third-party payors and a reduction in available capital to bridge the gap created by payment delays or reductions.  Meanwhile, with baby boomers retiring, the patient base is burgeoning.  Physician practices have little ability to reduce health care delivery costs to meet the reduced or delayed payment.  Some practices have been required to file for bankruptcy protection, either closing or reorganizing. 

In 2005, Congress amended the bankruptcy code by adding provisions directed solely to bankruptcies filed by health care entities, including medical practices.  For the individual physician, practice bankruptcy can be traumatic.  The physician likely will be a creditor of the estate-owed back wages and benefits.  If the practice is reorganizing, the physician must decide whether to stay with the practice, join a new practice or strike out on his own.  This article will discuss some of the unique aspects of bankruptcy on physicians and their practices.

Bankruptcy and Payment

Most third-party payment contracts contain provisions relieving the payor from its contractual obligations to a bankrupt physician group.  The 2005 amendments to the bankruptcy code permit the US Department of Health and Human Services to exclude a health care entity from participation in Medicare or any other federal health care program under certain conditions, regardless of the bankruptcy filing and its automatic stay provisions.  One court has permitted the government to offset from post-bankruptcy payments overpayments made before the bankruptcy, despite the automatic stay of a bankruptcy.  The automatic stay otherwise prevents collection efforts by creditors.  Thus, the revenue stream of a practice seeking bankruptcy reorganization can be affected by the bankruptcy in ways that further cripple it.

A physician practice contemplating bankruptcy to reorganize (as opposed to a bankruptcy to shut down) cannot rely on third-party payor contracts or government payment to resurrect the practice upon debt relief obtained through bankruptcy reorganization.  To prevent unanticipated revenue loss following a bankruptcy for reorganization, a practice should work with third-party payors and the government agencies before bankruptcy filing to determine whether these entities will tolerate and support the practice through reorganization. 

For the individual physician employee, the termination of third-party payor agreements may spell the end to the ability of the organization to retain the physician.  A physician employee must decide whether to stick with the practice through reorganization or form or locate another practice willing to accept his or her patients and the third-party payor agreements that come with them.  The individual physician may be the signatory on third-party payment agreements.  The physician may be able to transfer those agreements to a new practice; however, any transfer may result in an offset by the payor of overpayments made to the previous practice.  The physician may have no idea of the extent of the offsets.  If the physician is in the dark, it may be better to negotiate new payor agreements upon leaving the bankrupt group.

Bankruptcy and Employee Salary and Benefits

Bankrupt practices must address the compensation they are obligated to pay their physicians.  Physicians and owed wages become creditors of the bankrupt estate, entitled to notice like any other creditor.  Employee creditors are entitled to preferential payment by the estate for past due wages; that is, by law they stand near the front of the line of creditors to receive payments from the estate.  In addition to wages, bankrupt practices may be unable to pay their employees' benefits.  It is important for an employed physician to ensure he or she retains health and professional liability insurance.  Accordingly, the employed physician must determine whether he or she can assume payments for proper insurance, or must purchase new policies that provide coverage for actions taken by the physician while employed.  If the practice was obligated by contract to pay for the physician's coverage, the physician may seek payment for the benefits, as a creditor of the estate.

Transferring Patients

One unique aspect of bankruptcy for health care entities is the effect of bankruptcy on patient care.  A practice that simply closes its doors without providing an alternative source for treatment runs the risk of being accused of patient abandonment.  Physicians in the group could face disciplinary action by the state medical board or lawsuits as a result. 

The 2005 bankruptcy code amendments address the need for ongoing medical care for patients by a health care entity shutting its doors.  The amendments require, among other things, that a health care practice in bankruptcy "use all reasonable and best efforts" to transfer patients to a practice that:

• 1) Is in the vicinity of the closing facility;
• 2) Offers substantially similar patient care services; and
• 3) Maintains a reasonable quality of patient care.

The amendments thus impose a substantial burden on practices to evaluate an entity that could receive transferred patients. 

Bankruptcy is very chaotic.  Employed physicians of a bankrupt practice must struggle with issues of:

• 1) Compensation;
• 2) Future employment; and
• 3) Liability exposure and insurance, among other things.

In this setting, they are not in the best position to be providing medical care to the practice's patients who, too, may wonder where to obtain future medical care.

Pre-bankruptcy planning goes a long way toward militating against possible licensure issues, malpractice claims, or other patient problems associated with bankruptcy.  A practice planning to file for bankruptcy protection should provide an alternative source of care for patients before closing.  The alternative source may be formerly employed physicians; these physicians and the practice should work together before bankruptcy to ensure continuity of patient care. 

Medical Records Storage

As a practical matter, a physician practice contemplating bankruptcy and closing should contact its physicians to determine whether they intend to remain in the geographic area and whether they are prepared to accept patients they treated in the group.  The patients can be notified of their physician's new practice location and agree to medical records transfer.  This alleviates the risk that records would be destroyed or stored at the practice's expense.  Physicians leaving a bankrupt practice can approach the practice about transferring patients and their records to a new practice, thereby reducing costs to the bankrupt practice.  The practice can also contact patients and transfer medical records directly to them.  However, for legal purposes, a physician employed by the practice would be wise to retain a copy of any records of that physician's practice that are given to the patient. These transfers will significantly reduce the costs associated with post-bankruptcy record handling and storage.

Patient Care Ombudsman

The 2005 bankruptcy amendments also require a patient care ombudsman to be appointed within 30 days of filing by a health care entity for bankruptcy, unless relieved by the court.  The ombudsman is required to report regularly to the court.  The ombudsman is to monitor patient care and file a report or motion with the court if patient care is declining significantly or otherwise materially compromised.  The court will appoint an ombudsman based upon a number of criteria, including:

• Whether the facility has sufficient internal controls to ensure quality patient care during reorganization;
• The reason for the bankruptcy;
• The presence of licensing body supervision;
• The practice's past history of patient care;
• The ability of patients to protect their rights;
• Patients' dependency on the health care entity;
• The tension between the interests of the patients and the practice;
• The potential patient injury in the event of a dramatic reduction in patient care; and
• The cost of the ombudsman on successful reorganization.  

An ombudsman is an expensive additional cost to a struggling practice in reorganization.  A practice planning to file for bankruptcy protection for reorganization should be aware of the potential for the appointment of an ombudsman.  With some pre-planning, the practice should be prepared to demonstrate to the court that an ombudsman is not necessary to protect patient care. 

Barbara Hensleigh, a former NICU nurse, has practiced law for more than 20 years. Her statewide practice is with the law firm of Andrews & Hensleigh, LLP, in Los Angeles, California.  Ms. Hensleigh's practice is devoted to the representation of physicians, physician groups and health care entities in litigation, arbitration and administrative proceedings.  She may be reached at hensleighlaw@earthlink.net.

DISCLAIMER

The articles provided in Practice Management News are general.  They do not constitute legal, practice management or coding advice in any particular factual situation or create an attorney-client relationship.  Consult your attorney or other professional for advice in your particular situation.