Patient Care Ombudsperson - A Question of Necessity

In the 2005 changes to the Bankruptcy Code, Congress added the concept of a patient care ombudsperson ("PCO"). A PCO monitors and ensures the quality of patient care for a debtor deemed to be a health care business. With this benefit can come a significant administrative expense. This article explores the circumstances in which a PCO may be necessary.

I.    What is a PCO?

11 U.S.C. § 333 of the Bankruptcy Code authorizes the appointment of a PCO if necessary to safeguard patient care and patient records when a "health care business", as that term is defined under the Code, files bankruptcy.

The PCO has specific obligations under § 333, including monitoring the quality of patient care and regularly reporting the findings regarding patient care to the court. A PCO's appointment in a case will lead to increased oversight into the debtor's affairs and increased administrative costs. A PCO is a professional and his or her fees are entitled to administrative priority status. Therefore, a debtor and other interested parties in the case should not take lightly the possibility of such an appointment.

II.    The Standard for Appointment

Under § 333, the court shall appoint a PCO not later than 30 days after the filing of a health care business bankruptcy, unless the court finds that appointment is not necessary for the protection of patients under the specific facts of the case. The party seeking to avoid appointment has the burden of proof to show either that the debtor is not a health care business under the Code or that a PCO appointment is unnecessary. § 333 provides that if the determination is made that a PCO is not required, nothing precludes a party from moving for the appointment of a PCO at any time during the case due to a change in circumstances.

A health care business is defined under 11 U.S.C. § 101(27A) as any public or private entity primarily offering to the general public facilities and services for (i) the diagnosis or treatment of injury, deformity, or disease; and (ii) surgical, drug treatment, psychiatric or obstetric care. § 101(27A) lists specific types of health care businesses subject to the appointment of a PCO, but the list is not exhaustive. Hospitals, home health agencies, hospices, and skilled nursing facilities are among the types of businesses specifically included in the definition.

III.    Application of the Standard

Courts have developed various criteria for determining whether to appoint a PCO. To determine whether a debtor is a health care business, several courts have implemented a four-part test based upon the Code's definition. See In re Medical Associates of Pinellas L.L.C., 360 B.R. 356, 359 (Bankr. M.D. Fla. 2007); In re Alternate Family Care, 377 B.R. 754, 757 (Bankr. S.D. Fla, 2007); In re William L. Saber, M.D., P.C., 369 B.R. 631, 635-7 (Bankr. D. Colo. 2007). To qualify as a health care business: (1) the debtor must be a public or private entity; (2) the debtor must be primarily engaged in offering to the general public facilities and services; (3) the facilities and services must be offered for the diagnosis or treatment of injury, deformity or disease; and (4) the facilities and services must be offered for surgical care, drug treatment, psychiatric care or obstetric care.

Even if the debtor is a health care business, a PCO may not be appointed if one is unnecessary given the specific facts of the case. A PCO may be unnecessary if the debtor has ceased doing business and is no longer providing support or services. In re Medical Associates of Pinellas L.L.C., 360 B.R. at 361. Also, a PCO appointment may not be warranted if the filing was not caused by concerns about patient care and if patient care has not been adversely affected by the bankruptcy filing. In re Total Woman Healthcare Center, P.C., 2006 WL 3708164, *2 (Bankr. M.D. Ga. 2006); In re William L. Saber, M.D., P.C., 369 B.R. 631, 634 (Bankr. D. Colo. 2007).

This second criterion to evaluate - whether a PCO appointment is necessary - appears to be evolving into a totality of the circumstances test. This test was first formally promulgated in In re Alternate Family Care, 377 B.R. 754 (S.D. Fla. 2007), which built upon the foundations laid in the Total Woman and Saber analyses. In Alternate Family Care, the court weighed nine nonexhaustive factors: (1) the cause of the bankruptcy; (2) the presence and role of licensing or supervising entities; (3) the debtor's past history of patient care; (4) the ability of the patients to protect their rights; (5) the level of dependence of the patients on the facility; (6) the likelihood of tension between the interests of the patients and the debtor; (7) the potential injury to the patients if the debtor drastically reduced its level of patient care; (8) the presence and sufficiency of internal safeguards to ensure appropriate level of care; and (9) the impact of the cost of a PCO on the likelihood of a successful reorganization. The Alternate Family Care court decided not to appoint a PCO because the majority of the factors weighed against such appointment.

At least one court has stated that the "weight to be accorded to each of the Alternate Family Care factors ...is left to the sound discretion of the court." In re Valley Health System, 381 B.R. 756, 761 (Bankr. C.D. Cal. 2008). The Valley Health System court also suggested other factors which could be considered, including: (1) the high quality of the debtor's existing patient care; (2) the debtor's financial ability to maintain high quality patient care; (3) the existence of an internal ombudsperson program to protect the rights of patients, and/or (4) the level of monitoring and oversight by federal, state, local, or professional association programs which render the services of an ombudsperson redundant. Id.

Thus, it appears that courts may consider a wide variety of factors in analyzing whether to appoint a PCO in a particular case. If a factor potentially impacts patient care, it is likely appropriate to bring that factor to the court's attention.

IV.    Tips and Emerging Trends

Within the first 30 days of the case, the court is required to appoint a PCO in a health care business case unless the court finds the appointment unnecessary. Therefore, the court will either enter a sua sponte order or a proactive party in interest may move for appointment or for a finding that such an appointment is not necessary. Creditors may also file pleadings requesting, supporting or opposing the appointment.

If the debtor believes it does not fit the definition of a healthcare business or the appointment is not necessary, it may be prudent to file a motion for determination of the issue soon after the case is filed. The debtor may need to know as soon as possible whether it must include PCO fees in its budget.

Because the Alternate Family Care test for whether appointment is necessary allows evaluation of additional factors beyond the nine enumerated therein, debtors may also raise additional considerations. Some additional considerations might include noting that the primary issues in the bankruptcy will be financial in nature and therefore create little to no impact on patient care, that a plan of reorganization has been or is expected to be filed early in the case and the debtor does not anticipate transferring medical records or selling the business as part of the reorganization, that patient care has not been adversely affected since the filing and patient privacy is ensured, or that no trustee has been appointed due to any allegations of mismanagement.

The United States Trustee program has collected data regarding PCO appointments since the provision became effective. Often, PCOs are appointed in cases involving hospitals and skilled nursing facilities. PCOs are less frequently appointed in situations where shelter and sustenance are not provided to patients. Regardless of the type of health care business, it is important to remember that the determination should focus on ensuring that the debtor's patients will be protected.

V.    Conclusion

PCO appointments are an important issue in health care business bankruptcies. Counsel must understand the debtor's operations, the standard for appointment, and how an appointment will affect the bankruptcy case. High standards for patient care must be ensured during the pendency of a bankruptcy. Whether a PCO should be appointed to help maintain these high standards is a question of necessity, and the determination should be made by looking at the debtor's operations, finances, track record for patient care, and future plans.