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Martin Bunin

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When a health care business files for bankruptcy, the appointment of an ombudsman to monitor the quality of patient care and represent the interests of the patients is required unless the bankruptcy court finds that an ombudsman “is not necessary for the protection of patients under the specific facts of the case.” Bankruptcy Code §333(a)(1).[1]  Because many health care businesses which file for bankruptcy believe a patient care ombudsman is not necessary to ensure their quality of care and the cost of an ombudsman (which is paid by the debtor) may be material, motions for a determination that a patient care ombudsman is not required are fairly common.

Neither the Bankruptcy Code nor the Bankruptcy Rules provide a guide for the bankruptcy court’s analysis of whether an ombudsman is needed. The bankruptcy courts have developed standards that examine the operation of the health care business using a number of non-exclusive factors. One frequently cited decision listed and analyzed the following factors: (1) the cause of the bankruptcy; (2) the presence and role of licensing or supervising entities; (3) the debtor’s history of patient care; (4) the ability of patients to protect their rights; (5) the level of dependency 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 the appropriate level of care; and (9) the impact of the cost of an ombudsman on the likelihood of a successful reorganization.  In re Alternate Family Care, 377 B.R. 754 (Bankr. S.D. Fla. 2007). The Bankruptcy Court for the Eastern District of New York adopted the Alternate Family Care factors in In re North Shore Hematology-Oncology Associates, P.C., 400 B.R. 7, 11 (2008). The North Shore decision listed an additional four factors found in a 2008 California bankruptcy court decision: (1) the quality of the debtor’s current patient care; (2) the debtor’s financial ability to maintain quality care; (3) whether the debtor has an internal ombudsman program; and (4) the level of oversight of the debtor by governmental and professional association programs which might make the services of an ombudsman duplicative. The weight to be accorded each of the factors, according to the North Shore decision, is left to the sound discretion of the reviewing court.

A leading bankruptcy treatise concludes that, based on the language of the patient care ombudsman provision of the Bankruptcy Code, the court should conduct an evidentiary hearing on the motion. However, the bankruptcy courts in the Eastern District of New York more often decide the motions after argument on the motion papers, including the consideration of evidence through fact declarations, without live testimony. For the motion to succeed, the debtor must overcome the presumption in the statute in favor of appointing ombudsmen in health care bankruptcies, as well as the bankruptcy court’s likely conservative approach that an ombudsman will be appointed unless there is no realistic possibility that the quality of care will be compromised in any way, especially if the debtor provides in-patient services.

 

[1] A health care business is broadly defined in the Bankruptcy Code to mean any entity that provides medical or psychiatric services, or long-term care.

 

            New York State does not require hospitals to insure medical malpractice claims, either through the purchase of commercial medical malpractice insurance or the establishment of an adequately funded self-insurance program.  New York has never required such insurance.  There are many hospitals which did not insure medical malpractice claims in the past, and a number that currently do not.

            Historically, the lack of insurance was often a matter of choice.  A number of community hospitals in the New York City area did not insure medical practice claims because they believed they would always be able to pay claims out of operations.  Others chose not to insure because they believed the lack of insurance improved their negotiating position with medical malpractice plaintiffs.  The hospitals would warn plaintiffs to settle their claims for what the hospitals considered reasonable amounts. If they did not, the hospitals would tell them that they would not be able to pay their claims and might have to resort to chapter 11 bankruptcy, where their malpractice claims would be general unsecured claims and receive pennies on the dollar.

            Attending physicians typically have malpractice insurance that covers claims against them individually for services they perform at the hospitals where they practice.  But physicians who are full-time employees of hospitals often do not have any individual malpractice insurance coverage; rather, they are dependent on their employers for it.

            Some hospitals, after “going bare” for a period of time and experiencing a large number of malpractice claims, are unable to purchase commercial medical malpractice insurance.  It is unclear whether they could have taken advantage of state programs established to enable them to purchase insurance for themselves and/or their physicians.  Although some of these hospitals set up self-insured programs, the programs were often inadequately funded.  When the hospitals experienced financial difficulties, the self-insurance reserves would often be used, in whole or in substantial part, to fund operating expenses.

            The lack of medical malpractice insurance or adequate self-insurance, needless to say, can be tragic for patients.  Patients may well be uninformed when admitted to a hospital that it is without medical malpractice insurance coverage or a sufficiently funded self-insurance program to fully compensate them if they are negligently injured during treatment or surgery.  Narratives of serious injuries caused by medical malpractice make for difficult reading, and an even worse ending if they cannot recover the damages to which they are entitled.

            Lack of malpractice insurance further raises issues for trade creditors, service providers and other unsecured creditors of the hospitals if the hospitals experience financial difficulties and file chapter 11.  Serious uninsured medical malpractice claims and large numbers of such claims, when added to the claims of other creditors, can greatly reduce the recovery of both malpractice claimants and business creditors in the chapter 11 cases of these hospitals.

            For more information, please contact Marty Bunin at 646-329-1982 or MBunin@FarrellFritz.com

New York State healthcare policymakers have always had a lukewarm relationship with for-profit providers.  While in some sectors the for-profit provision of care is common (e.g., nursing homes and home care), in others, there are few to no for-profit providers (e.g., hospitals and primary care clinics).  In fact, some in the industry are under the impression that in some areas of healthcare the State has actually prohibited for-profit providers (for the most part it hasn’t, although the scope of state regulation can sometimes create that impression).  At the same time, there is more and more public scrutiny of not-for-profit providers, and as not-for-profit mega-systems continue to grow in New York and elsewhere it is sometimes difficult to distinguish them from for-profit enterprises in many ways.

Certainly, both for-profit and not-for-profit providers can be driven by a real sense of mission, and even the most mission-driven not-for-profit needs to be conscious of the bottom line (the oft-heard refrain being, “no margin, no mission”).  Thus, patients and potential employees in search of a mission-focused entity need to scrutinize both types of providers in some detail when looking for care or employment.  Similarly, new providers selecting the model they want to use need to take into account the unique characteristics of both models.

There is another model which might afford providers, patients and employees exactly the right mix of mission focus and profit-driven efficiency they are looking for.  While it has not received much attention in New York State healthcare to date, the worker cooperative model, in which the employees are the owners, provides an interesting alternative.  Article 5-A of the New York Cooperative Corporation Law (“CCL”) was enacted in 1985 to promote the creation of worker cooperatives and provide a means by which businesses may be democratically controlled and operated by their own workers.  The legislature expected that cooperative ownership would result in increased economic benefits to the worker owners, as well as the creation of new jobs (CCL § 80).

New York permits the formation of for-profit worker cooperatives to conduct any lawful business.  The model has been used in a variety of industries, including child care, cleaning, consulting, education, media, and restaurants (an interesting list can be found here), and it has been actively supported by the administration of New York City Mayor Bill DiBlasio (see here).  However, it is uncommon in the healthcare space – while the model was pioneered by a home health care agency based in the Bronx with more than 2,000 worker owners that says that it is the largest worker cooperative in the nation, it is not in wide use.  Nonetheless, under the right circumstances, it offers some intriguing possibilities.

Any corporation organized under the New York Business Corporation Law (BCL) may elect to become a worker cooperative by so stating in its certificate of incorporation or amending it (CCL § 82).  The election may be revoked by an amendment approved by two-thirds of the cooperative’s members (CCL § 86).  Curiously, a worker cooperative may not be classified as a non-profit or not-for-profit corporation (CCL § 83); thus, a worker cooperative is inherently a for-profit enterprise.

Members are individuals who are employed by the cooperative and own voting stock in the form of one membership share each (CCL §§ 81, 88).  All full- and part-time employees are offered membership after completing a probationary period.  The cooperative issues membership shares for a fee, the amount and payment terms of which are set in the by-laws (CCL § 88).  The certificate of incorporation or by-laws establish the qualifications for acceptance and termination of members (CCL § 88).  Only membership shares have voting power, except that non-member stockholders (apparently stockholders who are not workers and who owned stock at the time of the corporation’s election to become a cooperative) may vote on amendments to the certificate of incorporation that would adversely affect their rights as stockholders (CCL §§ 88, 89).

Members receive wages and profit distributions at the end of the calendar or fiscal year of the cooperative.  Profits are allocated to members on the basis of their “patronage”, a defined term meaning the amount of work performed by a member measured in accordance with the certificate of incorporation and by-laws.  Profits are apportioned based on the ratio of each member’s patronage to the total patronage of all members during the applicable period of time.  Profit distributions may be in cash, credits, written notices of allocation or capital stock issued by the cooperative (CCL § 90).  The cooperative may establish a system of internal capital accounts to reflect the book value and determine the redemption price of membership shares (CCL § 92).

The majority of the board of directors of the worker cooperative must be members, although non-members may serve on the board.  Non-members may serve as president, first vice president and other officers.  The by-laws contain the governance provisions for the worker cooperative, including election, terms, classification and removal of directors and officers consistent with the CCL or the BCL (CCL § 91).

A host of unique legal and practical issues are created by the model in general, and by its use in healthcare, in particular.  For instance, how is the confluence of employment and ownership handled for purposes of licensure and certificate of need?  Thus far, the Department of Health has been willing to limit character and competence review to board members only, but that may change if the model were to proliferate.  Similarly, the termination of a sufficiently large group of employees would presumably trigger certificate of need review if those employees represented 10% or more of the ownership of the provider.  In regard to practical concerns, a worker cooperative needs to be very careful in choosing the right leadership – it is a rare corporate executive who possesses the necessary business acumen, but is still comfortable in a setting where his/her employees are, in a very real sense, his/her bosses.

In spite of these challenges, the worker cooperative model may be attractive in settings with a union workforce, where it would represent the next step in the empowerment of workers.  Or, it might serve as an alternative to unionization for a non-unionized workforce looking to become more active.  But either way, it changes the traditional dynamics of the employer/employee relationship – and requires careful consideration before implementation.

If you have any questions about the worker compensation model in the context of healthcare, please do not hesitate to contact Marty Bunin at 646-329-1982 or mbunin@farrellfritz.com or Mark Ustin at 518-313-1403 or mustin@farrellfritz.com.