American Bankruptcy Institute

                           C. Daniel Motsinger
                    Krieg DeVault LLP, Indianapolis, IN

                            Shawn M. Riley
                  McDonald Hopkins LLC, Cleveland, OH


 The Next (Tidal) Wave of Cases - Healthcare Restructurings and Insolvencies

                    Central States Bankruptcy Workshop

                             June 18 – 19, 2010

      Central StateS BankruptCy WorkShop

                              American Bankruptcy Institute

              C HEC KLI S T OF S A LI EN T I S S U ES I N V OLV ED

1.       I s d eb tor a “h ealth care b u s in es s ”?

         a)     See 11 U.S.C. §101(27A), which provides:

         The term “health care business”—

                (i)     means any public or private entity (without regard to whether that
                        entity is organized for profit or not for profit) that is primarily
                        engaged in offering to the general public facilities and services

                        (1)    the diagnosis or treatment of injury, deformity, or disease;

                        (2)    surgical, drug treatment, psychiatric, or obstetric care; and

                (ii)    includes—

                        (1)    any—

                               (A)     general or specialized hospital;

                               (B)     ancillary ambulatory,         emergency,    or   surgical
                                       treatment facility;

                               (C)     hospice;

                               (D)     home health agency; and

                               (E)     other health care institution that is similar to an
                                       entity referred to in subclause (I), (II), (III), or (IV);

                        (2)    any long-term care facility, including any—

                               (A)     skilled nursing facility;

                               (B)     intermediate care facility;

                               (C)     assisted living facility;

                               (D)     home for the aged;

                               (E)     domiciliary care facility; and

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                                       (F)      health care institution that is related to a facility
                                                referred to in subclause (I), (II), (III), (IV), or (V), if
                                                that institution is primarily engaged in offering
                                                room, board, laundry, or personal assistance with
                                                activities of daily living and incidentals to activities
                                                of daily living.

              b)      The majority view appears to be that 11 U.S.C. §101(27A)’s definition of
                      a health care business should be read narrowly as “contemplat[ing]
                      something more than a doctor’s office and clearly…more than an
                      administrative support facility…that does not deal with the general
                      public.” In re Medical Associates of Pinellas, L.L.C., 360 B.R. 356, 361
                      (Bankr. M.D. Fla. 2007) (Congress’ definition of a health care business
                      “was intended to refer to inpatient care facilities such as hospitals and
                      nursing homes and not most out-patient facilities such as a doctor's
                      office”). In order to be a health care business, the debtor must (i) be a
                      public or private entity, (ii) be primarily engaged in offering facilities and
                      services to the general public, (iii) offer these facilities and services to the
                      general public for the diagnosis or treatment of injury, deformity or
                      disease, and (iv) offer these facilities to the public for surgical care, drug
                      treatment, psychiatric care or obstetric care. Id. at 359.

                      (i)      Contra, In re Saber, 369 B.R. 631, 637 (Bankr. D. Colo. 2007)
                               (finding that a sole-owner, sole-physician plastic surgery office
                               with three additional employees nonetheless qualified as a
                               “surgical treatment facility” as contemplated by 11 U.S.C.
                               §101(27A)(B), and hence constituted a “health care business”
                               within the meaning of 11 U.S.C. §101(27A)).

      2.      I f th e d eb tor q u alifies as h ealth care b u s in es s w ith in th e
              mean in g of 11 U .S .C . §101(27A ), mu s t th e cou rt ap p oin t a
              Patien t C are Omb u d s man (“PC O”) p u rs u an t to 11 U .S .C . §333?

              a)      Purpose of a PCO is to “monitor the quality of patient care and to
                      represent the interests of the patients of the health care business.” 11
                      U.S.C. §333(a)(1).

              b)      11 U.S.C. §333 provides:

                      (i)      If the debtor in a case under chapter 7, 9,1 or 11 is a health care
                               business, the court shall order, not later than 30 days after the
                               commencement of the case, the appointment of an ombudsman to
                               monitor the quality of patient care and to represent the interests of
                               the patients of the health care business unless the court finds that

         Notwithstanding 11 U.S.C. § 333(a)’s reference to Chapter 9, note that 11 U.S.C. § 901(a) does not
      include § 333 as one of the sections applicable in a Chapter 9 case.

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        the appointment of such ombudsman is not necessary for the
        protection of patients under the specific facts of the case.

        (1)     If the court orders the appointment of an ombudsman under
                paragraph (1), the United States trustee shall appoint one
                disinterested person (other than the United States trustee) to
                serve as such ombudsman.

        (2)     If the debtor is a health care business that provides long-
                term care, then the United States trustee may appoint the
                State 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 required by
                paragraph (1).

        (3)     If the United States trustee does not appoint a State Long-
                Term Care Ombudsman under subparagraph (B), the court
                shall notify the State Long-Term Care Ombudsman
                appointed under the Older Americans Act of 1965 for the
                State in which the case is pending, of the name and address
                of the person who is appointed under subparagraph (A).

(ii)    An ombudsman appointed under subsection (a) shall—

        (1)     monitor the quality of patient care provided to patients of
                the debtor, to the extent necessary under the circumstances,
                including interviewing patients and physicians;

        (2)     not later than 60 days after the date of appointment, and not
                less frequently than at 60-day intervals thereafter, report to
                the court after notice to the parties in interest, at a hearing
                or in writing, regarding the quality of patient care provided
                to patients of the debtor; and

        (3)     if such ombudsman determines that the quality of patient
                care provided to patients of the debtor is declining
                significantly or is otherwise being materially compromised,
                file with the court a motion or a written report, with notice
                to the parties in interest immediately upon making such

(iii)   An ombudsman appointed under subsection (a) shall maintain any
        information obtained by such ombudsman under this section that
        relates to patients (including information relating to patient
        records) as confidential information. Such ombudsman may not
        review confidential patient records unless the court approves such
        review in advance and imposes restrictions on such ombudsman to
        protect the confidentiality of such records.

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           (iv)   An ombudsman appointed under subsection (a)(2)(B) shall have
                  access to patient records consistent with authority of such
                  ombudsman under the Older Americans Act of 1965 and under
                  non-Federal laws governing the State Long-Term Care
                  Ombudsman program.

      c)   The court must decide whether to appoint a PCO no later than 30 days
           postpetition. 11 U.S.C. §333(a)(1).

      d)   If the court decides a PCO should be appointed, the United States Trustee
           (“UST”) makes the appointment. 11 U.S.C. §333(2)(A).

           (i)    Fed.R.Bankr.P. (“BR”) 2007.2 governs the procedures for the
                  appointment of a PCO:

                  (1)    Order to Appoint Patient Care Ombudsman. In a
                         chapter 7, chapter 9, or chapter 11 case in which the debtor
                         is a health care business, the court shall order the
                         appointment of a patient care ombudsman under §333 of
                         the Code, unless the court, on motion of the United States
                         trustee or a party in interest filed no later than 20 days after
                         the commencement of the case or within another time fixed
                         by the court, finds that the appointment of a patient care
                         ombudsman is not necessary under the specific
                         circumstances of the case for the protection of patients.

                  (2)    Motion for Order to Appoint Ombudsman. If the court
                         has found that the appointment of an ombudsman is not
                         necessary, or has terminated the appointment, the court, on
                         motion of the United States trustee or a party in interest,
                         may order the appointment at a later time if it finds that the
                         appointment has become necessary to protect patients.

                  (3)    Notice of Appointment. If a patient care ombudsman is
                         appointed under § 333, the United States trustee shall
                         promptly file a notice of the appointment, including the
                         name and address of the person appointed. Unless the
                         person appointed is a State Long-Term Care Ombudsman,
                         the notice shall be accompanied by a verified statement of
                         the person appointed setting forth the person’s connections
                         with the debtor, creditors, patients, any other party in
                         interest, their respective attorneys and accountants, the
                         United States trustee, and any person employed in the
                         office of the United States trustee.

                  (4)    Termination of Appointment. On motion of the United
                         States trustee or a party in interest, the court may terminate

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              the appointment of a patient care ombudsman if the court
              finds that the appointment is not necessary for the
              protection of patients.

       (5)    Motion. A motion under this rule shall be governed by
              Rule 9014. The motion shall be transmitted to the United
              States trustee and served on: the debtor; the trustee; any
              committee elected under §705 or appointed under §1102 of
              the Code or its authorized agent, or, if the case is a chapter
              9 municipality case or a chapter 11 reorganization case and
              no committee of unsecured creditors has been appointed
              under § 1102, on the creditors included on the list filed
              under Rule 1007(d); and such other entities as the court
              may direct.

(ii)   A motion to dispense with the appointment of a PCO must be
       made by the UST or a party in interest no later than 20 days
       postpetition. BR 2007.2(a).

       (1)    Is appointment of a PCO necessary?

              (A)    In making this determination, courts generally focus
                     on whether the debtor health care business has had a
                     history of significant patient care issues, or whether
                     the debtor’s reorganization plans may pose risks to
                     its patients.

              (B)    See, e.g., In re Saber, 369 B.R. 631, 637 (Bankr. D.
                     Colo. 2007)(“bankruptcy filing was not precipitated
                     by concerns relating to the quality of patient care or
                     patient privacy matters”); In re Alternate Family
                     Care, 377 B.R. 754, 758 (Bankr. S.D. Fla. 2007)
                     (salient considerations are (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 patients’ ability to protect their
                     rights, (5) the patients’ dependence on the facility,
                     (6) the likelihood of tension between the interests of
                     patients and of the debtor, (7) the potential injury to
                     patients if the debtor were to reduce its level of
                     patient care drastically, (8) the presence of
                     sufficient internal safeguards to ensure appropriate
                     levels of care, and (9) the effect of a PCO’s cost on
                     the debtor’s ability successfully to reorganize); In re
                     Valley Health Sys., 381 B.R. 756, 761 (Bankr. C.D.
                     Cal. 2008) (additional considerations include (1) the
                     high quality of a debtor’s existing patient care, (2)

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                               the debtor’s financial ability to maintain high
                               quality patient care, (3) the existence of an internal
                               ombudsman 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 renders the services of
                               a PCO redundant).

                               (i)    Revisiting the issue: note that under BR
                                      2007.2(b), even if a court initially elects not
                                      to appoint a PCO, on motion of the UST or a
                                      party in interest, the court may order the
                                      appointment of a PCO at a later time if it
                                      finds that the appointment has become
                                      necessary to protect patients. See In re N.
                                      Shore Hematology-Oncology Assocs., P.C.,
                                      400 B.R. 7, 10-11, 13 (Bankr. E.D.N.Y.
                                      2008) (absence of any present risk to
                                      patients, coupled with court’s discretion
                                      under BR 2007.2(b) to appoint a PCO at a
                                      later time if needed, factored in court’s
                                      decision not to appoint a PCO at outset of

                        (C)    PCOs frequently not appointed: According to
                               statistics maintained by the Executive Office of the
                               UST, as of 2007, PCOs most were often appointed
                               in cases involving skilled nursing facilities (“SNF”)
                               (64% of the time), and were appointed only 7.4% of
                               the time in cases involving all other types of health
                               care businesses. See Harold L. Kaplan and Samuel
                               R. Maizel, The Evolving Standards for the
                               Appointment of a Patient Care Ombudsman: §333
                               in “Operation,” Am.Bankr.Inst.J., Mar. 2008, at 40.

      e)   Two types of PCOs are contemplated by 11 U.S.C. §333:

           (i)   Those for long-term care facilities (defined by 11 U.S.C.
                 §101(27A)(b)(ii) as including any SNF, intermediate care facility,
                 assisted living facility, home for the aged, or domiciliary care
                 facility). 11 U.S.C. §333(a)(2)(B).

                 (1)    For such a facility, UST may appoint the State Long-Term
                        Care Ombudsman (“SLTCO”) appointed under the federal
                        Older Americans Act of 1965, 42 U.S.C. §§ 3001, et seq.,
                        for the state in which case is pending.

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                    (A)     A list of such ombudsman for each state can be
                            found at

                    (B)     A SLTCO’s duties include identifying, investigating
                            and resolving complaints made by or on behalf of
                            residents of long-term care facilities; providing
                            services to assist in protecting the health, safety,
                            welfare, and rights of such residents; and
                            representing the interests of such residents before
                            governmental agencies, and seeking administrative,
                            legal, and other remedies to protect their health,
                            safety, welfare, and rights. 42 U.S.C. §3058g(a)(3).

            (2)     The SLTCO, whether or not appointed as the PCO, must be
                    notified of any PCO appointed by the UST. 11 U.S.C.

     (ii)   Those for other types of facilities.

f)   A PCO’s duties are detailed in 11 U.S.C. §§ 333(b)(1)-(3).

     (i)    PCO is required to provide a report to the court every 60 days. 11
            U.S.C. §333(b)(2).

            (1)     Note, however, that a PCO which is not a SLTCO is
                    limited by 11 U.S.C. §333(c)(1) in its ability to review
                    confidential patient records, and may not review them
                    “unless the court approves such review in advance and
                    imposes restrictions on such ombudsman to protect the
                    confidentiality of such records.”

                    (A)     A PCO which is a SLTCO can exercise the access
                            granted the SLTCO under the federal Older
                            Americans Act of 1965, and nonfederal law, to
                            review such confidential patient records. 11 U.S.C.

     (ii)   Because a PCO’s duties are to advocate for matters relating to
            patient welfare, it follows that a PCO may urge the court to require
            the debtor to take measures that may deplete the bankruptcy estate
            and/or diminish creditors’ recoveries. “The result is that the court
            and other parties cannot view a [PCO] as they do a fiduciary whose
            job includes improving an estate’s value.” In re Renaissance
            Hospital-Grand Prairie, Inc., 2008 WL 5746904 (Bankr. N.D.
            Tex. Dec. 31, 2008).

g)   If appointed, a PCO is entitled to seek compensation from the estate in the
     same manner as other professionals appointed with court authorization. 11

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                      U.S.C. §330(a)(1) (references “an ombudsman appointed under section
                      333” as being among those professional to which a court may award

              h)      Can a PCO retain professionals? While the Bankruptcy Code does not
                      specifically authorize a PCO to retain counsel or other professionals,
                      courts have recognized that retaining such professionals is a necessary and
                      logical consequence of appointing a PCO in a case. See, e.g., In re
                      Renaissance Hospital-Grand Prairie, Inc., 2008 WL 5746904 (Bankr.
                      N.D. Tex. 2008) (while “retention by [a PCO] of professionals is not
                      consistent with the central purpose of bankruptcy in general and chapter
                      11 in particular: improving return to creditors and equity owners,”
                      nonetheless PCOs should be allowed to retain professionals “in proper
                      circumstances and for limited purposes,” and such employment “should be
                      carefully circumscribed, and employment of a professional by [a PCO]
                      should be authorized only upon a clear showing of need,” with the court
                      expressing concern that “[r]epresentation of [PCOs] ought not to become a
                      new profit center for law firms and other professionals” because
                      “[e]states…are not so flush with funds that adding an additional layer of
                      administrative expense to the ordinary costs of chapter 11 is without
                      consequence for the economic constituencies who are the focus and
                      principal intended beneficiaries of the bankruptcy process”).

              i)      If the SLTCO is appointed as the PCO in a case, should the SLTCO be
                      compensated as an administrative expense of the estate?

                      (i)      Put another way, should a state be entitled to reimbursement from
                               a bankruptcy estate for the added expense of its SLTCO
                               occasioned by the SLTCO’s appointment as the PCO in a case?

      3.      D is p os al of p atien t record s b y ad min is tratively-in s olven t es tates :
              govern ed b y 11 U .S .C . §351 an d BR 6011.

              a)      11 U.S.C. §351 provides:

                       If a health care business commences a case under chapter 7, 92 or 11, and
                       the trustee does not have a sufficient amount of funds to pay for the
                       storage of patient records in the manner required under applicable Federal
                       or State law, the following requirements shall apply:

                      (i)      The trustee shall—

                               (1)     promptly publish notice, in one or more appropriate
                                       newspapers, that if patient records are not claimed by the

         Notwithstanding 11 U.S.C. § 333(a)’s reference to Chapter 9, note that 11 U.S.C. § 901(a) does not
      include § 351 as one of the sections applicable in a Chapter 9 case.

                   American Bankruptcy Institute

                    patient or an insurance provider (if applicable law permits
                    the insurance provider to make that claim) by the date that
                    is 365 days after the date of that notification, the trustee
                    will destroy the patient records; and

             (2)    during the first 180 days of the 365-day period described in
                    subparagraph (A), promptly attempt to notify directly each
                    patient that is the subject of the patient records and
                    appropriate insurance carrier concerning the patient records
                    by mailing to the most recent known address of that patient,
                    or a family member or contact person for that patient, and
                    to the appropriate insurance carrier an appropriate notice
                    regarding the claiming or disposing of patient records.

     (ii)    If, after providing the notification under paragraph (1), patient
             records are not claimed during the 365-day period described under
             that paragraph, the trustee shall mail, by certified mail, at the end
             of such 365-day period a written request to each appropriate
             Federal agency to request permission from that agency to deposit
             the patient records with that agency, except that no Federal agency
             is required to accept patient records under this paragraph.

     (iii)   If, following the 365-day period described in paragraph (2) and
             after providing the notification under paragraph (1), patient records
             are not claimed by a patient or insurance provider, or request is not
             granted by a Federal agency to deposit such records with that
             agency, the trustee shall destroy those records by—

             (1)    if the records are written, shredding or burning the records;

             (2)    if the records are magnetic, optical, or other electronic
                    records, by otherwise destroying those records so that those
                    records cannot be retrieved.

b)   BR 6011 further governs the disposal of patient records in administratively
     insolvent health care business bankruptcy cases, and requires that the court
     approve the form of any notice of intent to dispose of such records,
     providing for two methods for giving such notice, namely (1) by
     publication pursuant to 11 U.S.C. §351(1)(A), and (2) by mail pursuant to
     11 U.S.C. §351(1)(B):

     (i)     Notice By Publication Under § 351(1)(a). A notice regarding the
             claiming or disposing of patient records under § 351(1)(A) shall
             not identify patients by name or other identifying information, but

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                   (1)    identify with particularity the health care facility whose
                          patient records the trustee proposes to destroy;

                   (2)    state the name, address, telephone number, email address,
                          and website, if any, of a person from whom information
                          about the patient records may be obtained;

                   (3)    state how to claim the patient records; and

                   (4)    state the date by which patient records must be claimed,
                          and that if they are not so claimed the records will be

           (ii)    Notice By Mail Under § 351(1)(b). Subject to applicable
                   nonbankruptcy law relating to patient privacy, a notice regarding
                   the claiming or disposing of patient records under § 351(1)(B)
                   shall, in addition to including the information in subdivision (a),
                   direct that a patient’s family member or other representative who
                   receives the notice inform the patient of the notice. Any notice
                   under this subdivision shall be mailed to the patient and any family
                   member or other contact person whose name and address have
                   been given to the trustee or the debtor for the purpose of providing
                   information regarding the patient’s health care, to the Attorney
                   General of the State where the health care facility is located, and to
                   any insurance company known to have provided health care
                   insurance to the patient.

           (iii)   Proof of Compliance with Notice Requirement. Unless the
                   court orders the trustee to file proof of compliance with §
                   351(1)(B) under seal, the trustee shall not file, but shall maintain,
                   the proof of compliance for a reasonable time.

           (iv)    Report of Destruction of Records. The trustee shall file, no later
                   than 30 days after the destruction of patient records under § 351(3),
                   a report certifying that the unclaimed records have been destroyed
                   and explaining the method used to effect the destruction. The
                   report shall not identify any patient by name or other identifying

      c)   “Patient” and “Patient Record” definitions: For purposes of §351 and BR
           6011, the Bankruptcy Code defines a “patient” and a “patient record” as

           (i)     11 U.S.C. §101(40A). The term “patient” means any individual
                   who obtains or receives services from a health care business.

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     (ii)   11 U.S.C. §101(40B). The term “patient records” means any
            written document relating to a patient or a record recorded in a
            magnetic, optical, or other form of electronic medium.

d)   11 U.S.C. §351 triggered only if federal or state law governs health care
     business’ recordkeeping requirements: At least one court has suggested
     that §351’s patient records disposal rules apply only if the debtor health
     care business is governed by federal law (primarily, the Health Insurance
     Portability and Accountability Act of 1996 (“HIPAA”)) or state law that
     mandates how patient records are to be maintained.

     (i)    See In re LLSS Management Co., Inc., 07-02678-5-ATS, 2008 WL
            395184 (Bankr. E.D.N.C. Feb. 11, 2008) (“[t]here is no evidence
            before the court as to what Federal law or State law requires with
            respect to records relating to the treatment of nicotine addiction.
            The record retention policy under the federal Health Insurance
            Portability and Accountability Act of 1996 (“HIPAA”) does not
            apply to this facility. Furthermore…North Carolina does not have a
            medical record retention requirement…Because there is no such
            requirement, § 351 does not apply to the trustee's destruction of the
            debtor's patient records. Nevertheless, the requirements of § 351
            provide valuable guidance as to how the trustee should proceed in
            this case”).

e)   Is surcharge available as a means of paying for the disposal of patient
     records?: In theory (if not in practice), the cost of complying with §351
     may exceed the available funds in the bankruptcy estate. Where there are
     insufficient funds to pay for the storage and dissemination of the medical
     records, 11 U.S.C. §351’s legislative history states “[i]t is anticipated that
     if the estate of the debtor lacks the funds to pay for the costs and expenses
     related to the above [§351], the trustee may recover such costs and
     expenses under §506(c) of the Bankruptcy Code.” House Report No. 109-
     31(I), April 8, 2005.

     (i)    Administrative expense claim under 11 U.S.C. §503(b)(8): To this
            end, 11 U.S.C. §503(b)(8)(A) provides administrative expense
            status to “the actual, necessary costs and expenses of closing a
            health care business incurred by a trustee or by a Federal agency
            (as defined in section 551 (1) of title 5) or a department or agency
            of a State or political subdivision thereof, including any cost or
            expense incurred in disposing of patient records in accordance with
            section 351.”

            (1)     While 11 U.S.C. §506(c) allows a trustee to surcharge a
                    creditor’s collateral to “recover from property securing an
                    allowed secured claim the reasonable, necessary costs and
                    expenses of preserving, or disposing of, such property to

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                                the extent of any benefit to the holder of such claim,” the
                                sine qua non of such a claim in the context of patient
                                records is that a creditor hold a security interest in such
                                patient records.

                        (2)     Practically speaking, however, it may be unlikely that a
                                creditor would seek a security interest in patient records
                                because of, inter alia, the potential HIPAA patient
                                confidentiality limitations on the use and disposal of such
                                records via a foreclosure sale (e.g., the patient records
                                necessarily would contain protected health information
                                (“PHI”) that could be disclosed via a foreclosure sale only
                                to another entity that met HIPAA’s covered entity rules).

                        (3)     If the creditor does not hold a security interest in the patient
                                records, the patient records would not be “property
                                securing an allowed secured claim,” and as a result a
                                trustee could not use 11 U.S.C. §§ 503(b)(8) and 506(c) to
                                surcharge the secured creditor for the cost of complying
                                with 11 U.S.C. §351, notwithstanding Congress’ contrary
                                suggestion in the legislative history.

                                (A)     Could the removal of patient records from a facility
                                        trigger a benefit to a secured creditor (even not
                                        holding a security interest in the patient records)
                                        that would form the basis of a surcharge claim?

      4.   Tru s tee’s or D I P’s d u ty to tran s fer p atien ts from a h ealth care
           b u s in es s th at is in th e p roces s of b ein g clos ed :

           a)    Where circumstances are such that a health care business must be closed,
                 11 U.S.C. §§ 704(a)(12) and 1106(a)(1) require the trustee, or a debtor in
                 possession, to “use all reasonable and best efforts to transfer patients…to
                 an appropriate health care business that (A) is in the vicinity of the health
                 care business that is closing; (B) provides the patient with services that are
                 substantially similar to those provided by the health care business that is in
                 the process of being closed; and (C) maintains a reasonable quality of

                 (i)    As part of 11 U.S.C. §503(b)(8)’s administrative expense priority
                        for “the actual, necessary costs and expenses of closing a health
                        care business,” the Bankruptcy Code includes “any cost or expense
                        incurred” in connection with such transfer of patients. 11 U.S.C.

                        (1)     However, and for the reasons discussed above regarding
                                the impracticality of efforts to surcharge for the costs of

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                             preserving or disposing of patient records, this
                             administrative expense priority may sound better than it
                             really is.

5.   Pres ervation of HHS ’ p ow er to exclu d e a d eb tor from Med icare
     p articip ation :

     a)     Pursuant to 11 U.S.C. §362(b)(28), the United States Department of
            Health and Human Services (“HHS”) is granted an exception to the
            automatic stay to take action to exclude a debtor from participation in the
            federal Medicare program “or any other Federal health care program (as
            defined in section 1128B(f) of the Social Security Act pursuant to title XI
            or XVIII of such Act).”

6.   C on s id eration s in th e s ales        of   th e   as s ets   of   h ealth   care
     b u s in es s es in b an k ru p tcy:

     a)     Sales of assets of nonprofit health care businesses: In defining the
            parameters of property of the estate, 11 U.S.C. §541(f) provides that
            “[n]otwithstanding any other provision of this title, property that is held by
            a debtor that is a corporation described in section 501(c)(3) of the Internal
            Revenue Code of 1986 and exempt from tax under section 501(a) of such
            Code may be transferred to an entity that is not such a corporation, but
            only under the same conditions as would apply if the debtor had not filed a
            case under this title.” Accordingly, pursuant to 11 U.S.C. §363(d), when
            the assets of a nonprofit health care business (“a corporation or trust that is
            not a moneyed, business, or commercial corporation or trust”) are sold,
            any such sale must be made “in accordance with applicable nonbankruptcy
            law that governs the transfer of property by” such nonprofits.

            (i)    11 U.S.C. §1129(a)(16) contains, as a confirmation requirement, a
                   similar limitation applicable to transfers of assets of a nonprofit
                   health care business via a plan of reorganization.

                   (1)       But see 11 U.S.C. §§ 1123(a)(5), whose nonexclusive list
                             of the possible means for a plan’s implementation does not
                             include compliance with state regulatory laws. See In re
                             Public Serv. Co. of New Hampshire, 108 B.R. 854, 890-91
                             (Bankr. D. N.H. 1989) (holding that §1123(a)(5) preempts
                             state regulatory laws).

7.   S uccessor Liability:

     a)     Where a target health care business receives reimbursement from a health
            care program, the acquiring entity may be subject to significant liabilities
            resulting from the target’s historical overpayments from Medicare or
            Medicaid and/or historical fraud and abuse violations. David Deaton, et

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           al., Distressed Healthcare: Significant Considerations for Buyers, Sellers,
           and Lenders Arising from the Intersection of Healthcare and Bankruptcy
           Laws, 3 J. Health & Life Sci. L. 1, 25 (2010).

      b)   Like other transactions, health care transactions may be structured as asset
           purchases rather than stock purchases or mergers to protect the buyer from
           a seller’s liabilities. Id. This structure allows the sale of the health care
           business’s assets without the buyer risking assumption of the seller’s
           liabilities, except for liabilities associated with Medicare and Medicaid
           provider agreements. Id.

           (i)    Exceptions to the general rule that could lead successor liability:

                  (1)     if the buyer expressly or impliedly agreed to assume the
                          seller’s liabilities;

                  (2)     if the transaction amounts to a de facto merger or
                          consolidation of the two entities;

                  (3)     if it is a mere continuation of the seller’s business by the
                          buyer; or

                  (4)     if the transaction was fraudulently entered into to escape
                          liabilities. Id.; see also Leslie J. Levinson & Eric D. Fader,
                          Successor Liability for Acquirers of Healthcare Facilities,
                          Edwards Angell Plamer & Dodge Client Advisory (June
                          2009),                        available                     at

                          (A)     If a creditor or the seller can demonstrate that one of
                                  these four exceptions is applicable, a court could
                                  enforce the predecessor’s obligations against the
                                  successor company. See Levinson, Successor
                                  Liability, supra.

      c)   If an entity purchases assets from a distressed health care business under
           11 U.S.C. §363(f), much of the risk of successor liability is eliminated.
           See Deaton, Distressed Healthcare, supra, at 25.

           (i)    Pursuant to 11 U.S.C. §363(f), a debtor in bankruptcy may sell
                  assets “free and clear” of any third party’s “interest” in the assets

                  American Bankruptcy Institute

            (1)    applicable nonbankruptcy law permits sale of such property
                   free and clear of such interest;

            (2)    such entity consents;

            (3)    such interest is a lien and the price at which such property
                   is to be sold is greater than the aggregate value of all liens
                   on such property;

            (4)    such interest is in bona fide dispute; or

            (5)    such entity could be compelled, in a legal or equitable
                   proceeding, to accept a money satisfaction of such interest.

d)   Bankruptcy courts have held that if adequate notice has been provided
     regarding the bankruptcy case, the key dates of which have been made
     publicly known, a bankruptcy sale may occur that is free and clear of
     virtually all interests that arose before the sale, including contingent,
     unliquidated, and unknown claims. Catherine E. Groves, Medicare
     Provider Liability Following the Sale of Assets or Stock of a Provider
     Operating Under Chapter 11, 14 N. 4 Health Law. 15, 18 (2002) (citations
     omitted); see ABI Health Care Insolvency Manual, 54 (David C. Hillman
     & William W. Kannel eds., 2d ed. 2005) [hereinafter “ABI HCM”] (“[I]n
     a plan of reorganization, with proper notice and sometimes additional
     conditions, many cases hold that a bankruptcy sale is free and clear of
     virtually all claims and interests before the sale, including unknown,
     contingent and other types of potential claims”).

e)   Courts also have used plan confirmation powers and special plan
     discharge powers to eliminate many types of successor liability claims.
     ABI HCM, supra, at 54-55 (citing In re Paris Indus. Corp., 132 B.R. 504,
     510-14 (D. Me. 1991); In re White Motor Credit Corp., 75 B.R. 944 (N.D.
     Ohio 1987)).

f)   A more difficult question is whether a bankruptcy court can shield a
     transferee from recoupment claims under Medicare, Medicaid and similar
     governmental programs. Id. at 55.

     (i)    Some bankruptcy courts have held that 11 U.S.C. §363(f) vests in
            the bankruptcy court the authority to sell particular assets free and
            clear of an entity’s recoupment interest in the debtor’s property if
            the proposed sale serves a sound business purpose, if it generates
            significant value for the benefit of all creditors (including the
            government), and if exigent circumstances exist (such as the
            debtor’s cash flow) that warrant the relief requested. Groves,
            Medicare Provider Liability, supra, at 18 (citing 11 U.S.C.
            §363(f); In re BDK Health Mgmt. Inc., 1998 WL 34188241
            (Bankr. M.D. Fla. Nov. 6, 1998); In re WBQ P’ship, 189 B.R. 97

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              (Bankr. E.D. Va. 1995); In re Leckie Smokeless Coal Co., 201 B.R.
              163 (S.D. W.Va. 1996); In re P.K.R. Convalescent Centers, Inc.,
              189 B.R. 90, 93-4 (Bankr. E.D. Va. 1995)).

      (ii)    Other courts have held that recoupment claims can be asserted
              against a §363(f) purchaser of assets because recoupments are
              equitable defenses and, as such, are not “claims” or “interests” in
              property that can be sold fee and clear. See Deaton, Distressed
              Healthcare, supra, at 28 (citing Folger Adams Sec. v.
              DeMatteis/MacGregor, JV, 209 F.3d 252 (3d Cir. 2000); In re
              Vitalsigns, 396 B.R. 232, 241 (Bankr. D. Mass. 2008)).

      (iii)   At least two approaches have been used to address the recoupment

              (1)    Through the plan confirmation process, wherein the debtor
                     proposes, via a plan and with adequate notice, to eliminate
                     successor liability for those special Medicare and Medicaid
                     claims and to limit such claims to sale proceeds. ABI
                     HCM, supra, at 55; see also In re BDK, supra, 1998 WL
                     34188241, at 5. Since preservation and/or continuity of
                     health care to Medicare and Medicaid patients is an
                     important goal for governmental agencies, the continuity of
                     care provided by the sale may be important enough that the
                     agencies will not object to limiting their claims to sale
                     proceeds. ABI HCM, supra, at 55. Even if such agencies
                     object, case law exists that supports the concept that a sale
                     through a confirmed plan eliminates successor liability
                     under 11 U.S.C. §1141 even for these types of liability
                     under the Medicare and/or Medicaid laws. Id.

                     (A)    11 U.S.C. §1141(c) states: “Except as provided in
                            subsections (d)(2) and (d)(3) of this section and
                            except as otherwise provided in the plan or in the
                            order confirming the plan, after confirmation of a
                            plan, the property dealt with by the plan is free and
                            clear of all claims and interests of creditors, equity
                            security holders, and of general partners in the

              (2)    Through bankruptcy courts fashioning their own equitable
                     remedies. See In re Vitalsigns, 396 B.R. at 241; see also In
                     re Our Lady of Mercy Medical Center, No. 07-10609
                     (REG) (Bankr. S.D.N.Y. 2008).

                         American Bankruptcy Institute

8.   Hill Burton Obligations:

     a)    The Hill Burton program is a federal loan and grant program for the
           construction or modernization of non-profit and public health care
           facilities. ABI HCM, supra, at 57.

     b)    Recipients of Hill Burton funds obligate themselves to: (a) provide
           uncompensated care for either 20 years or perpetually; (b) provide
           community service, including participation in Medicare and Medicaid; and
           (c) complete certain compliance reporting. Id.

     c)    The government may recover grant funds used for the construction or
           modernization of a facility if, within 20 years after completion of the
           construction or modernization, the facility is (a) sold or transferred to an
           entity that is not qualified for a grant or not approved as a transferee by the
           state agency or (b) ceases to be a public or other non-profit hospital,
           outpatient facility, facility for long-term care or rehabilitation facility. A
           “transfer” occurs when the facility is conveyed to another entity through
           lease, merger, bankruptcy, foreclosure or other arrangement. Id.

9.   Assignment of Provider Agreements:

     a)    Consideration of Overpayments: Case law is inconsistent in its treatment
           of claims for successor liability for Medicare and Medicaid payments. In
           addition to recoupment claim considerations, a court’s decision to allow or
           disallow successor liability with regard to overpayments is largely
           dependent on whether the overpayments are construed to arise from a
           statutory entitlement program or an executory contract. See Deaton,
           Distressed Healthcare, supra, at 27.

           (i)    Generally, courts have concluded that provider agreements are
                  executory contracts because they create obligations on both sides,
                  either in terms of providing services or making payments for those
                  services. Lora L. Hock, Successor Liability in Asset Purchases of
                  Bankrupt Health Care Providers, 19 Bankr. Dev. J. 179, 199
                  (2002). Whether a provider agreement is considered an executory
                  contract significantly affects the debtor-in-possession or trustee’s
                  ability to assign the agreement. Id. at 199-200. If it is an
                  executory contract, the trustee cannot assign without first assuming
                  both it and the liabilities arising thereunder, including the
                  obligation to reimburse HHS for any pre-petition overpayments
                  subsequently discovered. Id. at 200; see also Sarah Robinson
                  Borders & Rebecca Cole Moore, Purchasing Medicare Provider
                  Agreements in Bankruptcy: The Case Against Successor Liability
                  for Prepetition Overpayments, 24 Cal. Bankr. J. 253, 261 (1998).

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             (1)    Although the debtor could reject the contract, leaving any
                    claim for prepetition overpayments as an unsecured claim
                    in the bankruptcy case, it would then lose the right to assign
                    the provider agreement and its assets to the purchaser. Id.;
                    see also Hock, Successor Liability, supra, at 200. While
                    rejection of the provider agreement would eliminate
                    successor liability because the new owner would have to
                    apply for a new provider agreement, the rejection would
                    result in the following problems: (i) interruption of
                    coverage; (ii) loss of patients; and (iii) the potential for a
                    lower sale price for the debtor’s assets. Hock, Successor
                    Liability, supra, at 200.

      (ii)   The minority position is that provider agreements are statutory
             entitlements rather than executory contracts. Robinson, Purchasing
             Medicare Provider Agreements, supra, at 261. Under this position,
             repayment obligations are statutorily-derived and the provider
             agreement constitutes property of the estate that may be sold free
             and clear of HHS’ interest in recouping pre-petition overpayments
             from such property. Id. In that event, the Bankruptcy Code would
             allow sale and assignment of the provider agreement as part of a
             reorganization, HHS would be limited to non-purchaser sources of
             recoupment for prior overpayments (such as from the debtor’s
             estate through a pre-petition claim limited to recovery of
             overpayments identified during the bankruptcy case), and HHS
             would be precluded by the antidiscrimination provision under 11
             U.S.C. §525(a) from terminating the provider agreement as a result
             of the discharge obligations. Id.

             (1)    Minority View Rationale:

                    (A)    The debtor’s right to reimbursement and the
                           government’s right to recover payments do not arise
                           from any contract, but rather from statutory and
                           regulator requirements completely independent of a
                           contract. Id. at 263; see Hollander v. Brezenoff, 787
                           F.2d 834, 839 (2d Cir. 1986).

                    (B)    Provider agreements lack two indicia of contracts
                           because: (i) HHS has substantial control over the
                           amount it is obligated to pay the provider for its
                           services and thus controls the scope of its
                           obligations under the provider agreement, and (ii)
                           the remedies available to each party upon the
                           other’s breach are not contractual remedies.
                           Robinson,     Purchasing    Medicare     Provider
                           Agreements, supra, at 265.

                  American Bankruptcy Institute

b)   Considerations Civil Monetary Penalties (“CMPs”):

     (i)    Civil monetary penalties receive similar treatment with regards to
            successor liability and the assignment of provider agreements.

            (1)    The Social Security Act, together with the Medicare and
                   Medicaid Patient and Program Protection Act, provides
                   civil and administrative penalties for the submission of
                   false claims to Medicare, Medicaid and other governmental
                   programs under the Civil Money Penalty Law. An action
                   regarding CMPs may be brought even though the fiscal
                   intermediary denied a claim or recovered an overpayment.
                   ABI HCM, supra, at 72. CMPs also may be imposed,
                   among other things, for: (1) violations of the fraud and
                   anti-kickback statute (i.e., the criminal statute prohibiting
                   any person from knowingly or willfully paying or receiving
                   any remuneration in cash or in kind for referrals for any
                   services under Medicare/Medicaid programs), and (ii)
                   violation of the Stark Law (which prohibits physicians from
                   making referrals for certain services to entities to which the
                   physician or an immediate family member has a financial
                   interest unless the arrangement satisfies one of the
                   exceptions to the law). Id. at 66-8, 78-9.

            (2)    If a provider agreement is not characterized as an executory
                   contract, the debtor health care business most likely can sell
                   the agreement free and clear of the government’s
                   overpayments, fines, and/or sanctions under 11 U.S.C. §§
                   363(f) & 1141(c). See Hock, Successor Liability, supra, at

            (3)    In Deerbrook Pavilion, LLC v. Shalala, the Eighth Circuit
                   held that an asset purchaser who accepts the previous
                   owner’s Medicare provider agreement was liable not only
                   for overpayments, but also for the CMPs of the previous
                   owner. The court noted that “the new owner acquires the
                   compliance history, good or bad, as well as the assets. The
                   new owner can always apply for a new provider
                   agreement.” Deerbrook Pavilion, LLC v. Shalala, 235 F.3d
                   1100, 1104 (8th Cir. 2000) (citation omitted). The court
                   also noted that the distinction between overpayments and
                   CMPs in the successor liability context is not significant.

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      10.   Closing a Health Care Facility: Th e k ey to a s mooth h ealth care
            facility clos in g an d min imization of p os t-clos u re liab ility an d
            exp os u re is p rep aration . A BI HC M, s u pr a, at 104.

            a)    Budgeting and Planning for Closing: Management should:

                  (i)     Prepare a budget for the “closing project,” which includes pre- and
                          post-closing costs.

                          (1)    The budget should include supplies, labor, record storage,
                                 telephone use, rent, utilities, disposal of medical waste and
                                 regulated drugs, contract termination issues and, as is
                                 required by law, long-term record storage and retrieval.

                  (ii)    Generate an adequate reserve before knowledge of the proposed
                          closing becomes public because, once knowledge is widespread,
                          income and collections may be adversely affected.

                  (iii)   Recognize that if a final Medicare cost report is not filed within
                          forty-five (45) days of closure, a facility’s final Medicare payments
                          may be forfeited.

                  (iv)    Consider budgeting for the purchase of a “tail” policy for the
                          officers’ and directors’ protection from potential lawsuits

                          (1)    Among the most important expenses that may be included
                                 in this budget is the continued funding of directors’ and
                                 officers’ general liability and other insurance.

                  (v)     Consult with professionals who can offer both health care and
                          insolvency advice in order to ensure that critical closing expenses
                          and requirements are not overlooked.

                  (vi)    Ask local hospital, medical and other health care provider
                          associations for any information or guidelines they can offer on the
                          closing process. Id. at 104-5.

            b)    Notice Requirements:

                  (i)     A facility closing requires a variety of official notices to various
                          parties, primarily governmental authorities and agencies. Id. at

                  (ii)    Federal Government Notice Requirements: For example, notice
                          must be provided to:

      American Bankruptcy Institute

(1)    The Centers for Medicare and Medicaid Services (“CMS”),
       if a facility is terminating the provision of Medicare
       services. Id.

(2)    The IRS, if a tax-exempt facility is terminating its tax-
       exempt status. Id.

(3)    The Employees under the Workers’ Adjustment and
       Retraining Notification (“WARN”) or Plant Closing Act
       (as well as similar state laws). Id. at 106.

       (A)    The WARN Act applies to all companies with at
              least 100 employees – including managers, officers
              and supervisors, but excluding part-time workers.
              The number of employees is calculated from the
              day the notice is due as opposed to the date on
              which a layoff or shutdown occurs. Id.

       (B)    An “employment loss” at these companies – caused
              by either a “plant closing” or a “mass layoff” at a
              single site – may trigger the notice requirements.
              “Employment loss” generally means termination
              other than for cause, but may also include
              reductions in employee hours. The loss is measured
              by employment site. Generally, employee losses at
              geographically-distinct locations are counted
              separately, but the term “single site” can include
              several buildings within a reasonable distance that
              function as a single operation. Id.

       (C)    A “plant closing” is a shutdown of a single site
              resulting in an employment loss of fifty (50) or
              more employees during any thirty (30)-day period.
              A “mass layoff,” as opposed to a plant closing, is a
              loss during any thirty (30)-day period of either
              thirty-three (33) percent of the workforce and at
              least fifty (50) employees or five hundred (500) or
              more employees. Splitting-up employment losses
              into different thirty (30)-day periods does not help.
              The WARN Act applies whenever employee groups
              are terminated within any ninety (90)-day period
              and their combined total still meets the statutory
              requirement. Id.

       (D)    Once the WARN Act applies, employers must give
              sixty (60) days’ written notice of a plant closing or
              mass layoff, stating the termination date, whether

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                            the action is temporary or permanent, the job titles
                            affected, whether “bumping” rights exist, the names
                            of employees holding the affected jobs and a
                            company contact person. The notice must be sent to
                            employees,        labor    union    representatives,
                            unrepresented employees, any state dislocated
                            worker unit and to the local government's chief
                            elected official, among others. Id.

                    (E)     Examples of Exceptions to the WARN Act:

                            (i)    A facility may avoid WARN requirements if
                                   the employment loss results from
                                   “unforeseeable business circumstances,”
                                   such as a sudden change in prices and costs
                                   or the sudden termination of a major
                                   contract. This is a very narrow exception, so
                                   a facility should be cautious in relying on it.
                                   Id. at 107.

                            (ii)   Full notice requirements may not apply
                                   under this exception if: (i) an employer is
                                   actively seeking capital or business that, if
                                   obtained, would enable it to postpone or
                                   avoid the shut-down during the sixty (60)-
                                   day notice period, and (ii) the employer
                                   reasonably believes that giving notice would
                                   have prevented it from obtaining the needed
                                   capital or business. However, the employer
                                   still must give as much notice as possible
                                   along with a statement of reasons for failing
                                   to provide the full sixty (60) days notice.
                                   This exception applies only to shutdowns,
                                   not layoffs or failed attempts to sell the
                                   business. Id.

                     (F)    Penalties for Non-Compliance Under the WARN
                            Act: The WARN Act allows private lawsuits, but
                            has no criminal penalties. An employer may be
                            liable for back pay, with interest, ERISA coverage,
                            civil penalties of up to $500 a day for a maximum
                            of sixty (60) days, and attorneys' fees. These claims
                            can harm a smooth facility closing, restructuring or
                            reorganization. Id.

      (iii)   State Agency Notice Requirements:

                   American Bankruptcy Institute

             (1)    The law changes over time and varies from state to state, so
                    one also must check the relevant applicable state law. Id.

                    (A)     Example:      Illinois requires ninety (90) days’
                            notification of plans to close, with failure to provide
                            the notice giving rise to possible fines. Id.

c)   Handling Patient Transfers:

     (i)     Patient transfer is an under-regulated area.          There is no
             comprehensive regulatory scheme to guide a facility on these
             transfers. Different states and their agencies may have their own
             controlling regulations or informal policies. Depending on the
             applicable law, transfer arrangements may be the primary
             responsibility of the patient’s family, the facility or a particular
             state agency. Id. at 107-8.

     (ii)    A handful of states – New York and Delaware included – require
             the preparation and submission of a transfer “plan” to health
             agencies. Id. at 108.

     (iii)   It is therefore best to check with local governing authorities for
             controlling requirements. Id.

     (iv)    Also, since patient information must be kept confidential, any
             discussions with possible recipient facilities must be done in such a
             way as to disclose information, but without the discussion of
             names. Id.

     (v)     In any event, information management and rumor control is vital to
             this effort. Id.

d)   Storage and Maintenance of Patient Records:

     (i)     Generally, a health care business remains liable for accidental or
             incidental disclosure of confidential patient information, even after
             closure. At the same time, these records must remain available for
             a patient’s later medical care. Id.

     (ii)    Federal regulations governing Medicare require that patient
             records be maintained for at least five (5) years to comply with the
             Medicare Conditions of Participation. Federal law also has even
             longer requirements for information relating to expenses and third-
             party contracts. Further, if a facility provides alcohol or drug
             abuse treatment, strict federal regulations will govern storage and
             disposal of, and later access to, patient records. Id.

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      (iii)   Record-keeping requirements vary greatly under state law, ranging
              from one year to 50 years. Thus, any closing preparations will
              require a close look at controlling state regulations to ensure
              compliance, if possible. Id.

      (iv)    At a minimum, notification to the patient whose records will be
              stored should be provided, and patients should be allowed to retain
              their own records if they wish. Local regulations may also require
              that notice of the proposed transfer or storage be given to certain
              state agencies. Id. at 109.

      (v)     Practical Reasons to Ensure Record Storage:

              (1)    Post-closing lawsuits against the facility may be difficult or
                     impossible to defend without patient records. In fact, the
                     failure to have maintained such records could lead to a
                     presumption that they would have contained damning
                     evidence. Id.

              (2)    If records contain information vital to a patient’s lawsuit
                     against a third party, the destruction or loss of records may
                     give rise to a “spoliation of evidence” claim. Thus, a
                     facility may be held liable for the loss of the case caused by
                     the lack of evidence. Id.

              (3)    If the records are being transferred to a commercial storage
                     facility, management should take care to ensure that the
                     facility has experience handling the storage of confidential
                     records, ensure the security and record access measures the
                     facility will provide and further ensure that insurance
                     covering any potential record loss will be available. It is
                     good practice to enter into a written contact with the
                     storage provider, which spells out their duties and
                     responsibilities. Id.

              (4)    If a facility closing is caused by financial distress, it is often
                     unlikely or even impossible to secure the required storage,
                     unless one uses the bankruptcy process to regulate and
                     manage the shutdown. In these situations, there are still
                     alternatives that can be pursued such as depositing the
                     records with a government agency or state archive, storing
                     them with a nearby health care facility or negotiating for
                     their storage as part of the sale or disposition of the assets.
                     If a sale or other disposition of assets is planned along with
                     the closing, record storage should be considered as an
                     element of that negotiation. Id.

                  American Bankruptcy Institute

e)   HIPAA:

     (i)    The Health Insurance Portability and Accountability Act of 1996
            (“HIPAA”) provides, among other things, standards and
            requirements to protect the privacy of health care data and
            establishes procedures for the creation of a common standard for
            storing and transmitting health care information. Since any closure
            (or sale) of a health care business necessarily involves storage
            and/or transmittal of health care information, HIPAA and its rules
            and regulations must be satisfied. Id. at 110.

f)   Other Considerations:

     (i)    A facility closing may also require the dissolution and final
            distribution of employee retirement or 401(k) plans, disposal of
            medical and environmental waste, obtaining permits for
            termination of certificates of need or exemption, termination of
            facility leases and possibly an examination of the requirements of
            charitable trust laws. Id.

     (ii)   Management must also consider its obligations to the patients,
            insurers, HMOs and providers. Id.

g)   Bankruptcy Code:

     (i)    As discussed in greater detail supra in Section 3 of this checklist,
            the Bankruptcy Code provides administrative expense claim status
            for various costs associated with closing a health care business,

            (1)     11 U.S.C. §351: for the costs associated with satisfying
                    notice and disposal procedure for patient records if the
                    bankruptcy estate lacks the funds to “pay for storage of
                    patient records in a manner required under applicable
                    federal or state law.” Id. at 110-11.

            (2)     11 U.S.C. §503(b)(8): for the actual and necessary costs
                    and expenses of closing a health care business incurred by a
                    trustee, debtor in possession, federal agency or department
                    or agency of a state or political subdivision thereof. Id.

     (ii)   Amendments to 11 U.S.C. §§ 704(a)(12) & 1106(a) require that a
            chapter 7 trustee or a debtor in possession “use all reasonable and
            best efforts to transfer patients from a health care business that is in
            the process of being closed to an appropriate health care business.”
            Appropriate health care businesses are facilities that are in the
            vicinity, provide substantially similar services and maintain a
            reasonable quality of care. Id.

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      11.   Possible Medicare Challenges to Post-§363 S ale Administrative Expenses:

            a)    Introduction:

                  (i)    Once a sale of a facility is accomplished pursuant to either 11
                         U.S.C. §363 or through a confirmed plan, there are many post-sale
                         and/or post-plan-confirmation activities for which the bankruptcy
                         estate continues to incur costs in the form of fees to counsel, U.S.
                         Trustee fees, fees for creditors’ committee, distribution costs, etc.
                         Id. at 165.

                  (ii)   Medicare has challenged all post-sale expenses on the ground
                         (among others) that such costs are necessarily “unrelated” to the
                         provision of patient care. Id.

                         (1)      Post-sale, Medicare’s view is that since the bankruptcy
                                  estate was no longer providing care (which, by definition,
                                  is true since operations had been transferred), Medicare
                                  cannot reimburse for post-sale expenses because the
                                  activities could not, per se, be costs of providing ongoing
                                  care. Id.

            b)    Medicare Reimbursement Principles:

                  (i)    The general principles of reimbursement are set forth in 42 C.F.R.
                         §§413.5 and 413.9, and begin with the fundamental proposition
                         that: “All necessary and proper expenses of an institution in the
                         production of services, including normal standby costs, are
                         recognized.” Id. Section 413.9 provides as follows:

                         (1)      (a) Principle. All payments to providers of services must
                                  be based on the reasonable cost of services covered under
                                  Medicare and related to the care of beneficiaries.
                                  Reasonable cost includes all necessary and proper costs
                                  incurred in furnishing the services, subject to principles
                                  relating to specific items of revenue and cost. Id.

                  (ii)   Section 413.9 goes on to make clear that Medicare is required to
                         reimburse both direct and indirect costs, including general and
                         administrative expenses:

                         (1)      (b) Definitions. (1) Reasonable cost . . . The regulations in
                                  this part take into account both direct and indirect costs of
                                  providers of services. The objective is that under the
                                  methods of determining costs, the costs with respect to
                                  individuals covered by the program not be borne by
                                  individuals not so covered, and the costs with respect to

              American Bankruptcy Institute

                individuals not so covered will not be borne by the

        (2)     (2) Necessary and proper costs. Necessary and proper costs
                are costs that are appropriate and helpful in developing and
                maintaining the operation of patient care facilities and
                activities. They are usually costs that are common and
                accepted occurrences in the field of the provider’s activity.

        (3)     (c) Application…
                (3) The determination of reasonable cost of services must
                be based on cost related to the care of Medicare
                beneficiaries. Reasonable cost includes all necessary and
                proper expenses incurred in furnishing services, such as
                administrative costs, maintenance costs, and premium
                payments for employee health and pension plans. It
                includes both direct and indirect costs and normal standby
                costs. . . . Id. at 166.

(iii)   Unless costs are “not related to patient care, specifically not
        reimbursable under the program, or flow[ ] from the provision of
        luxury items or services,” (42 C.F.R. §413.9(c)(3)) they are
        allowable under Medicare. In short, reimbursable expenses are not
        limited to “hands-on care,” but instead are defined in broad and
        flexible terms: all administrative and general overhead costs that
        are in some way “related to” the operation of patient care facilities
        and activities. Id. at 166-67.

(iv)    Given the broad standard that general administrative costs are
        allowable if “related to” patient care, numerous tribunals, both
        judicial and administrative, have held that administrative costs of
        the type generally arising post-sale (professional fees, collection
        and management costs, etc.) are allowable as general and
        administrative costs “related to” patient care. Id. at 167.

        (1)     The types of bankruptcy expenses usually incurred post-
                sale should fall squarely within this line of cases because
                they are also incurred in order to gather monies to pay pre-
                filing (and pre-sale) costs of providing patient care ― one
                could not have patient care if one could not collect the
                revenue necessary to pay for it. Id.

(v)     Generally, Medicare itself has been reasonable in allowing legal,
        accounting and other fees. This was well articulated in Mercy
        Community Hospital, ADMR (PRRB) 11/04/82, Dec. No. 82-

                   Central StateS BankruptCy WorkShop

                  (1)    All providers of services incur legal expenses which are
                         varied in their nature. Legal expenses encompass numerous
                         areas of provider responsibility such as labor-management
                         negotiations and contract preparation, bond issues,
                         malpractice defense, services to hospital auxiliaries and
                         guilds, medical staff contracts with hospital-based
                         physicians, municipal and county tax appeals, presentations
                         and appeals before state governing bodies, general
                         collection responsibilities, general litigation and appeals to
                         government bodies, such as the Provider Reimbursement
                         Review Board (PRRB). Some of these functions relate
                         directly to Medicare, while others do not. As a matter of
                         record, Medicare has allowed these types of legal expenses,
                         without regard to their relationship specifically to the
                         program. These legal costs, both directly and indirectly
                         related to the program or unrelated to the program, are then
                         allocated through administrative and general, according to
                         the facility's Medicare utilization. Id. at 168.

           (vi)   Thus, “post-sale” expenses are similar to bankruptcy expenses
                  incurred pre-sale: collecting accounts receivable, pursuing and
                  liquidating causes of action, reviewing claims for validity and
                  providing related administrative services. They are all incurred as
                  part of efforts to pay claims of vendors and other creditors that
                  provided goods and services used pre-sale to care for Medicare
                  beneficiaries. The expenses therefore would seem to qualify for
                  reimbursement as expenses “related to” the provision of services
                  under general principles of Medicare reimbursement. Id.

      c)   Post-Sale Bankruptcy Expenses:

           (i)    Medicare attempts to draw a distinction between pre- and post-sale
                  bankruptcy expenses. This distinction runs afoul of general
                  principles of Medicare reimbursement, the relevant Medicare
                  regulations, Medicare policy, a specific Medicare rule and simple
                  logic. Id. at 169.

                  (1)    First, the expenses are reimbursable under the general
                         principles set out in 42 C.F.R. §413.9 and the decisions
                         interpreting it. Post-sale bankruptcy fees (attorney fees,
                         accountant fees, etc.) are classic administrative costs of
                         operation, direct or indirect, and, therefore, these expenses
                         are per se allowable under the principal Medicare
                         regulation governing reimbursement of expenses―42
                         C.F.R. 413.9(b)(3). That provision makes no distinction
                         between pre- and post-sale expenses, nor is any such
                         distinction necessary or appropriate so long as the general

      American Bankruptcy Institute

       standards of reimbursement of C.F.R. §413.9 are satisfied.
       Several decisions have upheld post-sale expenses under
       general principles of reimbursement without reference in
       any specific rule or regulation dealing with post-sale (called
       “post-termination”) expense. Id.

(2)    Second, the principle that post-operation expenses are
       reimbursable by Medicare, so long as they relate to
       operations pre-sale, is specifically recognized by Medicare
       in a provision in its Provider Reimbursement Manual ―
       PRM §2176. PRM §2176, entitled “Administrative Costs
       Incurred After Provider Terminates Participation in
       Program,” states as follows:

       (A)    When a provider terminates its participation in the
              program, either voluntarily or involuntarily, or a
              change of ownership occurs (see Health Insurance
              Regulations Section 405.626), administrative costs
              associated with the preparation and settlement of
              cost reports with an intermediary and other third
              parties will be incurred after the effective date of
              termination. The direct administrative costs that are
              reasonable and related to the settlement of
              reimbursement for patient care rendered while the
              provider was participating in the program and bad
              debts resulting from coinsurance and deductibles
              billed to Medicare patients are allowable. Examples
              of allowable direct administrative costs are salaries
              and those costs associated with such salaries, i.e.,
              fringe benefits, workmen’s compensation insurance,
              and payroll taxes; accounting and legal fees which
              are incurred for bill preparation, bill processing, and
              cost report preparation; and, where applicable,
              hearing fees and expenses incurred for settlement
              with an intermediary and other third parties….
              However, legal fees and related costs incurred in the
              sale of the facilities, costs incurred on or after the
              effective date of termination for the operation or
              maintenance of closing of the facility are not
              allowable…. Id.

(3)    Therefore, by its plain language, PRM §2176 adopts the
       general principle that post-sale costs incurred to pay pre-
       sale costs of providing services to Medicare patients (i.e.,
       “…administrative costs…related to the settlement of
       reimbursement for patient care rendered while the provider
       was participating in the program….”) are reimbursable. Id.

                         Central StateS BankruptCy WorkShop

                         (4)   Decisions that reference PRM §2176 (as opposed to just the
                               general principles of Medicare reimbursement) have
                               recognized that its examples of allowable costs are merely
                               positive illustrations of the more general principle that post-
                               sale expenses relating to pre-sale care are reimbursable.
                               For example, those decisions note that PRM §2176
                               encompasses expenses “reasonably implied” from the list
                               of reimbursable examples. As a result, most of the post-
                               sale bankruptcy expenses fall well within the general
                               principle embraced by Section 2176―that post-sale
                               expenses related to collection of costs for pre-sale services
                               to Medicare patients are reimbursable, or, at least, they are
                               “reasonably implied” from the illustrative examples
                               provided in PRM §2176. Contrary to Medicare’s apparent
                               position, therefore, PRM §2176 actually supports claims
                               for post-sale bankruptcy expenses. Id. at 170-71.

                         (5)   Therefore, the only expenses expressly disallowed by PRM
                               §2176 are “legal fees and related costs incurred in the sale
                               of the facilities” or “costs incurred on or after the effective
                               date of termination for the operation or maintenance of
                               [sic] closing of the facility,” (i.e., payment of costs incurred
                               post operation). Generally, normal post-sale bankruptcy
                               expenses are the opposite ― they are costs incurred to pay
                               (albeit post-sale) debts, but such costs were incurred for the
                               operation of the facility pre-sale. In contrast to the positive
                               illustrations of allowable costs in PRM §2176, these
                               specifically disallowed costs must be interpreted in
                               accordance with the standard rule of construction principle
                               that exceptions to a general rule are to be construed
                               narrowly. Post-sale expenses that are used to pay pre-sale
                               costs do not fit within either category of disallowed costs.
                               Second, while PRM §2176 disallows costs incurred in the
                               sale of a facility (i.e., preparation of deeds, closing
                               statements, etc.), the allowance of post-sale costs or fees
                               “associated with” the sale of a facility is well supported in
                               Medicare law. Finally, as noted before, none of the usual
                               post-sale expenses of a bankruptcy estate for which
                               reimbursement would be sought were costs incurred “after
                               the operation or maintenance of closing of the facility.” Id.
                               at 171.



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