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With an abundance of medical schools, teaching hospitals and related businesses, and an aging population with an attendant increase in the number of long-term care facilities, this area has plenty of health care businesses, and has seen more of its share of health care business insolvency proceedings. Despite the number of such cases, one important constituency was either under-represented, or totally unrepresented, in such cases: the patients or residents. It is true that occasionally, and even then with the agreement of the debtor and creditors, a representative was appointed by the court to act as an advocate for residents of such facilities. However, the representative had no clear agenda and was, in effect, a minister without portfolio, who watched, asked questions and intervened when necessary. That all changed in 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted to change the ad hoc nature of this practice. Specifically, two provisions were added to the Bankruptcy Code. The first provision, Section 101(27A), added a definition of a “health care business,” which as drafted now includes most forms, both public and private, of institutions that provide health care services. Examples include not only general hospitals and skilled nursing facilities, but also home health agencies, drug treatment facilities, hospices and the like. Both for-profit and not-for-profit entities are included. The second provision, Section 333, calls for the appointment of a disinterested person to serve as a patient care ombudsman in all Chapter 7, 9 and 11 cases to monitor the quality of patient care and to represent the interests of patients. Section 333 further provides specific guidance for those appointed to serve as ombudsmen, such as monitoring the quality of patient care, which might involve interviewing physicians and patients, reporting to the court on a periodic basis regarding the quality of care being provided, and, if appropriate, advising the court immediately if patient care is declining. Although Section 333 appears at first blush to require the appointment of an ombudsman, appointment is not necessary in all cases; Section 333(a)(1) states that the ombudsman will not be appointed if ” . . . the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case.” Recently, the U.S. Bankruptcy Court for the Central District of California was presented with a request that an ombudsman not be appointed. In Valley Health System, the debtor, a governmental agency, operated a skilled nursing facility and three acute care hospitals. Each of the hospitals provided comprehensive health care services and emergency medical services. The burden of servicing its existing debt, coupled by issues involving capitation, led to its filing a petition under Chapter 9 of the code. Immediately after filing its petition, Valley Health System filed a motion requesting that a patient care ombudsman not be appointed. The motion was opposed by the U.S. Trustee. The parties did not dispute the fact that Valley Health System was a health care business. The court noted that Valley Health System was a public agency; it operated four health care facilities, and specifically operated for the diagnosis or treatment of injury, deformity or disease, and for surgical care, drug treatment, psychiatric care or obstetric care, all of which fall squarely within Section 101(27A)’s ambit. The parties did, however, vigorously dispute the need for an ombudsman “under the particular facts and circumstances of the case.” The court observed that a number of factors should be considered in concluding whether the “facts and circumstances” of a particular case obviate the need for an ombudsman. These are: The cause of the bankruptcy. The presence and role of licensing and supervising entities. The debtor’s past history of patient care. The ability of patients to protect their rights. The likelihood of tension between the interests of the patients and the debtor. The potential injury to the patients if the debtor drastically reduced its level of patient care. The presence and sufficiency of internal safeguards to ensure an appropriate level of care. The impact of the cost of an ombudsman on the likelihood of a successful reorganization. Other factors which may be considered include the quality of existing patient care and the debtor’s financial ability to maintain a high level of care, the existence of an established internal ombudsman program to protect the rights of patients, and the level of existing monitoring and oversight by other governmental and professional associations which render the services of a court-appointed ombudsman redundant. The court then undertook an analysis of the facts as they applied to the legal standards set forth. First, the cause of the filing was difficulty in servicing bonds, coupled with capitation problems. There was no evidence to indicate deficient patient care. Second, Valley Health System was subject to substantial monitoring by a variety of state and federal agencies, and must undergo a triennial certification by an accreditation association; each of the facilities within Valley Health System were currently fully accredited and in compliance with all state and federal regulations. Third, in the more than 60 years of Valley Health System’s existence, there had never been action taken by any regulatory authority because of deficiencies in patient care. Dealing with the factors of (a) the ability of patients to protect their rights, (b) the likelihood of tension, and (c) the presence and adequacy of internal safeguards together, the court concluded that Valley Health System had extensive quality controls and procedures for monitoring and for patient complaints. It had a proactive regulatory compliance program. It had self-evaluation committees. In sum, the court found that existing procedures and safeguards were both comprehensive and redundant, and weighed heavily against the appointment of an ombudsman. Regarding the level of dependency of patients on Valley Health System, the court stated that peradventure, the population was highly dependent on Valley Health System for their health safety and welfare; this factor suggested that the appointment of an ombudsman would be appropriate. Also, because of the comprehensive services being performed by Valley Health System, the potential risk to patients if the Valley Health System reduced its level of care is high and this factor would also weigh in favor of an ombudsman. Finally, the court took up the matter of costs. It noted that given the number of individual facilities involved and the need of an ombudsman to perform the myriad of functions set forth in Section 333, the cost of an ombudsman would be exceedingly high, especially given the already-existing Valley Health System in place to protect patient health, safety and welfare. In response to the U.S. Trustee’s argument that existing Valley Health System personnel cannot by definition provide the kind of “undivided loyalty” needed by patients, or fit the definition of “disinterested,” the court stated that no evidence was submitted that patient care is an issue or that Valley Health System will be unable to maintain the high quality of care, given the extensive and redundant policies and the extent of oversight, and that nothing in Section 333 requires that existing personnel fit the statute’s definition of “disinterested.” Weighing and balancing all factors, the court granted Valley Health System’s request, and declined to appoint an ombudsman. It did, though, state clearly that if any changed circumstances created a doubt as to its findings, the court would reconsider its conclusion and appoint an ombudsman if necessary. Expect this provision of the Bankruptcy Code to get a lot of play in health care cases. And be sure in factoring in the costs of a health care reorganization yet another cost, that of the ombudsman. MYRON A. BLOOM is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commercial workouts and creditors’ rights.

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