Healthcare restructurings: four key issues to consider before a chapter 11 filing

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Healthcare Alert

Restructuring Alert

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A growing number of healthcare companies are facing financial challenges. Among these challenges are the ever-changing regulatory environment, enhanced government scrutiny, increased competition, reimbursement changes and significant capital needs.

Many providers in financial distress may come to contemplate seeking chapter 11 relief. These companies should, however, be mindful of the ways in which healthcare restructurings are different. Here are four key differences:

  1. Time is of the essence. The lifeblood of any healthcare company is the continued ability to provide consistent and quality care to those seeking healthcare services. A long and uncertain restructuring process may make it difficult to maintain the confidence of key constituents, including patients, residents, physicians, nurses and regulators. On the other hand, if the debtor prepares sufficiently in advance, so that it can quickly implement a viable exit, confidence can be maintained. It is, thus, important to be able to articulate an exit strategy to key constituents as early as possible in the process.
  2. Role of regulatory agencies. The healthcare industry is heavily regulated. Because a bankruptcy filing does not excuse the debtor from complying with applicable regulations, regulators play a significant role in a healthcare company's restructuring. Therefore, in addition to considering how to address the claims of secured and unsecured creditors, companies should be prepared to address the concerns of, among others, various state agencies and the United States Centers for Medicare and Medicaid Services (CMS). Healthcare debtors should also anticipate the appointment of a patient care ombudsman who is charged with monitoring the impact of the filing on patients.
  3. Bankruptcy court's limited jurisdiction. Healthcare companies may find that bankruptcy courts have limited jurisdiction to adjudicate key issues that impact their restructurings. For example, the Eleventh Circuit recently determined that bankruptcy courts do not have authority to prevent CMS from terminating Medicare and Medicaid provider agreements with healthcare companies in chapter 11. Courts have also held that they do not have authority to approve the assumption and assignment of Medicare and Medicaid provider agreements free and clear of potential recoupment claims by the government.
  4. Sale issues. The Bankruptcy Code provides a debtor with the unique opportunity to sell its assets to a buyer "free and clear" of claims and encumbrances through an auction process. Typically, the successful buyer is the entity willing to pay the highest price for the debtor's assets. However, particularly with respect to nonprofit healthcare companies, courts also consider other factors in determining the successful bidder, including a buyer's willingness to honor the debtor's charitable mission.

Although a healthcare restructuring can present a number of unique challenges, proper preparation and awareness of the unique issues can allow a healthcare company to obtain effective relief.

To discuss any of the issues touched on by this article, please contact the authors.