Health-Care Bankruptcies: What to Expect in 2017

The coming year will likely be tumultuous for health-care providers, suppliers, and payers, as they adapt to meet new challenges, market forces, and a changing regulatory environment, particularly in light of the open questions that remain as to the viability and continued existence of the Affordable Care Act (ACA). Recent comments made by members of the incoming Trump administration have only served to heighten the uncertainty. The following are 10 things to watch that may impact the number and progression of health-care bankruptcies in 2017.

1. Challenging Reimbursement Landscape

Health-care systems are struggling to adapt to value-based purchasing, which requires a shift from fee-for-service (often rewarding service volume) payments, demands structural changes to reimbursements, and even impacts how clinical care is provided. A large driver of declining reimbursements is Medicare, which has begun to tie traditional Medicare payments to quality, outcomes, and value through alternative payment models. Financial resources will be further stretched as Medicare enrollment continues to increase as the population ages, and as coverage of increasingly expensive items and services is required. Medicare has already achieved its initial milestone of tying 30 percent of all traditional Medicare payments to quality or value through alternative payment models. This trend is expected to continue as Medicare plans to increase this level to 50 percent by 2018. While these changed approaches are still relatively new and providers and suppliers continue to adapt, this trend has negatively impacted margins on some Medicare business. While the incoming administration may make sweeping changes in health care, it is unlikely that the change will be a move away from a value-based payment system or a continuing reduction in what providers are paid. Accordingly, health-care businesses that rely heavily on Medicare will need to be nimble in adapting their business model in 2017. Some may find that bankruptcy offers appealing options, either in filings or in acquisitions of distressed entities.

2. The Affordable Care Act’s
Uncertain Future

The Trump administration has stated that there will be a broad effort to roll back the ACA, either in whole or in part, and replace it with programs based on free market principles. Exactly what this means, how it will impact profitability for health-care providers and suppliers remains to be seen. But any large impact on the current model will certainly send reverberations throughout the market and may cause distress to health-care providers (who may have to treat patients who have no coverage) as well as to patients who may have trouble obtaining other coverage. The ability for health-care providers to be reimbursed through insurance providers also may decrease in 2017 even in the absence of any drastic changes to the ACA, as several large insurance companies weigh whether to continue to participate in the health-care exchanges.

3. Acquisition of Distressed
Health-Care Assets

Health-care providers and suppliers that have filed for and are in bankruptcy may offer an interesting opportunity for expansion to health systems that are seeking to enter a new geographic location, increase their market share, or take advantage of economies of scale. Health-care systems that have been unable to adapt quickly enough to the structural changes ushered in by the ACA, or have unhealthy cash flows, may find that bankruptcy is the most cost-effective way to market and sell their assets. A process provided by 11 U.S.C. § 363, whereby a debtor may sell some or all of its assets “free and clear” with approval of the bankruptcy court, may be particularly attractive. This provision creates unparalleled ability to shed prepetition liabilities and escape overleveraged balance sheets, creating opportunities for buyers looking to expand. Acquisition targets will likely include stand-alone hospitals and other smaller providers that lack purchasing power or the ability to expand programs because of capital constraints.

4. Administrative Finality and Jurisdiction

Health-care providers engaged in a dispute with Medicare or Medicaid regarding the status of their provider agreements will have additional reasons to negotiate and work closely through the programs’ administrative process in 2017. Three closely watched cases in 2016 demonstrated that the U.S. is actively taking measures to channel all issues dealing with the Medicare or Medicaid program through the administrative process established for such disputes. Outside of bankruptcy proceedings, a Medicare or Medicaid provider must exhaust the program’s administrative process before a federal court may determine a dispute involving the provider’s Medicare and Medicaid participation agreements. However, two cases, In re Bayou Shores SNF, LLC and In re Nurses’ Registry & Home Health Corp., raised issues of whether the automatic stay prevents or delays the termination of a provider agreement based on survey deficiencies, or requires ongoing reimbursements where there is an issue of overpayment. Ultimately, in In re Bayou Shores, the Eleventh Circuit held that the bankruptcy court lacked jurisdiction to stay the termination of a provider agreement. This creates a circuit split with the Ninth Circuit, which has held that bankruptcy jurisdiction is not barred by administratively unexhausted claims. Interestingly, in Nurses’ Registry, the bankruptcy court for the Eastern District of Kentucky initially held that it had jurisdiction and ordered Medicare to make payments that were withheld, but later vacated this order following a settlement and upon joint motion of the debtor and the U.S.

The First Circuit was also confronted by a jurisdictional dispute in Parkview Adventist Med. Ctr. and acknowledged the circuit split on administrative exhaustion. However, the First Circuit chose not to weigh in on the dispute and instead bypassed the jurisdictional issue, assuming jurisdiction “because of the difficulty of the jurisdictional issue,” and because the merits failed on their face. The issue in Parkview Adventist Med. Ctr. was whether a debtor-hospital could utilize the Bankruptcy Code to compel post-petition performance of a provider agreement governing its eligibility for Medicare reimbursement. The First Circuit affirmed the bankruptcy court’s denial of the motion to compel finding that there was no violation of the automatic stay or nondiscrimination provision of the Bankruptcy Code where the “police and regulatory power” exception to the automatic stay applied. The “police and regulatory power” exception is set forth in 11 U.S.C. § 362(b)(4) and provides that the automatic stay of actions against the debtor does not apply to “an action or proceeding by a governmental unit … to enforce such governmental unit’s … police and regulatory power.” The First Circuit found termination of the provider agreement to be such an exercise of the police and regulatory power and affirmed the denial.

With these three cases providing authority for other courts, it is unlikely that the argument for bankruptcy jurisdiction will be as hotly contested in 2017 the way it was in 2016. However, with few other options available to health-care providers with terminated provider agreements and the unresolved circuit split, it is unlikely that the arguments for jurisdiction will completely subside. Even if not ultimately successful, the arguments may provide some delay in government actions against the estate. The strategic issues and the circuit split also could provide compelling reasons for the Supreme Court to weigh in on the subject.

5. Government Deals and Prepackaged
Reorganization Plans

We will likely continue to see settlements with the U.S. government that include prepackaged bankruptcy plans. An example of this type of settlement was seen in the bankruptcy filing of Millennium Health LLC, one of the nation’s largest drug-testing laboratories. Before filing for bankruptcy, Millennium agreed to pay more than $200 million to settle allegations that it violated the False Claims Act for billing Medicare and Medicaid for medically unnecessary testing. The Department of Justice was Millennium’s largest unsecured creditor, and the plan provided for its lenders to become the new owners. This approach may continue to be a useful option for the U.S. when it does not wish to eliminate the services of a health-care provider in a community, but the provider does not have sufficient funds to satisfy its debts.

6. Health Information and Technology:
Costs and Risks

Also providing financial challenge to health-care providers and suppliers is the focus on care management and enhanced quality capabilities that may require investment in additional personnel and technology beyond what smaller health systems can afford. Delivering high-quality clinical care can be vastly improved with the support of strategic and integrated IT systems. However, this same technology creates privacy and security risks and requires substantial resource investment. Despite past government subsidies, implementing electronic health records may at least in the short term increase costs and decrease income for health-care providers and suppliers. Additionally, maintaining compliance with regulations under the Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act is becoming increasingly complex as health-care providers retain and share more information electronically, and are subject to audits, potential fines, and increased risks from hackers. In a bankruptcy filing of a health-care entity, we may see increasing appointments of ombudsman to oversee the privacy and security of patient information and a recognition of this cost to the bankruptcy estate as part of bankruptcy planning.

7. Health Care-Related Debt Spurs
More Consumer Bankruptcies

It is not just providers and suppliers who may be involved in bankruptcies. Consumers may also find that bankruptcy is an option for resolving their medical debts. The ACA helped to reduce the number of people without insurance. However, many Americans still lack insurance and many plans do not provide robust coverage. Resulting medical debt for services has been a major cause of consumer bankruptcies. This trend is slowing, but health-care debt will likely continue to feature prominently in consumer bankruptcies in 2017. If an “Obamacare” coverage option is eliminated, consumer bankruptcies related to the costs of health care may increase. Moreover, health-care providers and suppliers will need to be sensitive to the likely loss of income if consumer bankruptcies involving medical debt increase due to changes in available coverage.

8. Cost of Providing Care

Hospitals have faced increased expenses as they hire more employees and invest in technology, which may lead to expenses outpacing revenue for some hospitals. Increasing costs to a health-care provider for items or services that are bundled into pre-set treatment rates or reimbursed under new payment methodologies may not be easily recoverable if the health-care provider or supplier cannot simply raise its costs to patients to reflect the increase in its own costs. The costs of employees and supplies will be an additional factor to watch in 2017, as other financial pressures mount on distressed health-care providers. Ultimately, the cost of care in combination with decreasing reimbursements and difficulties in collecting accounts receivable may spur a rise in health-care bankruptcy filings this year.

9. Prescription Drug Cost Increases

Over the past two years, insurance reimbursements from pharmacy benefit managers have not kept up with the increasing cost of prescription drugs. This has led to losses that are more easily offset by larger pharmacies and will lead to more consolidation in the market. Large purchasers have pushed back against rising drug costs, but an effective approach to control costs while continuing to provide adequate drug coverage and availability has not as yet been identified. For example, California recently proposed to cap pharmaceutical drug prices for certain populations, but the proposition ultimately failed. The continued focus on rising prescription drug prices suggests that further methods to cut these costs will continue to be a contentious topic and could lead to further consolidation, acquisition, and structural changes in the pharmaceutical industry. Providers will be affected as they continue to conduct their own negotiations with vendors and attempt to control costs associated with stocking and dispensing necessary drugs.

10. Nursing Home Distress

The nursing home industry also faces pressure, which may increase financial distress for nursing homes operators in 2017, as the industry faces stagnant Medicaid rates and a shrinking number of nursing-home residents. While some market participants are still investing in skilled nursing facilities, some are trimming their exposure and selling assets. Skilled nursing facilities are largely dependent upon Medicaid funding, so any cuts or changes to Medicaid reimbursements, as are likely under the Trump administration, may hit this sector particularly hard. In addition, cost containment pressure continues with respect to Medicare in-patient hospital admissions (and whether patients are more appropriately treated as outpatients). Medicare coverage for skilled nursing services is dependent upon a preceding inpatient hospital admission, so reduced hospital admissions may result in a reduced number of Medicare patients for skilled nursing facilities.

Conclusion

The health-care industry is likely to feel stress in the months and years ahead, and some health-care entities, as well as health-care consumers, may find that bankruptcy is one—or the only—way to address new or continued challenges. However, a bankruptcy filing is not without its own risks and consequences. Potential bankruptcy strategies must be carefully assessed to determine if they will produce a desired result for a particular debtor, given that debtor’s unique circumstances.