Death, Bankruptcy, and the Public Hospital

By Michael Francus (Notre Dame Law School)

The COVID-19 pandemic highlighted, and strained, finances across the healthcare industry. As we emerge from that pandemic, and the influx of funding to combat the pandemic dissipates, many institutions in the industry have, or will, find themselves in financial difficulty.

Among these institutions are public hospitals—government-owned hospitals that often provide healthcare where it otherwise would be unavailable. These public hospitals typically serve populations in rural areas, or in poor urban ones, so tens of millions of patients rely on those hospitals’ services and would not obtain healthcare without them.

Because these hospitals are government entities rather than private businesses, when they file for bankruptcy, they file under Chapter 9, rather than Chapter 11. Chapter 9 brings with it a set of distinct rules, in particular rules that limit the court’s power so that Chapter 9 comports with principles of federalism. To date, those rules have led scholars to believe that Chapter 9 has little to offer. And there has been minimal work on what Chapter 9 bankruptcies look like, especially for governments businesses like public hospitals.

Death, Bankruptcy, and the Public Hospital explores that unexplored area of bankruptcy law. And in doing so, it offers lessons on how government businesses end up in bankruptcy court, what bankruptcy can do for them, and its promise for preserving healthcare in places where it would otherwise go wanting.

On the causes of bankruptcy, the Article reveals that overwhelmingly public hospitals encounter financial distress from a decline in Medicare or Medicaid revenues. Notably, the Balanced Budget Act (which slashed Medicare in the late 1990s) and Medicaid nonexpansion (after the Affordable Care Act) led to a spike in public hospital filings.

Despite that lack of control over their own funding, public hospitals have been successful inside of bankruptcy. That holds both for their processes and for their outcomes.

On process, Chapter 9 works smoothly for public hospitals. Creditors seldom move to dismiss or initiate adversary proceedings. Often, governmental creditors do not stand on their rights and reach settlements favorable to the hospital. The community regularly votes to raise its own taxes to support the hospital. More generally, the atmosphere is one of collaboration—a far cry from the hardball that has become standard in Chapter 11 reorganizations.

As for substance, public hospitals have proven creative in finding ways to survive despite not controlling their main revenue streams. About half reorganize in the traditional sense, cutting unprofitable segments of the business or finding alternate sources of revenue. About half privatize, either through a sale or an agreement with private entities that can bring more expertise and resources to bear in running the hospital. And in the long run, those bankruptcy maneuvers prove successful, with public hospitals surviving after their bankruptcy more often than their private hospital analogues.

In either the reorganization or the privatization model, bankruptcy plays a key role. For reorganization, discharging past debt is key for the hospital to start afresh. For privatization, a free-and-clear sale avoids any buyer concerns over successor liability, enabling the hospital to privatize when those concerns might otherwise cause it to close.

All this suggests that legislators and administrators should consider bankruptcy as an option for public hospitals. Indeed, it may be the only path for survival for those hospitals and the only way to preserve healthcare for tens of millions of patients.

Click here to read the full article.