HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

I. INTRODUCTION

As tightening government reimbursement policies, industry consolidation, competition and alternative pricing structures affect the profitability of many health care providers, bankruptcy practitioners have seen an increase in the need for provider reorganizations and liquidations. This article provides basic information designed to orient the practitioner in the health care environment and a more detailed analysis of the treatment of specific health care provider issues by the Bankruptcy Courts.

II. HOSPITAL GOVERNANCE

Hospitals, like all corporations, are creatures of the law and are governed by the statutes of the states in which they are organized. Hospitals, therefore, are governed much the same way as any other corporation; with a Governing Board (Board of Directors) and officers who are employees of the corporation reporting to that Board.

The Governing Board is charged with ultimate responsibility for all areas of operation, including but not limited to financial, credentialing of medical staff members, quality control, business decisions, compliance with governmental regulations and accreditation standards (e.g., Joint Commission on Accreditation of Health Care Organizations). The Board receives advice and input from the Chief Executive Officer (who is usually also the "Administrator"), the Chief Financial Officer, any other administrative officers at the hospital, and from the Medical Executive Committee ("MEC"), which is composed of physicians on staff appointed to serve for specific terms. The Board also receives information and recommendations from various other committees appointed to address specific concerns such as quality assurance, credentialing of physicians, and peer review. Some hospitals also may appoint committees devoted to review of fiscal concerns, that would also report to the Board, sometimes by way of the MEC.

The number of committees and manner in which they are appointed are prescribed by the hospital's by-laws, which are drafted and adopted by the Governing Board. Similarly, reporting lines vary at each hospital depending upon what is established within the by-laws. Since it is critical that a Governing Board comply with its own bylaws, a bankruptcy lawyer working with a hospital would be wise to obtain a copy of the by-laws to ensure a clear understanding of the governance of that particular hospital.

The ultimate authority and responsibility of the Governing Board differs between for-profit and not-for-profit hospitals. The Governing Board of a for-profit hospital will make fiscal decisions with regard to what is best for the shareholders.

Not-for-profit corporations and public corporations (e.g. municipal hospitals) have no private owners, and no private person is entitled to benefit in their profits and increased value. Such benefits are "owned" by the hospital and held for the benefit of the public. The not-for-profit hospital corporation must use its profits, therefore, in furtherance only of the corporation's purposes, which usually are established within the hospital's "mission statement." The primary creditors of not-for-profit hospitals are typically bondholders.

The methods for controlling not-for-profit and public corporations are governed by statute. The control may be vested in a membership group, which elects directors, or in a self-perpetuating board of directors, which provides for its own succession. Control of public hospitals typically vests, directly or indirectly, in elected officials. The directors (i.e., the Governing Board) in both cases owe their duty to the corporation alone.

Some states may not permit their non-profit corporations to file bankruptcy, and provide instead detailed procedures for receivership to be overseen by state courts. It is critical when dealing with a not-for-profit hospital to