HEALTH CARE BASICS FOR BANKRUPTCY LAWYERS

In applying this test, the court of appeals found that an HMO is a domestic insurance company under Illinois law. First, the court looked to the definitional section of the Illinois Insurance Code and found that Medcare fit within the Insurance Code's definition of a domestic insurance company. Next, the court examined the way Illinois treats HMOs for liquidation and rehabilitation purposes. The relevant Illinois statute specifically provided that any liquidation, rehabilitation or conservation of an HMO would be supervised by the director of insurance who would liquidate or rehabilitate the HMO using the same scheme adopted for the liquidation, rehabilitation or conservation of insurance companies. The statute also provided that the priorities for distribution would be the same for an insurance company or an HMO. Importantly, the statute gave enrollee claims priority in the distribution scheme. The court noted that protection of consumer interest as evidenced by the high priority given to enrollee claims is typical of the state laws governing entities excluded from bankruptcy protection under section 109(b)(2).

The court further evaluated whether Medcare had the essential attributes of the excluded entity, a domestic insurance company. The court looked to the degree of state regulation of the HMO, the existence the state scheme for rehabilitation or liquidation of HMOs, and the public or quasi public nature of the HMO's business. Medcare argued that it differed from an insurance company because insurance companies do not provide medical services as Medcare did and because Medcare was not authorized to sell simple indemnification insurance as insurance companies are. Although the court agreed that Medcare's powers and functions were not coextensive with those of traditional insurance companies, the court found that HMOs and insurance companies shared the attributes prompting exclusion under section 109. The court defined the essential attribute as the assumption of third party risk for a premium. The court also placed significance on the degree of state regulation. Illinois' extensive regulation of HMOs indicated the presence of a strong state interest and made it likely that Congress intended to leave the liquidation or rehabilitation of HMOs to the state.

Medcare should make it even more difficult for HMOs to file bankruptcy. Since most states do regulate HMOs extensively and provide a means for their liquidation and rehabilitation, it will be difficult for an HMO to argue, in the face of a challenge by the state insurance authorities, that it falls far outside the parameters established in Medcare.

A more far-reaching result of Medcare and many of the bankruptcy court decisions holding that an HMO is not eligible for bankruptcy is the effect that this precedent may have on other managed care organizations as the models of health care delivery change. A key element in the decisions finding HMOs to be insurance companies is the conclusion that HMOs are simply another method for spreading risk. To the extent that new entities designed to spread risk become highly regulated by the state, they may find themselves ineligible for bankruptcy court protection.

B. Non-Profit and Municipal Hospitals

In most cases, a non-profit hospital will be eligible for bankruptcy protection. However, non-profit hospitals cannot be involuntary debtors. Moreover, the Chapter 11 case of a non-profit hospital cannot be converted to a Chapter 7 over the debtor's objection. Municipal hospitals may not be eligible for reorganization under Chapter 11, but may reorganize under Chapter 9. One court has held that a municipal hospital district can confirm a non-consensual plan under Chapter 9 that (i) separately classifies and favors the claims of the State Department of Health Services, and (ii) refuses to raise tax assessments as a means to increase payments to general unsecured creditors.