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Chapter 9: A possible lifeline for Oklahoma rural hospitals

With 35% of rural hospitals operating at a financial loss, it’s easy to understand why a record number of public trust, city, and county hospitals (collectively referred to as “Public Hospitals”) are unable to stay open. Since 2010, over 70 rural hospitals, many of which are Public Hospitals, have closed due to Medicare/Medicaid payment cuts.

A recent survey conducted by the Oklahoma Hospital Association indicates that if Medicaid reimbursement is cut an additional 25% as proposed, 4 out of 5 rural hospitals will not deliver babies and 12 rural hospitals will close within 1 year. Not only do these cuts impact hospitals, but they also affect the public-at-large. Access to medical care, particularly in rural communities, decreases with every closure.

What is a Public Hospital supposed to do?

Public Hospitals that are loaded down with debt may need to consider filing for bankruptcy in order to give them time to restructure and still keep their doors open. Naturally, Public Hospitals are often reluctant to take this step due for several reasons; one of which is the fear of losing control of the facility that often happens in traditional Chapter 11 bankruptcies.

However, Chapter 9 bankruptcies are significantly different than Chapter 11 bankruptcies and are much better for Public Hospitals. Chapter 9 applies to “municipalities.” Many don’t realize that Chapter 9 bankruptcy is available to more than cities and towns. The Bankruptcy Code defines “municipality” as any “political subdivision or public agency or instrumentality of a State.” Under this broad definition, public trust hospitals and other types of Public Hospitals have been permitted to file for protection under Chapter 9.

Here are 7 reasons that Chapter 9 is especially beneficial to Public Hospitals

  1. A Chapter 9 Bankruptcy Court cannot interfere with the Debtor’s governmental powers, property or revenue.
  2. This means that no bankruptcy estate is created in the case and municipalities do not need Court permission to deal with assets.

  3. Reduced oversight by the Bankruptcy Trustee.
  4. According to 28 U.S.C. § 586, the Trustee is to “supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15…” Chapter 9 is missing from this list.

  5. Few reporting obligations.
  6. A Chapter 9 debtor only needs to file a list of creditors, as opposed to numerous schedules and volumes of financial statements from current and previous periods. Further, a Chapter 9 debtor has no monthly or other reporting obligations.

  7. Chapter 9 debtors enjoy an expanded automatic stay.
  8. Even though no estate is created, the automatic stay protects both the municipality and its property, and extends the stay to prohibit proceedings against officers of the debtor.

  9. Only the debtor may file a plan of reorganization.

  10. A Chapter 9 case can never be converted to a liquidation.

  11. The Bankruptcy Code does not prescribe any predetermined deadlines within which a plan must be filed.
    This means the debtor has significant control over its restructuring efforts and timeline.
If your Public Hospital is in financial distress and your options for survival seem limited, please contact us to assist you in evaluating whether filing for Chapter 9 may be the lifeline you need.

About the Author

Cori H. Loomis, J.D. is an associate attorney at Christensen Law Group, PLLC. She is an expert in healthcare law, employment issues, and business transactions. You can read more about her and her legal experience here.

POSTED May. 5, 2016 | SHARE NEWS