Reorganizing Healthcare Bankruptcy

Many healthcare providers are experiencing financial distress, and if the predicted wave of healthcare bankruptcies materializes, the entire U.S. economy could suffer. Unfortunately, healthcare providers are part of a growing group of “bankruptcy misfits,” in the sense that bankruptcy does not work for them the way it works for other businesses. This is so for two primary reasons. First, the Bankruptcy Code (“Code”) is insufficiently specific with respect to healthcare debtors. Second, the Code lacks an organizing principle to allow courts to reconcile the competing players and interests in healthcare bankruptcy cases. Previous attempts to address these issues have not succeeded. Notably, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 scattered reforms across the Code, which made bankruptcy more complicated for healthcare debtors. As a result, some have argued that these debtors are better off using bankruptcy alternatives, such as state receiverships, to address their debts. This Article asserts that despite their bankruptcy misfit status, healthcare providers can realize distinct benefits from bankruptcy relief. To be effective, however, this relief must respond to healthcare providers’ unique needs. Creating separate Code subchapters for healthcare business bankruptcies would allow Congress to clarify many aspects of healthcare bankruptcy and enable the development of specific procedures and a distinct organizing principle unique to healthcare provider bankruptcies. Although this proposal contemplates a significant structural change to the Code, this Article explains why this change is warranted as part of the Code’s necessary evolution.