Firm News & Legal Alerts

Thursday, January 10, 2013

Hospital Bankruptcy Risks for Physicians

The recent Chapter 11 bankruptcy filing by Interfaith Medical Center, Inc., serves as a reminder to physicians (and other healthcare providers) of the importance of doing a thorough investigation, and asking the right questions, before entering into contractual relationships (such as an employment contract) with hospitals in New York.  In our experience through representation of physicians in the bankruptcy cases involving various hospitals, it is not unusual for physicians or residents to learn - - unfortunately, after the fact - - that hospitals have provided insufficient or no medical malpractice insurance despite being promised in the employment contract.  In some cases, the hospital held itself out as “self insured,” but did not segregate the funds needed to actually cover malpractice claims.  In other cases, there was inadequate funding to purchase tail coverage.

These deficiencies leave such physicians vulnerable to the extraordinary cost and potential liability of future medical malpractice claims, unless the hospital is forced to make alternative arrangements in order to protect the physicians from uninsured litigation.  This was the case in the St. Vincents Catholic Medical Center bankruptcy, a motion was filed to compel the hospital to purchase tail coverage for both residents and employed attending physicians, and we were able to negotiate a settlement with the hospital which ultimately protected the physicians and created a fund for potential claimants.  Of course, taking steps to prevent this problem in the first place is a preferable solution - - which can best be accomplished during the contract negotiation process at the inception of the relationship.

Another area of concern for hospital employed physicians concerns unpaid pre-petition wages and benefits due as of the date of the bankruptcy filing.  The Bankruptcy Code only recognizes as a priority claim those wages and benefits (vacation, sick days, personal days, etc.) that were earned within 180 days before the filing of the bankruptcy petition, and only to the extent of the priority limit, which is currently set at $11,750.  The remainder of such wages and benefits are deemed to be a general unsecured claim, with very little chance of a significant recovery. 

Even physicians who have an individual contract with a hospital, or whose professional corporation, partnership or limited liability company has such a contract, are not immune from the effects of bankruptcy.  The Bankruptcy Code allows for the rejection of such contracts, often with a limitation on the amount of the claim that will be allowed by the Court.  It is usually beneficial for physicians who find themselves facing such issues to engage experienced bankruptcy counsel upon the filing of a bankruptcy petition by a hospital, in order to guide them through a process and achieve for a better result.


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