By Emily Siguenza
In the healthcare industry, there are numerous standards that healthcare personnel must follow to ensure safe and effective care for their patients.[1] However, when a healthcare business declares bankruptcy and sells off its assets, there are no standards in place for maintaining medical malpractice coverage during the sale of hospitals.[2]
Steward Healthcare Systems LLC (“Steward Healthcare”) was the “biggest privatized healthcare network in the country.”[3] On May 6, 2024, Steward Healthcare filed for bankruptcy under Chapter 11.[4] Chapter 11 defines the term “healthcare business” as a company that either in public or private or for-profit or non-profit offers “to the general public facilities and services for the diagnosis or treatment of injury, deformity, or disease; and surgical, drug treatment, psychiatric, or obstetric care.”[5] Since Steward Healthcare is headquartered in Dallas, Texas, the United States Bankruptcy Court for the Southern District of Texas is hearing the case before the Honorable Christopher M. Lopez.[6]
A business can be sold in two ways after declaring bankruptcy. [7] They can either provide a plan of reorganization or an asset sale under Bankruptcy Code Section 363.[8] Steward Healthcare planned to “close hospitals, including several in Massachusetts, to cut costs.”[9] A vital point is that the assets of the sale must be “free and clear of liens, claims, and encumbrances.”[10]
On October 7, 2024, the Massachusetts Attorney General urged the Bankruptcy Court to require Steward Healthcare to maintain adequate medical malpractice insurance coverage as it sells off its hospitals.[11] The Steward Healthcare case reveals that the healthcare business lacks bankruptcy standards.
Why the Need For Medical Malpractice Insurance During Bankruptcy
Massachusetts Attorney General states that they are “justifiably concerned that [Steward Healthcare’s] fiscal and operational mismanagement has put patient health and safety at risk.”[12] Medical malpractice insurance is an essential part of the healthcare industry that protects healthcare professionals from covering the costs of “claims of services that result in patient’s injury or death.”[13] Per Bankruptcy Code Section 363, assets of the sale must be “free and clear of liens, claims, and encumbrances”; therefore, this means that any claims of medical malpractice fall under this definition.[14] In the case of In re: Sheokhzadeh,[15] the Bankruptcy Court explains when a bankruptcy case is filed, an estate is created.[16] It is widely recognized that pre-petition claims of medical malpractice become property of the estate.[17] The case of Baham et al. v. Trustee in Bankruptcy of Estate of Metzner[18] reiterates that a party can still be held liable for pre-bankruptcy medical malpractice claims.[19] However, in 2005, the Bankruptcy Court expanded the well-known concept by establishing that individuals can still recover on their medical malpractice claims under the debtor’s malpractice policy.[20] The purpose of maintaining medical malpractice insurance coverage is to ensure patients who were subjected to a healthcare professional’s negligent action are still permitted to recover despite the bankruptcy of the healthcare business.[21]
Final Thoughts
Medical malpractice is the result of a healthcare professional’s negligent action which “adversely affect[s] the public health, safety, and welfare which necessitates the imposition of a limitation on the liability of health care providers.”[22] If the Bankruptcy Court allows Steward Healthcare, the largest private for-profit hospital chain in the country, to sell its hospitals without adequate medical malpractice insurance, this could set a dangerous precedent, suggesting that healthcare businesses may neglect necessary precautions regarding malpractice insurance.[23] The Steward Healthcare case could be crucial in establishing standards for the bankruptcy of healthcare businesses, particularly regarding the necessity of maintaining adequate medical malpractice insurance when selling business assets.
Moreover, a ruling in favor of such a sale could undermine public trust in the healthcare system, as patients may feel increasingly vulnerable to the repercussions of negligent care without the protective buffer of malpractice insurance. It could also incentivize other bankrupt healthcare businesses to operate without sufficient coverage, creating a ripple effect that endangers patient safety across the industry. The implications extend beyond individual institutions; they raise fundamental questions about accountability in healthcare. If large healthcare businesses can bypass financial responsibilities, the burden of malpractice may ultimately shift onto patients, further complicating access to justice for those harmed by negligent care. Thus, the outcome of this case may not only shape the legal landscape for bankrupt healthcare businesses but also influence the ethical obligations of healthcare providers toward their patients.
[1] Michael Young & Mark A. Smith, Standards and Evaluation of Healthcare Quality Safety, and Person-Centered Care, Nat’l Lib. of Med. (Dec. 13, 2022), https://www.ncbi.nlm.nih.gov/books/NBK576432/.
[2] James Nani, Massachusetts Challenges Steward Health on Malpractice Coverage, Bloomberg L. (Oct. 8, 2024), https://www.bloomberglaw.com/product/bky/bloomberglawnews/access-message.
[3] Id.
[4] See Steward Health Care System LLC, Kroll, https://restructuring.ra.kroll.com/Steward/ (last visited Oct. 13, 2024).
[5] See 11 U.S.C.A. § 101(27A).
[6] Kroll, supra note 4.
[7] Mary H. Rose, Buying a Distressed Hospital Out of Bankruptcy, Buchalter (Dec. 2011), https://www.buchalter.com/publication/buying-a-distressed-hospital-out-of-bankruptcy/.
[8] Id.
[9] Janine Phakdeetham, Steward Health Goes Bankrupt After Mounting Financial Trouble, Bloomberg L. (May 6, 2024), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/XFO6TD3S000000#jcite.
[10] Rose, supra note 7.
[11] James Nani, Massachusetts Challenges Steward Health on Malpractice Coverage, Bloomberg L. (Oct. 8, 2024), https://news.bloomberglaw.com/bankruptcy-law/massachusetts-challenges-steward-health-on-malpractice-coverage.
[12] See Informational Brief of the Commonwealth of Massachusetts in Support of Responses to the Debtors’ Emergency Motions at 13, In re: Steward Health Care Sys. LLC., No. 24-90213 (Bankr. S.D. Tex. May 7, 2024).
[13]Jackie Lam & Jason Metz, What Is Medical Malpractice Insurance?, Forbes (Oct. 25, 2022), https://www.forbes.com/advisor/business-insurance/medical-malpractice-insurance/.
[14] In re: Sheikhzadeh, No. 14-14219-BFK, 2018 WL 3197752 at *2 (Bankr. E.D. Va. June 26, 2018); Mary H. Rose, Buying a Distressed Hospital Out of Bankruptcy, Buchalter (Dec. 2011), https://www.buchalter.com/publication/buying-a-distressed-hospital-out-of-bankruptcy/.
[15] 2018 WL 3197752 at *3
[16] Id.
[17] Id.
[18] 892 F. Supp. 150, 151 (E.D. La. 1995)
[19] Id.
[20] In re: Baltimore Emergency Servs. II, LLC, 334 B.R. 164, 172-74 (Bankr. D. Md. 2005).
[21] See, e.g. In re: Sheikhzadeh, 2018 WL 3197752 at *2; In re: Baltimore Emergency Servs. II, LLC, 334 B.R. at 172; Baham v. Tr. In Bankr. Of Est. of Metzner, 892 F. Supp. at 151.
[22] In re: Sheikhzadeh, 2018 WL 3197752 at *7.
[23] Janine Phakdeetham, Steward Health Goes Bankrupt After Mounting Financial Trouble, Bloomberg L. (May 6, 2024), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/XFO6TD3S000000.
