Failure to pay doctors’ malpractice insurance lands St. Chris, Hahnemann owners in bankruptcy trouble

“It’s part of a game of chicken"

• Nina Feldman/WHYY
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  Nina Feldman covers behavioral health for WHYY. She grew up in Ann Arbor Michigan, but before coming to Philadelphia she lived in New Orleans, where she worked at American Routes and contributed to the NPR affiliate WWNO. She likes to understand neighborhoods, watch friends do what they’re good at, and be underwater. She also started the New Orleans Ladies Arm Wrestling league, or NO LAW.

(Philadelphia) — For weeks, former physicians and medical residents at Hahnemann University Hospital and St. Christopher’s Hospital for Children have been making noise about something called “tail coverage.”

It’s the part of a medical malpractice insurance policy that covers a doctor for the time he or she worked at a given hospital after the doctor leaves. The coverage is important because many medical malpractice claims are filed years after the incidents occurred.

The federal judge overseeing the bankruptcy proceedings for Philadelphia Academic Health System — which until this week owned both hospitals — has denied two of the doctors’ motions arguing that the company is required to provide the coverage under agreements already approved by the court. Now, bankruptcy judge Kevin Gross has taken another step: On Monday, he issued an order requiring PAHS to file for Chapter 7 bankruptcy instead of Chapter 11, unless its lawyers can give him a good reason why it shouldn’t.

“The debtors appear to have failed to maintain appropriate insurance for physicians they employed, which would give rise to conversion pursuant to 11 U.S.C.,” Gross wrote in his order. He added that Philadelphia Academic Health System seemed to have “substantial and continuing loss” to the estate of the company, with little hope for rehabilitation.

Under Chapter 11 of the U.S. Bankruptcy Code, a company is allowed to reorganize and continue to exist as a going concern, though potentially an entirely restructured one. A company is eligible to file for Chapter 11 when there is a realistic chance that it can be saved, and, according to the bankruptcy code, when all its insurance payments are in good standing.

A Chapter 7 bankruptcy is liquidation: Assets are placed into the hands of a U.S. trustee instead of a restructuring officer hired by the debtor company. The company’s property is more likely to be sold quickly, and therefore for less value. A trustee also has more incentive to look into the behavior of the company’s owners before the bankruptcy petition was filed, to look for wrongdoing, according to Jonathan Lipson, who teaches bankruptcy law at Temple University’s Beasley School of Law.

“It’s part of a game of chicken,” said Lipson, who theorized that Judge Gross might be threatening to convert the case to Chapter 7 not because that is magically going to create cash to pay for the doctors’ tail-coverage malpractice insurance, but instead as an incentive for Philadelphia Academic Health to pay it and avoid the reclassification.

“The owners are smart enough to understand that if this case is converted, there might be a greater likelihood that they will get sued for things they did before bankruptcy,” Lipson said.

The doctors and former medical residents estimate that between Hahnemann and St. Christopher’s, 600 of them are affected by this issue, and they estimate that all together they could be owed more than $20 million. Rates vary depending on medical specialty and other factors, but some of the doctors told WHYY that they had received quotes for the coverage ranging from $5,000 to $75,000. Many of these doctors are still in their post-graduate training or early on in their careers, and carry substantial debt from medical school.

Lawyers for the Pennsylvania Department of Health, which filed a motion in bankruptcy court asking the judge to compel the company to pay, warned that because the Medical Care Availability and Reduction of Error Act requires physicians in the state to maintain insurance coverage, failing to provide the tail insurance may “prevent hundreds of doctors from providing medical care in the Commonwealth of Pennsylvania at a time when the Commonwealth of Pennsylvania is experiencing a shortage of physicians.”

Gretchen Metzenberg was chief resident at St. Christopher’s Hospital for Children last year, and expected to continue there as a fellow. But after the bankruptcy, the chair of her program was let go, and her fellowship in pediatric infectious disease was canceled. Effective December 15, St. Christopher’s is owned and operated by Drexel University and Tower Health, which bought the hospital for $50 million at bankruptcy auction.

“I’m in a bit of a pickle,” said Metzenberg, who is currently unemployed and estimated her tail insurance policy would cost $25,000. That’s higher than some of her colleagues because she was chief resident.

“Most people I know don’t just have $15,000 in their pocket,” she said.

Allen Wilen, chief restructuring officer for Philadelphia Academic Health said “the parties are working together toward a consensual resolution of the issues.”

Gross had scheduled a hearing for Tuesday and required Philadelphia Academic Health to make a case for why the bankruptcy should not be converted, but the hearing has been pushed back to Jan. 6.

The current tail insurance policy expires Jan. 10.

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WHYY is the leading public media station serving the Philadelphia region, including Delaware, South Jersey and Pennsylvania. This story originally appeared on WHYY.org.