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Watch for Client Bankruptcies

Cheryl A. Thompson

With increasingly more skilled-nursing facilities (SNFs) filing for bankruptcy protection, pharmacies and consultant pharmacists need to keep a close eye on the financial health of their clients.

Take for example Atlanta-based Mariner Post-Acute Network Inc., one of the country’s largest chains, with more than 400 SNFs nationwide. In January, the company filed for chapter 11 bankruptcy protection after losing about $60 million in the last quarter of 1999, 53 percent more than a year earlier. Mariner stated in a February report to the Securities and Exchange Commission (SEC) that the increased loss resulted in part from full implementation of Medicare’s prospective pricing system for SNF-provided services.

Clues to the impending chapter 11 filing, which protects the company while it reorganizes its finances, could be found in resources such as The Motley Fool Inc. In December, the Virginia-based investment education company reported Mariner "teetering on the brink of insolvency." For many publicly traded companies, financial information including SEC filings can be found online at sites such as Yahoo! Finance.

Pharmacies and consultant pharmacists who suspect their clients might file for chapter 11 bankruptcy protection should learn the rules covering this type of business salvation. The 1998 publication Bankruptcy Basics, by the Administrative Office of the United States Courts, offers the following facts:

  • A business that seeks reorganization under chapter 11 wants to continue operating and concurrently pay its debts through a court-approved plan. 
  • During the first 120 days, the business has the exclusive right to submit a reorganization plan; after this period, a creditor can submit a competing plan. 
  • The business must provide creditors with adequate information for them to evaluate the reorganization plan. 
  • If the court approves the reorganization plan, the business can reduce its debts by repaying part of its financial obligations and "discharging," or expunging, the rest. 
  • All creditors identified by the business receive from the court clerk a copy of the entire list of discharged debts. 
  • Debts not identified by the business cannot be discharged. 
  • Creditors cannot take any type of action to collect debts that have been discharged. 
  • The business can voluntarily repay any discharged debt (to maintain goodwill, for example). 
  • As part of the reorganization plan, the business can terminate burdensome contracts and leases, recover assets, and change its operations in order to return to profitability. 
  • After a period of consolidation, the reorganized business emerges from chapter 11 protection with less debt.

More information is available in the booklet. Once familiar with the basic rules, pharmacies and consultant pharmacists with unpaid debts from businesses whose bottom lines turn redder every quarter should consult an attorney who specializes in bankruptcy law and their accountant.