by Kirk S. Cheney

Idaho’s Medical Indigency Act (the “Act”)¹ offers significant benefits to medical providers. Idaho’s legislature enacted it in 1974 with the express intent “to allow hospitals to obtain compensation for services rendered to indigents.”² The Act requires counties to reimburse medical providers for services provided to indigent patients, provided certain conditions are met. By carefully complying with the Act, a medical provider can effectively shift collection risk to the indigent patient’s county of residence.

Not surprisingly, there is significant overlap between patients who are medically indigent and those who seek protection under the Bankruptcy Code. Accordingly, it is important for medical providers to understand how a patient’s bankruptcy may affect the provider’s rights under the Act. This article sets forth two simple rules medical providers should follow to preserve the protections of the Act in their favor, notwithstanding a patient’s subsequent bankruptcy filing.

Basics of the Act

The Act obligates counties to pay medical providers at applicable Medicaid reimbursement rates for “necessary medical services” provided to medically indigent patients.³ Necessary medical services are defined to include ordinary, generally accepted procedures necessary to treat patients, but exclude, for example, such treatments as organ transplants, cosmetic surgery, and “normal, uncomplicated pregnancies.”⁴ To receive county assistance, an application must be submitted to the county clerk in the county of the patient’s residence.⁵ The Act allows medical providers to submit the application on a patient’s behalf, and, as explained below, providers should make it a practice to do so.⁶ The application must be submitted within 31 days of treatment for emergency medical services, and 10 days in advance of treatment for non-emergency medical services.⁷

When an application is filed, an automatic lien arises and attaches to all real and personal property owned by the patient.⁸ The county may perfect the lien as to real property by filing a notice of lien in the county real property records, and may perfect it as to personal property by filing a notice of application with the Idaho Secretary of State. If recorded, the lien’s perfection will arise as of the date services were provided.⁹

Within 45 days of the application, the county clerk will review the application, interview the patient, and issue findings to the county commissioners.¹⁰ The county commissioners will then, within 15 days, make an initial determination to approve or deny the application for indigent assistance.¹¹ A patient is medically indigent if, together with the patient’s spouse, the patient “does not have income or other resources available to him from whatever source sufficient to pay for necessary medical services.”¹² If a patient meets this definition and necessary services were provided, the county has no discretion to deny the application.¹³

A provider may appeal the county commissioners’ initial determination to deny the application, and the commissioners will hold a hearing to consider additional evidence.¹⁴ If the commissioners then make a final determination to deny the application, the provider may appeal to the county district court.¹⁵ If, on the other hand, the application is approved, the county will issue payment to the medical provider, and the patient will be obligated to repay the county over time, to the extent the county determines the patient is able.¹⁶

What Happens When the Medical Indigency Act Meets the Bankruptcy Code?

A medical emergency may lead an indigent patient eventually to file for bankruptcy protection. Such protection typically takes one of two forms. First, a patient may file under chapter 7 of the Bankruptcy Code. Under that chapter, a trustee is appointed to sell the debtor’s assets, other than certain exempt assets, and use the proceeds to pay the debtor’s debts. Alternatively, a patient may file under chapter 13 of the Bankruptcy Code. If he does, he must file a bankruptcy plan, which generally will require him to allocate his disposable income to the repayment of debts over a five year period. At the conclusion of a chapter 7 case, or once the debtor complies with a chapter 13 plan, the debtor receives a “discharge”¹⁷ which eliminates the debtor’s pre-bankruptcy liabilities, subject to limited exceptions.

The Idaho Bankruptcy Court has repeatedly been called upon to determine the impact of the Bankruptcy Code on the Medical Indigency Act, and in particular, the effect of the bankruptcy discharge on the automatic indigency lien arising under the Act. Stated succinctly, the rule is that an indigency lien survives bankruptcy and attaches to the property the debtor possessed on the date he or she filed bankruptcy.¹⁸ Any property the debtor obtains after the bankruptcy filing will not be subject to the lien.¹⁹ Though a debtor’s personal liability is discharged after bankruptcy, valid, perfected liens continue to attach to the debtor’s property until they are released, which may occur when the property is sold and the proceeds are used to satisfy the amount of the lien.

Perhaps recognizing that the bankruptcy discharge does not eliminate an indigency lien, some debtors have attempted proactively to avoid the lien during the bankruptcy case, prior to discharge. They have not been successful. In both chapter 13 and chapter 7 cases, the Idaho Bankruptcy Court has rejected debtors’ arguments that indigency liens could be avoided on various grounds, including that the lien is an unconstitutional taking;²⁰ that it unlawfully impairs the debtor’s homestead exemption;²¹ or that the lien impliedly expires after a certain period.²²

In short, a timely, perfected indigency lien is not significantly impaired by a patient’s bankruptcy case.²³ There are, however, two rules medical providers should follow to maximize the likelihood of reimbursement and minimize the risk of running afoul of the bankruptcy court.

Two Rules for Medical Providers

File the Application Promptly

First, medical providers should file a “completed application” for emergency necessary medical services as quickly as practicable after emergency medical services are rendered to any patient suspected to be indigent. In no event should the application be filed more than 31 days after services are provided.²⁴ The sooner the better: the indigency lien arises upon the filing of the application, and is valid even if a decision to grant or deny the application is not reached before the patient files for bankruptcy.²⁵

Medical providers should designate a person or persons responsible for evaluating the financial resources of all patients and promptly filing indigency applications where appropriate. A “completed application” must include at a minimum a cover sheet requesting services, applicant information including diagnosis and requests for services and signatures, information regarding the patient’s finances and available resources, patient rights and responsibilities, and other signatures and information requested in the application form.²⁶ A more thorough and complete application presumably is more likely to be granted.

Medical providers should not rely on the patient to file an application. The Idaho Bankruptcy Court has held that a medical provider was not justified in relying on a patient’s representation that she had filed an indigency application.²⁷ Nor should the hospital disregard its ordinary collection procedures with respect to indigent patients. The Act requires medical providers to use reasonable efforts to collect the bill, and only secondarily to rely on county funds.²⁸

Consult Bankruptcy Counsel and Seek Stay Relief Before Taking Any Action After the Patient Has Filed for Bankruptcy Protection

When a patient files for bankruptcy protection, the patient/debtor is required to notify all creditors (including the medical provider) pursuant to Bankruptcy Rule 2002(f). Thereafter, most actions relating to the debtor or his assets are prohibited by the Bankruptcy Code’s automatic stay. Bankruptcy Code § 362 prevents, among other things: (1) commencement or continuation of administrative proceedings; (2) acts against the debtor’s property, including the creation, perfection, or enforcement of liens; and (3) attempts to collect a debt or claim. Actual damages, punitive damages, and attorney fees may be awarded against a creditor who willfully violates the automatic stay.²⁹

The Idaho Bankruptcy Court has held that a county and a hospital violated the automatic stay by continuing to prosecute a patient’s indigency application after the patient filed for bankruptcy protection. The court’s broad ruling was that “all proceedings undertaken concerning the application for assistance after Plaintiff filed for bankruptcy relief occurred in violation of the automatic stay” and were void.³⁰ The Court later applied the same rule to the filing of an indigency application, holding that the application itself is void if it occurs after the patient files for bankruptcy, even if the medical provider is unaware of the bankruptcy filing.³¹ In that case, no indigency lien arose against the debtor’s assets because the hospital filed the indigency application one day after the patient filed for bankruptcy protection. The application was void.

A creditor may be entitled to “lift” the stay pursuant to Bankruptcy Code § 362(d) so that it can protect its interests. Before taking any action respecting the debtor’s indigency application or property, a medical provider should consult bankruptcy counsel to determine whether relief from the automatic stay is necessary and whether a court would likely grant such relief.

Conclusion

Medical providers are likely to see indigent patients eventually file for bankruptcy protection. Idaho’s Medical Indigency Act can be a great benefit to medical providers in such circumstances, helping them collect in full when other creditors may receive pennies on the dollar. By promptly filing a thorough, complete indigency application with the appropriate county, medical providers can improve their likelihood of reimbursement. Medical providers should carefully monitor bankruptcy notices that they receive and should not take any action relating to a bankrupt patient’s indigency application or assets without consulting bankruptcy counsel.

¹See Idaho Code § 31-3501 et. seq.
²See In re Hendricks, 2010 Bankr. LEXIS 632, at *3-4 (Bankr. D. Idaho Mar. 1, 2010).
³See Idaho Code § 31-3508.
⁴See Idaho Code § 31-3502(18).
⁵See Idaho Code §§ 31-3504 & 3506.
⁶See Idaho Code § 31-3504.
⁷See Idaho Code § 31-3505.
⁸See Idaho Code § 31-3504(4).
⁹See id.
¹⁰See Idaho Code § 31-3505A.
¹¹See Idaho Code § 31-3505C.
¹²See Idaho Code § 31-3502(1).
¹³See Johnson v. Stapelman (In re Johnson), 386 B.R. 272, 281 (Bankr. D. Idaho 2008) (“If the board determined that Plaintiff was indeed medically indigent at the time the emergency medical services were rendered, it had no discretion to deny the application.”); IHC Hosp., Inc. v. Board of Comm’rs of Twin Falls County, 108 Idaho 136, 145, 697 P.2d 1150, 1159 (1985) (“[A]fter presentation of some proof of indigency (not necessarily a prima facie showing) by the hospital, then the claim must be paid . . . .”).
¹⁴See Idaho Code § 31-3505D.
¹⁵See Idaho Code § 31-3505G; St. Luke’s Reg. Med. Ctr. v. Board of Comm’rs of Ada County, 146 Idaho 753, 203 P.3d 683 (2009) (provider has standing to appeal). The provider must comply with Idaho’s Administrative Procedures Act, Idaho Code § 67-5201 et. seq.
¹⁶See Idaho Code § 31-3510A.
¹⁷See 11 U.S.C. §§ 727(b) and 1328.
¹⁸See In re Mechling, 284 B.R. 127 (Bankr. D. Idaho 2002); In re Handy, 97.3 IBCR 79 (Bankr. D. Idaho 1997).
¹⁹See Mechling, 284 B.R. at 132.
²⁰See In re Johnson, 386 B.R. 272, 278-30 (Bankr. D. Idaho 2008).
²¹See In re Matlock, 2002 Bankr. LEXIS 1739 (Bankr D. Idaho 2002).
²² See In re Hendricks, 2010 Bankr. LEXIS 632 (Bankr. D. Idaho 2010).
²³Note, however, that if the county fails to perfect (record) the lien, the county’s claim against the debtor will be a general unsecured claim in the bankruptcy case, and the county will be required to share pro rata with other unsecured creditors in the distribution of the debtor’s assets. See In re Walker, 97.3 IBCR 91, 92 (Bankr. D. Idaho 1997).
²⁴For non-emergency services, the application must be filed at least 10 days prior to the provision of services.
²⁵See Johnson, 386 B.R. at 277.
²⁶See Idaho Code § 31-3502(7).
²⁷See In re University of Utah Hosp. v. Board of County Commer’s, 113 Idaho 441, 447 (Bankr. D. Idaho 1987).
²⁸See Idaho Code § 31-3509(2).
²⁹See 11 U.S.C. § 362(k)(1).
³⁰See In re Sarty, 99.4 IBCR 162, 164 (Bankr. D. Idaho 1994).
³¹See In re Hegel, 00.2 IBCR 101, 102 (Bankr. D. Idaho 2000).

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For questions regarding this update, please contact
Kirk S. Cheney
Holland & Hart, U.S. Bank Plaza, 101 S. Capitol Boulevard, Suite 1400, Boise, ID 83702-7714
email: kscheney@hollandhart.com, phone: 208-383-3930

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