By Jeff Overley

Law360 (April 3, 2020, 6:46 PM EDT) -- In this installment of Coronavirus Q&A, the health practice chair at O'Melveny & Myers LLP discusses a whirlwind effort with California's governor to rapidly revitalize bankrupt hospitals, looming litigation between health insurers and providers over coronavirus costs, and a potential wave of whistleblower suits involving pandemic-related billing and stimulus funds.

David Deaton, a Southern California-based partner, discussed the work as part of a series of interviews Law360 is conducting with lawyers across the country about wide-ranging legal work on the COVID-19 crisis.

A specialist in mergers and acquisitions as well as False Claims Act enforcement, Deaton has been tapped to help add desperately needed hospital beds in the Golden State. He's also beginning to contemplate legal disputes that the coronavirus pandemic will almost inevitably generate.

This interview has been edited for length and clarity.

I know O'Melveny has been working during the crisis to expand health care capacity. What exactly has the firm been handling?

We have a range of clients that we typically wouldn't see. Gov. [Gavin] Newsom in California asked his team to pull together the right folks to bring online a hospital that had been shut down in bankruptcy in Los Angeles. And there was another hospital in the Bay Area that was significantly underutilized and also in bankruptcy. The governor's team turned to us in March to put together a deal and work through all the logistics.

It was a project you would expect to take many months. Things that would normally take weeks were taking hours. I've never [experienced] the kind of collaboration that existed among the regulators, the governor's office, the lawyers for all of the various parties.

The hospital system was Verity Health System and the hospitals that were involved were St. Vincent Medical Center [in Los Angeles] and Seton Medical Center [in Daly City].

Just so you have a sense of the mechanics, we had to negotiate the lease and operating agreements, and then also because this was in bankruptcy court, put together an emergency motion with debtor's counsel and get approval of the court. This is kind of a classic example of how we work at O'Melveny, where our bankruptcy and restructuring team worked hand-in-glove with our health care practice and other practices in order to get the job done.

And this is getting a little beyond your question, but we're seeing an awful lot of what this crisis is calling for. No one person has the answer. There are so many things that are coming up that are requiring cross-discipline and cross-practice expertise, and that was certainly the case on this California deal.

What specifically had to be tackled on a shorter timetable than usual?

Literally everything. From the financial terms all the way through to the commitments that were being made in the lease and operating agreements — all of those negotiations can literally take weeks and months in an average deal. The governor's office, they called on a Thursday and literally said, "We want this done in a week." And the team worked around the clock to get the job done. And it happened.

Candidly, it was an honor to be a part of the project. It was one of those times in my career where I believe the work that our team did will save lives.

O'Melveny's health practice has lots of health insurer clients. How is the crisis affecting them?

With insurers, if you think of the costs associated with this crisis, [one question is], "Who's going to eat the cost?" You're going to have the cost of testing and the cost of treatment. You're going to have the [policyholder] impact — what copays and coinsurance are involved — and the hospitals' [financial] impact.

You also have cities, counties and states thinking about the costs associated with this, and at the state level in particular, we're starting to see requests of the insurers to assist with this crisis in a variety of ways. And [we're watching] things like executive orders suspending the ability to cancel policies.

It's just the start of what I believe will be a patchwork of new guidance and rules, not all of them consistent with one another. And some of what we're seeing is even internally inconsistent.

[So we're] trying to understand exactly what the expectation is. And the cost and how that's passed along may not be all that rational in terms of how the system works — I think the question is really, "Who's going to be left holding the bag for this, and how is that going to be paid for?"

So is the idea that if one line of business — say, Medicare Advantage — faces disproportionately large COVID-19 costs, how you spread those costs around?

There are obviously rules that are going to apply there, and paying for the raw costs of treatment is going to be one thing.

But I also think — and this is thinking down the road a little bit — the hospital sector is already operating at fairly low margins. And it basically canceled all of its elective procedures, which tend to be more profitable. And in lieu of that, you're bringing in a lot of COVID-19 patients. In return, you presumably have full utilization of your hospital. But that full utilization probably came at a cost, because your labor costs just went up to fill the remainder of your staff, and as your staff gets sick, that gets more and more complicated, and more and more costly.

And so if you think about this from the insurers' perspective, you could very well have hospitals that are critical to your network in financial distress. And then you have the various lines of business, and how does that factor into this?

You have the sheer costs of [the crisis], but then you also have practical ramifications if multiple providers in your network experience distress all at the same time. That affects your Medicare Advantage line of business, but it also affects your Affordable Care Act [line of business] and every other line of business.

So developing strategies for how to manage through a process where you have multiple providers in distress is going to be one of the key issues that is going to confront the insurance sector.

So if I'm an insurer and many providers are in distress, is the issue that they'll want larger payments than previously agreed upon?

Good question. On any given day, you already have litigation over contract terms. And so I would expect an increase in litigation just on the terms of the provider contract. And that litigation will be made more complicated by the executive orders and the regulations and whatever else is coming out from each individual state. And we're in a crisis mode, so there are going to be challenges for the insurers to [respond] in a way that is well thought through and consistent.

So that's one aspect of it. But another aspect is — and I can't think of another time in history when this has been so pronounced — what happens when you have multiple hospitals on the brink of bankruptcy or in bankruptcy? What happens to your contract terms when that hospital emerges from bankruptcy? Is your contract assumed? Is it not assumed?

There are any number of concerns that can arise just by virtue of a single provider in bankruptcy. But if you're confronted with multiple providers in bankruptcy at the same time, or on the edge of bankruptcy, how do you manage a network so you have confidence that your members have someplace to go?

In the enforcement area, could this crisis create more whistleblower cases under the False Claims Act from aggrieved employees?

It's safe to assume that as you enter into a recession, there will be increased incentives to bring a whistleblower case. Particularly as employees are laid off, whistleblower complaints frequently accompany even a garden-variety employment claim. One of my partners likes to say, "There's no such thing as a 'gruntled' former employee." So it's safe to assume we'll see a fair amount of that just by virtue of the economic conditions.

And then you also have the largest stimulus bill in the history of the country. It is broadly available to so many different businesses, and so many different individuals, and in so many different programs.

The opportunities for false statements, false claims, outright fraud — there are any number of opportunities there that create an additional source for white collar and False Claims Act defense lawyers.

--Editing by Kelly Duncan and Emily Kokoll.

This is part of a series of Law360 conversations with attorneys about the coronavirus pandemic. For previous interviews, see here and here.

For a reprint of this article, please contact reprints@law360.com.