The Continuing Bayou Shores Saga – An Appeal and, Perhaps, a Circuit Split

In the March 2015 edition of The Business Advisor – Healthcare Focused Newsletter, I wrote about the success of Bayou Shores SNF, LLC in using a bankruptcy filing with the U.S. Bankruptcy Court for the Middle District of Florida to preserve its Medicare and Medicaid provider agreements notwithstanding the pre-petition issuance by the U.S. Department of Health and Human Services (HHS) of a notice of termination of Bayou Shores’ Medicare provider agreement.¹ Following up, I wrote in the July 2015 The Business Advisor – Healthcare Focused Special Alert, about the reversal by the U.S. District Court for the Middle District of Florida (“District Court”) of Bayou Shores’ success before the Bankruptcy Court. On June 26, 2015, the District Court entered an order (“Reversal Order”) reversing: (i) the bankruptcy court’s order (“Injunction”) enjoining the HHS and the Florida Agency for Health Care Administration (AHCA), respectively, from terminating Bayou Shores’ Medicare and Medicaid provider agreements; and (ii) those provisions of the Bankruptcy Court’s order (“Confirmation Order”) confirming Bayou Shore’s plan of reorganization that approved Bayou Shores’ assumption of its provider agreements. [U.S.D.C. MD Fla. Docket No. 8:14-cv-02816-JSM ECF Docket No. 72] The Bayou Shores saga continues, with the parties now before the U.S. Court of Appeals for the Eleventh Circuit, and the prospect of a circuit split looming.

It has never been a secret that Bayou Shores’ survival depends on preventing the actual termination of its Medicare and Medicaid provider agreements. Unfortunately for Bayou Shores, the Reversal Order authorizes HHS and AHCA to do just that. To avoid the termination of its provider agreements, which would have effectively mooted any appeal to the Eleventh Circuit, on July 10, 2015, Bayou Shores filed a motion (“Stay Motion”) to stay the Reversal Order, pending Bayou Shores’ appeal to the Eleventh Circuit. In the Stay Motion, Bayou Shores reasserted its previous arguments before the Bankruptcy and District Courts and asserted that failure to stay the Reversal Order would irreparably harm Bayou Shores. HHS and AHCA vigorously contested the Stay Motion. Nevertheless, on July 20, 2015, the District Court entered an Order (“Stay Order”) [U.S.D.C. MD Fla. Docket No. 8:14-cv-02816-JSM ECF Docket No. 83] staying the Reversal Order for 90 days, or until October 18, 2015. However, the Stay Order expressly granted the stay to permit Bayou Shores to provide its residents with sufficient notice to make suitable arrangements for their transfer and care. Moreover, the Stay Order expressly directs Bayou Shores to obtain any further stays of the Reversal Order from the Eleventh Circuit.

Bayou Shores filed its notice of appeal from the Reversal Order on August 19, 2015. The Appeal has been docketed in the Eleventh Circuit as Case No. 15-13731. As of the date of this article, briefing has not commenced, and Bayou Shores has not sought a further stay of the Reversal Order from the Eleventh Circuit. A reversal by the Eleventh Circuit would benefit Bayou Shores. An affirmance would create a circuit split on the authority of bankruptcy courts to adjudicate a Medicare-related dispute when the debtor has not exhausted its administrative remedies under the Medicare Act and an avenue for Supreme Court review of the issue.

More than 20 years ago, in In re Town & Country Home Nursing Services,² the U.S. Court of Appeals for the Ninth Circuit addressed, inter alia, the exhaustion of remedies issue in a Medicare context. The debtor in Town & Country provided in-home nursing services and derived a portion of its revenue from Medicare. To obtain reimbursement for services provided to Medicare beneficiaries, the debtor submitted cost reports to a financial intermediary for review. In late 1984, the financial intermediary asserted that the debtor had been overpaid by approximately $555,000. To resolve the issue, the debtor executed a promissory note in the amount of $555,539 (“Note”) payable to the United States, providing for repayment of the overpayment in installments.

Between November 1984 and September 1985, the financial intermediary obtained payment of the Note by offsetting approximately $21,000 per month against Medicare reimbursement payments otherwise due the debtor. The debtor filed its chapter 11 bankruptcy petition during the payment period on July 19, 1985. The financial intermediary continued offsetting the amounts due on the Note against reimbursements due the debtor until September 1985, when the debtor’s obligations under the Note were fully satisfied. In all, $88,700 was deducted from reimbursements due the debtor after its bankruptcy filing.

After the Note was paid in full, the financial intermediary discovered that it had erred in calculating the overpayment, which it determined was, in fact, only about $250,000. In 1986, the debtor initiated an adversary proceeding against, inter alia, the financial intermediary, the Secretary of HHS, and the Health Care Financing Administration³ to recover the amount by which the overpayment had been overstated. On the defendants’ motion, the bankruptcy court dismissed the adversary proceeding. On appeal, the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit reversed, concluding, inter alia, that the exhaustion of administrative remedies provisions of the Medicare Act (42 U.S.C. § 405(h)) had no bearing on the debtor’s claims because of the independent grant of bankruptcy jurisdiction under 28 U.S.C. §§ 157 and 1334.⁴ The defendants appealed the BAP’s ruling to the Ninth Circuit.

After concluding that HHS and HCFA had waived their sovereign immunity with respect to the debtor’s claims,⁵ the Ninth Circuit’s addressed the parties’ contentions with respect to the exhaustion of remedies issue. Relying on 42 U.S.C. § 405(h), HHS and HCFA contended that the Medicare Act bars review of Medicare-related claims before the exhaustion of the administrative remedies under the Medicare Act.⁶ Relying on the federal bankruptcy jurisdiction statutes, 28 U.S.C. §§ 157, 1334, the debtor responded that the bankruptcy court had a separate and distinct basis for exercising jurisdiction, because the debtor’s claims related to property of the estate.”⁷ After acknowledging that courts were divided on the exhaustion of remedies issue, the Ninth Circuit adopted the BAP’s position.⁸

When adopting that position, the Ninth Circuit noted the consistency with prior Ninth Circuit precedent of the BAP’s conclusion that the broad grants of jurisdiction in 28 U.S.C. §§ 157 and 1334 provide district and bankruptcy courts with jurisdiction over actions related to bankruptcy which they would not otherwise have.⁹ The interpretation by HHS and HCFA of 42 U.S.C. § 405(h) in support of their position was deemed “unpersuasive,” because 42 U.S.C. § 405(h) subjects to its provisions only cases brought under 28 U.S.C. § 1331 and 1346 and “in no way prohibits assertion of [bankruptcy] jurisdiction under section 1334” over Medicare-related claims.¹⁰ The Ninth Circuit then noted that the broad jurisdictional grant of 28 U.S.C. §§ 157 and 1334 promotes a “Congressionally-endorsed objective: the efficient and expeditions of all matters related to the bankruptcy estate.”¹¹ The Ninth Circuit, therefore, affirmed the BAP’s decision, holding that the debtor was not required to have exhausted its administrative remedies under the Medicare Act before filing its adversary proceeding.

The ruling in Town & Country almost guarantees the appeal of any ruling Eleventh Circuit on Bayou Shores’ to the Supreme Court. The result of a ruling in favor of Bayou Shores would be two circuit-level opinions permitting the use of a bankruptcy filing to bypass the administrative remedies provided by the Medicaid Act. Faced with two circuit-level allowing Medicaid issues to be decided by bankruptcy courts, HHS would have every incentive to seek a reversal by the Supreme Court. The same would be true for AHCA, because healthcare providers in Florida seeking reimbursement from Medicaid would be incentivized to use a bankruptcy filing to avoid the termination of a provider agreement. A ruling adverse to Bayou Shores would create a circuit split and, thereby, an avenue for review by the Supreme Court. In sum, regardless of how the Eleventh Circuit rules, the Supreme Court likely will be presented with yet another bankruptcy issue to decide.

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¹ The actual termination of Bayou Shores’ Medicare provider agreement would have resulted in the termination of its Medicaid provider agreement.
² 963 F.2d 1146 (9th Cir. 1992). 
³ HCFA was the predecessor to the Center for Medicare and Medicaid Services, the agency of HHS that currently administers the Medicare program. 
⁴ Id. at 1149. 
⁵ Id. at 1149-55. 
⁶ Id. at 1155. 
⁷ Id.
⁸ Id.
⁹ Id.
¹⁰ Id.
¹¹ Id. (citations omitted).