Hope for Healthcare Debtors after Bayou Shores?
See What the Fifth Circuit Says in Family Rehabilitation


The Business Advisor

May 2018

Bayou Shores SNF filed for bankruptcy relief in 2014 to avoid the termination of its Medicare and Medicaid provider agreements by Centers for Medicare and Medicaid Services (“CMS”) and the Florida Agency for Health Care Administration (“AHCA”). CMS and AHCA vigorously opposed Bayou Shore’s motions to enjoin the termination of those agreements, contending that Bayou Shores had not previously exhausted its administrative remedies. Bayou Shores succeeded before the bankruptcy court, obtaining injunctive relief and confirming a plan of reorganization that approved its assumption of those provider agreements. On appeal by the CMS and AHCA, the district court reversed the bankruptcy court’s approval of Bayou Shores’ assumption of its provider agreements. Bayou Shores fared no better on its subsequent appeal to the Eleventh Circuit. That court held that 45 U.S.C. § 405(h) deprived the bankruptcy court of subject matter jurisdiction over Medicare and Medicaid disputes absent the debtor’s prior exhaustion of its administrative remedies.1 The Supreme Court declined to review the Eleventh Circuit’s ruling, leaving a split of authority on the exhaustion of remedies issue between the Eleventh Circuit opinion in Bayou Shores and the Ninth Circuit’s opinion in In re Town & Country Nursing Home Services, Inc.,2 authorizing bankruptcy court’s to address Medicare disputes even if the healthcare debtor had not previously exhausted all administrative remedies.

A recent decision by the Fifth Circuit potentially widens the split between the Eleventh and the Ninth Circuit. The Fifth Circuit issued its decision in Family Rehabilitation, Inc. v. Azar (Case No.17-11337) on March 27, 2018. Family Rehabilitation was not a bankruptcy case. However, the Fifth Circuit’s reasoning in Family Rehabilitation is equally applicable in the bankruptcy context. The opinion arguably provides healthcare debtors with a path to obtain temporary injunctive relief against CMS and state healthcare agencies even before the exhaustion of administrative remedies.

Following an audit in 2016, CMS determined that it had overpaid Family Rehabilitation, Inc. (“Family Rehabilitation”) by approximately $7.6 million in Medicare reimbursements. Family Rehabilitation then commenced the four-level Medicare appeals process. Following the exhaustion of the first two steps, CMS began to recoup the alleged overpayment from Medicare reimbursements otherwise payable to Family Rehabilitation. Family Rehabilitation thereupon initiated an action before the United States District Court for the Northern District of Texas (“District Court”) seeking to enjoin further recoupments, contending that continued recoupment by CMS would force it to cease operations before it could complete the four-step appeal process, a fact CMS apparently could not dispute. CMS’s continued recoupment of the alleged overpayment, concluded Family Rehabilitation: (i) violated its rights to procedural due process; (ii) established an ultra vires cause of action; (iii) infringed on its substantive due process rights; and (iv) entitled it to a “preservation of rights” injunction under the Administrative Procedures Act (5 U.S.C. § 705-05).

The District Court, sua sponte, held that it lacked subject matter jurisdiction because Family Rehabilitation had not exhausted its administrative remedies under the Medicare Act. See 42 U.S.C. § 405(g) (setting forth the exhaustion requirement). Family Rehabilitation appealed. On appeal, the Fifth Circuit reversed and remanded as to Family Rehabilitation’s procedural due process and ultra vires claims, but affirmed as to the substantive due process and “preservation of rights” injunction claim.3

Consistent with the Eleventh Circuit’s ruling in Bayou Shores, the Fifth Circuit began its analysis acknowledging that: (i) Family Rehabilitation’s claims arose under the Medicare Act, and (ii) courts may not rule on those claims before the claimant’s exhaustion of all administrative remedies under the Medicare Act. Slip Op. at pp. 5-6, quoting 42 U.S.C. § 405(f) and (g) and 42 C.F.R. § 405.1132. For the Fifth Circuit, however, the provisions of 42 U.S.C. § 405(f) and 42 C.F.R. § 405.1132 were not dispositive. What the Fifth Circuit found dispositive was the Supreme Court’s holding in Matthews v Eldridge, 424 U.S. 319, 326-32 (1976) (“Eldridge”). There the Court held that, notwithstanding a claimant’s failure to exhaust administrative remedies, district courts may exercise jurisdiction over claims (a) that are “entirely collateral” to a substantive agency decision and (b) for which “full relief cannot be obtained at a post-deprivation hearing.” Slip Op., p. 6, quoting Eldridge, 424 U.S. at 330-32. Where both of those factors exist, courts must deem the requirement of exhaustion of administrative remedies to have been waived. Slip Op. p. 7, citing, inter alia, Eldridge, 424 U.S. at 330-32. With the exhaustion requirement deemed waived, concluded the Fifth Circuit, plaintiffs may: (i) bring judicial actions against a federal administrative agency (providing they arise only under Constitutional or procedural law); and (ii) seek by those actions the temporary continuation of benefits until the agency complies with Constitutional and/or statutory requirements. Slip Op., p. 9, citing, inter alia, Eldridge, 424 U.S. at 330-32.

In Family Rehabilitation, the Fifth Circuit first determined that resolving Family Rehabilitation’s ultra vires and procedural due process claims would not require the application of the Medicare Act to the recoupment issue. Slip Op., p.10. Family Rehabilitation was not seeking a determination that CMS’s recoupments violated the Medicare Act. Id. Rather, it only sought a determination of the quantum of process required under the Constitution or other applicable non-Medicare federal law before recoupment was appropriate. Id. Of crucial importance to the Fifth Circuit, moreover, Family Rehabilitation was not seeking permanent relief, but merely a temporary cessation of recoupment pending a hearing on its ultra vires and procedural due process claims. Id. In other words, Family Rehabilitation was not seeking from the District Court the same plenary and permanent relief – reversal of the finding of an overpayment – it was seeking, via the Medicare appeal process, relief that would require the prior exhaustion of administrative remedies.

After determining that Family Rehabilitation’s ultra vires and procedural due process claims were “entirely collateral” to CMS’s Medicare claims, the Fifth Circuit found that Family Rehabilitation had “raised at least a colorable claim” that “full relief [could not] be obtained at a post-deprivation hearing.” Slip Op., p. 11, citing Eldridge, 424 U.S. at 331. More specifically, Family Rehabilitation had stated a colorable claim that the harms resulting from CMS’s continued recoupment efforts – primarily, being forced out of business – could not be remedied by retroactive payments after the completion of the remaining two steps of the Medicare appeal process. Slip Op., p. 11. The Fifth Circuit concluded that that harm – with its negative impact on Family Rehabilitation, its patients, and its employees – could justify injunctive relief. Id. The Fifth Circuit rejected CMS’s contention that those harms were not irreparable, stating that courts must “be especially sensitive” to irreparable harm “where the Government seeks to require claimants to exhaust administrative remedies merely to enable them to receive the [rights] they should have been afforded in the first place.” Slip Op., p.11, quoting Bowen v. City of New York, 476 U.S. 467, 484 (1986).

Based on the foregoing analysis, the Fifth Circuit concluded that the District Court had jurisdiction to resolve Family Rehabilitation’s ultra vires and procedural due process claims against CMS, even absent the prior exhaustion of administrative remedies. Slip Op., pp. 7, 9-10, 11. The reasoning underlying the Fifth Circuit’s conclusion potentially provides healthcare debtors with significant tools in dealing with CMS and state healthcare agencies, particularly when those agencies seek to recoup alleged overpayments or to terminate provider agreements. Drawing on the reasoning in Eldridge and its progeny, Family Rehabilitation arguably creates a crack in the almost insurmountable wall that the exhaustion of remedies doctrine inserts in healthcare bankruptcy cases. Family Rehabilitation (albeit unintentionally) points healthcare debtors – and bankruptcy courts – to a legal theory that does not require the application of Medicare or Medicaid law but that nevertheless can be asserted in support of relief from actions of CMS or a state healthcare agency. By doing so, Family Rehabilitation encourages debtors to plumb the Bankruptcy Code and other applicable law to find additional legal theories.

The temporary injunctive relief endorsed by Family Rehabilitation also potentially benefits healthcare debtors seeking to prevent the loss of Medicare or Medicaid revenues to recoupment by CMS or a state healthcare agency. Most courts treat Medicare and Medicaid provider agreements as a single transaction and permit CMS and state healthcare agencies to recoup any overpayment to the debtor from any reimbursement owed the debtor, regardless of the cost year to which the overpayment or reimbursement relates. Even courts in the Second and Third Circuits treat the whole cost year under a provider agreement as a single transaction. In either situation, recoupment of overpayments could easily scuttle a debtor’s reorganization.

Family Rehabilitation also benefits debtors by providing a means for avoiding the hotly contested, and as yet undecided, question of whether the exhaustion of remedy rules of 42 U.S.C. § 405(g) and (h) even apply in bankruptcy cases.

For several reasons, however, Family Rehabilitation may end up being of limited use in healthcare bankruptcy cases. First, the Fifth Circuit reversed and remanded, and Family Rehabilitation may not prevail before the District Court on remand. Second, consistent with Bayou Shores, the Fifth Circuit reaffirmed the general prohibition against the judicial review of Medicare or Medicaid issues absent prior exhaustion of remedies; to obtain relief against CMS or a state healthcare agency, the healthcare debtor is going have to structure the request for relief to avoid any determination of Medicare or Medicaid issues. Third, Family Rehabilitation may be limited by its context – a dispute arising out of CMS’s alleged overpayment of the healthcare provider. Especially in light of the police power exception to the automatic stay contained in 11 U.S.C. § 364(b)(4), courts may not be willing to extend Family Rehabilitation to situations in which CMS or a state healthcare agency seeks to terminate a provider agreement on the basis of purported patient care or safety issues. In those circumstances, it would be difficult to conclude that the healthcare agency was acting ultra vires in terminating a provider agreement. Finally, some courts may dismiss Family Rehabilitation on the basis that it reflects more the Fifth Circuit’s indisputable distaste, repeatedly expressed in the opinion, of what it characterizes as the “harrowing labyrinth” of Medicare’s “Byzantine” administrative appeals process rather than a reasoned legal analysis.

If you have any questions about the issues addressed in this article, please contact the author at dcrapo@gibbonslaw.com or (973) 596-4523.

1. See In re Bayou Shores SNF, 828 F.3d 1297 (11th Cir. 2016). Prior articles about the Bayou Shores saga can be found at gibbonslaw.com.
2. 963 F.2d 1146 (9th Cir. 1992)
3. The latter claims will not be discussed further in this article.