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Preserving Medicare and Medicaid Provider Agreements in Bankruptcy:
Bayou Shores’ Gamble


The Business Advisor - Healthcare Focused Newsletter

March 2015

Medicare and Medicaid reimbursements are the lifeblood of many, if not most, skilled nursing facilities (SNFs). Bayou Shores SNF, LLC, which owns and operates a 159-bed SNF in St. Petersburg, FL, is no exception. More than 90% of its revenue is derived from Medicare and Medicaid reimbursements. Loss of that revenue would be Bayou Shores’ death knell. Thus, when the Centers for Medicare and Medicaid Services (“CMS”) notified Bayou Shores of its intent to terminate its Medicare provider agreement – which would also result in the termination of its Medicaid provider agreement with Florida – quick and effective action was required. In rapid succession, Bayou Shores filed an administrative appeal, a complaint to enjoin termination and, in a real gamble, a bankruptcy petition to preserve its provider agreements. So far, that gamble has paid off.

Payment to SNFs under the Medicare and Medicaid programs is conditioned on compliance with the requirements of 42 C.F.R. Part 483, Subpart B. Subpart B authorizes state healthcare administration agencies (in connection with Medicaid) and CMS (in connection with Medicare) to conduct surveys of SNFs to determine whether they are in compliance with applicable law. Upon a determination of noncompliance, CMS may terminate a SNF’s Medicare provider agreement. Termination of a Medicare provider agreement obligates the state to terminate the SNF’s Medicaid provider agreement.

Between February and July of 2014, CMS cited Bayou Shores for patient safety deficiencies on three separate occasions. In each case, CMS determined that the deficiency created “a situation in which [Bayou Shores’] noncompliance . . . caused or is likely to cause serious injury, harm, impairment, or death to a resident.”1 Bayou Shores took prompt corrective action to cure the deficiencies, including hiring an outside compliance consultant to review the sufficiency of those measures, and advised CMS of the actions taken. However, CMS did not revisit Bayou Shores’ facility to evaluate those measures. Rather, on July 22, 2014, CMS notified Bayou Shores that it was terminating its provider agreement, effective August 3, 2014.

Bayou Shores acted quickly, filing an administrative appeal and requesting an expedited hearing before an administrative law judge. However, the appeal would not preclude CMS from withholding payment from Bayou Shores, which would put Bayou Shores out of business before the appeals process was completed. To avoid that result, on August 1, 2014, Bayou Shores sought and obtained from the United States District Court for the Middle District of Florida (“District Court”) a temporary restraining order (TRO) enjoining the termination of the provider agreement through August 15, 2014. CMS moved to dissolve the TRO, arguing that the District Court lacked subject matter jurisdiction to consider the termination of the provider agreement, because Bayou Shores had not exhausted its administrative remedies as required by 42 U.S.C. § 405(h). The District Court dissolved the TRO on August 15, 2014.

A few hours later, also on August 15, 2014 (Petition Date), Bayou Shores filed a chapter 11 bankruptcy petition with the United States Bankruptcy Court for the Middle District of Florida (Bankruptcy Court).2 A week later, on September 21, 2014, Bayou Shores filed an Emergency Motion to Enforce the Automatic Stay (Stay Motion), seeking a ruling that the automatic stay prohibited CMS from terminating its Medicare provider agreement.3 CMS opposed the Stay Motion, arguing, inter alia, that the “police powers” exception to the automatic stay4 permitted CMS to terminate the provider agreement notwithstanding the bankruptcy filing. The Bankruptcy Court overruled CMS, reasoning that the termination of a Medicare provider agreement did not fall within the “police powers” exception. The Bankruptcy Court drew a distinction between the termination of a provider agreement and the closure of an SNF facility. By terminating Bayou Shores’ provider agreement, CMS would only be protecting its pecuniary interests and, therefore, its actions were subject to the automatic stay. By contrast, actions taken to close Bayou Shore’s facility presumably would be actions taken to protect public health and safety and, for that reason, would be permitted by the “police powers” exception. On September 5, 2014, the Bankruptcy Court entered a final order (“Stay Order”) enjoining CMS from terminating the provider agreement.

Bayou Shores took full advantage of the Stay Order and fast-tracked its case. The Plan was filed on November 21, 2014,5 and provided, inter alia, for the assumption of Bayou Shores’ Medicare and Medicaid provider agreements. CMS objected to Bayou Shores’ assumption of its Medicare provider agreement6 and the confirmation of the Plan,7 contending that the Plan was not feasible, because Bayou Shores’ Medicare provider agreement had been terminated pre-petition and, for that reason, could not be assumed. Meanwhile, the Florida Agency for Health Care Administration (“AHCA”), which oversees Florida’s Medicaid program, filed a Motion for Clarification of or Relief from Stay,8 seeking leave to either commence an administrative proceeding to revoke Bayou Shore’s existing SNF license or deny Bayou Shore’s pending request for renewal of its license (“Clarification Motion”), contending that (i) the termination of the Medicare provider agreement resulted in the termination of Bayou Shore’s Medicaid provider agreement; and (ii) AHCA intended to revoke, or deny renewal of, Bayou Shore’s SNF license.

The Bankruptcy Court confirmed the Plan on December 31, 2014 and entered a final confirmation order (“Confirmation Order”) on January 7, 2015.9 In its Memorandum Opinion and Order on Confirmation (“Confirmation Opinion”),10 the Bankruptcy Court rejected CMS’s contention that Bayou Shores’ Medicare provider agreement had been terminated pre-petition. In fact, Bayou Shores’ administrative appeal of CMS’s decision had not been completed as of the Petition Date. That being the case, the termination of the provider agreement was not “complete and irreversible” pre-petition, meaning that Bayou Shores’ rights thereunder became part of its bankruptcy estate and subject to the contract assumption provisions of 11 U.S.C. § 365.

The Bankruptcy Court also ruled that the exhaustion of remedies provisions of 42 U.S.C. § 405(h) did not deprive it of subject matter jurisdiction to consider Bayou Shores’ proposed assumption of its provider agreements. The Bankruptcy Court acknowledged that federal courts are generally prohibited from exercising jurisdiction over Medicare matters, and, in the past, 42 U.S.C. § 405 precluded the exercise of bankruptcy jurisdiction over any Medicare matters. However, when Congress amended § 405(h) in 1984, it omitted any reference to the bankruptcy jurisdiction statute, 28 U.S.C. § 1334. Because of this omission, the Bankruptcy Court concluded, federal courts may exercise bankruptcy jurisdiction over Medicare matters.

Indeed, the Bankruptcy Court treated CMS’s invocation of § 405(h) as a red herring. Section 405(h) clearly limits the ability of federal courts to review the findings of fact or decisions of a federal agency. However, when deciding whether to confirm the Plan, the Bankruptcy Court was not revisiting CMS’s determination of Bayou Shores’ noncompliance (and actually assumed noncompliance), but was addressing a bankruptcy issue; namely, whether Bayou Shores could assume its provider agreements pursuant to 11 U.S.C. § 365(a).

The Bankruptcy Court had no trouble ruling that Bayou Shores could assume its Medicare and Medicaid provider agreements. In reaching that decision, the Bankruptcy Court was clearly impressed by Bayou Shores’ expeditious corrective actions. The effectiveness of those measures was corroborated by several witnesses, including the Patient Care Ombudsman. Those corrective measures served as the cure of Bayou Shores’ pre-petition defaults under its provider agreements that was required by 11 U.S.C. § 365(b)(1)(A) as a condition to their assumption. Together with Bayou Shores’ post-petition compliance with applicable law and its continued retention of a regulatory consultant, Bayou Shores’ remedial measures also provided adequate assurance of Bayou Shores’ future performance under the provider agreements that 11 U.S.C. § 365(b)(1)(C) required as a condition to their assumption.

The Bankruptcy Court was equally impressed – albeit negatively – with CMS’s utter failure to present any evidence of Bayou Shores’ non-compliance with Medicare law to support its objection to the Plan and Bayou Shores’ proposed assumption of its provider agreements. Instead, CMS relied on its contention that the Medicare provider agreement had been terminated pre-petition. CMS’s failure to present evidence of Bayou Shore’s non-compliance proved fatal to its objections. CMS left the Bankruptcy Court with the impression that it believed that “the § 365 requirements do not apply to Medicare provider agreements because a [SNF] has no right to cure a deficiency.” Quoting the Third Circuit Court of Appeals in In re University Medical Center,11 the Bankruptcy Court rejected such a position, concluding that Congress’ failure to legislate special treatment for Medicare provider agreements indicates that assumption of those agreements are subject to the requirements of § 365, including the debtor’s right to cure monetary and non-monetary pre-petition defaults.

The Confirmation Opinion may not have provided Bayou Shores with a complete victory. According to the Bankruptcy Court, a determination whether the Plan was feasible required a consideration of AHCA’s stated intention to revoke, or deny renewal of, Bayou Shore’s SNF license. The Bankruptcy Court acknowledged that, in contrast to CMS’s termination of Bayou Shores’ provider agreement, AHCA’s revocation of, or refusal to renew, Bayou Shores’ SNF license, would be protected by the “police power” exception to the automatic stay. The Bankruptcy Court further acknowledged that courts, including the Third Circuit, have held that a plan of reorganization is not feasible if the debtor’s successful reorganization depends on the outcome of pending litigation. However, the Bankruptcy Court noted that confirmation of the Plan would collaterally estop AHCA from asserting that either of Bayou Shores’ provider agreements have been terminated as a basis for either revocation or non-renewal of the SNF license. Second, in contrast to Medicare regulations, Florida’s Medicaid statutes provides that SNF’s may contest a license revocation or nonrenewal. Pointing to Bayou Shores’ remediation efforts, the Bankruptcy Court concluded that it was by no means a foregone conclusion that AHCA would succeed in either revoking or denying Bayou Shores a renewal of its SNF license. For that reason, AHCA’s stated intentions did not preclude a finding that the Plan is feasible.

CMS and AHCA have appealed the Stay and Confirmation Orders.12 By Order dated January 20, 2015, the Bankruptcy Court granted AHCA’s Clarification Motion allowing it to go forward with administrative procedures to revoke or deny renewal of Bayou Shore’s SNF license.13 Both of the Bankruptcy14 and District Courts have denied emergency motions for a stay of the consummation of the Plan, pending the appeal. CMS feared that consummation of the Plan would equitably moot its appeals. However, the District Court stated in a brief docket entry that equitable mootness was not at issue in CMS’s and AHCA’s appeals; the issue was the Bankruptcy Court’s subject matter jurisdiction. Hence, the District Court has signaled that it will probably not decide the appeals on the basis of equitable mootness.

Although fairly successful thus far Bayou Shores faces numerous risks. In the Confirmation Opinion, the Bankruptcy Court acknowledged the various authority contrary to the conclusions it reached. The District Court, which is clearly focusing on subject matter jurisdiction, might find that authority more persuasive, particularly in light of the tendency in the wake of Stern v. Marshall to limit bankruptcy court jurisdiction. Additionally, AHCA could effectively subvert the plan by prevailing in a proceeding to revoke or deny the renewal of Bayou Shores’ SNF license. In any event, appeals at least as far as the Eleventh Circuit are almost certain in the Bayou Shores case.

In conclusion, Bayou Shores gambled by filing a bankruptcy petition to preserve its provider agreements. So far, the gamble has paid off. If the gamble continues to pay off, health care providers like Bayou Shores may have an additional means of preserving their provider agreements in the face of a CMS termination notice.

1 See 42 C.F.R. 488.404(b).
2 In re Bayou Shores SNF, LLC, Case No, 8:14-bk-09521-MGW.
3 ECF Docket No. 25.
4 See 11 U.S.C § 362(b)(4).
5 ECF Docket No. 186.
6 ECF Docket No. 255.
7 ECF Docket No. 242.
8 ECF Docket No. 246.
9 ECF Docket No. 285.
10 ECF Docket No. 282.
11 973 F. 2d 1065, 1077 (3d Cir. 1992).
12 The appeals have been consolidated before the District Court in case no. 8:14-cv-02816-JSM.
13 ECF Docket No. 341.
14 ECF Docket No. 245.