District Court Refuses Stay Protection for Provider Agreements in Bankruptcy

A recent court ruling is a good reminder to health care providers that bankruptcy may not (as is sometimes suggested) be a safe harbor for providers in danger of being forced out of business by the loss of their Medicare and Medicaid provider agreements.

That reminder comes from a district court in the Middle District of Florida, which ruled the bankruptcy automatic stay did not prevent termination of Medicare and Medicaid provider agreements where the provider has failed to pursue all other administrative remedies.

Rehabilitation Center Sought to Enjoin Termination of Provider Agreements

Bayou Shores SNF, LLC (Bayou) operated the Rehabilitation Center of St. Petersburg, providing services to patients with psychiatric conditions.  Bayou’s patients consisted primarily of Medicare and Medicaid patients, with more than 90% of Bayou’s revenue being derived from services furnished to these Medicare and Medicaid patients. Based on a survey from the Florida Agency for Health Care Administration, the Centers for Medicare and Medicaid Services (CMS) advised Bayou of its intent to terminate Bayou’s provider agreements as of August 3, 2014.

Bayou sought in the district court to enjoin CMS from terminating the provider agreements. The district court initially granted, but later vacated the injunction, noting that when a Medicare or Medicaid provider agreement is terminated, a provider may challenge termination through the program’s administrative process. 42 U.S.C. § 405(h) acts as a jurisdictional bar to challenges to Medicare decisions until all other administrative remedies are exhausted. The district court ruled that until the administrative appeal process was completed, it had no jurisdiction to address challenges to CMS termination decisions.

Bayou Files for Bankruptcy, Seeking to Enforce Automatic Stay

Bayou next filed for bankruptcy relief, seeking to enforce the automatic stay. In bankruptcy, a stay automatically freezes all actions affecting property of the bankruptcy debtor’s estate. Bankruptcy is often used as a last resort for companies to impose the stay and prevent parties from engaging in actions that will drive the company out of business. Clearly, the termination of the provider agreements would have a devastating effect on Bayou, which derived the vast majority of its income from Medicare and Medicaid.

Bayou argued that Medicare and Medicaid provider agreements are property of the estate as defined in the Bankruptcy Code, and therefore the automatic stay should apply and an injunction prohibiting CMS from terminating the provider agreement should be permitted. The bankruptcy court agreed. The bankruptcy court held that it had jurisdiction under 28 U.S.C. § 1334 (which grants bankruptcy courts jurisdiction over proceedings related to a bankruptcy case), that the outcome of this dispute could affect the bankruptcy estate, and that Bayou sufficiently showed that the provider agreements were property of the estate.  Based on these findings, the bankruptcy court issued an order enforcing the automatic stay preventing CMS from terminating the provider agreements.

Bankruptcy Court Lacks Jurisdiction Over the Dispute

CMS appealed the bankruptcy court ruling to the district court, which reversed the ruling. The district court held that under 42 U.S.C. § 405(h), the bankruptcy court could not exercise jurisdiction over the dispute, unless to conduct judicial review after the administrative appellate process concluded. Because Bayou did not exhaust its administrative remedies, the bankruptcy court had no jurisdiction to interpose itself in this process, and its ruling “thwarted the administrative process and allowed the Debtor to circumvent its administrative obligations.”

Providers Should Exhaust Remedies – But Even That May Not Be Enough

Going forward, Medicare or Medicaid service providers in jurisdictions where courts have ruled in line with Bayou or where the issue is undecided should be diligent in exhausting all administrative remedies available. Fail to do so, and not even the automatic stay can stave off termination of the provider agreements.

Also, while the district court tacitly acknowledged the bankruptcy court’s authority to challenge rulings on provider agreements after a provider has exhausted administrative remedies, it is unclear whether a bankruptcy court would do so. As a practical matter, bankruptcy judges may be unwilling to challenge a ruling where the result of the administrative process strongly supports termination of provider agreements for the health or welfare of patients. Thus, although this decision technically addresses only the need to exhaust administrative remedies before seeking a stay to halt a termination of a provider agreement in bankruptcy court, this decision may effectively prevent the use of bankruptcy proceedings to successfully delay or contest provider agreement terminations in jurisdictions operating under the same reasoning as the Bayou court.

Bayou has indicated in filings to the district court that it intends to appeal this decision, but no appeal has been filed yet. The cases can be found in the Middle District of Florida Bankruptcy and District Courts, respectively, at case numbers 8-14-bk-09521 in the bankruptcy court and 8:14-cv-02816 in the district court.

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