Bankruptcy Court Denied Jurisdiction Over Medicare Issues
Reprinted with permission from the August 3, 2016 issue of The Legal Intelligencer. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The lifeblood of any assisted living or skilled nursing center is access to the Medicare and Medicaid reimbursement systems that cover the costs of care for many of their residents. If such governmental reimbursement is lost, closure of the facility nearly always follows. Therefore, a recent decision, In re Bayou Shores, Docket No. 15-13731 (11th Cir. July 11, 2016), by the U.S. Court of Appeals for the Eleventh Circuit presents bad news for operators who might otherwise seek to use the bankruptcy court as a means to block termination of their provider agreements. Bayou Shores was a St. Petersburg, Florida-based operator of a skilled nursing home which derived over 90 percent of its revenues from the Medicare/Medicaid systems. In February 2014, the Florida Agency for Health Care Administration (AHCA), which administers the state's Medicaid program, conducted a survey at Bayou Shores that revealed several problems including a failure to correctly track "do not resuscitate" orders, as well as patient hygiene and medication-related issues. As a result, it was determined that these deficiencies could cause "serious injury, harm, impairment, or death to a resident." The Department of Health and Human Services (HHS), which administers the Medicare system, utilizes the AHCA surveys to determine compliance with its program.
As per regulations, the facility was provided time to address these problems. During a subsequent survey conducted on March 20, 2014, AHCA identified several more deficiencies, which allegedly included the housing of a "known sexual offender" in the same room as a disabled patient without informing such patient of the criminal background of the new roommate. These deficiencies were again determined to pose "a threat of imminent jeopardy" to the residents at Bayou Shores. Nevertheless, Bayou Shores was given another opportunity to remedy these deficiencies.
Finally, following a survey which occurred on July 11, 2014, more deficiencies were identified resulting in a noncompliance letter being issued by HHS. That letter, which provided for termination of Bayou Shores' Medicare provider agreement as of 11:59 p.m. Aug. 3, 2014, also would trigger simultaneous termination under the Florida Medicaid system.
Prior to the Aug. 3 deadline, Bayou Shores sought emergency injunctive relief from the U.S. District Court for the Middle District of Florida in an attempt to block termination. Although the court initially granted the injunction, on subsequent motion by HHS, the complaint was dismissed based upon a failure to exhaust available administrative remedies and a lack of subject matter jurisdiction pursuant to 42 U.S.C. Section 405(h).
Shortly thereafter, Bayou Shores commenced a voluntary Chapter 11 and immediately renewed its efforts to obtain an emergency injunction to block termination of the provider agreements. The bankruptcy court, relying upon 28 U.S.C. Section 1334 as a jurisdictional basis, issued the preliminary injunction finding that the provider agreements remained property of the estate subject to the automatic stay. Following entry of the preliminary injunction, the bankruptcy court conducted an evidentiary hearing at which it concluded that the debtor's residents no longer faced imminent harm and as a result, prohibited HHS and AHCA from terminating their respective provider agreements.
On Dec. 31, 2014, the debtor's plan of reorganization was confirmed. The debtor was also authorized to assume the disputed provider agreements. As part of the approval process, the bankruptcy court repeated its position that it held sufficient jurisdiction pursuant to 28 U.S.C. Section 1334 to issue such a ruling and rejected the governmental authorities' argument that 42 U.S.C. Section 405(h) precluded bankruptcy court jurisdiction over Medicare claims. In so ruling, the bankruptcy court applied a plain language interpretation to Section 405(h), which does not specifically incorporate 28 U.S.C. Section 1334 as one of the jurisdictional areas reserved exclusively for the commissioner of Social Security. Essentially, the bankruptcy court blocked the government's attempt to terminate the provider agreements, thus permitting the debtor to reorganize and enjoy continued access to the Medicare and Medicaid systems.
At the heart of the dispute lies the proper interpretation of Section 405(h) as it currently exists:
"(h) Finality of commissioner's decision
The findings and decision of the commissioner of Social Security after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as herein provided. No action against the United States, the commissioner of Social Security, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter," 42 U.S.C. Section 405(h).
On appeal, first to the to the district court, which reversed the bankruptcy court, and then to the Eleventh Circuit, the debtor contended that because Section 405(h) does not specifically reference 28 U.S.C. Section 1334 (which creates the jurisdictional basis for the bankruptcy court), it did not preclude the bankruptcy court from reviewing AHCA's and HHS's decision to terminate the Bayou Shores provider agreements.
Based upon the original version of Section 405(h), it was clear that bankruptcy courts did not have jurisdiction over Medicare-related claims. Section 405(h) was enacted as part of the Social Security Amendments of 1939, Pub. L. No. 76-379, 53 Stat. 1360 (1939), and subsequently amended by the Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 (1984). The difference between the 1939 version of Section 405(h) and the current version involves a reference in the 1939 statute to Section 24 of the Judicial Code of the United States as opposed to Section 1331 and Section 1346 of Title 28 in the revised form. Despite the omission of Section 1334, Section 336 of the Deficit Reduction Act does provide that "none of such amendments shall be construed as changing or affecting any right, liability, status, or interpretation which existed (under the provisions of law involved) before that date."
The government argued that the failure to expressly reference Section 1334 was merely a scrivener's error committed at a time when the statutes were being updated. Section 24 of the Judicial Code as originally contained in the 1939 statute, referenced the broad jurisdiction given to district courts that included jurisdiction over bankruptcy matters. Effectively, Section 24 "contained all of that title's grants of jurisdiction to U.S. district courts, save for several special-purpose jurisdiction grants of no relevance to the constitutionality of [Medicare] statutes," as in Weinberger v. Salfi, 422 U.S. 749, 756, n. 3 (1975).
After reviewing the statutory history, the Eleventh Circuit determined that the Deficit Reduction Act was intended to cause only technical modifications as opposed to a substantive change to existing law. In support of this conclusion, the circuit court also reviewed a number of decisions which it believed supported its view that the exclusion of a specific reference to Section 1334 did not otherwise grant jurisdiction over Medicare claims to the bankruptcy court. The most important of these decisions was Shalala v. Illinois Council on Long Term Care, 529 U.S. 1 (2000), in which the Supreme Court "again emphasized that the effect of Section 405(h) was to reach beyond normal principles of 'administrative exhaustion' and 'ripeness,' and prevent even the application of normal exceptions to those doctrines." The Shalala court went on to hold that Section 405(h) "demands the 'channeling' of virtually all legal attacks through the agency."
The Eleventh Circuit noted that the Third, Seventh and Eighth circuits have also concluded that the amendments to Section 405(h) did not otherwise change the original 1939 statute which also precluded district courts from exercising diversity jurisdiction involving Medicare claims even though Section 1332 is also not expressly mentioned in the most recent statutory amendments (see Bodimetric Health Services. v. Aetna Life & Casualty, 903 F.2d 480 (7th Cir. 1990); Nichole Medical Equipment & Supply v. TriCenturion, 694 F.3d 340, 346-47 (3d Cir. 2012); Midland Psychiatric Association v. United States, 145 F.3d 1000, 1004 (8th Cir. 1998). The Eleventh Circuit did note, however, that the Ninth Circuit has found that Section 405(h) does not bar bankruptcy court jurisdiction under Section 1334, emphasizing "Section 1334's broad jurisdictional grant over all matters conceivably having an effect on the bankruptcy estate."
Notwithstanding the foregoing, the Eleventh Circuit in affirming the district court's decision, found that the absence of a specific reference to Section 1334 in Section 405(h) did not change the original impact of the 1939 statute, which effectively precluded the bankruptcy court from exercising jurisdiction over Medicare claims. The net result of this decision is that at least in the Eleventh Circuit, the termination of a Medicare provider agreement cannot be enjoined or overcome through the exercise of a bankruptcy court's jurisdiction even though the likely result will be the destruction of the skilled nursing home's operations. This decision serves to emphasize the need for assisted living and skilled nursing home facilities as well as other medical providers to immediately address survey violations and to ensure that repeated offenses do not occur. Otherwise, at least in the Eleventh Circuit, the bankruptcy court will offer no shelter to the offending debtor.
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