Chapter 11 Plan Assumes Medicare, Medicaid Provider Agreements
Reprinted with permission from the January 16, 2015 issue of The Legal Intelligencer. © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
Nearly every assisted living and nursing facility in the country depends heavily upon its Medicare and Medicaid provider agreements to fund the cost of caring for their residents. Termination by the government of either or both typically results in closure or sale of the affected facility. In a recent Florida bankruptcy case—In re Bayou Shores SNF, 2014 Bankr. LEXIS 5200 (M.D. Fla., Dec. 31, 2014)—that could have far-reaching ramifications, however, one operator successfully fought back and in the process may have created a pathway for others to maintain access to the Medicare and Medicaid systems over the government's objection. In Bayou Shores, the debtor, which derived substantially all of its revenue from Medicare and Medicaid, filed a Chapter 11 petition in an effort to stay termination of its provider agreements. The debtor was not only successful in enjoining the termination, but subsequently confirmed a Chapter 11 plan that included assumption of the provider agreements over the objection of both the federal and state governments.
Medicare is a federal program that provides payment for skilled nursing services for aged or disabled individuals. Medicaid is a joint federal and state program that provides medical assistance to low-income individuals who are disabled. The U.S. Department of Health and Human Services (HHS) administers the Medicare and Medicaid programs through the Centers for Medicare & Medicaid Services (CMS). A skilled nursing facility must comply with specific federal requirements to receive payment under the Medicare and Medicaid programs and is subject to surveys by the state regulators and CMS to certify compliance. If a skilled nursing facility is certified to be in noncompliance, CMS may, in addition to other remedies, terminate the provider agreements.
The primary asset of the debtor, Bayou Shores SNF LLC, is a 159-bed skilled nursing facility located in St. Petersburg, Fla. Most of the residents suffer from serious psychiatric conditions and have few, if any, living alternatives other than the debtor's facility. Almost all of the residents are participants in the Medicaid and/or Medicare programs, from which more than 90 percent of the debtor's revenue is derived.
CMS determined that the debtor was in noncompliance on three separate occasions from February 2014 through July 2014. The debtor immediately cured the first two deficiencies, placing the debtor back in substantial compliance following reinspection by CMS. Thereafter, the debtor received the third notice of deficiency, which it also took steps to cure. However, rather than revisiting the facility to certify substantial compliance, CMS decided to terminate the debtor's Medicare provider agreement, effective as of Aug. 3, 2014.
Although the debtor appealed the decision through the administrative law process, CMS could nevertheless withhold reimbursement while the appeal was pending, triggering the abrupt closure of the debtor's facility to the detriment of the debtor and its residents. The debtor filed its Chapter 11 in an attempt to prevent termination of the provider agreement and the denial of payment pending appeal.
Shortly after the bankruptcy filing, the debtor sought and received a ruling from the bankruptcy court that the automatic stay enjoined termination of the Medicare provider agreement pending completion of the administrative appeals process. As a result, the debtor was able to maintain Medicare reimbursement while in Chapter 11, despite the issuance of the pre-bankruptcy notice of termination. The debtor then used that window of opportunity to file and seek approval of a Chapter 11 plan providing for the assumption of its provider agreements.
CMS argued that the bankruptcy court was unable to rule on the provider agreement issues because, among other reasons, it did not have authority to review the facts or findings of an agency decision. Without such authority, CMS asserted that the court could not review the determination by CMS that the debtor was in noncompliance with the regulations. The court found this argument inapposite, as it framed the issue before it as a determination of whether the debtor could assume the Medicare provider agreement under Section 365 of the Bankruptcy Code notwithstanding noncompliance.
The court agreed with the majority of courts that have ruled on the issue in finding that Medicare provider agreements are executory contracts and therefore, subject to assumption. Although a debtor cannot assume a contract that is terminated prior to its bankruptcy filing (because there is simply nothing left to assume), the court found that the termination of the debtor's Medicare provider agreement was not complete until the appeals process was finished. As a result, the court also found that the Medicare provider agreement remained capable of being assumed.
In order to assume and assign the Medicare provider agreement or any executory contract, a debtor must cure existing defaults and provide adequate assurance of future performance. Notably, CMS did not dispute the debtor's fulfillment of either obligation. The court likewise found that the steps implemented by the debtor in response to the third deficiency notice coupled with the debtor's satisfactory care for its residents during the bankruptcy proceeding cured the deficiency and evidenced the requisite adequate assurance of future performance.
The Florida Agency for Health Care Administration (AHCA), which administers Florida's Medicaid program, also objected on the basis that the plan should not be confirmed because AHCA still intended to revoke or deny renewal of the debtor's license. The court considered the objection and found that AHCA's stated intention of future revocation or denial of renewal did not make the plan unfeasible or unconfirmable.
In light of its ruling on AHCA's objection and holding that the Medicare and Medicaid provider agreements would remain in effect, the court concluded that the debtor's plan was feasible and confirmable. Although this ruling will create some heartburn for both federal and state regulators, and provides distressed facilities a leverage point in maintaining their provider agreements, it leaves numerous issues open and may not be the panacea it seems to present at first blush. Although the court approved assumption of the provider agreements, the bankruptcy court did not—and presumably could not—enjoin the state from seeking revocation or denial of renewal of the debtor's license after emergence from bankruptcy. While these potential outcomes present good reason for concern for operators, this decision, if followed by other courts, offers a debtor at least some breathing room while in bankruptcy, and possibly time to either negotiate a different outcome with regulators or complete the administrative appeal process. Stay tuned as future judicial development on this issue will surely follow.
Content contributed by attorneys of Troutman Sanders LLP and Pepper Hamilton LLP prior to April 1, 2020, is included here, together with content contributed by attorneys of Troutman Pepper (the combined entity) after the merger date.