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CMS v. U.S. Bankruptcy Courts - SCOTUS takes a pass
CMS v. U.S. Bankruptcy Courts - SCOTUS takes a pass
By Jeff Parrish | 06-13-2017

The U.S. Supreme Court won’t be taking sides in a turf war between the Centers for Medicare and Medicaid Services (CMS) and U.S. bankruptcy courts. On June 5, 2017, the Court passed on an opportunity to resolve a conflict among certain federal circuits on two different legal issues involving the authority of U.S. bankruptcy courts to stay administrative enforcement actions – such as the termination of provider agreements – by the U.S. Department of Health and Human Services (HHS) through CMS.

In Bayou Shores SNF, LLC v. Florida Agency for Health Care Administration, and the U.S., on behalf of the Secretary of the Department of Health and Human Services,  Bayou Shores’ skilled nursing facility obtained some negative survey findings by the Florida state survey agency (SSA), and the SSA recommended that HHS/CMS terminate the facility’s Medicare and Medicaid provider agreements. The facility timely appealed the threatened program terminations, and also, in an effort to avoid the immediate, effective cessation of its business operations pending appeal, filed for bankruptcy protection.  The bankruptcy court enforced the automatic stay to prevent the termination of the facility’s provider agreements, appointed an independent monitor to oversee patient welfare, determined that the facility had provided adequate assurance of future performance under its provider agreements, and confirmed the facility’s plan of bankruptcy reorganization.  The U.S. District Court, however, reversed the bankruptcy court’s confirmation orders and found that, in spite of a bankruptcy court’s comprehensive jurisdiction over the property of a bankruptcy estate, the Medicare Act stripped the bankruptcy court of jurisdiction over the SNF’s provider agreements.  Bayou Shores appealed the District Court’s order to the Eleventh Circuit. 

The legal analysis involved focuses upon one section of what is commonly referred to as the Medicare Act that limits parties’ ability to pursue certain claims under the Act in federal court.  Specifically, 42 U.S.C. §405(h) provides that no action against the United States – in this case HHS – shall be brought under §1331 or §1346 of Title 28 of the U.S. Code both of which address federal court jurisdiction.  Section 1331 creates federal question jurisdiction, and §1346 addresses cases involving the United States as a defendant. The Medicare Act, however, does not contain any express prohibition against bringing an action against the United States under §1334 of Title 28 which specifically pertains to bankruptcy cases and proceedings.

Bayou Shores, citing definitive and on point Ninth Circuit law, argued that the Medicare Act’s §405(h) only bars actions under 28 U.S.C. §1331 and §1346; it in no way prohibits an attachment of bankruptcy jurisdiction under §1334. Bayou Shores argued that the plain meaning of §405(h) in the context of bankruptcy cases “promotes a congressionally-endorsed objective: the efficient and expeditious resolution of all matters connected to the bankruptcy estate.”  The Eleventh Circuit, however, decided to align itself with the Third, Seventh, and Eighth Circuits and held that §405(h) bars bankruptcy court jurisdiction over claims that arise under the Medicare Act. As a result of this ruling, these four Circuits were in conflict with the Ninth Circuit.

In addition, the Eleventh Circuit, relying on §405 again, held that §405(h)’s requirement that all Medicare administrative review proceedings be exhausted before judicial review is sought applies to bankruptcy cases arising under §1334 and, as a result, the bankruptcy court (even if it had original jurisdiction) could not address the termination of Bayou Shores’ provider agreements as part of a bankruptcy case until after the Medicare appeal process was exhausted.  This holding is also in conflict with other federal Circuits specifically the Third and Ninth Circuits.

In February, Bayou Shores filed a Petition for a Writ of Certiorari in the U.S. Supreme Court. In its petition, Bayou Shores argued that (1) the Eleventh  Circuit’s decision on the authority of the bankruptcy court was incorrect because §405’s language is plain and unambiguous, i.e. §1334 (bankruptcy jurisdiction) is not included in the list of banned grants of jurisdiction under the Medicare Act, and (2) the decision requiring exhaustion of administrative remedies was also erroneous stating that “if the Eleventh Circuit’s interpretation were correct, the government could drive a healthcare provider out of business while waiting administrative review. Practically speaking, this would preclude any ‘attempt [at] an effective reorganization,’ thereby ‘completely defeat[ing]’ the ‘purpose of the bankruptcy statutes.’”  HHS and the Florida SSA opposed Bayou Shores’ petition.

On Monday, June 5, 2017, the U.S. Supreme Court denied Bayou Shores’ petition.

As a result of the Supreme Court taking a pass on hearing this case, there continues to be conflict among a number of federal circuits, district courts and bankruptcy courts on both of these questions in relation to the Medicare Act, the bankruptcy courts, CMS enforcement actions, and healthcare providers. In other words, healthcare providers located in states comprising the federal Ninth Circuit may seek bankruptcy protection from Medicare enforcement actions; in certain other states, however, they cannot. And in other states, the issue is uncertain.

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Jeffery D. Parrish
615.850.8734
jeff.parrish@wallerlaw.com
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