A recent bankruptcy decision in Florida may have implications for troubled healthcare entities that seek to avoid Medicare termination and preserve
reimbursements. In the case In re: Bayou Shores SNF, LLC, Case No. 8:14-bk-09521-MGW, (Bankr. M.D. Fla. Dec. 31, 2014), the bankruptcy court found
that a nursing home’s Medicare provider agreement had survived bankruptcy despite notice and intent to terminate the agreement issued by the Center for
Medicare and Medicaid Services (CMS). The nursing home entered bankruptcy prior to the termination becoming effective and obtained an automatic stay of the
termination. Although the decision is subject to review by a higher court, other providers may attempt to duplicate Bayou Shores’ strategy, in order to buy
time to turn around troubled facilities, if faced with the potential crushing financial impact of Medicare and Medicaid termination.
The debtor, Bayou Shore SNF, LLC (Bayou Shores), operates a 159-bed skilled nursing facility in St. Petersburg, Fl. – one of few facilities in the area
that cater to patients with serious psychiatric conditions. Over 90 percent of the nursing home’s revenue is derived from Medicare and Medicaid. Between
February and July 2014, the nursing home was cited on three separate occasions for noncompliance with program requirements. The deficiencies related to the
nursing home’s recordkeeping, admission procedure and facility security. In each case, the nursing home was cited for “immediate jeopardy,” giving the
nursing home 23 days to remove the immediate jeopardy situation in order to avoid Medicare provider termination.
The nursing home immediately cured the first two deficiencies and CMS found it to be in substantial compliance. The nursing home cured the third
deficiency, including hiring a third-party consultant to conduct an extensive review of the nursing home’s corrective measures, but CMS did not revisit the
facility. Instead, it elected to terminate the nursing home’s Medicare provider agreement. Although the nursing home appealed the decision to terminate,
the appeal did not stay the ability of CMS to begin denying payments. According to the court, the loss of such payments would have led to a chain of events
requiring the closing of the facility and displacement of its residents.
The nursing home obtained a temporary restraining order from the district court prior to the termination becoming effective. Almost immediately after the
district court dissolved the restraining order for lack of subject-matter jurisdiction, the nursing home filed for bankruptcy and sought a ruling that the
automatic stay precluded termination of the Medicare provider agreement.
CMS’s Exclusion and Termination Power in Bankruptcy Proceedings
The strategy of using bankruptcy as protection from CMS termination has been discussed for a number of years. Prior to 2005, in seeking to exclude or
terminate a provider, CMS would rely on the police and regulatory exception to the automatic stay, which allows governmental units to enforce their police
or regulatory power against entities in bankruptcy. In 2005, Congress passed the Bankruptcy Abuse
Prevention and Consumer Protection Act (BAPCP), which provided that the Secretary of Health and Human Services (HHS) may exclude providers from federal
health care programs without violating the automatic stay. The BAPCP did not, however, include a parallel
provision allowing CMS to terminate providers. The absence of such a provision led commenters at the time to debate whether courts would interpret
congressional silence as an indication that Congress had intentionally withheld such power from CMS.
In the Bayou Shores decision, the court did not address the issue of congressional intent and took a different approach in analyzing CMS’ right to
terminate the debtor’s provider agreement. HHS argued that the police and regulatory exception should apply based on case law finding that bankruptcy
courts should not be a “haven for wrongdoers.” HHS also argued that the standard for the police and
regulation exception was not “imminent harm or urgent public necessity,” as prior Florida bankruptcy cases had allowed the exception to be applied in
various cases involving revocation of licenses and permits not involving a threat to public safety. Further, according to HHS, the termination of the
nursing home’s Medicare provider agreement was in the interest of the health and welfare of the citizens living there.
The Bayou Shores court did not use an “imminent harm” standard, but instead applied a test from prior case law that considered whether the
government was acting from a pecuniary purpose or to advance public welfare. In enjoining HHS from
terminating the nursing home’s Medicare provider agreement, the court concluded that HHS’ actions did not fall within the police and regulatory exception
to the automatic stay. The court noted that HHS had not attempted to close the facility and instead had acted only to cut off the flow of government funds,
which supported the finding that HHS was acting from a pecuniary purpose in terminating the Medicare provider agreement.
Assumption of Medicare Provider Agreement and Plan Feasibility
A central issue in the case was whether the debtor’s Medicare provider agreement was terminated prepetition. There was no dispute that Medicare provider
agreements are executory contracts that may be assumed by a debtor, but a debtor may not assume an executory contract if the contract was terminated
prepetition. According to HHS, the Medicare provider agreement was terminated on the date specified in HHS’s notice to terminate while the debtor argued
that the agreement could not have been terminated prepetition because the debtor brought the facility back into substantial compliance, thereby eliminating
the right to terminate. The court sided with the debtor, but for different reasons.
The court held that, in order for a prepetition termination to preclude assumption, the termination must be complete and not subject to reversal, and in
this case, Bayou Shores had the right to appeal. Furthermore, to assume an executory contract, a debtor
must provide adequate assurance of future performance. Here, the court emphasizes that while HHS challenged Bayou Shore’s right to assume the Medicare
provider agreement, it did not challenge Bayou Shore’s assertion that it had cured its deficiencies and provided adequate assurance of future performance.
The court also considered the validity of the nursing home’s reorganization plan. The plan, backed by all
of the nursing home’s creditors, provided for exit financing of $1 million and for the continued management of the nursing home by the same managing member
of Bayou Shores. The court considered whether the plan met the requirements to be confirmed under 11 USC 1129 and determined that the only issue in dispute
was whether the plan was feasible.
The court found that the plan was feasible despite questions about the future viability of the nursing home. As discussed above, the court found that Bayou
Shores could assume the Medicare provider agreement as it had not been terminated by CMS. The court also considered whether the statement by Florida Agency
for Health Care Administration (AHCA) that it intended to deny the renewal of the nursing home’s license rendered the plan infeasible. In this regard, the
court found that although refusal of the renewal was within the power of the AHCA, the plan was still feasible as, under Florida law, the nursing home had
the right to present mitigating factors that argue against revocation. Based on a consideration of these factors, the court concluded that AHCA’s statement
did “not sound the death knell” for the business. In a subsequent order, the court confirmed the right of AHCA to revoke or refuse to renew the license
under the police or regulatory power exception.
The court’s decision in Bayou Shores highlights a potentially viable avenue for providers facing the crippling effect of Medicare and Medicaid
termination, at least temporarily. However, the use of this strategy is potentially limited by a number of factors. First, providers must file for
bankruptcy prior to the Medicare termination becoming effective. Second, providers need to provide adequate assurance of future performance under the
provider agreement, which, in part, means showing substantial compliance with Medicare and Medicaid program requirements. In Bayou Shores, the court
emphasized the nursing home’s actions in response to the first two citations and the lack of opportunity to remedy the third citation even though the
nursing home had taken actual steps to cure the deficiency and remove immediate jeopardy. Finally, the bankruptcy court’s decision may provide only a short
reprieve as the deficiencies may also provide a basis for state revocation or refusal to renew a critical license, such as the facility license in the case
at hand. The full ramifications of the Bayou Shores decision will not be known until a final resolution of all appeals. The court recently denied
CMS’ motion for a stay of the reorganization plan pending the appeal as well as denied Bayou Shores’ motion to dismiss CMS’ appeal. Still, depending on the
results of these and any future appeals, the Bayou Shores decision may provide a means for certain providers to live to fight another day. If you
have any questions, please do not hesitate to contact any of the authors.
1. 11 USC 362(b)(4).
2. 11 USC 362(b)(28).
3. In re: Bayou Shores SNF, LLC, Case No. 8:14-bk-09521-MGW, Doc. 5, Brief of the Appellant (Bankr. M.D. Fla. 2014).
4. See, e.g., In re Pollock, 402 B.R. 534 (Bankr. N.D.N.Y. 2009).
5. Providers have the right to appeal termination of their provider agreement under 42 CFR 489.53. The appeals process is set out under 42 CFR 498 and
entitles providers to a hearing before an administrative law judge.
6. In re: Bayou Shores SNF, LLC, Case No. 8:14-bk-09521-MGW, Doc. 186, First Amended Chapter 11 Plan of Reorganization (Bankr. M.D. Fla. Dec. 31, 2014).