Bayou Shores decision is a reminder that, in a fight with CMS over Medicare/Medicaid reimbursement, successful restructurings require advice of experienced health care counsel

August 09, 2016

Distressed Health Care Alert

Author(s): Robert N. H. Christmas

Outside of bankruptcy proceedings, a Medicare or Medicaid program provider must exhaust administrative process before a federal district court may determine a dispute involving the provider’s program agreements; whether this rule applies post-bankruptcy, however, has been hotly litigated in bankruptcy cases for over two decades. In a recent decision by the United States Court of Appeals for the Eleventh Circuit, on appeal from a bankruptcy case called Bayou Shores, the court found it did not need to answer this question in the context of a bankruptcy proceeding, holding that the question’s fundamental premise—that the bankruptcy court could determine these issues—was incorrect. The court determined that all such matters involving provider disputes are fully outside of the jurisdiction of the bankruptcy court. This case is a reminder that, in a fight with CMS over Medicare/Medicaid reimbursement, be sure to consult with experienced health care insolvency counsel—because, if not planned correctly, this and other similar decisions may pose a hurdle to successful restructuring.


The appeal was from a decision that we reported last year, in the Bayou Shores skilled nursing facility bankruptcy, Fla. Agency for Health Care Admin. v. Bayou Shores SNF, LLC (In re Bayou Shores SNF, LLC), 2015 U.S. Dist. LEXIS 83390 (M.D. Fla. June 26, 2015). Bayou Shores SNF, LLC (“Bayou”) operated a nursing facility in Florida for patients with serious psychiatric conditions. Bayou provided Medicare and Medicaid services through provider agreements issued by the federal and state governments under the Social Security Act’s Medicare and Medicaid provisions.

In July 2014, the Centers for Medicare and Medicaid Services (“CMS”) notified Bayou that, after the Agency for Health Care Administration (“AHCA”) conducted a survey, it determined that Bayou was not in compliance with requirements to receive payment under the Medicare and Medicaid programs. CMS subsequently terminated Bayou’s provider agreement. Bayou sought injunctive relief in the United States District Court for the Middle District of Florida (the “District Court”) and obtained an ex parte temporary restraining order enjoining CMS from terminating the Medicare and Medicaid provider agreements.

Subsequently, the District Court dissolved the temporary restraining order and concluded that Medicare’s jurisdictional bar under 42 U.S.C. § 405(h) precluded the court from exercising jurisdiction over the controversy before the debtor exhausted its administrative remedies.

Less than an hour after the District Court’s ruling, Bayou filed for a petition for Chapter 11 protection in the United States Bankruptcy Court for the Middle District of Florida (the “Bankruptcy Court”), accompanied by an emergency motion to enjoin CMS and AHCA from terminating the debtor’s Medicare and Medicaid provider agreements.

The Bankruptcy Court decision. The Bankruptcy Court enjoined CMS and AHCA from terminating the agreements on the basis that the provider agreements were property of the debtor’s estate subject to the protections of the automatic stay, and that the Bankruptcy Court had jurisdiction to issue such injunction pursuant to 28 U.S.C. § 1334. AHCA and the United States government appealed the Bankruptcy Court’s decision to the District Court, contending that the Bankruptcy Court lacked jurisdiction to enjoin the termination of the provider agreements.

The District Court decision. The District Court determined that, with respect to a Medicare dispute, the judicial review provision in 42 U.S.C. § 405(g) is the “exclusive source of federal court jurisdiction.” [1] Thus, the District Court held that the Bankruptcy Court was barred from exercising jurisdiction over the dispute except for conducting judicial review of the final decision of the Secretary of the United States Department of Health and Human Services (the “Secretary”).

The District Court further held that Bayou had failed to exhaust its administrative remedies with regard to CMS’s decision terminating the provider agreements. The District Court found that, by enjoining the termination of the provider agreements, the Bankruptcy Court had “thwarted” the administrative process and allowed the debtor to “circumvent its administrative obligations.” The District Court held that the Bankruptcy Court was “without jurisdiction to interpose itself in the process, including entering an injunction to enjoin the provider agreements.” As to jurisdiction, the Bankruptcy Court had held that its jurisdiction was not barred under section 405(h) because that section does not expressly proscribe bankruptcy jurisdiction under 28 U.S.C. § 1334.[2] However, the District Court, following what it described as the majority view, held that there had been a ministerial codification error, and that the jurisdictional bar in section 405(h) in fact does apply to “all cases in which administrative remedies have not been exhausted.” Notably, the Eleventh Circuit Court of Appeals, covering the region where both Bayou and the District Court are located, had not yet ruled on the issue.

The Eleventh Circuit decision. The circuit court focused solely on jurisdiction. The federal government’s central argument was, as in the courts below, that the bankruptcy courts are barred by section 405(h) from jurisdiction over the termination of the provider agreements. Reviewing the statutory history, the Eleventh Circuit found that “[f]rom the Social Security Amendments of 1939 until 1984, it is undisputed that bankruptcy courts lacked jurisdiction” over Medicare Act claims, and that, in enacting a recodification in 1984, it is “abundantly clear that Congress expressed no . . . intention” to change existing law to re-vest the bankruptcy courts with jurisdiction. The court thus joined the Seventh, Eighth, and Third Circuits and held that the bankruptcy court is barred from jurisdiction over claims that arise under the Medicare Act.

Ramifications for health care providers

The Eleventh Circuit has joined three other circuit courts in excluding bankruptcy courts from jurisdiction to hear disputes with an agency over Medicare or Medicaid. Accordingly, this decision is a reminder that proper planning is required if restructuring is to occur where there is a pending dispute with CMS over Medicare/Medicaid reimbursement. The advice of experienced health care insolvency counsel is essential to navigate the legal “shoals” of Bayou Shores and similar cases, to arrive at a successful restructuring.

  1. Section 405(g) provides, in relevant part that “[a]ny individual, after any final decision of the [Secretary] made after a hearing to which he was a party . . . , may obtain a review of such decision by a civil action commenced within sixty days after the mailing to him of notice of such decision or within such further time as the [Secretary] may allow.”
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  2. Section 405(h) provides, in relevant part, that “[n]o findings of fact or decision of the [Secretary] shall be reviewed by any person, tribunal[] or governmental agency except herein provided.”
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