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.

Factual Background

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.[1] 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.[2] 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.”[3] 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.[4] 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.[5] 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.[6] 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.

Conclusion

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 Shoresdecision 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 Shoresdecision 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 listed below.