In every health care insolvency matter involving a governmental entity—meaning most of them—the government can be expected to raise at least three, and sometimes four, roadblocks to the resolution of disputes by the bankruptcy court. The governmental agency almost always will argue that, before a bankruptcy court can resolve a health care related issue, it must address three doctrines that may require the issue to be resolved in some other forum: (1) primary jurisdiction, (2) exhaustion of administrative remedies and (3) withdrawal of the reference to the bankruptcy court. In cases involving state agencies, those agencies also will raise the defense of sovereign immunity. This article provides some thoughts on how the government raises these theories and how courts have resolved these controversies.

Which Forum Has "Primary Jurisdiction"?

The federal government payer, usually the Health Care Financing Administration (HCFA), will argue that the bankruptcy court must defer to the Provider Reimburse-ment Review Board (PRRB) and the other processes established in the Medicare Act for resolution of controversies between the government and providers.¹ In making this argument, the government will rely on the doctrine of primary jurisdiction. This doctrine requires federal courts to defer to the other forum when "enforcement of the claim requires the resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative body; in such cases the judicial process is suspended pending referral of such issues to the administrative body for its views."² This referral does not deprive the original court of jurisdiction; that court can either retain jurisdiction and stay the proceeding or dismiss it without prejudice.³ The application of this doctrine is not generally discretionary, even in the bankruptcy context. The Supreme Court has held that the doctrine of primary jurisdiction is "applicable to claims properly cognizable in court that contain some issue within the special competence of an administrative agency. It requires the court to enable a ‘referral’ to the agency, staying further proceedings so as to give the parties reasonable opportunity to seek an administrative ruling."⁴

In the Medicare area, the PRRB was established to review issues concerning payment of Medicare-based claims to Medicare providers and is a "specialized tribunal" that decides questions relating to payment issues. The government argues that, based on the doctrine of primary jurisdiction, questions of Medicare reimbursement ought to be referred by bankruptcy courts to the PRRB for resolution. The government will define "questions of Medicare reimbursement" as any challenge to the government’s control over Medicare payments to the provider.

While bankruptcy courts generally have respected the doctrine of primary jurisdiction,⁵ some courts have held that the broad grant of jurisdiction in 28 U.S.C. §1334 provides the bankruptcy court with concurrent jurisdiction so that there is no requirement to defer.⁶ Moreover, in the health care context, courts may be very reluctant to defer because the process can take years. Finally, it is not clear how the deferral is to be accomplished. There is no mechanism for bankruptcy courts to refer matters to the PRRB. Thus, courts that grant the government’s motion to defer will simply stay the proceeding and tell the debtor to come back when it has obtained a decision from the PRRB.

Is Exhaustion of Administrative Remedies Required?

The government will argue that the debtor cannot take its controversy with HCFA to the bankruptcy court unless and until the debtor has exhausted the administrative remedies provided for entities in the Medicare Act.⁷ The Medicare statute incorporates the doctrine of exhaustion of administrative remedies into the Medicare payment scheme.⁸ This doctrine provides that a party is not entitled to judicial relief unless and until available administrative remedies have been exhausted,⁹ and is applicable in bankruptcy cases.¹⁰ Unlike the doctrine of primary jurisdiction, where a party fails to exhaust required administrative remedies, the court actually lacks jurisdiction because the suit is premature.¹¹ However, exhaustion is not required where "resort to administrative remedies is futile or inadequate."¹²

The arguments concerning whether health care providers must exhaust their administrative remedies before proceeding in bankruptcy courts revolves around the language of §405(h) the Medicare Act. It provides that "[n]o action...shall be brought under §1331 or §1346 of title 28, U.S. Code, to recover any claim arising under this title."¹³ Thus, federal courts lack jurisdiction over disputes "inextricably intertwined" with a request for reimbursement from the Medicare program unless and until a provider exhausts its administrative remedies.¹⁴ HCFA will argue that this applies to bankruptcy courts and that the absence of any reference to 28 U.S.C. §1334 (bankruptcy jurisdiction) in this section of the Medicare Act is inadvertent and irrelevant. To support this argument, the HCFA relies on the legislative history of §405(h).

Prior to 1984, §405(h) precluded bankruptcy court jurisdiction over disputes arising out of the Medicare program by prohibiting any action under §24 of the Judicial Code. That section contained virtually all of the jurisdictional grants to the district courts including bankruptcy jurisdiction.¹⁵ The language of §405(h) was revised in 1984 when Congress substituted the words "§1331 or §1346 of title 28" for the prior reference to §24 of the Judicial Code. "Obviously the [revised] language of §405(h) omits any reference to the preclusion of Medicare claim jurisdiction" in bankruptcy cases.¹⁶ However, HCFA relies on the legislative history of §405(h), which states that the 1984 revision was meant to be purely technical and not to enlarge the substantive rights of parties proceeding under the Medicare Act.¹⁷ Because parties proceeding under the pre-1984 version of §405(h) had to exhaust administrative remedies before any federal court, including bankruptcy courts, could take jurisdiction over Medicare disputes over reimbursement, and the 1984 amendments were not meant to alter substantive rights, HCFA will argue that debtors proceeding under the post-1984 version of §405(h) also must exhaust their administrative remedies before any federal court, including bankruptcy courts, can take jurisdiction over a Medicare matter. Several bankruptcy courts have found this argu-ment persuasive.¹⁸ Other courts have relied on the plain language of the statute, holding that because §1334 is not listed among the precluded basis for jurisdiction, bankruptcy courts are not required to await exhaustion of administrative remedies before hearing a Medicare dispute.¹⁹

While no circuit court in a bankruptcy case has adopted the government’s argument, courts of appeals outside of bankruptcy cases have agreed that the absence of a reference in §405(h) to a particular jurisdictional basis in Title 28 does not alter the provider’s need to exhaust administrative remedies.²⁰ On the other hand, the Supreme Court has cautioned trial courts that they are to apply the plain language of a statute as Congress wrote it. Moreover, Congress has not revised §405(h) despite a decade of controversy over this issue.²¹ Finally, as noted above, requiring exhaustion creates a practical problem. Resolution of these cases can take years, and the bankruptcy court frequently cannot wait to decide whether to allow the government to withhold payments to a debtor. Because of the long delay, many bankruptcy courts have found the administrative remedies "inadequate" and refused to wait.²²

Does the District Court Have to Withdraw the Reference of Cases Involving the Medicare Act?

The bankruptcy court is only an "adjunct" of the district court and has the authority to hear and decide cases arising under the Bankruptcy Code because cases are "referred" to it by the district court through standing orders of referral. District courts are required to withdraw that "reference" upon timely motion "if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the U.S. regulating organizations or activities affecting interstate commerce."²³ HCFA will argue that the Medicare Act is a "law of the United States regulating orga-nizations or activities affecting interstate commerce." HCFA, relying on the plain language of the Bankruptcy Code, will argue that if resolution of the debtor’s complaint requires "consideration of" the Medicare Act, the district court must withdraw the reference.

Some courts have adopted this approach.²⁴ However, most courts hold that withdrawal is mandatory only if "substantial and material consideration" of a non-Code federal statute is necessary for resolution of the proceeding.²⁵ Under this standard, district courts will likely withdraw the reference only in cases involving unique or unsettled issues of health care law.

Where mandatory withdrawal is unavailable, the government will move for permissive withdrawal. The district court may, but is not required to, withdraw partially or totally a case referred to the bankruptcy court, upon its own motion or upon timely motion of a party, for cause shown.²⁶ Courts have considered the following factors in determining a motion for permissive withdrawal: (1) uniformity in bankruptcy administration; (2) reduction of forum shopping and confusion; (3) fostering economical use of debtors’ and creditors’ resources; and (4) expediting the bankruptcy process.²⁷ This doctrine applies to both core and non-core proceedings.²⁸

For example, in United States v. Weiss²⁹ the debtor was the owner and operator of BR Ambulance, a corporation engaged in the business of transporting patients to and from dialysis centers, clinics, doctors’ offices and hospitals. Medicare will pay only for ambulance transportation deemed reasonable and medically necessary, and there have been numerous instances where Medicare has been improperly billed for ambulance services that were not medically necessary or reasonable. In other words, parties frequently used the ambulance services as a taxi service.³⁰

After an investigation, Weiss was indicted for and eventually pled guilty to Medicare fraud under the federal False Claims Act. Weiss then filed a bankruptcy petition. The government brought an adversary proceeding under 11 U.S.C. §523 seeking to have a $17 million claim made non-dischargeable because it was based on Medicare fraud. The government subsequently moved to withdraw the reference of the adversary proceeding, arguing that it was a non-core proceeding and the interests of judicial economy would be best served by having the action proceed in the district court.

The district court in Weiss agreed that the adversary proceeding was non-core because it could have been brought in the district court under the False Claims Act. However, the court refused to withdraw the reference because: (1) withdrawing the proceeding would not promote judicial economy because such withdrawal would require two hearings, one in the district court to determine Weiss’s liability and the other in the bankruptcy court to determine the dischargeability of the debt; (2) the fact that the district court had resolved the criminal matter did not mean that it was intimately familiar with the underlying facts of the bankruptcy issues particularly since Weiss had pled guilty and the hearing was in essence perfunctory; and (3) no issue of uniformity of bankruptcy administration, forum shopping, nor increasing costs was present or supported the motion to withdraw the reference.

What About Sovereign Immunity for State Agencies?

While obtaining jurisdiction over the federal government may not be a problem,³¹ the Supreme Court’s decision in Seminole Tribe of Florida v. Florida³² may mean that there is no waiver of sovereign immunity allowing the court to compel state governments to pay over withheld Medicaid funds. However, if state officials freeze Medicaid payments, the debtor may be able to get relief through injunction against state officials. Two recent decisions of the courts in Louisiana illustrate the application of this approach.

In Guiding Light Corp. v. State of Louisiana (Matter of Guiding Light Corp.)³³ the debtor was a Medicaid provider whose payments were suspended because state agencies were investigating the possibility of fraud or abuse. The debtor filed a complaint asking for declaratory relief that the funds held by the state were property of the estate and for immediate turnover of the property. The state filed a motion to dismiss, claiming immunity from suit under the Eleventh Amendment, relying on Seminole. In response, the debtor filed an amended complaint adding an additional count naming the director of the state agency that oversees the Medicaid program and asking for injunctive relief against that official and his officers and employees from exercising control over the previously withheld funds or any future payments.

The bankruptcy court granted the state’s motion to dismiss as to the state and the state agencies, based on the decision in Seminole, holding that §106(a) of the Bankruptcy Code was uncon-stitutional. The court, however, allowed the case to proceed against the state official under the doctrine set forth in Ex parte Young.³⁴ Young permits a private party to compel a state’s compliance with federal law by suing a state official responsible for the state’s non-compliance with that law. That official can be made subject to prospective declaratory and injunctive relief without violating the Eleventh Amendment. The order may not require the individual state official to pay previously incurred damages arising out of the violation of federal law if those payments will likely come from the state treasury. Such suits are treated as if actually being brought against the state and are barred. That the future declaratory and injunctive relief requires the expenditure of the necessary funds to bring the state into compliance with federal law does not bar the suit.

This doctrine should allow bankruptcy lawyers a remedy to compel state agencies that are withholding Medicaid funds to restart the stream of payments by proceeding against state officials seeking injunctive relief. Of course, a substantial problem for debtors also involves the efforts to compel the turnover of monies withheld by state agencies before the bankruptcy case is filed. Young does not assist in this latter problem.

In the subsequent decision in In re Guiding Light Corp.,³⁵ the bankruptcy court reviewed the remaining complaint filed by the debtor against the state. The court held that the debtor had no property interest in the withheld funds, finding that a Medicaid provider does not have a property interest in Medicaid payments for claims pending investigation for fraud or willful mis-representation. The court also denied the debtor’s efforts to obtain prospective relief, holding that a Medicaid provider has no property interest in future reimbursements. Because the debtor sought a turnover order under §542 of the Code, the court found that this is retrospective relief not properly the subject of the Ex parte Young suit. The court relied on the debtor not having submitted any claims after the bankruptcy was filed and that the withholding was instituted prior to the bankruptcy filing. The court found that any order directing the state official to pay money into the bankruptcy estate would be an order authorizing retrospective relief from the state treasury to the bankruptcy estate, not authorized under the Ex parte Young exception.

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Footnotes

¹State agencies make this argument as well. See In re Sacred Heart Hospital, 199 B.R. 129 (Bankr. E.D.Pa. 1996) (state government moves to dismiss on grounds bankruptcy court should defer to state agency). Return to text.

²West Coast Truck Lines Inc. v. Weyerhaeuser Co., 893 F.2d 1016, 1020 (9th Cir. 1990) (quoting United States v. Western Pac. Ry. Co., 352 U.S. 59, 63-64 (1956)). Return to text.

³Reiter v. Cooper, 507 U.S. 258, 267, 113 S. Ct. 1213, 122 L. Ed. 2d 604 (1993). Return to text.

⁴Reiter, 507 U.S. at 268, 113 S. Ct. at 1220; Board of Governors of Federal Reserve Sys. v. MCorp Fin. Inc., 502 U.S. 32, 38, 112 S. Ct. 459, 116 L. Ed. 2d 358 (1991) (where Congress has committed certain types of decisions to specialized tribunals, bankruptcy courts must defer). Return to text.

⁵See, e.g., In re Transcom Lines, 89 F.3d 559 (9th Cir. 1996) (bankruptcy court referral to ICC); In re Murdock Mach. and Eng’g Co., 990 F.2d 567 (10th Cir. 1993) (bankruptcy court defers to ASBCA); In re Kalvar Microfilm Inc., 208 B.R. 819 (Bankr. D. Del. 1997) (bankruptcy court deferral to CIT). But see Quality Tooling, Inc. v. United States, 47 F.3d 1569 (Fed. Cir. 1995) (Bankruptcy courts need not defer resolution of government contract issues to Court of Federal Claims; while resolution by specialized forums "is preferable," transfer is not required.). Return to text.

⁶Town & Country Home Nursing Servs. Inc. v. Blue Cross, 112 B.R. 329 (B.A.P. 9th Cir. 1990), aff’d, 963 F.2d 1146 (9th Cir. 1992) (The independent grants of bankruptcy jurisdiction in 28 U.S.C. §§157 and 1334 overcome any limitations on judicial review found in Medicare statutes, the Tucker Act, and the Federal Tort Claims Act.). Return to text.

⁷See St. Mary Hospital v. Commonwealth of Pa. 125 B.R. 422, 428 (E. D. Pa. 1991) (discussing exhaustion requirement). Return to text.

⁸42 U.S.C. §405(h) incorporated into the Medicare Statute by 42 U.S.C. §1395. Return to text.

⁹See generally Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 50-51 (1938). Return to text.

¹⁰ Reiter v. Cooper, 507 U.S. at 269, 113 S. Ct. at 1220 (1993). Return to text.

¹¹ Id. Return to text.

¹² Hall v. National Gypsum Co., 105 F.3d 225, 232 (5th Cir. 1997). Return to text.

¹³ 42 U.S.C. §405(h). Return to text.

¹⁴ See, e.g., Heckler v. Ringer, 466 U.S. 602 (1984); Weinberger v. Salfi, 422 U.S. 749 (1975); Farkas v. Blue Cross & Blue Shield of Mich., 24 F. 3d 853 (6th Cir. 1994). Note that the provider has no appeal rights where payments are suspended for suspicion of fraud; the provider has only the right to file a rebuttal. The PRRB appeal process described herein only applies to total payment controversies. Return to text.

¹⁵ Matter of First American Health Care of Georgia Inc., 208 B.R. 985, 988 (Bankr. S.D.Ga. 1996) (quoting In re St. Johns Home Health Agency Inc., 173 B.R. 238, 244 (Bankr. S.D. Fla. 1994)). Return to text.

¹⁶ First American Health Care, 208 B.R. at 989. Return to text.

¹⁷ See St. John’s Home Health Agency, 173 B.R. at 242. Return to text.

¹⁸ See In re Southern Inst. for Treatment & Evaluation Inc., 217 B.R. 962 (Bankr. S.D. Fla. 1998); St. John’s Home Health Agency Inc., supra; In re Upsher Labs Inc., 135 B.R. 117 (Bankr W.D. Mo. 1991); In re Berger, 16 B.R. 236 (Bankr. S.D. Fla. 1981). Return to text.

¹⁹ See Sullivan v. Town & Country Home Nursing Servs. Inc. (In re Town & Country Home Nursing Servs. Inc.), 963 F. 2d 1146, 1154 (9th Cir. 1992); First American, 208 B.R. at 988; In re Tidewater Memorial Hospital Inc., 106 B.R. 876, 880 (Bankr. E.D. Va. 1989). Return to text.

²⁰ See Bodimetric Health Services Inc. v. Aetna Life & Casualty Co., 903 F. 2d 480 (7th Cir.). Return to text.

²¹ See In re Shelby County Healthcare Servs. of AL. Inc., 80 B.R. 555, 560 (Bankr. N.D. Ga. 1987) (holding bankruptcy courts have concurrent jurisdiction of §405(h) matters).Return to text.

²² See, e.g., First American, supra. Return to text.

²³ 28 U.S.C. §157(d).Return to text.

²⁴ Contemporary Lithographers Inc. v. Hibbert, 127 B.R. 122 (M.D.N.C. 1991); AT&T v. LTV, 88 B.R. 581 (S.D.N.Y. 1988); In re Johns-Manville Inc., 63 B.R. 600 (S.D.N.Y. 1986).Return to text.

²⁵ See, e.g., In re E & S Facilities Inc., 181 B.R. 369, 372 (S.D. Ind. 1995) (Withdrawal requires either "(1) complicated issues of first impression requiring significant interpretation of federal law, or (2) substantial and material conflicts between the Bankruptcy Code and non-title 11 laws.").Return to text.

²⁶ 28 U.S.C. §157(d).Return to text.

²⁷ See In re Pruitt, 910 F.2d 1160 (3d Cir. 1990); In re CIS Corp., 172 B.R. 748 (S.D.N.Y. 1994) (comprehensive discussion of standards for deciding motion to withdraw the reference). Return to text.

²⁸ See Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992 (5th Cir. 1985). To the extent it is considered a relevant factor, which court determines core status is subject to controversy. Compare In re Orion Pictures Corp., 4 F.3d 1101 (2d Cir. 1993) (district court determines) with In re Delaware & Hudson Ry. Co., 122 B.R. 887, 892 (D. Del. 1991) (bankruptcy court determines). Return to text.

²⁹ 1998 U.S. Dist. LEXIS 3265 (E.D.N.Y. Mar. 13, 1998). Return to text.

³⁰ See In re Medicar Ambulance Co., Inc., 166 B.R. 918, 926-27 (Bankr. N.D.Cal. 1994) (ambulance company fraud against Medicare). Return to text.

³¹ See 11 U.S.C. §106. Return to text.

³² 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996). Return to text.

³³ 213 B.R. 489 (Bankr. E.D. La. 1997). Return to text.

³⁴ 209 U.S. 123, 28 S. Ct. 441 (1908). Return to text.

³⁵ 217 B.R. 493 (Bankr. E.D. La. 1998). Return to text.