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Skilled Nursing Homes May Not Seek Protection From Medicare/Medicaid Termination Under the Bankruptcy Code

By: Anthony J. Ienna

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

          In In re Bayou Shores SNF, LLC, a district court found that a bankruptcy court lacked subject matter jurisdiction to thwart the regulation of Medicare and Medicaid funds of a non-compliant debtor. [i]  In particular, the district court, siding with the majority view, determined that 42 U.S.C. 405(h) bars bankruptcy courts from interfering with decisions made by the Centers for Medicare and Medicaid Services (“CMS”) relating to Medicare and Medicaid.[ii]

          In Bayou, the debtor, Bayou Shores, owned and operated a skilled nursing facility, of which ninety percent of its revenue was derived from patients’ Medicare and Medicaid programs.[iii]  Skilled nursing facilities, such as Bayou Shores, must comply with 42 C.F.R. Part 483, Subpart B to receive funds through Medicare and Medicaid.[iv] Skilled nursing homes, which provide for elderly patients who are especially infirm, receive special attention under the 42 C. F. R. due to their patients’ vulnerability.[v]  These facilities charge higher costs than traditional nursing homes and their patients are typically dependent on the government through Medicaid for payment.[vi]  Skilled nursing homes are also prone to financial difficulty and bankruptcy due to the constant need to modernize, competition with traditional nursing homes and dependence on Medicaid reimbursements. [vii]

          CMS, an agency of the Unites States Department of Health and Human Services, ensures the quality and safety of skilled nursing homes, which it regulates through its survey and certification process. [viii] The CMS found that the debtor was not compliant with the regulations and placed its patients’ health and safety in jeopardy.  Subsequently, the CMS informed the debtor that Medicare and Medicaid payments would terminate in 30 days on August 3, 2014.[ix]  Prior to filing for bankruptcy, upon the debtor’s request The District Court for Middle District of Florida issued an ex parte temporary restraining order (“TRO”) enjoining termination of the Medicaid and Medicare agreements, until August 15, 2014.[x]  Thereafter, the district court dissolved the TRO after concluding that 42 U.S.C. 405(h) precluded the court from exercising jurisdiction prior to the debtor exhausting its administrative remedies.[xi]  One hour after the district court dissolved the TRO, the debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code and requested an emergency order enjoining CMS from terminating the patient agreements.[xii]  The bankruptcy court found that it had jurisdiction over all civil proceedings arising under or relating to chapter 11 pursuant to 28 U.S.C. 1334.[xiii] Consequently, the bankruptcy court found the provider agreements to be property, and thus enjoined CMS from terminating the agreements. [xiv]

          The Agency for Health Care and Administration (“AHCA”) and the United States of America appealed the bankruptcy court’s order on the same basis, which was argued in the bankruptcy court of the Middle District of Florida that the court lacked jurisdiction to enjoin the termination of the provider agreements.[xv]  The district court reversed the bankruptcy court, finding that a bankruptcy court may only conduct judicial review of the Secretary’s final decision pursuant to 42 U.S.C. 405(g).[xvi]  Thus the district court found that 405(g) is the “exclusive source of federal court jurisdiction.”[xvii]  The court reasoned that enjoining the CSM’s termination “essentially thwarted the administrative process and allowed the debtor to circumvent its administrative obligations.”[xviii]          

          The district court rejected the bankruptcy courts interpretation of 42 U.S.C. 405(h) and sided with the majority of courts by finding section 405(h) to bar bankruptcy courts from interfering with CSM regulations.[xix]  Under 42 U.S.C. 405(h), courts are barred from reviewing decisions made by the CSM in relation to Medicare and Medicaid controversies.[xx] 42 U.S.C. 405(h) explicitly lists jurisdictions that cannot bring actions against CSM, which includes federal question claims under 28 U.S.C. 1331 and claims where the United States is a defendant under 28 U.S.C. 1346.[xxi]  Nevertheless, others courts, including the Bayou court, concluded that the omission of 28 U.S.C. 1334 and other jurisdictional grants should be overlooked.[xxii] The court looked at the first enactment of 42 U.S.C. 405(h), which prohibited any action under 24 U.S.C, which contained “virtually all jurisdictional grants, including bankruptcy jurisdiction.” [xxiii] However in the 1948 revision, 24 U.S.C. was replaced with sections 1331 and 1346 but left out section 1334, bankruptcy jurisdiction. [xxiv] Guided by Congress’ statement that  “none of such amendments shall be construed as changing or affecting any right, liability or status or interpretation which existed" the court found the exclusion of Section 1334 was not Congress’ true intent and should be ignored.  [xxv]

          Nevertheless, not all courts believe that Congressional intent should aide in interpreting 42 U.S.C., even when an error is apparent. [xxvi] In In re Nurses’ Registry & Home Health Corp., decided soon after Bayou, a debtor operating a caregiver service, which tended to over 1,300 patients, successfully received a preliminary injunction requesting turnover of Medicare funds.[xxvii] The bankruptcy court rejected the Bayou Courts interpretive reasoning and felt  “it is beyond our province to rescue Congress from its drafting errors....”[xxviii] The court rationalized that Congress’ assertion that no technical amendments “shall be construed as changing or affecting any right, liability or status or interpretation which existed." is itself incorrect for Congress had used technical amendments to change substantive rights.[xxix] Therefore, the bankruptcy court felt it was not its place to amend statutes that may have been written erroneously.[xxx]

          In the face of future termination of federal funding non-complaint entities can view bankruptcy as a possible safe house or at least a way to buy them valuable time.[xxxi] However, some courts do not allow health care providers to circumvent CMS decisions.[xxxii]  The In Bayou decision reflects the important role policy implications play when courts are dealing with medical facilities.[xxxiii] There, the court took noncompliance seriously by limiting skilled nursing homes path to bankruptcy and possible abuse of its patients through 42 U.S.C. [xxxiv] However, health care providers hoping to honestly restructure through chapter 11 may face sudden termination, which could in turn place patients in danger. [xxxv]

[i]In re Bayou Shores SNF, LLC, 533 B.R. 337, 388 (Bankr. M.D. Fla. 2015).

[ii] 42 C.F.R. § 483.3(b) (2002); See id. at 338.

[iii] Id. at 339.

[iv] 42 C.F.R. § 483.3(b) (2002); See In re Bayou Shores SNF, 533 B.R. at 339.

[v] See Amy Parise DeLaney, Maneuvering the Labyrinth of Long-Term Care Admissions Contracts, 4 Nat’1 Acad. Elder Law Att’ys J. 35, 35 (2008). (“The laws pertaining to skilled and intermediate care facilities are the most detailed and expansive. Public policy necessitates widespread control, since skilled and intermediate care nursing facilities generally service the infirm, chronically ill, and most vulnerable members of our society.”)

[vi] See id.

[vii] See Nancy A. Peterman & Collin B. Williams, Skilled Nursing Home Facilities: The Challenges of the 21st Century, Am. Bankr. Inst. J., March 2005, at 30, 30.

[viii] See Survey & Certification - General Information, Centers for Medical & Medicaid Services, (Oct. 5, 2015),

[ix] See In re Bayou Shores SNF, 533 B.R. at 339.

[x] Id.

[xi] 42 U.S.C. § 405(h)(2012); In re Bayou Shores SNF, 533 B.R. at 337.

[xii] Id.

[xiii] Id.

[xiv] 28 U.S.C. § 1334 (2012); In re Bayou Shores SNF, 533 B.R. at 340.

[xv] Id.

[xvi] 42 U.S.C. § 405(g)(2012).

[xvii] Id.; In re Bayou Shores SNF, 533 B.R. at 340 (citing Jackson v. Astrue, 506 F.3d 1349, 1353 (11th Cir. 2007).

[xviii] Id. at 342.

[xix] See 42 U.S.C. § 405(h)(2012); In re Bayou Shores SNF, 533 B.R. at 342.

[xx] 42 U.S.C. § 405(h)(2012); See In re Bayou Shores SNF, 533 B.R. at 339. 

[xxi] 42 U.S.C. § 405(g); See In re Bayou Shores SNF, 533 B.R. at 342. 

[xxii] See Id.

[xxiii] Id.

[xxiv] District Courts Jurisdiction, Pub. L. No. 98-369, § 2664(b), 98 Stat. 1171-72 (1984).

[xxv] Social Security Act, Pub. L. No. 109-8, § 323, 53 Stat. 1362, 1371, (1939). ; Id.

[xxvi] See In re Nurses' Registry & Home Health Corp., 533 B.R. 590, 595 (Bankr. E.D. Ky. 2015)

[xxvii] Id.

[xxviii] Id.

[xxix] Id. (citing  Lamie v. United States Tr., 540 U.S. 526, 542(2004)).

[xxx] See Id. at 595.

[xxxi] See In re Bayou Shores SNF, 533 B.R. at 339.

[xxxii] 42 U.S.C. § 405(h)(2012); See Id. at 342.

[xxxiii]See Id.

[xxxiv] Id. at 342.

[xxxv] In re Nurses' Registry & Home Health Corp., 533 B.R. at 595.