The First Circuit declined to take sides in a circuit split about a bankruptcy court’s ability to compel the federal government to continue Medicare and Medicaid funding. Instead, the appeals court exercised “hypothetical jurisdiction” by reaching the merits and deciding that cutting off Medicare reimbursement was “plainly” an exercise of “police and regulatory power” exempt from the automatic stay under Section 362(b)(4).
Given the Nov. 29 opinion from the First Circuit and the Eleventh Circuit’s Bayou Shores decision in July, a hospital cannot fight Medicare in chapter 11 and survive.
A hospital in Maine had a strategy for closing down inpatient services in chapter 11 while continuing to provide outpatient care. Just before filing the petition, the hospital told Medicare authorities that it would halt inpatient admission after filing in chapter 11 and would immediately transfer patients to another acute-care hospital. The hospital intended to continue offering outpatient services.
The hospital was evidently too forthright, because the government announced that it was immediately terminating the provider agreement and cutting off Medicare funding because the facility no longer qualified as a “hospital” following the cessation of inpatient services.
The hospital’s strategy required continued Medicare funding to finance the transition of the facility in chapter 11. Consequently, the hospital sued Medicare authorities while in chapter 11, asking the judge to compel continuation of government funding. The bankruptcy judge declined to enjoin federal authorities, and the decision was upheld in district court. Both lower courts held there was no jurisdiction and that the government did not violate the automatic stay by terminating the hospital’s Medicare provider agreement.
The hospital lost again in the Nov. 29 opinion by Circuit Judge Sandra L. Lynch.
According to Judge Lynch, the “majority of circuits” hold, as in Bayou Shores, that bankruptcy courts have no jurisdiction over a Medicare or Medicaid dispute by virtue of Section 405(h) of Title 42 of the U.S. Code. The Ninth Circuit takes the contrary view that Section 405(h) does not preclude bankruptcy jurisdiction.
Rather than leap into the circuit split, Judge Lynch upheld the decisions below “on narrower grounds evident from the record.”
Although jurisdiction is typically a threshold issue on appeal, Judge Lynch exercised “hypothetical jurisdiction” because “only statutory jurisdiction is at stake,” not “Article III jurisdiction.”
Turning to the merits, Judge Lynch said that the police and regulatory exception to the automatic stay in Section 362(b)(4) is “designed primarily to protect the public safety and welfare.” The exception does not apply if the government is trying to “recover property” or has a “pecuniary purpose.”
Judge Lynch said it was “true, but largely irrelevant,” that termination of the provider agreement did not result from a “threat to the health or safety of patients.” Concerns for health and safety alone, she said, are “too circumscribed a view of the public interest.” Precedents distinguish between governmental actions that govern behavior and those that “enforce contractual rights against debtors.”
There is a “strong public policy interest,” Judge Lynch said, in ensuring that Medicare dollars “are not spent on institutions that fail to meet qualification standards.” Because the hospital itself “had taken actions to disqualify itself from the Medicare program,” she said it was “plainly the exercise of a regulatory power” to prevent the “waste of public monies.”
To read ABI’s discussion of Bayou Shores, click here.