The Circuit Split on Medicare: Jurisdictional Uncertainty in the Age of Coronavirus

The COVID-19 pandemic is straining already-troubled hospitals and other health care providers. Many will seek refuge in chapter 11, and bankruptcy courts nationwide will be called upon to adjudicate a host of issues, many time-sensitive, as health care providers struggle to provide services. Disputes regarding transferability of critical Medicare provider agreements are inevitable. Unfortunately, there is no judicial consensus on Medicare-related bankruptcy law, including the existential question of jurisdiction. Given the current health crisis and the concomitant need to permit hospitals to move quickly to reorganize, a national resolution of this split — be it via the Supreme Court or Congress — is necessary. Given the current state of affairs, congressional action may be the only timely solution.

Approximately 5,300 hospitals across the country participate in Medicare: federal health insurance for persons aged 65 and older and those eligible for Social Security disability benefits.[2] Medicare is administered by the U.S. Centers for Medicare & Medicaid Services (CMS). The relationships between CMS and participating hospitals are governed by (a) federal statute,[3] (b) applicable federal regulations[4] and (c) Medicare provider agreements.

While Medicare provides a steady flow of income for health care providers, payments under provider agreements have historically lagged behind the costs of patient care. For example, hospitals received only 87 cents for every dollar spent on Medicare patients in 2018.[5] In addition to this front-end “Medicare Gap,” hospitals are also subject to audits to determine whether they have been overpaid. When such overpayments are found, CMS will usually seek to recoup the overpayments against current Medicare payments. The initial Medicare Gap and the potential for back-end recoupment leaves many providers in a chronically precarious financial condition. And this was pre-pandemic.

The COVID-19 epidemic has exacerbated these problems. Hospitals are whipsawed between spending unprecedented amounts for the expected flood of coronavirus patients, while at the same time scaling back, or ceasing entirely, primary care appointments and lucrative elective procedures. Moreover, many potential patients with non-COVID-19 issues are staying away from emergency rooms, which have historically been consistent revenue-generators for hospitals. Thus, despite the increase in gross volume of patients, it is likely that there will be a significant uptick of providers in financial distress. Many will find it necessary to quickly sell operating assets if they are to avoid shutting down. Closure without a buyer, especially in rural areas, could be catastrophic.

Given that Medicare provider agreements represent a reliable revenue stream, they are often key assets prized by potential purchasers who may not have their own pre-existing provider agreements with CMS that are needed to provide uninterrupted services, which is not a simple exercise. CMS is protective of its jurisdiction and has shown, in numerous chapter 11 cases, that it will fight to preserve jurisdiction. Courts have historically deferred to CMS and its administrative prerogatives in these cases, which can create a substantial impediment to a quick sale. This tension between CMS’s efforts to control the transfer process, and the ordinarily expeditious treatment of asset sales in bankruptcy, has manifested itself in substantial delays and uncertainties for buyers and sellers of hospital assets, roadblocks that are the opposite of what is needed in these fraught times.

Two recent cases, In re Verity Health Sys. of Calif. Inc.[6] and In re Center City Healthcare LLC, d/b/a Hahnemann Univ. Hosp.,[7] suggest that bankruptcy courts are becoming receptive to arguments that facilitate transfers of Medicare provider agreements in a timely fashion. These cases hold that the provider agreement is not an executory contract, the assignment of which would require cure of monetary defaults pursuant to 11 U.S.C. § 365. Instead they are treated as statutory entitlements that constitute a debtor’s property rights under U.S.C. § 541. As such, they can be sold free and clear of liens and encumbrances under 11 U.S.C. § 363(f), including claims of CMS. In both cases, CMS opposed this characterization of provider agreements as statutory entitlements instead of executory contracts.

While the Verity and Hahnemann cases evidence considerable tension and controversy between CMS and debtors as to whether a provider agreement is an executory contract or a property right, this controversy fundamentally misses the point. Regardless of whether the transfer of a Medicare provider agreement is governed by § 363 or 365, the transfer is still subject to applicable Medicare laws and regulations that may give CMS the ability to hinder a transfer or impose financially untenable conditions.[8]

The real question raised in connection with the potential transfer of a Medicare provider agreement is who gets to interpret and decide the meaning of, and the requirements imposed by, these Medicare laws and regulations: CMS, or the bankruptcy courts? If CMS is empowered to impose transfer conditions, then, regardless of whether § 363 or 365 is the statutory transfer mechanism, history has shown that CMS will not hesitate to impose financially onerous conditions that may scuttle a sale. Such decisions would first be reviewable under applicable federal administrative procedure review laws, not by the bankruptcy courts. By the time it gets to the bankruptcy court, a sale opportunity may be long gone, leaving patients and other parties in interest with one less health care provider. If, on the other hand, it is the bankruptcy courts that get to interpret and apply Medicare laws and regulations, it is reasonable to expect decisions that are quicker and more conducive to restructurings and sales, such as Verity and Hahnemann. Unsurprisingly, CMS has been fighting to maintain its right to interpret and apply these laws and regulations, to the exclusion of the bankruptcy courts, and with that, the right to control transfers of provider agreements.

A troubling split among the circuits has developed on this jurisdictional issue. The genesis of the confusion is 42 U.S.C. § 405(h), which vests jurisdiction in CMS over Medicare disputes until all administrative appeals are exhausted. That section reads, in relevant part: “No action against the United States, the Commissioner of Social Security, or any officer or employee thereof shall be brought under section 1331 or 1346 of Title 28 to recover on any claim arising under this subchapter.” (Emphasis added.) Some circuits have held the absence of any reference in § 405(h) to 28 U.S.C. § 1334, the statute granting bankruptcy jurisdiction to the district courts, to mean that the power to adjudicate Medicare-related disputes vests exclusively in CMS. Other circuits have held that CMS’s jurisdiction is concurrent with that of the district courts (and bankruptcy courts) under § 1334.

Two circuits, the Third and Fifth, have held that § 405(h) does not bar bankruptcy court jurisdiction over Medicare disputes when there is a distinct Code-based reason to exercise jurisdiction, such as relief from the automatic stay.[9] Without a statutory hook, such as a dispute over entitlement to Medicare benefits not implicating any provision of the Bankruptcy Code, cases hold that under § 1334, jurisdiction does not lie. The Eleventh Circuit, by contrast, has interpreted § 405(h) as essentially an absolute bar to the exercise of any bankruptcy jurisdiction during the CMS administrative process.[10] The Ninth Circuit has adopted a maximalist view of § 1334 jurisdiction, notwithstanding § 405(h)’s purported exclusivity.[11] Other circuits, such as the First, have acknowledged the split but declined to weigh in.[12] The only consensus on this issue among the courts is that there is no consensus.[13]

CMS continues to view this as a problematic issue as evidenced by its position in Hahnemann. Notwithstanding the Third Circuit’s controlling (and almost 30-year-old) University Medical Center case holding that bankruptcy courts have jurisdiction over Medicare disputes that implicate the Bankruptcy Code, CMS argued, albeit unsuccessfully, that § 405(h) divested the bankruptcy court of jurisdiction over the proposed sale.[14]

In sum, the critical issue presented in connection with the transfer of provider agreements is not whether § 363 or 365 controls, but whether bankruptcy courts can even apply the Code to Medicare assets and disputes. The uncertainty engendered by the lack of uniformity on this issue benefits no one, especially in the age of COVID-19 and the extreme pressure it places on the nation’s health care infrastructure. Given the current crisis and the lack of any indication that the Supreme Court will resolve the circuit split in the near future (if ever), legislative action is needed. Congress should either amend § 405(h) to grant bankruptcy courts jurisdiction to adjudicate Medicare issues, or make it clear that there is no jurisdiction. This will remove an intractable threshold issue from chapter 11 hospital cases and allow them to proceed in a more orderly, economical and timely fashion.