Did a Florida Nursing Home Win the Bankruptcy Court Battle But Lose the War?

By I. Paul Mandelkern:  Two recent orders by a bankruptcy judge in the United States Bankruptcy Court for the Middle District of Florida show the impact of a Chapter 11 bankruptcy plan on a noncompliant skilled nursing facility’s ability to continue its operations and maintain its Medicare and Medicaid provider agreements and its Florida skilled nursing facility license.

Bayou Shores NSF, LLC owns and operates a 159 bed skilled nursing facility in St. Petersburg, Florida.  Almost all of its patients participate in the Medicare and Medicaid programs, and those programs account for more than 90 percent of its revenue.  Between February and July 2014, the facility was cited three times for not being in substantial compliance with the Medicare requirements, and the Centers for Medicare & Medicaid Services (CMS) notified the facility that it was terminating its Medicare provider agreement because the patients were in “immediate jeopardy”.  Termination of the Medicare provider agreement would also result in termination of the facility’s Medicaid provider agreement with the Florida Agency for Health Care Administration (AHCA).  The facility began an administrative appeal of the termination of its Medicare provider agreement, but when the federal district court refused to enjoin the termination of that agreement pending the outcome of the appeal, the facility filed for bankruptcy protection under Chapter 11 of the federal bankruptcy code.  A key fact was that neither the Medicare nor the Medicaid provider agreements had been terminated prior to the filing of the facility’s bankruptcy petition.

After an evidentiary hearing, and over the objections of CMS and AHCA, the federal bankruptcy judge approved the facility’s bankruptcy plan and ruled that the Medicare and Medicaid provider agreements were to remain in force, allowing the facility to continue its operations because neither agreement was terminated prior to the commencement of the bankruptcy proceeding.  However, both CMS and AHCA are appealing the bankruptcy judge’s order to the district court.  Many commentators remarked that if the bankruptcy’s order stands up on appeal it sets forth a roadmap as to how a troubled skilled nursing facility can use the federal bankruptcy code to maintain its Medicare and Medicaid provider agreements.

Although the facility won the battle over whether its Medicare and Medicaid provider agreements could be terminated by CMS and AHCA after it filed for bankruptcy court protection, it may yet lose the war.  While its appeal is pending, AHCA requested that the bankruptcy judge clarify his order as to whether AHCA can revoke the facility’s state license.  AHCA told the court that it would resume an administrative proceeding to revoke the license due to the previous finding of “immediate jeopardy” and, since the facility had recently filed an application to renew its license, AHCA intends to deny the renewal application.  AHCA’s position was that either action is allowed under an exception in the federal bankruptcy code that allows a state agency to enforce its police or regulatory powers.  The bankruptcy judge agreed with AHCA’s position, and he ruled that AHCA was not prohibited from revoking the facility’s license or denying its renewal application based on the previous finding of “immediate jeopardy”.

If AHCA revokes the facility’s state license or denies its license renewal application, the facility may have won the bankruptcy court battle but lost the war since without its state license it will be forced to close.

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