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Seventh Circuit dismisses the Illinois Fund’s challenge to Section 111 reporting -- holds that administrative remedies must first be exhausted before the court has jurisdiction

In Illinois Insurance Guaranty Fund v. Becerra, 2022 WL 1438506 (7th Cir. May 6, 2022), the United States Seventh Circuit Court of Appeals affirmed a lower court decision dismissing an action filed by the Illinois Insurance Guaranty Fund (“Illinois Fund” or “Fund”) challenging its obligation to comply with Medicare’s Section 111 reporting law on grounds that the court lacked jurisdiction to hear the case since the Fund failed to first exhaust Medicare’s administrative appeal process.  

Ninth Circuit: Ciga Is Not A “primary Payer” Under The Msp And Does Not Have To Reimburse Medicare

Case Summary

In this case, the Illinois Fund filed a declaratory judgment action seeking a court order that it was not a primary plan or an applicable plan for Section 111 reporting purposes and, thus, had no duty to comply with CMS’s reporting law.  CMS and the other defendants[1] moved to dismiss, in main part, on grounds that the court lacked jurisdiction to hear the case since the Fund had failed to exhaust available administrative remedies by not first processing its action through Medicare’s administrative appeals process before seeking judicial review.  The United States District Court for the Northern District of Illinois agreed with CMS and dismissed the action.  Illinois Insurance Guaranty Fund v. Cochran, 2021 WL 1600172 (N.D. Ill. April 23, 2021).  The Fund then appealed this decision to the United States Seventh Circuit Court of Appeals.

On appeal, the Illinois Fund argued that the general rule requiring parties to exhaust administrative remedies before seeking judicial review was not applicable in this case, in part, since CMS had not yet established its Section 111 appeals process for parties to process Section 111 disputes.  The Seventh Circuit, however, affirmed the district court’s decision finding that the requirement to exhaust administrative remedies applied in this case.  On this point, the court, while conceding that the Fund’s argument had "some appeal," it ultimately found that the Fund could have challenged its Section 111 reporting obligations by arguing it is not a primary plan as part of an administrative appeal of a Medicare conditional payment reimbursement demand.[2]   The court observed that if the Fund was not a primary plan this would then mean it would have no Section 111 reporting obligations “[b]ecause the term ‘primary plan’ includes … all types of applicable plans, if an entity does not qualify as a primary plan, the entity necessarily has no reporting obligations under [S]ection 111.”[3] 

In the bigger picture, the Illinois Fund’s action against CMS comes on the heels of a successful challenge asserted by the California Insurance Guarantee Association (CIGA) in 2019 in which the Ninth Circuit ruled that CIGA was not a primary plan subject to Medicare conditional payment recovery claims. California Insurance Guarantee Ass’n v. Burwell, 227 F.Supp. 3d 1101 (C.D. Cal. 2017), rev’d, 940 F.3d 1061 (9th Cir. 2019).  CMS subsequently confirmed that CIGA was also not responsible for Section 111 reporting based on the Ninth Circuit’s ruling.  The CIGA decision has sparked interest with some guaranty funds in mounting similar challenges to its obligations under the Medicare Secondary Payer (MSP), as evidenced by the Illinois Fund’s action. In addition, it is noted that the North Carolina Insurance Guaranty Association has also filed an action arguing that it is not a primary plan or applicable plan for MSP compliance purposes.  However, the United States District Court for the Eastern District of North Carolina dismissed the North Carolina Fund’s action, in part, on similar jurisdictional grounds involving administrative exhaustion. North Carolina Insurance Guaranty Association v. Becerra, et. al., 2021 WL 4302243 (E.D. North Carolina September 21, 2021).  The North Carolina Fund has appealed this decision to the United States Fourth Circuit Court of Appeals which remains pending at this time.

For those interested in a more detailed overview of the court’s decision in the Illinois Fund case, the following is presented:

Background  

This action brought by Illinois Fund follows a successful challenge asserted by the California Insurance Guarantee Association (CIGA) a few years earlier regarding its MSP obligations in California Insurance Guarantee Ass’n v. Burwell, 227 F.Supp. 3d 1101 (C.D. Cal. 2017), rev’d, 940 F.3d 1061 (9th Cir. 2019).  In CIGA, the Ninth Circuit reversed a lower court ruling and held that CIGA was not a primary plan subject to CMS conditional payment reimbursement demands and, thus, was not obligated to reimburse CMS for conditional payments.[4]  Following this ruling, CIGA asked CMS whether the Ninth Circuit’s ruling also meant that it was not required to report under Section 111.  In response, the Director of CMS’s Office of Financial Management replied that CIGA no longer had Section 111 reporting obligations for payments made on behalf of insolvent California members.[5] 

Following this chain of events, the Illinois Fund then asked the Director of CMS’s Office of Financial Management if, based on the Ninth Circuit’s ruling, this also meant that the Illinois Fund had no reporting responsibilities.[6]  In response, however, the Director advised the Fund that the Ninth Circuit decision in CIGA did not apply to the Illinois Fund and, accordingly, the Office of Financial Management would not provide the Illinois Fund with written confirmation that it was exempt from Section 111 reporting obligations.[7] 

CMS’s response then prompted the Illinois Fund to file a declaratory judgment action in the United States District Court for Northern District of Illinois seeking a court order that (i) it was not a primary plan or an applicable plan subject to Section 111 reporting; (ii) it was not required to process its claim through any existing administrative process to obtain relief; and (iii) that CMS’s letter was a final agency action under the Administrative Procedure Act that should be set-aside as arbitrary and capricious.[8]   CMS moved to dismiss the Fund’s action for lack of standing and lack of subject matter jurisdiction.[9]

District court rules for CMS -- the Illinois Fund’s action is dismissed on jurisdictional grounds

The district court granted CMS’s motion to dismiss finding no Article III standing, no federal-question jurisdiction, and no subject matter jurisdiction since the Illinois Fund failed to first exhaust administrative remedies before filing its action in federal court.[10]   The Illinois Fund then appealed to United States Seventh Circuit Court of Appeal arguing that (i) the district court erred in finding no standing when Section 111 imposed “on-going, present compliance costs; and (ii) the court has subject-matter jurisdiction to hear its claim because no administrative channel currently exists to appeal its status as an applicable plan.”[11]

The Seventh Circuit affirms the district court’s ruling – the Fund had to first exhaust administrative remedies before seeking judicial review

On appeal, the Seventh Circuit affirmed the district court’s decision agreeing that the court had no subject matter jurisdiction to address the Illinois Fund’s claim since the Fund failed to first process its claim through Medicare’s administrative appeals process before seeking judicial review.   

In support of its decision, the court explained that “federal courts have long applied the general rule that a plaintiff must exhaust available administrative remedies before seeking judicial review” for certain claims where Congress has codified an administrative exhaustion requirement, such as certain claims involving Medicare, Social Security, and Medicaid.[12]   The court noted that “[e]ven styling a claim arising under the Medicare Act does not ordinarily permit a plaintiff to forgo exhausting administrative remedies.”[13]  According to the court, this exhaustion requirement “protects the authority of administrative agencies and promotes judicial efficiency.”[14]

Regarding Medicare, the court noted that the Social Security Act “imposes a strong administrative exhaustion requirement” per 42 U.S.C. 405(g) and (h).  In general, Section 405(g) authorizes judicial review of an agency’s “final decision” while Section 405(h) closes other routes to federal court.[15]   In this regard, the court noted that “[i]n the overwhelming majority of cases, subject matter jurisdiction over a Medicare claim stems only from Section 405(g) … which requires a party (i) to present the claim to [Medicare]; and (ii) to exhaust administrative remedies.”[16]   Finding the “presentment” aspect to be a non-issue in this case, the court focused its analysis and ruling on the requirement of administrative exhaustion.[17]

Against this backdrop, the Illinois Fund argued that the requirement to exhaust administrative remedies was not applicable in this case since CMS has not yet issued a final rule establishing a process to directly challenge Section 111 reporting obligations.[18]  Accordingly, the Fund argued that applying Section 405(h) would totally bar judicial review of its claim.[19]   

While noting the Fund’s argument had “some appeal,” the court ultimately  found that the Fund could have challenged its Section 111 reporting obligations as part of an administrative appeal of a Medicare conditional payment claim by arguing it is not a “primary plan” responsible for reimbursement under the MSP.[20]   Within this context, the court observed that if it was determined the  Fund was not a primary plan this would then mean that it would have no  Section 111 reporting obligations “[b]ecause the term ‘primary plan’ includes … all types of applicable plans, if an entity does not qualify as a primary plan, the entity necessarily has no reporting obligations under [S]ection 111.”[21]  In reaching this conclusion, the court noted that it had ordered CMS to submit a letter to the court addressing whether such a determination that the Fund is not a primary plan “also conclusively determines whether the [Illinois Fund] is required to submit reports under Section 111 …. .”[22] In response, CMS advised the court that if the Fund “is categorically excluded from being a primary plan, it cannot be an applicable plan as defined by [42 U.S.C. § 1395y(b)(8)(F)] and cannot be responsible for [Section 111 reporting].”[23]   

From another angle, the court also rejected the Illinois Fund’s argument that an exception to the general rule requiring exhaustion of administrative remedies should be applied in this case.  On this point, the court acknowledged that the United States Supreme Court has allowed a limited exception to the exhaustion requirement in certain situations where, generally, “there is simply no other method for a plan or individual to obtain relief under the Medicare Act”[24] and that “enforcement of the exhaustion requirement would make judicial review truly impossible.”[25]  However, it was noted that the Supreme Court has construed this exception narrowly and strictly[26] and has refused to allow a party, by way of example, to circumvent the exhaustion requirement simply based on “added inconvenience or cost.”[27]  The court ultimately declined to apply this exception to the Illinois Fund’s claim stating that “[w]hile applying 405(h) to foreclose federal-question jurisdiction might cause delay and inconvenience, it would not amount to a ‘complete preclusion of judicial review.’”[28]  The court also noted that while a governmental agency “can waive a plaintiff’s failure to exhaust some or all of the steps in the administrative review process without defeating jurisdiction under § 405(g),” the government had not done so in this case.[29]

No conflict with the CIGA decision

The court also opined that its decision did not conflict with the Ninth Circuit’s decision in California Insurance Guarantee Ass’n, 227 F.Supp. 3d 1106 (9th Cir. 2019).  In this case, as noted above, the court noted that the Ninth Circuit determined that CIGA was not a primary plan and, thus, was not subject to the MSP’s reimbursement requirements, which the court noted were issues not presented in the appeal before it.[30] Further, it was noted that the 9th Circuit assumed jurisdiction, without elaboration, under 28 U.S.C. 1331 and that the relevant regulation providing an appeals process for primary plans to challenge reimbursement determinations was not finalized until after CIGA filed suit, so the initial determinations sent to CIGA were deemed final agency actions subject to judicial review.[31]  In contrast, Seventh Circuit found that Section 405 (h) controlled the Fund’s claim “because it can use the appeals process for Medicare demands for repayment to challenge its status as a primary plan … [and] [s]uccess in such an appeal would show that the Illinois Fund has no section 111 reporting obligations.”[32]

Claims Considerations

The court’s opinion indicates that the Fund is now pursuing an administrative appeal of a Medicare recovery claim challenging its status as a primary payer which, as outlined above, was a possible avenue for the Fund to pursue as noted by the court.[33] Going forward, it will be interesting to see how the Fund fares on this question as it action proceeds through the administrative appeals process. Likewise, it will be interesting to see how the United States Fourth Circuit Court of Appeals will ultimately rule on a similar challenge brought by the North Carolina Insurance Guaranty Association regarding its MSP compliance obligations currently pending appellate review.  See, North Carolina Insurance Guaranty Association v. Becerra, et. al., 2021 WL 4302243 (E.D. North Carolina September 21, 2021).

On a more macro level, the court’s decision in Illinois Fund is an example of another case highlighting the court’s long-standing efforts to protect Medicare’s administrative appeals process and to ensure that disputes are channeled and exhausted through this process before assuming jurisdiction.  On this point, the Seventh Circuit’s ruling joins other recent court decisions holding that parties need to exhaust administrative remedies before seeking judicial review of their Medicare disputes.  See e.g., North Carolina Insurance Guaranty Association v. Becerra, et. al., 2021 WL 4302243 (E.D. North Carolina September 21, 2021); Fowler Pickert LLC v. Glasgow, et. al., 2020 WL 1955266 (W.D. Missouri, April 23, 2020); Fortner v. Price, 2017 WL 117712 (E.D. Missouri, March 30, 2017), Spencer v. Manes, 2013 WL 4007816 (S.D. Ohio, W.D., July 20, 2013), Taransky v. Sebelius, 953 F. Supp. 2d 563 (D. New Jersey, June 12, 2013).

Please do not hesitate to contact the author if you have any questions.


[1] The named defendants in this case included Xavier Becerra, the Secretary of Health and Human Services, the Centers for Medicare and Medicaid Services (CMS), and the United States Department of Health and Human Services. For purposes of the article, the author will simply use “CMS” when referring to the defendants.

[2] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7. 

[3]  Regarding this conclusion, the court stated more fully as follows:

[S]ection 111 divides primary plans into two categories with different reporting requirements. The term “primary plan” means (i) a group health plan or large group health plan, and (ii) a workers’ compensation law or plan, an automobile or liability insurance policy or plan, including a self-insured plan, and no-fault insurance. 42 U.S.C. § 1395y(b)(2)(A). Section 111 reporting requirements for group health plans are specified in § 1395y(b)(7), and requirements for applicable plans in § 1395y(b)(8). The parties do not argue that the Illinois Fund is a group health plan, so the specifics of how that term is defined are not relevant here. More immediately, “applicable plan” means liability insurance (including self-insurance), no-fault insurance, and workers’ compensation laws or plans. § 1395y(b)(8)(F). Because the term “primary plan” includes group health plans and all types of applicable plans, if an entity does not qualify as a primary plan, the entity necessarily has no reporting obligations under section 111. Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7 and 8.

[4] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *4. 

[5] Id. at *4.

[6] Id.

[7] Id.

[8] Id. at *1.

[9] Id. at *4.

[10] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *4, citing, Illinois Insurance Guaranty Fund v. Cochran, 2021 WL 1600172, at *2-5 (N.D. Ill. April 23, 2021).

[11] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *4.

[12] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *5, citing Woodford v. Ngo, 548 U.S. 81 (2006).

[13] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *6, citing Ancillary Affiliated v. Shalala, 165 F.3d 1069, at 1070 (7th Cir. 1999).

[14] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *5

[15] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *5

42 U.S.C. § 405(g) states as follows:

(g) Judicial review

Any individual, after any final decision of the Commissioner of Social Security made after a hearing to which he was a party, irrespective of the amount in controversy, may obtain a review of such decision by a civil action commenced within sixty days after the mailing to him of notice of such decision or within such further time as the Commissioner of Social Security may allow. Such action shall be brought in the district court of the United States for the judicial district in which the plaintiff resides, or has his principal place of business, or, if he does not reside or have his principal place of business within any such judicial district, in the United States District Court for the District of Columbia. As part of the Commissioner’s answer the Commissioner of Social Security shall file a certified copy of the transcript of the record including the evidence upon which the findings and decision complained of are based. The court shall have power to enter, upon the pleadings and transcript of the record, a judgment affirming, modifying, or reversing the decision of the Commissioner of Social Security, with or without remanding the cause for a rehearing. The findings of the Commissioner of Social Security as to any fact, if supported by substantial evidence, shall be conclusive, and where a claim has been denied by the Commissioner of Social Security or a decision is rendered under subsection (b) of this section which is adverse to an individual who was a party to the hearing before the Commissioner of Social Security, because of failure of the claimant or such individual to submit proof in conformity with any regulation prescribed under subsection (a) of this section, the court shall review only the question of conformity with such regulations and the validity of such regulations. The court may, on motion of the Commissioner of Social Security made for good cause shown before the Commissioner files the Commissioner’s answer, remand the case to the Commissioner of Social Security for further action by the Commissioner of Social Security, and it may at any time order additional evidence to be taken before the Commissioner of Social Security, but only upon a showing that there is new evidence which is material and that there is good cause for the failure to incorporate such evidence into the record in a prior proceeding; and the Commissioner of Social Security shall, after the case is remanded, and after hearing such additional evidence if so ordered, modify or affirm the Commissioner’s findings of fact or the Commissioner’s decision, or both, and shall file with the court any such additional and modified findings of fact and decision, and, in any case in which the Commissioner has not made a decision fully favorable to the individual, a transcript of the additional record and testimony upon which the Commissioner’s action in modifying or affirming was based. Such additional or modified findings of fact and decision shall be reviewable only to the extent provided for review of the original findings of fact and decision. The judgment of the court shall be final except that it shall be subject to review in the same manner as a judgment in other civil actions. Any action instituted in accordance with this subsection shall survive notwithstanding any change in the person occupying the office of Commissioner of Social Security or any vacancy in such office.

42 U.S.C. § 405(h) states as follows:

(h) Finality of Commissioner’s decision

The findings and decision of the Commissioner of Social Security after a hearing shall be binding upon all individuals who were parties to such hearing. No findings of fact or decision of the Commissioner of Social Security shall be reviewed by any person, tribunal, or governmental agency except as herein provided. 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.

[16] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at 6, citing Matthews v. Eldridge, 424 U.S. 319, at 328 (1976). 

[17] As part of its analysis, the court embarked on a discussion regarding the distinction between “presentment” and “exhaustion” noting, in part, that the Supreme Court has distinguished presentment from “the requirement that the administrative remedies prescribed by the Secretary be exhausted” to emphasize the Secretary’s power to waive administrative review only for claims presented to him. 424 U.S. at 328, 96 S.Ct. 893. Neither the Secretary nor the court can waive presentment because § 405(g) requires a decision, and without presentment, the Secretary cannot make any decision at all. See id. From its analysis, the court ultimately decided that this distinction between presentment and exhaustion of remedies made “no difference here, however, because CMS has not waived the exhaustion defense … [w]hen the government invokes the defense, we enforce the exhaustion requirement.”  Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *6.  On this point the court further stated that “[h]ere, the Illinois Fund has not exhausted administrative remedies, and CMS has not agreed to waive exhaustion. As a result, we have no need to consider whether the Illinois Fund’s letter to CMS satisfied the presentment requirement. In any event, there is no jurisdiction over this claim under § 405(g).” Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7.

[18] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7 and 8.  Regarding CMS’s forthcoming rule, the court noted that “CMS noted that it expected the final rule to fit within the existing structure for appeals of civil monetary penalties assessed by the Department of Health and Human Services. 85 Fed. Reg. at 8795–96, citing 42 C.F.R. §§ 402.19, 1005.1–.23. CMS also said that the final rule, which has not yet been issued, will be enforced only prospectively. Id. at 8796.”   Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at 4.

[19] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7 and 8.

[20] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7.   The court noted that the appeal process for an initial determination by CMS consists of four steps under 42 C.F.R. 405.904(a)(2) which it described as follows:

First, the plan can ask the contractor making initial determinations on behalf of CMS to perform a redetermination. § 405.940. Next, the plan can seek reconsideration from a “qualified independent contractor.” § 405.960. Then the plan can request a hearing before an administrative law judge, who conducts a review de novo. §§ 405.1000, 405.1042. Finally, a plan can seek de novo review from the Medicare Appeals Council, which issues the Secretary’s final decision on the matter. §§ 405.1100, 405.1130. Under 42 U.S.C. § 405(b), a district court has jurisdiction to review a decision by the Medicare Appeals Council. See also 42 C.F.R. §§ 405.1130, 405.1136(a). Section 405(h) bars federal-question jurisdiction for such appeals at any point in the review process. The only statutory source of subject-matter jurisdiction for an appeal of a repayment demand is § 405(g)’s grant of jurisdiction to review a final administrative decision. Thus, if a failure to exhaust administrative remedies defeats jurisdiction under § 405(g), subject-matter jurisdiction is lacking, and failure to exhaust administrative remedies, which is usually a waivable affirmative defense, becomes a jurisdictional bar.  Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *3.

[21] Regarding this conclusion, the court stated more fully as follows:

[S]ection 111 divides primary plans into two categories with different reporting requirements. The term “primary plan” means (i) a group health plan or large group health plan, and (ii) a workers’ compensation law or plan, an automobile or liability insurance policy or plan, including a self-insured plan, and no-fault insurance. 42 U.S.C. § 1395y(b)(2)(A). Section 111 reporting requirements for group health plans are specified in § 1395y(b)(7), and requirements for applicable plans in § 1395y(b)(8). The parties do not argue that the Illinois Fund is a group health plan, so the specifics of how that term is defined are not relevant here. More immediately, “applicable plan” means liability insurance (including self-insurance), no-fault insurance, and workers’ compensation laws or plans. § 1395y(b)(8)(F). Because the term “primary plan” includes group health plans and all types of applicable plans, if an entity does not qualify as a primary plan, the entity necessarily has no reporting obligations under section 111. Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7 and 8.

[22] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506, n 4.

[23] Id.

[24] Id. at *5[25]

[25] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *6, citing, Bowen v. Michigan Academy of Family Physicians, 476 U.S. 667 (1986).[26]

[26] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7, citing, Shalala v. Illinois Council, 529 U.S. 1, at 15 (2000).[27]

[27]Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *7.

[28] Id. at *8.

[29] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *6, citing Matthews v. Eldridge, 42 U.S. 319, at 328 (1976)

[30] Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *9.

[31]  Id. at *9, citing, California Insurance Guarantee Ass’n, 227 F. Supp. 3d at 1106 n.2; see also 80 Fed. Reg. 10611.

[32]Illinois Insurance Guaranty Illinois Fund, 2022 WL 1438506 at *9.

[33] Id. at n3.


Mark Popolizio, J.D.

Mark Popolizio, J.D., is vice president of MSP compliance, Casualty Solutions at Verisk. You can contact Mark at mpopolizio@verisk.com.


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