CABINET FOR HEALTH AND FAMILY SERVICES v. FACES OF CHANGE LLC (2026)

OPINION

The Cabinet for Health and Family Services, Department for Medicaid Services (“DMS”), et al., appeal from an order which held it did not follow certain regulatory rules and improperly withheld Medicaid payments from Faces of Change, LLC. The order also enjoined DMS from further action against Appellee until DMS complied with the relevant statutes and regulations. We believe that this cause of action is premature because Appellee did not exhaust its administrative remedies before filing the underlying complaint and petition; therefore, we reverse and remand.

FACTS AND PROCEDURAL HISTORY

Appellee is an addiction recovery center that provides drug and alcohol addiction services to people in Louisville, Kentucky. Appellee only provides services to people on Medicaid. On February 27, 2023, the Attorney General's Office of Medicaid Fraud and Abuse (“OMFA”) sent DMS a letter indicating it was investigating Appellee for potential Medicaid fraud. The letter requested that DMS not suspend Medicaid payments to Appellee at that time so as to not jeopardize OMFA's investigation. DMS did not suspend Appellee's Medicaid payments at this time.

On October 31, 2023, OMFA sent DMS another letter withdrawing its request that Medicaid payments not be suspended. The letter stated that OMFA's investigation indicated Appellee was engaged in improper billing and that Appellee was billing for services not provided. The services provided were related to code H-0038, which refers to peer support services. OMFA indicated the suspension of payments would no longer jeopardize its investigation and DMS should “determine whether to suspend payments” to Appellee. The letter does not include any evidence of improper or fraudulent billing.

On November 2, 2023, DMS sent Appellee a letter notifying it that all payments for Medicaid claims were being suspended and escrowed as of October 31, 2023. The letter stated that “[t]his withholding is due to a credible allegation of fraud relating to inappropriate billing and billing for services not provided related to code H-0038, which is currently under investigation by law enforcement.” The letter also informed Appellee that it could appeal this decision and request a dispute resolution meeting. To do so, Appellee would need to inform DMS, in writing, of its request for a meeting and also inform DMS the issues being disputed and the basis on which the department's decision was erroneous. Appellee could also provide documentation to support its decision.

DMS is permitted to withhold Medicaid payments during an investigation into Medicaid fraud or willful misrepresentation pursuant to 907 KAR ¹ 1:671, § 4(1). That regulation states that “[t]he department may withhold Medicaid payments ․ upon receipt of reliable evidence that the circumstances giving rise to the need for a withholding of payments involve fraud or willful misrepresentation under the Medicaid Program.” Id.

On December 4, 2023, Appellee, through counsel, sent a letter to DMS requesting a dispute resolution meeting. This letter also requested more information regarding the allegations. Counsel for Appellee believed DMS's letter was inadequate and did not follow 907 KAR 1:671, § 4(3), which describes what is required to be in the notice DMS sends to a provider when that provider's Medicaid payments are being withheld and suspended. The requirements listed in 907 KAR 1:671, § 4(3) are:

(a) The notice shall establish the general allegations of the nature of the withholding action, including the types of payments and payment code sections to which fraud or willful misrepresentation is alleged to have occurred. The notice shall not disclose specific information concerning its ongoing investigation.

(b) The notice shall advise a provider:

1. That payments are being withheld in accordance with this administrative regulation;

2. The statutory and regulatory basis for withholding and the facts upon which the action is taken;

3. The date upon which withholding began;

4. That withholding shall be for a temporary period;

5. The circumstances under which withholding shall be discontinued;

6. The type of Medicaid claim, as appropriate, to which withholding shall apply;

7. The provider's right to submit written evidence for consideration by the department; and

8. The provider's administrative appeal process rights, if any, in accordance with Sections 8 and 9 of this administrative regulation.

In the letter, Appellee's counsel stated that he did not believe DMS provided sufficient facts in its letter to allow Appellee to dispute the allegations. Counsel for Appellee also informed DMS that he believed there was no credible allegation of fraud sufficient to withhold Medicaid payments.

DMS then sent Appellee's counsel a letter dated January 9, 2024. This letter informed Appellee that DMS was waiving the dispute resolution meeting, as allowed by 907 KAR 1:671, § 8(12). The letter also stated that DMS was upholding the Medicaid payment withholding and that this decision was subject to review by an administrative hearing if requested by Appellee. Finally, the letter stated that DMS accepted the opening of a law enforcement investigation by OMFA as a credible allegation of fraud. The letter provided no new information regarding the fraud allegations.

On January 26, 2024, Appellee submitted a request for an administrative hearing. A hearing officer was assigned on May 14, 2024, and an initial telephonic conference occurred on June 11, 2024. The parties then submitted briefs to the hearing officer. On September 27, 2024, the parties filed a motion for a final ruling.

On October 9, 2024, Appellee filed a petition in the Franklin Circuit Court seeking a declaratory judgment and injunction. Appellee raised the same issues that it raised in its letter to DMS, namely, that DMS violated 907 KAR 1:671 by not having adequate information in its letter regarding the allegations and for not having a credible allegation of fraud. Appellee also claimed that DMS acted arbitrarily. We note this petition was filed before the administrative appeals process was completed. A hearing regarding the injunction was held on October 30, 2024. The issues were discussed and argued before the court. The court believed that there were no factual issues in dispute and that only legal issues were in question. The court then stated that it was treating the issue as ripe for summary judgment and allowed the parties to submit briefs.

On January 7, 2025, the court entered an order of summary judgment in favor of Appellee. The court held that Appellee did not have an adequate administrative remedy; therefore, it was not required to exhaust that avenue of appeal before bringing the issue to the court. In addition, the court held that DMS's notice letter did not adhere to the 907 KAR 1:671, § 4 requirements because it did not provide sufficient information regarding the alleged fraudulent activities. The court also believed that the opening of an investigation into fraudulent activities by the OMFA, by itself, was not a “credible allegation of fraud” sufficient to trigger the Medicaid withholding. The court further held that DMS acted arbitrarily by failing to give sufficient information in its notice letter that would allow it to adequately defend itself in a dispute resolution meeting. Finally, the court granted injunctive relief to Appellee. The court believed Appellee would be destroyed and driven out of business if DMS continued to withhold Medicaid payments; therefore, it enjoined DMS from withholding and escrowing future Medicaid payments. The injunction was not permanent. The court only enjoined further action by DMS until they complied with 907 KAR 1:671, § 4. This appeal followed.

ANALYSIS

As stated previously, we must reverse and remand this case. Appellants correctly argue that Appellee did not exhaust its administrative remedies before filing the underlying lawsuit. Appellee sought redress from the courts before the Secretary of the Cabinet for Health and Family Services was able to enter a final order.

“As a general rule, exhaustion of administrative remedies is a jurisdictional prerequisite to seeking judicial relief.” Commonwealth v. DLX, Inc., 42 S.W.3d 624, 625 (Ky. 2001) (citation omitted).

The doctrine of exhaustion of administrative remedies defined as the proper judicial administration mandates judicial deference until after exhaustion of all viable remedies before the agency vested with primary jurisdiction over the matter. Exhaustion of remedies does have exceptions as explained in Popplewell's Alligator Dock No. 1, Inc. v. Revenue Cabinet, 133 S.W.3d 456 (Ky. 2004), wherein the Supreme Court recognized two exceptions to the general and often relied upon rule that to appeal an agency's decision, one must previously exhaust all administrative remedies. These exceptions are: 1) where a regulation is void on its face; or 2) where continuation of the administrative process would be an exercise in futility. The latter exception applies when a complaint raises an issue of jurisdiction as a mere legal question, not dependent upon disputed facts, so that an administrative denial of the relief sought would be clearly arbitrary.

Board of Trustees of Kentucky Retirement Systems v. Commonwealth, Board of Claims, 251 S.W.3d 334, 339 (Ky. App. 2008) (internal quotation marks and citations omitted).

Here, the trial court believed Appellee did not have to exhaust its administrative remedies because it would be an act of futility. Specifically, the court believed it would be futile for Appellee to wait for a final order from the Secretary of the Cabinet because it would likely hold that suspending and escrowing the Medicaid payments was proper. The court held as such because it had sat on previous cases where such a result occurred and believed the same would happen to Appellee. In essence, the court held that Appellee need not wait for an outcome that was all but certain.

In addition, the court held that forcing Appellee to wait for the Secretary of the Cabinet to enter a final order would foist undue hardship upon Appellee. At the time of the trial court's judgment, it had been 292 days since Appellee had requested an administrative hearing. The court believed that withholding all Medicaid payments from Appellee until the conclusion of the administrative process would be a death sentence to the company.

While we are sympathetic with Appellee's plight, the court's reasons for ruling that Appellee need not conclude the administrative process were erroneous. The “futility exception” applies when an administrative agency cannot act within its jurisdiction, or the agency cannot provide the other party a remedy. Popplewell's, 133 S.W.3d at 469. For example, if Appellee was only arguing that a regulation or statute was unconstitutional, then forcing it to go through the administrative process would be an act of futility. “This is because an administrative agency cannot decide constitutional issues.” DLX, Inc., 42 S.W.3d at 626 (citation omitted). In this example, Appellee would go through an administrative process that would ultimately not be able to decide the constitutional issue and also provide no remedy to Appellee. This would be a futile waste of time.

Such futility is not present in the case before us. First, the Cabinet and DMS are not acting outside their jurisdiction. Appellee and the court may believe the Cabinet and DMS are misinterpreting relevant regulations, but that does not mean the Cabinet and DMS are acting without jurisdiction. The proper interpretation of the regulations can be argued during the administrative process. Second, the Cabinet can provide a remedy for Appellee. Appellee may be frustrated waiting for the potential remedy, but the remedy exists. The Secretary of the Cabinet could agree that the Medicaid payments were erroneously withheld from Appellee. The Secretary could then release said funds and conclude there is no reason to withhold additional payments. Further, while the trial court may believe that it knows how the Secretary of the Cabinet will ultimately rule, such belief does not negate the existence of a potential administrative remedy.

The court's reasons for allowing Appellee to jump ahead in its appeal do not equate to futility. We agree that the hardship Appellee is experiencing is real and the consequences for a prolonged administrative process are dire; however, extreme hardship does not equate to futility and is not a valid justification for failing to exhaust administrative remedies.

Appellants raise other issues on appeal, but they are moot considering our holding regarding exhaustion of administrative remedies.

CONCLUSION

Based on the foregoing, we reverse and remand. Appellee erroneously began court proceedings before exhausting its administrative remedies and the trial court erred in allowing the case to proceed. As a final note, we urge the Secretary of the Cabinet to rule on Appellee's administrative appeal as quickly as possible. We remind Appellants that they are not just withholding payments from allegedly fraudulent claims but withholding all payments. We do not know the status of the administrative appeal as it is outside of the record before us, but Appellee has clearly been waiting a long time for a resolution.

After my review of this case, I respectfully submit this dissent. The majority Opinion premises its decision reversing the Franklin Circuit Court on the alleged failure of the Appellee, Faces of Changes, LLC (FOC), to exhaust its administrative remedies prior to seeking judicial relief. While that rule is generally applicable in cases involving review of administrative matters, it is not absolute. I am persuaded that it is clearly not absolute in this case and that Appellee properly pursued -- and that the Franklin Circuit Court properly granted -- relief under the circumstances of this case.

The majority Opinion sets forth the chronology of events that need not be repeated in detail here. The Attorney General's Office of Medicaid Fraud and Abuse sent the Department for Medicaid Services a letter announcing the initiation of an investigation of the Appellee for “potential Medicaid fraud.” While Medicaid payments were not suspended at first, that status soon changed, and payments were suspended. Critical for our consideration is the fact that insufficient information was withheld from Appellee that would have enabled it to understand the nature of the allegations against it and to mount a defense. Furthermore, the furnishing of the information was required by 907 KAR 1:671, § 4(3). More troubling yet is the inordinate length of time that transpired before final administrative action was taken, making exhaustion of administrative remedies a virtual sham in this case.

As the circuit court correctly noted, the mandatory nature of the exhaustion doctrine is subject to several exceptions -- the main one pertinent to this case being where a party can demonstrate the futility of pursuing the administrative process as a condition precedent to seeking recourse to the courts. I am satisfied that such futility does indeed exist in this case due to the Cabinet's failure to provide required information, the unconscionably long passage of time, and the likelihood of resulting irreparable damage absent judicial intervention. The circuit court was amply satisfied that such an exception to the exhaustion doctrine exists. Moreover, it engaged in a meticulous analysis of the factors governing injunctive relief as set forth in Maupin v. Stansbury, 575 S.W.2d 695 (Ky. App. 1978), finding that all three factors justifying injunctive relief existed: (1) irreparable injury, (2) the presence of compelling equities (i.e., detriment to public interest involving devastating consequences to the most vulnerable patient population), and (3) the presentation of a substantial question.

The circuit court clearly found that the public interest strongly supports injunctive relief as a critical source of funding for medical care that will disappear for the Medicare recipients served by FOC. There is no adequate remedy available in the form of a pecuniary standard to measure damages. The court analyzed Court of Appeals precedent involving the determination of pecuniary damages. It then engaged in an analysis as set forth at page 19 of its Opinion that is both persuasive and compelling:

The Court of Appeals did recognize that “[a]n injury is irreparable if there exists no certain pecuniary standard for the measurement of the damages.” Id. (citing Cy[p]rus Mountain Coal Corp. v. Brewer, 828 S.W.2d 642, 645 (Ky. 1992)). It is hard to imagine a situation that more accurately meets this description. The Cabinet may be withholding and escrowing payments, which are a certain amount, but it is doing so for an indeterminate time. If the Cabinet continues to escrow FOC's Medicaid payments, FOC will quite literally cease to exist. Even if it later recovers those payments, by the time it does so, it will be too late to recover its business. The infrastructure and programming that FOC has painstakingly created and implemented will no longer operate, the few remaining employees will have been let go, and the patients that it was established to serve will have had to go elsewhere. There is no “certain pecuniary standard” for this measure of damages.

Finally, if we were to permit this mischievous conduct to continue merely because the Cabinet has raised the exhaustion doctrine as a shield and excuse for its behavior, the danger that such a subterfuge could be utilized in the future is not only possible but highly likely. The oft-quoted language of dodging such a bullet comes readily to mind: “capable of repetition, yet evading review.” Commonwealth, Dep't of Corrections v. Engle, 302 S.W.3d 60, 63 (Ky. 2010). The Franklin Circuit Court properly analyzed the circumstances of the case to find that the futility exception to the exhaustion doctrine does exist to justify the extraordinary injunctive relief that it granted. Consequently, I would affirm its Opinion and Order.

FOOTNOTES

1.   Kentucky Administrative Regulations.

THOMPSON, CHIEF JUDGE:

ECKERLE, JUDGE, CONCURS. COMBS, JUDGE, DISSENTS AND FILES SEPARATE OPINION.