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United States ex rel. Schaengold v. Memorial Health, Inc.

United States District Court, S.D. Georgia, Savannah Division

December 8, 2014

UNITED STATES, ex rel. PHILLIP S. SCHAENGOLD, Plaintiff-Relator,
MEMORIAL HEALTH, INC., et al. Defendants.


B. AVANT EDENFIELD, District Judge.


Memorial Health, Inc. ("Memorial Health"), Memorial Health University Medical Center, Inc. ("Memorial Hospital"), Provident Health Services, Inc. ("Provident"), and MPPG, Inc., d/b/a Memorial Health University Physicians ("MHUP") (collectively "Defendants") have moved the Court to dismiss Count Three of the United States's Complaint in Intervention. ECF No. 73. In Count Three of its Complaint in Intervention, the United States ("Government") seeks recovery under the "reverse false claims" provision of the False Claims Act ("FCA"), 31 U.S.C. § 3729(a)(1)(G). ECF No. 50 at 42-43.

Defendants argue that the Government has failed to allege that any Defendant owed a clear and established obligation to the Government as required under Section 3729(a)(1)(G) and has not alleged that any Defendant used a false record to avoid an obligation owed to the Government. ECF No. 74 at 1. Thus, Defendants argue that Count Three of the Government's Complaint in Intervention is subject to dismissal under Federal Rules of Civil Procedure 12(b)(6) and 9(b). Id. at 2. Defendants also argue that Count Three of the Complaint must be dismissed as to Memorial Health, Provident, and MHUP, because the Complaint lacks any allegations that those entities violated the reverse false claims provision of the FCA. Id. at 15.

For the reasons set forth below, the Court DENIES IN PART and GRANTS IN PART Defendants' Partial Motion to Dismiss the Government's Complaint in Intervention, ECF No. 73.


The Government has intervened as to Count I of the qui tam action brought by Phillip S. Schaengold ("Relator") for recovery under the FCA. ECF Nos. 2; 50; 51. In its most general form, the Government's Complaint in Intervention alleges that "[f]rom 2008 until 2011, Defendants entered into compensation arrangements with certain physicians that exceeded fair market value, took into account the volume of value of referrals or other business, and were not commercially reasonable, all in violation of provisions of the Social Security Act... and regulations promulgated thereunder." ECF No. 50 at 1-2 (citation omitted). Thus, the Government contends that Defendants violated the FCA "[b]y knowingly submitting claims for reimbursement based on referrals generated by physicians who received improper compensation pursuant to th[o]se relationships." Id. at 2.

A. Statutory Background

1. The False Claims Act

"[T]he FCA makes it unlawful to knowingly submit a fraudulent claim to the government." United States ex rel. Schumann v. Astrazeneca Pharms. L.P., 769 F.3d 837, 840 (3d Cir. 2014). A "reverse false claim" under the FCA "is a false statement used not to obtain payments from the government, but to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government." United States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 835 (7th Cir. 2011) (quotation omitted); see also United States ex rel. Matheny v. Medco Health Solutions, Inc., 671 F.3d 1217, 1222 (11th Cir. 2012) (stating "liability results from avoiding the payment of money due to the government" in a "reverse false claim" action).

A prima facie reverse false claim cause of action requires proof of "(1) a false record or statement; (2) the defendant's knowledge of the falsity; (3) that the defendant made, used, or causes to be made or used a false statement or record; (4) for the purpose to conceal, avoid, or decrease an obligation to pay money to the government; and (5) the materiality of the misrepresentation." Matheny, 671 F.3d at 1222.

2. The Stark Statute

Congress enacted the "Stark Statute" in 1989 as part of the Omnibus Budget Reconciliation Act of 1989. See Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2106, § 6204, 103 Stat. 2106, 2236-43 (1989). "The oft-stated goal of the Stark laws is to curb overutilization of services by physicians who could profit by referring patients to facilities in which they have a financial interest." Jo-Ellyn Sakowitz Klein, The Stark Laws: Conquering Physician Conflicts of Interest?, 87 Geo. L.J. 499, 511 (1999).

In its current form, the Stark Statute contains two general prohibitions. First, physicians may not refer patients to an entity with which the physician, or an immediate family member, has a financial relationship "for the furnishing of designated health services" ("DHS"). 42 U.S.C. § 1395nn(a)(1)(A). Second, the law prohibits entities from presenting claims for DHS provided pursuant to a prohibited referral. Id. § 1395nn(a)(1)(B).

With certain exceptions, the Stark Statute defines a financial relationship between a physician, or a physician's immediate family member, and an entity as "ownership or investment in the entity, " or "a compensation arrangement... between the physician... and the entity." Id. § 1395nn(a)(2)(A)-(B). A "compensation arrangement" is any arrangement involving any remuneration between a physician, or a physician's immediate family member. Id. § 1395nn(h)(1)(A). "A direct compensation arrangement exists if remuneration passes between the referring physician... and the entity furnishing DHS without any intervening persons or entities." 42 C.F.R. § 411.354(c)(1)(i). On the other hand, an "indirect compensation arrangement" is one where (1) "[b]etween the referring physician... and the entity furnishing DHS there exists an unbroken chain of any number... of persons or entities that have financial relationships... between them..."; (2) "[t]he referring physician... receives aggregate compensation from the person or entity in the chain with which the physician... has a direct financial relationship that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS"; and (3) "[t]he entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician... receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS." See id. §§ 411.354(c)(2)(i)-(iii).

The Stark Statute includes several exceptions to its general prohibition on compensation arrangements between referring physicians and health care entities. See 42 U.S.C. §§ 1395nn(b), (e); 42 C.F.R. § 411.357; see also United States v. Halifax Hosp. Med. Ctr., 2013 WL 6017329, at *5 (M.D. Fla Nov. 13, 2013). Of particular relevance here, the Stark Statute excepts what the statute "describes as bona fide employment relationships.' Halifax Hosp. Med. Ctr., 2013 WL 6017329, at *5; see also United States ex rel. Drakeford v. Tuomey Healthcare Sys, Inc., 675 F.3d 394, 398 (4th Cir. 2012). A compensation arrangement meets the strictures of this exception if:

(A) the employment is for identifiable services,
(B) the amount of the remuneration under the employment-
(i) is consistent with the fair market value of the services, and
(ii) is not determined in a manner that takes into account (directly or indirectly) the volume of any referrals by the referring physician,
(C) the remuneration is provided pursuant to an agreement which would be commercially reasonable even if no referrals were made to the employer, and
(D) the employment meets such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.

42 U.S.C. § 1395nn(e)(2).

The Stark Statute provides that no payment shall be made for DHS provided in violation of the statute. Id § 1395nn(g)(1). Any person who collects funds billed in violation of the statute may be liable for civil money penalties and "shall refund on a timely basis... any amounts" collected in violation of the statute. See id. §§ 1395nn(g)(2)-(3); 42 C.F.R. § 411.353(d) ("An entity that collects payment for a [DHS] that was performed pursuant to a prohibited referral must refund all collected amounts on a timely basis."). The regulations implementing the Stark Statute define a "timely basis" as "the 60-day period from the time the prohibited amounts are collected by the individual or the entity." 42 C.F.R. § 1003.101.

3. The Medicare Program

Congress enacted Title XVIII of the Social Security Act in 1965, "establish[ing] the Medicare program to provide health insurance for the aged." Eleanor D. Kinney, The Medicare Appeals System for Coverage and Payment Disputes: Achieving Fairness in a Time of Constraint, 1 Admin. L.J. 1, 5 (1987). Today, eligible Medicare beneficiaries include people who are sixty-five years of age or older, people who are under sixty-five years of age with certain disabilities, and people with "End-Stage Renal Disease." Medicare Program General Information,, Information/MedicareGenIn fo/index. html (last updated July 25, 2014, 10:10 AM). Part A of the Medicare Program "helps cover inpatient care in hospitals... and skilled nursing facilities, " as well as "hospice care and some home health care, " while Part B of the Program "helps cover doctors' services and outpatient care." Id.

The Centers for Medicare and Medicaid Services ("CMS") is primarily responsible for the administration of the Medicare Program and CMS, in turn, "contracts with private entities known as Medicare administrative contractors ("MACs") to assist in it in administering the program." Centro Radiológico Rolón, Inc. v. United States, 2014 WL 556452, at *1 (D.P.R. Feb. 13, 2014). These MACs act on behalf of CMS, see 42 C.F.R. § 421.5(b), and "make[] payments retrospectively (after the services are furnished) to healthcare entities, such as hospitals, for inpatient and outpatient services." Drakeford, 675 F.3d at 397 n.5. CMS requires hospitals enrolled in the Medicare program to submit claims for reimbursement "using a Form UB-04, '" Halifax Hosp. Med Ctr., 2013 WL 6017329, at *1, and to "submit annually a Hospital Cost Report... which summarizes the amount of interim payments received and the amount to which they claim entitlement from Medicare." In re Cardiac Devices Qui Tam Litig., 221 F.R.D. 318, 328 (D. Conn. 2004). At all times relevant to the Government's Complaint, Memorial Hospital "was... enrolled in Medicare as a participating provider." ECF No. 50 at 9.

Every cost report contains a "Certification" that the covered provider's chief administrator, or a responsible designee, must sign. Id. at 11. Memorial Hospital's cost reports contained the following certification during the relevant time period:

[T]o the best of my knowledge and belief, [the hospital cost report and statement] are true, correct and complete, and prepared from the books and records of the provider in accordance with applicable instructions, except as noted. I further certify that I am familiar with the laws and regulations regarding the provision of health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations.

Id. (second alteration in original).

Additionally, Memorial Hospital's cost reports contained a notice advising its signer that any misrepresentation or falsification, as well as any violation of applicable law, may result in civil, criminal, or administrative punishment. Id.

MACs rely on these cost reports and certifications in determining how much reimbursement is due to the provider and whether the government is due recoupment for any overpayments. See 42 C.F.R. § 405.1803. Falsely certifying compliance with the Stark Statute in connection with a claim for reimbursement under the Medicare program is actionable under the FCA. United States ex rel. Kosenske v. Carlisle HMA, Inc., 554 F.3d 88, 94 (3d Cir. 2009).

B. Factual Background

The scheme alleged in the Government's Complaint is complex and therefore bears explaining in some detail. For purposes of this background, the Court accepts all facts stated in the Government's Complaint in Intervention as true. See Kwok v. Delta Air Lines Inc., 994 F.Supp.2d 1290, 1292 (N.D.Ga. 2014).

1. Defendants and Their Relationship to Each Other

As an initial matter, it is important to identify the individual Defendants and their relation to each other. Memorial Health, a Georgia non-profit corporation, owns and operates a healthcare system made up of both outpatient and inpatient facilities, physician practices, residency teaching programs, and other ancillary facilities and programs (collectively "Memorial System"). ECF No. 50 at 3. Memorial Health also is the parent company of several wholly-owned subsidiaries. Id.

Memorial Hospital, a Georgia non-profit corporation and a wholly-owned subsidiary of Memorial Health, operates a 654-bed medical center serving counties in southeastern Georgia and southern South Carolina and is enrolled in the ...

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