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United States ex rel. Complin v. North Carolina Baptist Hospital

United States District Court, M.D. North Carolina

February 4, 2019




         This matter is before the court for review of the Memorandum Opinion and Recommendation (the “Recommendation”) filed on December 28, 2016, by Magistrate Judge L. Patrick Auld, (Doc. 83), in accordance with 28 U.S.C. § 636(b)(1), Fed.R.Civ.P. 72(b), and Local Rule 72.1(a). The Recommendation addressed the motions to dismiss filed by Defendant North Carolina Baptist Hospital (“NCBH”), (Doc. 64), and Defendant The Charlotte-Mecklenburg Hospital Authority, doing business as Carolinas Healthcare System (“CHS”), (Doc. 67). In the Recommendation, the Magistrate Judge recommended that each Defendant's motion to dismiss be granted and that Plaintiff/ Relator's (“Relator”) Second Amended Complaint, (Doc. 62), be dismissed with prejudice. Relator objected to the Recommendation, (Doc. 86); Defendants responded, (Docs. 89, 90), and Relator replied, (Docs. 101, 102). For the reasons set forth herein, this court will adopt the Recommendation and will overrule Relator's objections to the Recommendation. Relator's Second Amended Complaint should be and will be dismissed with prejudice.


         Relator initiated this case over nine years ago. On June 11, 2009, Relator filed under seal his original qui tam Complaint in this matter, alleging violations of the federal False Claims Act (“FCA”), 31 U.S.C. § 3279 et seq., by Defendant NCBH and one of Defendant CHS's facilities, Carolinas Medical Center. (Complaint (Doc. 1).) On July 26, 2010, Relator filed his First Amended Complaint under seal, adding claims under North Carolina's FCA, N.C. Gen Stat. § 1-605 et seq. (Amended Complaint (Doc. 16).) The case remained under seal for several years following numerous orders issued by Magistrate Judge Wallace W. Dixon, and then Magistrate Judge Auld, granting numerous motions by the United States for an extension of time to decide whether to intervene. (E.g., Docs. 26, 29, 38.) On August 14, 2015, the United States declined to intervene. (Doc. 48.) Shortly thereafter, on August 27, 2015, Magistrate Judge Auld ordered the case unsealed and ordered Relator to serve the then-operative Complaint on Defendants. (Doc. 49.) Counsel for Defendants waived service. (Docs. 57, 58.)

         On February 4, 2016, Relator filed the Second Amended Complaint, (Doc. 62), which is the subject of the Magistrate Judge's Recommendation. (Relator revealed in the Second Amended Complaint that Complin, a Delaware general partnership, was the nominal plaintiff in this case and that Joseph H. Vincoli was the real plaintiff/relator, (Second Amended Complaint (“Second Am. Compl.”) (Doc. 62) ¶ 7); this court uses Relator to refer to Vincoli.) In the Second Amended Complaint, Relator alleged under Count One that Defendants NCBH and the Charlotte-Mecklenburg Hospital Authority, d/b/a/ Carolinas Healthcare System (CHS), violated the federal FCA through a complex Medicare reimbursement scheme whereby Defendants presented false or fraudulent claims for payment to the United States that overstated the cost of health care provided to their own employees under Defendants' self-funded health benefit plans. (See Id. ¶¶ 2, 101-06.) Under Counts Two and Three, Relator brought retaliation claims under the federal (Count Two) and North Carolina (Count Three) FCAs against Defendant NCBH, Relator's former employer. (Id. ¶¶ 8, 107-20.)

         On April 8, 2016, Defendant NCBH moved to dismiss the Second Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim. (Doc. 64.) As to Count One, NCBH argued that: (i) Relator's claims were barred by a signed release; (ii) Relator failed to sufficiently allege scienter under the federal FCA; and (iii) the Second Amended Complaint failed to meet the heightened pleading requirements of Fed.R.Civ.P. 9(b). (See Docs. 64-66.) As to Counts Two and Three, NCBH argued that Relator could not recover for retaliatory actions by NCBH that allegedly occurred after the termination of his employment with NCBH and that Relator nevertheless failed to allege a plausible retaliation claim. (See id.) Defendant CHS likewise moved to dismiss for failure to state a claim, making similar arguments as to Count One. (See Docs. 67, 68.) Relator responded to both motions in a consolidated memorandum, (Doc. 73), and both Defendants replied, (Docs. 76; Doc. 77). Pursuant to Magistrate Judge Auld's order, (see Text Order dated July 12, 2016), Relator submitted a consolidated sur-reply, (Doc. 81).

         On December 28, 2016, Magistrate Judge Auld issued his Recommendation, (Doc. 83), in which he recommended that this court grant Defendants' motions to dismiss and dismiss the Second Amended Complaint with prejudice, (id. at 1, 78). The Magistrate Judge then granted Relator's motion for an extension of time to respond to the Recommendation, (Text Order dated Jan. 10, 2017), and Relator timely objected on January 18, 2017 (the “Objections”), (Obj. (Doc. 86); Declaration of Charles H. Rabon, Jr. in Supp. of Obj. (“Rabon Decl.”), Ex. A (Doc. 87-1)). Both Defendants responded. (Def. NCBH's Resp. to Pl.'s Obj. (“NCBH's Resp.”) (Doc. 89); Def. CHS's Resp. to Pl.'s Obj. (“CHS's Resp.”) (Doc. 90).) By two separate orders on September 13, 2017, this court (i) permitted Relator to reply to newly-raised matters in Defendants' responses, (Doc. 99), and (ii) denied Relator's motion to strike the documents attached to Defendants' responses or in the alternative for an extension of time to conduct discovery, (Doc. 100). On September 18, 2017, Relator replied separately to each Defendant's response to Relator's Objections. (Pl.'s Reply to CHS's Resp. (Doc. 101); Pl.'s Reply to NCBH's Resp. (Doc. 102).)


         Given the procedural posture of this case, this court will only summarize the Recommendation and Objections.

         A. The Magistrate Judge's Recommendation

         As an initial matter, in connection with his termination from NCBH, Relator and NCBH entered into a Settlement and Mutual Release Agreement effective on either May 28, 2008 or May 30, 2008. (Recommendation (Doc. 83) at 17-18; Declaration of Philip J. Mohr in Supp. of NCBH's Mot. to Dismiss (“Mohr Decl.”), Ex. 1 (Doc. 65-1).) The Magistrate Judge recommended that all claims arising before May 30, 2008, be dismissed pursuant to that settlement agreement. (Recommendation (Doc. 83) at 17-18.) Relatedly, the Magistrate Judge recommended dismissing as time-barred Relator's retaliation claims against NCBH to the extent Relator seeks recovery from NCBH in connection with a lawsuit NCBH filed against Relator in January 2011 for allegedly breaching the May 2008 settlement agreement. (Id. at 18-19; see also Second Am. Compl. (Doc. 62) ¶ 88.)

         The Magistrate Judge recommended that this court reject Defendants' arguments that Relator failed to identify with sufficient particularity those individuals who perpetrated the alleged fraud. (Recommendation (Doc. 83) at 34); see also Fed.R.Civ.P. 9(b). Similarly, the Magistrate Judge rejected Defendants' arguments that, because Relator had no actual and personal knowledge of the alleged fraud, Relator's Second Amended Complaint was not plausible and reliable as required by Fed.R.Civ.P. 9(b). (Recommendation (Doc. 83) at 36-38 (“[I]n the absence of an original source requirement . . . neither the FCA nor Rule 9(b) mandates that a relator possess personal knowledge of the alleged fraud.”).) Notwithstanding Relator's short term of employment at NCBH and the fact that Relator was never employed by CHS, Relator knew of the alleged self-dealing relationship between Defendants and the entity they purportedly co-own, MedCost Benefit Services, LLC (“MedCost”); he had reviewed publicly available Medicare cost reports; and he attached to the Second Amended Complaint a spreadsheet indicating the particulars of the allegedly fraudulent submissions - which included the approximate submission dates and alleged overstatements for numerous claims. (Id. at 34-38; Second Am. Compl., Ex. A (Doc. 62-1).)

         The Magistrate Judge, however, found that Relator failed to plausibly allege the requisite scienter by Defendants to survive a motion to dismiss in a FCA case. (Recommendation (Doc. 83) at 53-54.) The Magistrate Judge rejected Relator's argument that circumstantial evidence permitted an inference of scienter. (See Id. at 39); see also United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (citation and internal quotation marks omitted) (“[A]n FCA plaintiff . . . must set forth specific facts that support an inference of fraud.”). The Magistrate Judge found - on several different and alternative grounds - that Relator failed to sufficiently allege Defendants' knowledge in the FCA context.

         First, Relator could not establish scienter by alleging that the NCBH and CHS officials who certified the Medicare Cost Reports (the allegedly false claims) indicated “familiarity with the laws and regulations regarding the provision of health care services” when in fact they were either unaware of or recklessly disregarded the Provider Reimbursement Review Board's (non-binding and non-precedential) decision in St. Francis Hosp. Greenville v. Blue Cross Blue Shield Ass'n/Palmetto Gov't Benefits Adm'rs, No. 04-1774, 2007 WL 1774634 (P.R.R.B. Apr. 19, 2007). (Recommendation (Doc. 83) at 41-42.)

         Second, the Magistrate Judge declined to infer scienter from Defendants' motive and opportunity to defraud the United States - an argument Relator took from the securities litigation context and attempted to adapt to the qui tam context. (Id. at 42-43 (citing United States ex rel. K&R Ltd. P'Ship v. Mass. Hous. Fin. Agency, 456 F.Supp.2d 46, 62 (D.D.C. 2006), aff'd, 530 F.3d 980 (D.C. Cir. 2008)).)

         Third, the Magistrate Judge rejected Relator's argument that the complexity of the structure of Defendants' self-funded employee benefit plans was itself evidence of an intent to hide the fraud. (Recommendation (Doc. 83) at 43-44.) The Magistrate Judge found that MedCost performed legitimate functions in relation to the benefit plans. (Id. at 44-45.) Further, there were no allegations that the NCBH and CHS employees who allegedly falsely certified the Medicare Cost Reports either had any involvement in establishing MedCost or were aware that MedCost might not have been a third-party administrator under the plans, which was crucial to Relator's fraud theory. (See Id. at 45.)

         Fourth, Relator argued that sophisticated institutions like Defendants could not have innocently or mistakenly claimed “a billion dollars in fictitious costs.” (Id. at 46 (quoting Pl.'s Mem. in Opp'n to Mots. to Dismiss (Doc. 73) at 6); see also Second Am. Compl. (Doc. 62) ¶ 1.) The Magistrate Judge found that whether those costs were fictitious was a legal determination. (Recommendation (Doc. 83) at 46 (certain citations omitted) (citing United States ex rel. Rostholder v. Omnicare, Inc., 745 F.3d 694, 700 (4th Cir. 2014)).) Neither the Magistrate Judge nor this court are bound by Relator's characterization of the costs as fictitious. (Recommendation (Doc. 83) at 47 (citing United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 455 (4th Cir. 2013)).) The Magistrate Judge stated that, even assuming arguendo the costs were fictitious, the court would not infer that Defendants acted knowingly based on that fact alone because the Medicare rules were so complex and ambiguous. (See Recommendation (Doc. 83) at 47-48 (“[T]he relevant Medicare rules and regulations do not, by themselves, compel an inference that the [defendants] failed to act ‘innocently' in claiming the allegedly fictitious costs.”).)

         The Magistrate Judge summarized the relevant Centers for Medicare and Medicaid Services (“CMS”) instructions that specify what costs hospitals with self-funded employee benefit plans may claim for reimbursement. (Id. at 49.) He described what costs those plans with a third-party administrator may claim and what costs those without a third-party administrator may claim. (Id.) Hospitals with self-funded plans that do not have a third-party administrator may claim as allowable costs “the costs the hospital incurs in providing services under the plan to its employees and the hospital's payment to unrelated health care providers for services rendered . . . .” (Id. (quoting Medicare Provider Reimbursement Manual (“MPRM”), Part II, § 4005.02, at 40-62).) Relator argued that Defendants' self-funded plans had no third-party administrator and that Defendants improperly claimed amounts paid by MedCost - which was owned by Defendants and thus not an “unrelated health care provider” - to them for domestic care claims under the self-funded plans. Whether or not those payments were proper appears to depend on MedCost's status as a third-party administrator. If MedCost was not a third-party administrator, as Relator argued, then the allowable costs should have been reduced because MedCost and Defendants are related parties. The Magistrate Judge found, however, that CMS provided no specific criteria to govern how an entity is qualified or categorized as a third-party administrator. (Recommendation (Doc. 83) at 49 (citing MPRM Part II, § 4005.02, at 40-62).) Further, in responding to Relator's argument that MedCost was not a true third-party administrator, the Magistrate Judge noted that, according to a North Carolina Department of Insurance Third Party Administrator Directory provided by NCBH, (Mohr Decl. in Supp. of Defs.' Mot. to Dismiss, Ex. A (Doc 78-1) at 24), MedCost was a licensed third-party administrator in North Carolina, (Recommendation (Doc. 83) at 50).

         The Magistrate Judge agreed that MedCost was likely a related party for purposes of the related-party rule. (See Id. at 51.) That rule is applicable to those self-funded plans without a third-party administrator.[1] It specifies that the “costs applicable to services, facilities, and supplies furnished” to Defendants by a related party can be reimbursed at the cost to the related party but that cost must not exceed the comparable market cost of such services, facilities, or supplies. (Recommendation (Doc. 83) at 51 (quoting 42 C.F.R. § 413.17(a)).) The Magistrate Judge suggested, however, that the domestic care costs at issue here did not arise from “services, facilities, [or] supplies” furnished by MedCost. (Recommendation (Doc. 83) at 51.) The Magistrate Judge also found that certain CMS guidance relied upon by Relator, i.e., MPRM, Part I, §§ 332.1 and 2144.4, “lack[ed] clear applicability” to Defendants' allowable-cost determinations. (Id. at 51-52.) Finally, the Magistrate Judge reiterated that, because the Provider Reimbursement Review Board's decision in St. ...

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