United States ex rel. Corporate Compliance Assocs. v. N.Y. Soc'y for the Relief Ruptured

UNITED STATES OF AMERICA, AND THE STATE OF NEW YORK EX REL.CORPORATE COMPLIANCE ASSOCIATES, Plaintiffs, v. NEW YORK SOCIETY FOR THE RELIEF OF THE RUPTURED AND CRIPPLED,MAINTAINING THE HOSPITAL FOR SPECIAL SURGERY d/b/a HOSPITALFOR SPECIAL SURGERY, JOHN R. REYNOLDS and MICHAEL H. KEMP, Defendants.

07 Civ. 292 (PKC)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

August 7, 2014

MEMORANDUM AND ORDER

CASTEL, U.S.D.J.

Corporate Compliance Associates ("Corporate Compliance") is the relator in this qui tarn action brought under the False Claims Act, 31 U.S.C. § 3729, et seq. (the "FCA"). Its Fourth Amended Complaint (the "Complaint") asserts that the defendants orchestrated several long-running schemes to defraud Medicare and Medicaid by falsely certifying legal compliance with certain regulatory and statutory obligations.

Corporate Compliance asserts that, under the direction of its then-CEO John. R. Reynolds, defendant Hospital for Special Surgery¹ (the "Hospital") paid excessive compensation to its physicians in order to induce in-house service referrals that inured to the Hospital's financial benefit. These alleged physician "kickbacks" came principally in the form of compensation arrangements that included variations in base salary tied to the physicians' referralvolumes, and an annual across-the-board payment for administrative and teaching responsibilities that the Complaint deems to have been a sham. The claim is that the Hospital has linked physician compensation to the volume of in-Hospital service referrals, and, thus, violated two federal criminal laws: the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the Stark Act, 42 U.S.C. § 1395nn(a). According to the Complaint, the Hospital fraudulently certified in its government reimbursement forms that it complied with relevant laws and regulations, when in truth it was in violation of these two statutes. The Complaint also alleges that the hospital submitted codes that falsely indicated that certain procedures where performed in physicians' private offices and not at the Hospital, and sought reimbursement for radiological procedures at two unlicensed facilities. It further alleges that defendant Reynolds successfully solicited kickbacks from an outside billing company owned by defendant Michael H. Kemp.

The Complaint alleges that the defendants' conduct has caused damage to the United States in excess of $788,000,000, arising out of hundreds of thousands of false claims. It does not quantify the amount of damages incurred by the State of New York as a result of alleged Medicaid fraud. If the FCA's treble damages provision were to apply, 31 U.S.C. § 3729(a)(1), the Hospital could be liable for an amount well in excess of $2 billion. As the qui tam relator, Corporate Compliance would be entitled to a percentage of any damages it might recover on behalf of the United States of America and the State of New York, both of which have declined to intervene in this action.

The three defendants have filed motions to dismiss pursuant to Rules 9(b) and 12(b)(6), Fed. R. Civ. P. (Docket # 60, 64, 69.) For reasons that will be explained, the Court concludes that the Complaint fails to satisfy the pleading requirements of Rule 9(b). In reaching that conclusion, this Court joins others that have concluded that an FCA claim does not satisfyRule 9(b) solely by allegations of a fraudulent scheme, but must set forth with particularity the circumstances constituting the fraud as to the claims themselves.

Defendants' motions to dismiss are therefore granted.

BACKGROUND

A. The Parties.

The Hospital is a not-for-profit corporation that operates a 172-bed orthopedic surgery center and teaching hospital located at 535 East 70th Street. (Compl't ¶ 29.) It was founded in 1863, is affiliated with the New York-Presbyterian Healthcare System and Weill Cornell Medical College, and has more than 3,000 full-time employees. (Compl't ¶ 79.) The Complaint alleges that the Hospital participates in a competitive New York City healthcare market. (Compl't ¶¶ 80-81.)

Defendant John R. Reynolds was the Hospital's Chief Financial Officer from 1986 to 1997 and its Chief Executive Officer from 1997 to 2006. (Compl't ¶ 30.) According to the Complaint, Reynolds oversaw the implementation of several unlawful schemes in an attempt to boost the Hospital's revenue. Those alleged schemes are explained in greater detail below. The Complaint asserts that on July 11, 2013, Reynolds pleaded guilty to one count of wire fraud and one count of making false statements to a law enforcement agent. (Compl't ¶ 18.) According to the indictment in the criminal case, those schemes involved kickbacks of a different kind, which were made for Reynolds's personal gain and were concealed from the Hospital's board of directors; in other words, the Hospital was a victim of Reynolds's misdeeds.²The late Judge Harold Baer sentenced Reynolds to 18 months' imprisonment on November 7, 2013. (Compl't ¶ 18.) Corporate Compliance alleges that, due to Reynolds's misconduct, the Hospital submitted claims and cost reports to the United States and the State of New York that falsely certified that the Hospital and its physicians received Medicare and Medicaid reimbursements in compliance with governing laws. (Compl't ¶ 19.)

Defendant Michael H. Kemp is the former owner of Professional Billing Controls, Inc. ("PBC"), an outside firm that provided billing services to the Hospital. (Compl't ¶ 31.) As will be discussed in greater detail, Corporate Compliance alleges that Kemp and PBC paid monthly kickbacks to Reynolds in exchange for the Hospital's billing-services contracts. (Compl't ¶ 138.)

Corporate Compliance is the qui tam relator. Corporate Compliance describes itself as a Delaware general partnership, and makes no allegations as to its business or its operations; it does not allege any relationship to the Hospital. (Compl't ¶ 28.) It appears that its claims are based in part on information obtained from unnamed former officers employed by the Hospital, including its former Chief Compliance Officer and its former Associate Vice President of Physician Services.

B. Alleged Kickbacks to Solicit Physician Inducements for Hospital Referrals.

As noted, much of the Complaint is directed toward an alleged scheme whereby the Hospital paid excessive compensation to its physicians in order to induce them to make referrals for patient services within the Hospital. The Complaint alleges that the Hospital sought to enhance its profits by ensuring that lucrative procedures were performed within the Hospital's own facilities and not at other institutions. It again bears emphasizing that the Complaint's theory of liability is premised on the Hospital's legal certifications that its submissions for reimbursement complied with applicable laws.

According to the Complaint, the Hospital sought to increase its profits from facilities-based revenue. Corporate Compliances alleges that because the Hospital has a limited number of beds, it generates substantial revenue from offices visits, surgeries, diagnostic services and rehabilitation services. (Compl't ¶ 4.) The Hospital's physicians bill patients for services such as visits and surgeries, but, separately, the Hospital bills patients for the use of facilities associated with those services, such as access to operating rooms, diagnostic equipment and supplies. (Compl't ¶ 4.) Corporate Compliances labels the Hospital's facilities-based revenue as "derivative revenue." (Compl't ¶ 4.)

Corporate Compliance asserts that the Hospital provided monetary incentives to physicians in order to induce and encourage referrals that brought the Hospital derivative revenue. (Compl't ¶ 5.) In calculating such physician payments, the Hospital allegedly considered the value and volume of physician referrals. (Compl't ¶ 5.) The Hospital and the physicians then submitted claims to Medicaid and Medicare for reimbursement. (Compl't ¶ 5.)

The Hospital's compensation arrangements varied based on whether a doctor was classified as a "contract physician" or an "independent physician."

1. The Compensation Arrangement for Contract Physicians.

The Hospital paid contract physicians both a salary and a percentage of their billings. (Compl't ¶¶ 7, 92.) According to the Complaint, salary and billing percentage varied based on the amount of derivative revenue that the physician generated to the Hospital. (Compl't ¶ 8.) The base salaries of contract physicians ranged from $200,000 to $750,000. (Compl't ¶ 92.) Contract physicians received other on-the-job benefits, including payment of administrative costs and malpractice insurance. (Compl't ¶ 92.)

Because contract physicians referred "nearly 100% of their patients to [the Hospital's] operating rooms," derivative revenue substantially underwrote physician salaries. (Compl't ¶ 9.) According to the Complaint, the Hospital heavily weighed the amount of derivative revenue generated by a contract physician when it calculated salaries. (Compl't ¶ 96.) The greater the derivative revenue, the higher the physician salary. (Compl't ¶ 96.) The Complaint names two specific physicians who allegedly received variable compensation in 2002 and 2003 based on the number of surgeries that they performed and the corresponding derivative revenue gained by the Hospital. (Compl't ¶¶ 98-100.) Were it not for physician referrals, the resulting derivative revenue and the corresponding reimbursement from Medicare and Medicaid, the Complaint alleges, the Hospital would have been "subsidizing" physician salaries, because the revenue generated solely through the physicians' professional billings was less than their salaries. (Compl't ¶¶ 9-10, 101-07.)

2. The Hospital's Use of Independent Physicians.

According to Corporate Compliance, the Hospital "tried to push" contract physicians who generated low derivative revenue into reclassification as "independent physicians." (Compl't ¶¶ 109-11.) Independent physicians...