United States ex rel. Kuzma v. N. Ariz. Healthcare Corp.

United States of America, ex rel. Gregory Kuzma, Plaintiff, v. Northern Arizona Healthcare Corporation, et al., Defendants.

No. CV-18-8040-PCT-DGC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

September 30, 2020

ORDER

Relator Gregory Kuzma alleges that Defendants Northern Arizona Healthcare Corporation ("NAHC"), Northern Arizona Healthcare Foundation ("NAHF"), and Flagstaff Medical Center, Inc. ("FMC") violated the False Claims Act ("FCA"), 31 U.S.C. § 3729, et seq. Doc. 35. Defendants move to dismiss the amended complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Docs. 37 (NAHC and FMC), 39 (NAHF). The motions are fully briefed (Docs. 38, 40, 43-46), and the Court held oral argument on September 25, 2020. While the Court finds that Relator's allegations state a plausible theory under the FCA, Relator has failed to plead with the particularity required by Rule 9(b). The Court will grant the motions to dismiss without prejudice and allow Relator to amend his complaint.¹

I. Background.

A. Regulatory Framework.

Medicaid is a healthcare assistance program jointly financed by the federal government and the states, and administered by the states in accordance with federal regulations. Doc. 35 ¶ 21. Arizona's Medicaid program is administered by the Arizona Health Care Cost Containment System ("AHCCCS"), a state agency. Id. ¶ 23; see A.R.S. § 36-2901, et seq. The federal government funds a portion of Medicaid expenditures - a portion called the Federal Financial Participation ("FFP"). Id. ¶ 22.

For state contributions to prompt the receipt of FFP payments under federal law, the state contributions generally must consist of state or local public funds rather than donations from private health care providers such as hospitals. See 42 U.S.C. § 1396b(w)(1)(A); 42 C.F.R. § 433.54. Provider-related donations are permitted if they are "bona fide," meaning they have no "direct or indirect relationship" to Medicaid payments the provider receives from the state or local government. See 42 U.S.C. § 1369b(w)(2)(B); 42 C.F.R. § 433.54(a). Provider donations have a "direct or indirect relationship" to Medicaid payments if the donations are returned to the provider under a "hold harmless" arrangement. Id. § 433.54(b). Such an arrangement occurs where: (1) the state or other unit of government provides for a direct or indirect Medicaid payment to the provider or others making the donation, and the payment amount is positively correlated to the donation; (2) all or any portion of the Medicaid payment to the donor varies based only on the amount of the donation, including where the Medicaid payment is conditioned on receipt of the donation; or (3) the state or other unit of government receiving the donation provides for any direct or indirect payment, offset, or waiver that directly or indirectly guarantees to return any portion of the donation to the provider or other parties responsible for the donation. Id. § 433.54(c)(1)-(3). If a provider-related donation falls within one of these hold harmless definitions, and therefore is not "bona fide," the Centers for Medicare & Medicaid Services ("CMS") - the federal agency that administers theMedicaid program - will deduct the amount of the donation from the FFP the state receives. Doc. 35 ¶ 28; 42 C.F.R. § 433.54(e).

A state may fund its share of Medicaid and prompt the payment of FFP from the federal government through an Intergovernmental Agreement ("IGA"). See 42 U.S.C. § 1396b(w)(6)(A)-(B). An IGA is an agreement between the state Medicaid administrator (in Arizona, AHCCCS) and a qualifying public entity, under which the public entity transfers public funds to the Medicaid administrator for the state's share of Medicaid. Doc. 38 at 3.²

The restrictions on non-bona fide provider-related donations include not only donations made by a provider to the state administrator, but also donations made by a provider "to an organization, which in turn donates money to the State." Id. § 433.52(4)(1). Thus, any funds transferred by a qualifying public entity to AHCCCS pursuant to an IGA, which AHCCCS then uses to claim FFP funds, cannot come from non-bona fide provider-related donations. See 42 U.S.C. § 1396b(w)(6)(A) (allowing IGA transfers "unless the transferred funds are derived by the unit of government from donations or taxes that would not otherwise be recognized as the non-federal share"); 42 C.F.R. § 433.54(b).

AHCCCS may pay its share of Medicaid, plus the corresponding FFP, to a qualifying hospital through the Disproportionate Share Hospital program ("DSH"). This program provides supplemental Medicaid payments to hospitals that serve a disproportionate share of uninsured individuals. See generally 42 C.F.R. § 412.106.

B. Relator's Allegations.

The Court takes the factual allegations of Relator's amended complaint as true for purposes of the motions to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Relator worked for NAHC as its vice president and chief financial officer from 2004 to 2014. Doc. 35 ¶¶ 7-8. Since 2016, Relator has been employed as the chief financial officer of North Country HealthCare ("North Country"), a private nonprofit health center that is atenant in a building owned by the Williams Hospital District ("WHD"), a state entity. Id. ¶¶ 9, 37.

In 2015, WHD asked NAHC to consider donating $3 million to fund the construction of a new medical building, matching the amount WHD had collected through a tax assessment. Id. ¶¶ 38-39. NAHC declined, and instead proposed that WHD pursue a matching contribution under an IGA. Id. ¶ 40; see A.R.S. § 11-952. NAHC and FMC held discussions with WHD regarding the proposed IGA and related transactions for approximately one year, during which time NAHC formed NAHF, a nonprofit entity. Id. ¶¶ 12, 47-48. NAHF was formed in part to facilitate the series of transactions discussed below between NAHC, FMC, and WHD. Id. ¶ 48.

Relator became aware of the discussions between Defendants and WHD while working for North Country and expressed concern about the legality of the proposed transaction. Id. ¶¶ 49, 51. Relator had previously discussed the federal prohibition on recycling of Medicaid funds with Rick Smith, a former NAHC employee who in 2016 became the president and CEO of NAHF. Id. ¶ 52. Smith explained that FMC was considering participating in an IGA to obtain Medicaid funds, and Relator replied that there were insufficient state and local funds to legally pursue the Medicaid opportunity. Id. ¶ 53.

In August 2016, Relator expressed his concern about the proposed funding arrangement to a North Country colleague who was present for some of the ongoing discussions between Defendants and WHD, and suggested that his colleague request a "flow of funds" of the transaction at the next meeting. Id. ¶¶ 54-55. According to Relator's colleague, when asked for the flow of funds at the meeting, Jennifer Hidinger, an NAHC employee who acted on behalf of all Defendants in the discussions, said "we can't put anything in writing." Id. ¶ 56.

On February 1, 2017, WHD entered into an IGA with AHCCCS. Id. ¶ 58; Doc. 38-1 at 8. Attachment B to the IGA was an "Agreement to Reimburse Impermissible Disproportionate Share Hospital Payments" signed by FMC as the hospital that would receive the DSH payment. Id. at 10. The agreement required FMC to refund the DSHpayment if it was determined that the source of the funds was not permissible under federal law. See id. Neither NAHC nor NAHF were parties to the IGA or signatories to its attachments. Id.

Pursuant to the IGA, WHD transferred $2.2 million to AHCCCS and represented that the funds constituted the non-federal share of a DSH payment to be made to FMC. Doc. 35 ¶ 58. AHCCCS then requested and received $4,757,270 of FFP from the federal government, and transferred the total received from WHD and the federal government ($6,975,270) to FMC as a DSH payment. Id. ¶ 59. FMC in turn transferred $6 million of this amount to NAHF, and NAHF gave a $6 million grant to WHD. Id. ¶¶ 58-60. Relator alleges that this series of transactions had the effect of returning the original $2.2 million that WHD had provided to AHCCCS, plus an additional $3.8 million. Id. ¶ 60. FMC retained approximately $975,000. Id. ¶¶ 60, 62.

Relator filed this action on February 28, 2018. Doc. 1. Two years later, the United States notified the Court of its decision not to intervene. Doc. 19. Relator amended his complaint after conferring with Defendants about their planned motion to dismiss. Docs. 30, 35. The amended complaint alleges that Defendants violated the FCA by implementing the series of transactions described above. Doc. 35. Relator further alleges that Defendants violated the FCA by failing to reimburse Medicaid for the impermissible DSH payment to FMC. Id.

II. Relevant Legal Standards.

When analyzing a complaint for failure to state a claim to relief under Rule 12(b)(6), the well-pled factual allegations are taken as true and construed in the light most favorable to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). A successful motion to dismiss under Rule 12(b)(6) must show either that the complaint lacks a cognizable legal theory or fails to allege facts sufficient to support its theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). A complaint that sets forth a cognizable legal theory will survive a motion to dismiss as long as it contains "sufficientfactual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Because FCA claims involve allegations of fraud, they must comply with the heightened pleading requirements of Rule 9(b). Cafasso ex rel. United States v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054-55 (9th Cir. 2011). That rule requires a party alleging fraud to "state with particularity the circumstances...