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

January 8, 2021

ORDER

Defendants Northern Arizona Healthcare Corporation ("NAHC"), Northern Arizona Healthcare Foundation ("NAHF"), and Flagstaff Medical Center, Inc. ("FMC") have filed a motion to dismiss Relator Gregory Kuzma's second amended complaint. Doc. 60. The motion is fully briefed, and oral argument will not aid the Court's decision. Fed. R. Civ. P. 78(b); LRCiv 7.2(f). The Court will deny the motion.¹

I. Background.

A. Procedural History.

Relator filed this action in February 2018, alleging that Defendants violated the False Claims Act ("FCA"), 31 U.S.C. § 3729, et seq., by causing the State of Arizona to present a false claim to the federal government for payment of approximately $4.775million in federal Medicaid funds. Doc. 1. Two years later, the United States declined to intervene. Doc. 19. After conferring with Defendants, Relator filed a first amended complaint ("FAC"). Doc. 35. In September 2020, the Court dismissed the FAC for failure to plead with particularity under Rule 9(b) and granted Relator leave to amend. Doc. 52. Relator filed a second amended complaint ("SAC") on October 14, 2020. Doc. 53.

B. 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. 53 ¶ 21. Arizona's Medicaid program is administered by the Arizona Health Care Cost Containment System ("AHCCCS"), a state agency. Id. ¶ 24; see A.R.S. § 36-2901, et seq. The federal government funds a portion of Medicaid expenditures called the Federal Financial Participation ("FFP"). Doc. 53 ¶ 22. Each quarter, based on a state's estimate of anticipated Medicaid expenditures, the Centers for Medicare & Medicaid Services ("CMS") - a federal agency that administers the Medicaid program - makes an advance payment of federal funds to the state. 42 C.F.R. § 430.30(a)(2). The state draws down those funds to pay providers. Id. § 430.30(d)(3). At the end of the quarter, the state submits a Form CMS-64 ("Form-64") to CMS detailing its actual recorded Medicaid expenditures. Id. § 430.30(c)(1); Doc. 53 ¶ 31. CMS considers the Form-64 and other information in calculating the amount of federal funds awarded to the state each quarter. See 42 C.F.R. § 430.30(a)(2). If CMS's advance payment exceeds the state's actual expenditures as detailed in the Form-64, the overpayment may be withheld from future advances. Id. § 430.30(d)(2). Each Form-64 requires a state to certify that "[t]he required amount of state and/or local funds were available and used to match the state's allowable expenditures included in this report, and such state and/or local funds were in accordance with all applicable federal requirements for the non-federal share match of expenditures." Doc. 53 ¶ 32.

For state contributions to trigger FFP payments under federal law, the contributions generally must consist of state or local public funds rather than donations from privatehealth 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, however, 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). To ensure that states and their local governments bear their fair share of Medicaid expenditures, and to incentivize them to monitor their Medicaid programs for waste or fraud, non-bona fide provider-related donations are prohibited. Doc. 53 ¶¶1-2; see also, e.g., 84 Fed. Reg. 63722, 63728 (Nov. 18, 2019). All provider-related donations must be reported and documented on CMS Form-64.11 and Form 64.11A, which are part of the Form-64 package submitted by the state to the federal government. Doc. 53 ¶ 42; see also 42 C.F.R. § 433.74(a).

Provider-related donations made to states are not bona fide, have a "direct or indirect relationship" to Medicaid payments, and therefore cannot properly trigger federal payments if the donations are returned to the provider under a "hold harmless" arrangement. 42 C.F.R. § 433.54(b). Such an arrangement occurs where: (1) the state or other unit of government provides for a direct or indirect non-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," CMS will deduct the amount of the donation from the FFP the state receives. Id. § 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. 53 ¶ 50.

The restrictions on non-bona fide provider-related donations include not only donations made directly 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." 42 C.F.R. § 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 - known in Arizona as the DSH "Pool 5" program - provides supplemental Medicaid payments to hospitals that serve a disproportionate share of uninsured individuals. See generally 42 C.F.R. § 412.106; Doc. 53 ¶ 27.

C. Relator's Allegations.

The Court takes the factual allegations of the SAC as true for purposes of the motion 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. 53 ¶ 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 a tenant in a building owned by the Williams Hospital District ("WHD"), a state entity. Id. ¶¶ 9, 45-46.

In July 2015, WHD asked NAHC to consider donating $3 million to WHD to fund construction of a new medical building, matching an amount WHD had collected through a tax assessment. Id. ¶¶ 47-48. NAHC declined, but in December 2015 approached WHD about pursuing a matching contribution under an IGA. Id. ¶ 49; see A.R.S. § 11-952.

NAHC, along with FMC (a wholly-owned subsidiary of NAHC that operates a flagship hospital in the NAHC system), held discussions with WHD regarding the proposed IGA and related transactions for approximately one year. Doc. 53 ¶¶ 11, 55. NAHC employees involved in the discussions included chief financial officer Jeffery Treasure, director of strategic planning Susan Longfield, and NAHC employees Richard Smith and Jennifer Hidinger. Id. ¶ 56. In March 2016, NAHC and FMC prepared and submitted to AHCCCS the application form for obtaining payment from Arizona's DSH Pool 5 funds. Id. ¶ 57. The application, a prerequisite to the IGA, listed Smith, Hidinger, Treasure, and Longfield as FMC contacts. Id ¶¶ 58-60. On March 24, 2016, FMC and NAHC presented a document entitled "FMC Funding Proposal Speaking Points" at a WHD board meeting. Id. ¶ 59. The document stated that WHD and FMC would enter into an agreement whereby funds provided by WHD pursuant to the IGA would eventually be returned to WHD. Id. ¶¶ 59, 70(a)-(d). From April through June 2016, WHD held additional meetings to discuss updates on the agreement. Id. ¶ 61. In June 2016, NAHC formed NAHF, a nonprofit entity. Id. ¶ 62. NAHF was formed in part to facilitate the series of transactions discussed below between NAHC, FMC, and WHD. Id. Smith and Hidinger both assumed leadership roles at NAHF: Smith as president and CEO, Hidinger as development officer. Id. ¶ 56. Hidinger participated in discussions regarding the IGA on behalf of NAHF. Id. ¶ 62. Smith participated in the discussions on behalf of both NAHC and FMC. See id. ¶ 69.

Discussions between Defendants and WHD concluded at the end of 2016. Id. Defendants and WHD agreed to a scheme whereby WHD would transfer $2.2 million to AHCCCS pursuant to an IGA, with FMC as the designated beneficiary of the DSH Pool 5 payment that would be prompted by the transfer. Id. ¶ 70(a)-(c). Once FMC received the payment from AHCCCS - which would include matching FFP funds - FMC would make a grant to WHD through NAHF. Id. ¶ 70(d). The grant would return to WHD the original $2.2 million it had donated to AHCCCS plus a portion of the FFP that FMC had received in the DSH Pool 5 payment. Id. The leftover FFP would remain with FMC or NAHF, in which NAHC retained a reversionary interest....