United States ex rel. Sibley v. Univ. of Chi. Med. Ctr.

44 F.4th 646

UNITED STATES of America EX REL. Kenya SIBLEY, et al., Plaintiffs-Appellants,

v.UNIVERSITY OF CHICAGO MEDICAL CENTER d/b/a University of Chicago Medicine, et al., Defendants-Appellees.

No. 21-2610

United States Court of Appeals, Seventh Circuit.

Argued May 18, 2022

Decided August 11, 2022

Warner Mendenhall, Attorney, Law Offices of Warner Mendenhall, for Plaintiffs-Appellants.

Paul Whitfield Hughes, Andrew Lyons-Berg, Attorneys, McDermott, Will & Emery, Washington, DC, David S. Rosenbloom, Sean Hennessy, Attorneys, McDermott, Will & Emery LLP, Chicago, IL, for Defendant-Appellee University of Chicago Medical Center.

Sarah R. Marmor, George D. Sax, Attorneys, Scharf Banks Marmor LLC, Chicago, IL, Morgan G. Churma, Attorney, Farella Braun & Martel, San Francisco, CA, for Defendants-Appellees Trustmark Recovery Services, Medical Business Office.

Before Hamilton, Brennan, and Kirsch, Circuit Judges.

Brennan, Circuit Judge.

Kenya Sibley, Jasmeka Collins, and Jessica Lopez worked for Medical Business Office Corp. ("MBO") and Trustmark Recovery Services, Inc., two jointly owned companies that deliver medical-billing and debt-collection services to healthcare providers. After they raised concerns about their employers' business practices, the three employees were fired. They sued MBO and Trustmark—as well as the University of Chicago Medical Center ("UCMC"), one of MBO's clients—under the False Claims Act, 31 U.S.C. § 3729, et seq. That statute allows private parties, known as relators, to sue on behalf of the United States.

Regulations specify that Medicare providers seeking reimbursement for "bad debts" owed by beneficiaries must have first made reasonable efforts to collect those debts. The relators' allegations concern those regulations. UCMC, they assert, knowingly avoided an obligation to repay the government after it effectively learned that it had been reimbursed for noncompliant debts. Per the relators, MBO and Trustmark caused the submission of false claims to the government by flouting the regulatory requirements. Each relator also brings a retaliation claim against MBO and Trustmark.

The district court dismissed the operative complaint with prejudice. It ruled that UCMC could not be liable because it never recognized any obligation to repay the government. The court also concluded that MBO and Trustmark were not liable for causing the submission of false claims to the government because the complaint did not identify an example of a false statement made in connection with Medicare reimbursements. The retaliation claims were dismissed as well because the relators could not show they reasonably believed their employers were causing the submission of false claims.

We affirm in part and reverse in part. The district court properly dismissed the claim against UCMC, which neither had an established duty to repay the government nor acted knowingly in avoiding any such duty. The direct false claim against MBO was also correctly dismissed. As to MBO, the relators did not meet the applicable standard because they failed to include specific representative examples of noncompliant patient debts, linked to MBO, for which reimbursement was sought. But the complaint includes specific examples of patient debts as to Trustmark, so we reverse the dismissal of the direct false claim against it. As for retaliation, Sibley and Collins have alleged facts that support the inference that they reasonably believed their employers were causing the submission of false claims to the government. We hold that their retaliation claims may proceed. Lopez cannot meet that standard, though, so her retaliation claim was appropriately dismissed.

I

A

The federal government reimburses Medicare providers for "bad debts" under 42 C.F.R. § 413.89. If a Medicare patient fails to make required deductible or coinsurance payments, the provider may seek reimbursement from the Centers for Medicare and Medicaid Services ("CMS") for those bad debts. 42 C.F.R. § 413.89(b), (e). There are four longstanding requirements for a debt to be reimbursable:

• The debt "must be related to covered services and derived from deductible and coinsurance amounts";

• The provider "must be able to establish that reasonable collection efforts were made";

• The debt must be "actually uncollectible when claimed as worthless"; and

• "Sound business judgment [must establish] that there was no likelihood of recovery at any time in the future."

Id. § 413.89(e); see also 31 Fed. Reg. 14808, 14813 (Nov. 22, 1966) (delineating these requirements).

CMS has promulgated specific rules for what actions a provider must take to meet the second requirement—"reasonable collection efforts." For years, those rules were contained in CMS's Provider Reimbursement Manual. Then, in 2020, CMS retroactively codified those regulations at 42 C.F.R. § 413.89(e)(2). CMS explained that the rules had not changed; rather, the newly codified regulations expressed longstanding policies. 85 Fed. Reg. 58432, 58989–96 (Sept. 18, 2020).

Under § 413.89(e)(2), a provider's reasonable collection efforts must last at least 120 days after the issuance of the original bill before a debt is written off as uncollectible. A provider is also required to "[s]tart a new 120-day collection period each time a payment is received within a 120-day collection period." Id. § 413.89(e)(2)(i)(A)(5). If a provider takes the appropriate steps, it may seek reimbursement for debts from CMS when it submits its annual cost report. Hospitals are entitled to recover 65 percent of their allowable bad debts for any fiscal year after 2012. Id. § 413.89(h)(1)(v).

B

This appeal reviews the district court's dismissal of the relators' claims under Federal Rule of Civil Procedure 12(b)(6), so we must accept all well-pleaded facts as true and draw all reasonable inferences in their favor. United States ex rel. Prose v. Molina Healthcare of Ill., Inc. , 17 F.4th 732, 738–39 (7th Cir. 2021). The following facts are taken from the relators' operative Second Amended Complaint.

The UCMC bad debt scheme. Beginning in 2004, UCMC contracted with MBO to provide billing and collection services. Under the contract, UCMC paid MBO a monthly rate based on the number of MBO employees working full-time to collect debts owed to UCMC. They amended the contract in 2016 to allow MBO to handle additional UCMC accounts, including Medicare and Medicaid accounts receivable. Some of MBO's duties involved collecting debts that Medicare beneficiaries owed to UCMC, which would ultimately report many of those debts to CMS as Medicare bad debts.

UCMC authorized MBO to have up to nine employees working on the Medicare/Medicaid project. Instead, MBO assigned only two employees to work on collecting UCMC's Medicare and Medicaid beneficiary debt while falsely invoicing UCMC for the remaining authorized employees. Keith Sauter, UCMC's Financial Director, managed this arrangement. Sauter profited by receiving purported "consulting fees" from MBO in exchange for not reporting MBO's false invoices to UCMC executives.

When UCMC learned of MBO and Sauter's deception, the hospital system terminated Sauter's employment and began an internal audit of MBO's invoices. The audit confirmed that MBO had overbilled UCMC by at least $270,000 for the Medicare/Medicaid project between November 2016 and September 2017. In January 2018, UCMC's legal department sent MBO a letter. UCMC asserted that MBO had breached the contract by submitting inflated invoices, including those for the Medicare/Medicaid project, and it demanded approximately $700,000 in refunds.

The complaint alleges that, due to the audit, in late 2017 UCMC learned that MBO had only one person working part-time pursuing its Medicare beneficiary debt. Thus, after conducting the audit, UCMC effectively learned it was impossible that MBO had complied with federal regulations concerning reasonable collection efforts for the Medicare bad debts that UCMC had reported for the period between November 2016 and September 2017. At the time, UCMC's internal procedures for filling out cost reports dictated that the hospital system automatically submitted any amounts that MBO deemed uncollectable Medicare bad debts to the government.

In the latter half of 2017, UCMC submitted a cost report covering July 1, 2016 to June 30, 2017. UCMC certified that it had complied with all applicable regulations, and it sought reimbursement for Medicare bad debts, claiming approximately $1.16 million in adjusted reimbursable debt. According to the relators, the certification was false because UCMC knew of the procedures MBO followed when collecting debts. Despite that knowledge, UCMC never amended the 2017 cost report.

The Trustmark bad debt scheme. Trustmark has the same ownership and management as MBO, and the two companies share facilities, equipment, and employees. During the relevant period, Trustmark conducted MBO's bad debt collections for clients other than UCMC. The relators allege that Trustmark, when handling debt collection for other clients, declared Medicare beneficiary debts owed to its clients to be reimbursable bad debts. Trustmark did so even though it ignored the requirements for reimbursable bad debts under 42 C.F.R. § 413.89.

There are three mechanisms through which the relators allege Trustmark violated the bad debt regulations:

• Disregarding the requirement that at least 120 days have passed after the first statement was mailed to the beneficiary, id. § 413.89(e)(2)(i)(A)(5) ;

• Disregarding the requirement of sending the beneficiary multiple statements, seeid. § 413.89(e)(2)(i)(A)(4), (6); and

• Skipping review of many debts entirely.

As representative examples of how Trustmark's bad debt scheme operated, the relators point to debts that Trustmark handled on behalf of its client Community Hospital.

The operative complaint gives three examples in which MBO and Trustmark (acting on behalf of Trustmark's client, Community Hospital) wrote off patient...