United States ex rel. Flanagan v. Fresenius Med. Care Holdings

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UNITED STATES ex rel. MARTIN FLANAGAN, Plaintiff-Relator, v. FRESENIUS MEDICAL CARE HOLDINGS, INC., d/b/a FRESENIUS MEDICAL CARE NORTH AMERICA, Defendant.

Civil Action No. 21-11627-FDS

United States District Court, D. Massachusetts

December 2, 2022

MEMORANDUM AND ORDER ON DEFENDANT'S MOTION TO DISMISS

F. DENNIS SAYLOR IV, CHIEF JUDGE, UNITED STATES DISTRICT COURT

This is a qui tam action alleging violations of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, and False Claims Act, 31 U.S.C. §§ 3729 et seq., by a company that provides dialysis services to patients with kidney failure. Relator Martin Flanagan has brought suit against defendant Fresenius Medical Care Holdings, Inc., d/b/a Fresenius Medical Care North America (“FMCNA”) alleging that FMCNA improperly provided free or below-cost services to hospitals and physicians, and made various types of improper payments to physicians, in exchange for referrals to its dialysis clinics. The complaint alleges that FMCNA violated the Anti-Kickback Statute (“AKS”) and caused the submission of false claims for payment to Medicare, Medicaid, and other government health-care payors.

FMCNA has moved to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6) and for failure to allege fraud with particularity as required by Fed.R.Civ.P. 9(b).

The False Claims Act permits relators to reap substantial awards for reporting false claims to the government-in this case the relator could conceivably recover billions of dollars if his allegations are proved. The statute has a variety of strict requirements, however, that serve both to ensure that the government has a fair opportunity to control the litigation and to screen out claims that are incomplete redundant, or parasitic. Here, the motion to dismiss presents three sets of issues, all arising from the strict requirements for pleading such claims.

The first issue is whether relator complied with the requirements of the False Claims Act to notify the government of his claims prior to filing suit. See 31 U.S.C. § 3730(b)(2). Relator did comply with that requirement before filing his original complaint, which was 22 pages long and described an illegal scheme with two essential components. He did not do so, however, before filing his amended complaint, which is 147 pages long and contains a number of substantially new allegations of different components of the scheme. Because he did not present those new claims to the government, that portion of the amended complaint alleging false claims based on that conduct will be dismissed.

The second issue is whether the public-disclosure bar of the statute precludes all or any of the claims-that is, whether relator is filing suit concerning matters that had been previously disclosed to the public. See 31 U.S.C. § 3730(e)(4)(A). Under the circumstances, the Court concludes that the bar does not apply.

The third, and perhaps most difficult, issue is whether the amended complaint pleads fraud with sufficient particularity to meet the requirements of Fed.R.Civ.P. 9(b). As is often the case with qui tam actions, the issue is not whether the complaint alleges an unlawful scheme-it does, in considerable detail-but whether it actually pleads a violation of the False Claims Act. To do so, the complaint must both allege the existence of a scheme to defraud and identify particularized false claims. It is insufficient to allege a scheme and then to make generalized allegations that the scheme must have, as a matter of logic, resulted in false claims.

Here, despite its length, the amended complaint does not describe a single particular false claim. Instead, it alleges that FMCNA paid kickbacks for referrals on a widespread basis, and that therefore “all” claims for payment that it submitted to the government were false. It also provides a very limited amount of statistical evidence to attempt to bolster those allegations. The central issue is whether relator can sidestep the requirement to plead false claims with particularity by alleging that every single claim is necessarily false. Under the circumstances presented here, the Court concludes that he cannot.

Accordingly, and for the following reasons, the motion to dismiss will be granted.

I. Background

Unless otherwise noted, the following facts are alleged in the amended complaint.

A. The Parties

FMCNA is a wholly-owned subsidiary of Fresenius Medical Care AG & Co. KGaA, which is located in Bad Homburg, Germany. (Am. Compl. ¶ 13). FMCNA is headquartered in Waltham, Massachusetts. (Id.). It employs more than 40,000 employees and treats nearly 190,000 patients at approximately 2,400 outpatient clinics in the United States, including 39 in Massachusetts. (Id.). It also contracts with hospitals to provide dialysis services on an outpatient basis. (Id.).

Martin Flanagan is a resident of Texas. (Id. ¶ 11). He was employed by Fresenius for 29 years. (Id.). His last title was Director of Acute Market Development for the Fresenius Western Business Unit. (Id.). In that role, he was responsible for, among other duties, negotiating contracts under which FMCNA provided dialysis treatment to hospital inpatients. (Id.).

B. Factual Background

Chronic kidney disease refers to the progressive loss of a person's kidney function, which is normally irreversible. (Id. ¶ 14). End-Stage Renal Disease (“ESRD”) is the stage of advanced kidney impairment that requires either continued dialysis treatments or a kidney transplant to sustain life. (Id. ¶ 15). Dialysis refers to a treatment regimen aimed at artificially replacing some of the functions performed by a healthy kidney. (Id. ¶ 17). According to the United States Renal Data System, there were approximately 746,557 ESRD patients in the United States at the end of 2017. (Id. ¶ 15). Roughly 90% of all dialysis patients undergo hemodialysis at a dialysis clinic three times per week. (Id. ¶ 18). FMCNA is America's largest dialysis-services provider. (Id. ¶ 13).

Medicare is a federally-funded health-insurance program that primarily provides benefits to the elderly, but also provides coverage to patients with ESRD, regardless of age. (Id. ¶ 19). The Medicare ESRD program is administered through the Centers for Medicare & Medicaid Services (“CMS”), an agency within the Department of Health and Human Services (“HHS”). (Id. ¶ 25). Since 1972, Medicare has been the primary payor for more than 80% of the cost of dialysis treatment for nearly 800,000 ESRD patients in the United States. (Id. ¶ 22). ESRD expenditures by Medicare exceed $40 billion annually. (Id. ¶ 23).

According to the complaint, FMCNA clinics and other providers treating ESRD submit to the government one reimbursement claim bill per month for each patient, including the charges for several dialysis treatments, any separately billable laboratory services, and separately billable drugs. (Id. ¶ 28).

Medicaid is a state-administered program where each state sets its own guidelines concerning eligibility and services, with funding coming jointly from the states and the federal government. (Id. ¶ 38). In many states, Medicaid pays for treatment costs for ESRD patients who do not qualify for Medicare and/or pays for the 20% of treatment costs not covered by Medicare. (Id. ¶ 45). Submission of claims to Medicaid that were ineligible for payment because of violation of the AKS are actionable under the FCA because the payments of those claims were made with federal funds. (Id. ¶ 44).

In addition to Medicare and Medicaid, CHAMPUS/TRICARE, which is administered by the United States Department of Defense, provides ESRD benefits to health-care programs for individuals and dependents affiliated with the armed forces and to covered beneficiaries. (Id. ¶ 35). CHAMPVA, which is administered by the United States Department of Veterans Affairs, is a health-care program for families of veterans with 100% service-connected disabilities and provides ESRD benefits to covered beneficiaries. (Id.).

C. FMCNA's Allegedly Improper Conduct

The complaint alleges various methods by which FMCNA improperly induced the referral of patients to its dialysis clinics. First, it alleges that FMCNA offered remuneration to hospitals in two ways: by entering into contracts that provided no-cost and/or below-cost inpatient dialysis services, and by providing “significant” free services, including free dischargeplanning services, free in-service training to staff, free training to patients, and free quality assessment and improvement data analysis to hospitals. (Id. ¶¶ 81-166). Second, it alleges that FMCNA engaged in improper remuneration relationships with physicians who served as medical directors in its outpatient clinics in five ways: by selecting medical directors based on their expected and historical referrals; by paying them above-market compensation to reward referrals; by making no effort to report or verify their hours; by tracking their referrals to make sure they were not making referrals to competitors; and by requiring them to sign onerous noncompete agreements to lock them into their arrangements with FMCNA. (Id. ¶¶ 167-307). Third, it alleges that FMCNA provided physicians free or below-cost practice-management services. (Id. ¶¶ 308-20). Fourth, it alleges that FMCNA entered into favorable leases with medical directors that paid them above-market rates. (Id. ¶¶ 321-31). Fifth, it alleges that FMCNA entered into favorable joint-venture agreements (“JVAs”) with physician groups to induce them to make referrals. (Id. ¶¶ 332-75).

1. Hospital Services

According to the complaint, over the past two decades, the dialysis industry has become increasingly concentrated in the hands of two companies: DaVita...