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United States of America v. N Dialysis Clinic

January 19, 2011


The opinion of the court was delivered by: Norman A. Mordue, Chief U.S. District Judge:



On June 22, 2009, plaintiff Paul Blundell filed this qui tam action under seal in accordance with the provisions of the False Claims Act ("FCA"), 31 U.S.C. § 3729 et seq. as a relator on behalf of the United States of America, the State of New York and the County of Onondaga. On July 10, 2009, plaintiff filed an amended complaint under seal. Plaintiff asserted claims based upon the federal FCA and the New York State False Claims Act, §§ 188-194 of the New York State Finance Law. On February 24, 2010, the United States filed its Notice of Election to Decline Intervention and on the same day, the complaint was unsealed. On April 21, 2010, plaintiff served defendant. Presently before the Court are three motions: (1) defendant's motion pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the amended complaint for failure to plead fraud with particularity and failure to state a cause of action (Dkt. No. 27); (2) plaintiff's motion for leave to file a second amended complaint (Dkt. No. 30); and (3) defendant's motion pursuant to Rule 12(b)(1) to dismiss the second amended complaint for lack of subject matter jurisdiction. (Dkt. No. 34).


In support of the claims herein, plaintiff makes the following factual and legal averments: Dialysis Clinic, Inc. ("DCI" or defendant) is a dialysis treatment center with over 200 outpatient dialysis facilities in the United States. Plaintiff, a resident of Liverpool, New York, was employed at DCI's University Dialysis Center ("UDC") from August 2007 until October 2008 as a staff nurse, team leader and charge nurse. Dialysis is a method of treating End Stage Renal

Disease ("ESRD").*fn2 The federal Medicare program provides coverage for most individuals who are diagnosed with ESRD and organizations that provide these services are eligible for Medicare reimbursement. During plaintiff's employment with defendant, he questioned DCI's documentation of dialysis treatment which implicated billing issues for Medicare, Medicaid and Veterans' Administration patients. Plaintiff was not directly involved in the billing procedures and did not have access to the bills that were submitted for government reimbursement.

In 2008, the New York State Office of the Medicaid Inspector General ("OMIG")*fn3 conducted an audit and reviewed payments made from the New York State Medicaid Program to defendant from January 1, 2004 through December 31, 2005. On October 23, 2008, the OMIG issued a "Final Audit Report". The report was publicly available on the internet after October 23, 2008. The purpose of the report was described as follows:

This review consisted of a random sample of 200 services with Medicaid payments of $26,940.54. The purpose of the audit was to ensure that: Medicaid reimbursable services were rendered for the dates billed; appropriate rate or procedure codes were billed for services rendered; patient related records contained the documentation required by the regulations; and claims for payment were submitted in accordance with Department regulations and the Provider Manuals for Clinics.

The Audit Report contained four "Detailed Findings" set forth in pertinent part as follows:

* missing documentation

In 12 instances pertaining to 8 patients, the kidney dialysis services were not documented. Of these services, we found 5

instances where the written order for services was missing and 5 instances where the written order lacked the required signature. In 2 instances the Hemodialysis Flowsheet was missing.

* service delivery documents not signed by a licensed health professional

In 11 instances pertaining to 7 patients, the signature of a licensed health care professional, attesting to the delivery of the treatment service, was lacking on the Hemodialysis Flowsheet.

* threshold visit billed for incomplete treatment session In 4 instances relating to 4 patients, a threshold visit was incorrectly billed for hemodialysis sessions terminated before the treatment was completed.

* No EOB for Medicare covered services

In 4 instances pertaining to 2 patients, no Explanation of Medical Benefits was found for a Medicare eligible patient.

As a result of the aforementioned, the audit revealed sample overpayments in the amount of $4,171.20 resulting in a "mean per unit point" estimate of $160,508.00.*fn4 The report provided defendant with repayment options and further indicated:

Failure to arrange payment within 20 days of the issuance of this report will result in initiation of a 10% withhold of your Medicaid billings to recover the lower confidence limit amount of $113,499.00.

If the repayment term exceeds ninety (90) days, repayment interest will be charged as stated in the previous paragraph.

Plaintiff's employment with DCI ended two weeks before the Audit Report was issued and plaintiff was not aware of the audit report until after the report was posted on the Internet.

In the amended complaint, plaintiff alleges that DCI failed to comply with the New York State Public Health Law Regulations governing the operation of dialysis facilities and Title 42 of the Code of Federal Regulations, Public Health, Part 405, Subpart U-Conditions of Coverage of Suppliers of End-State Renal Disease (ESRD) Services.*fn5 (Am. Compl., ¶ 18). Plaintiff claims that 42 C.F.R. § 494 requires compliance with standards, "to protect dialysis patients' health and safety and to ensure that quality care is furnished to all patients in Medicare approved dialysis facilities." (Id. at ¶ 22). Plaintiff contends that DCI violated those procedures and regulatory requirements resulting in compromised patient care. Thus, defendant's submission of claims for payment to Medicare, Medicaid and the Veterans' Administration were fraudulent as they were based upon "false certifications". Specifically, plaintiff alleges that defendant violated the standards and regulatory requirements in the following respects: (1) by failing to provide

adequate staffing; (2) using unqualified personnel; (3) falsifying records; (4) permitting Personal Care Technicians ("PCT") to perform nursing functions; (5) permitting PCTs to administer Heparin; (6) permitting an Licensed Practical Nurse ("LPN") or PCT to assess a patient's condition; (7) allowing a PCT to verify prescription medication; (8) allowing home dialysis treatment to fail due to the lack of appropriate supervision; (9) failing to employ the appropriate techniques to prevent cross-contamination; (10) failing to provide comfortable temperatures within the facility; (11) failing to adequately survey or monitor patients receiving dialysis services; (12) failing to adequately train employees in all aspects of emergency preparedness; (13) failing to provide patients with information and to ensure that they understood their rights; (14) falsifying initial comprehensive assessment records; (15) failing to allow a register nurse to participate in interdisciplinary meetings; and (16) appointing nurses with inadequate experience.

Plaintiff claims that DCI defrauded the United States, State of New York and Onondaga County when it submitted Medicare claims and falsely certified that it was in compliance with applicable state and federal regulations pertaining to dialysis services. Plaintiff alleges four causes of action against defendant including Medicaid fraud, Medicare fraud, fraud against the Veterans Administration and Medicaid fraud against the State of New York and Onondaga County. Plaintiff alleges:

Because DCI's claims for payment are based upon false certification that the UDC facility is in compliance with the applicable rules and regulations and of generally accepted practices for quality of care, DCI's claims for payment are false claims within the meaning of FCA. (Am. Compl., ¶ 131). . . . services rendered at UDC were of low quality care and constituted a significant danger to patients undergoing dialysis treatment. (Id. at ¶ 132).

DCI knew, or should have know, that the United States of America would not pay for such services under the Medicaid program, if it had been aware of the poor quality of treatment and of the risks to patients. (Id. at ¶ 133). [], the UDC facility owned and operated by DCI has failed to meet a number of the standards for Medicare coverage set forth [in] Part 405 and in Part 494. (Id. at ¶ 144).

Consequently, the claims for payment that had been submitted by DCI for services rendered at UDC represent reimbursement payments for services to which DCI was not entitled. (Id. at ¶ 145).

DCI submitted claims for Medicare payments for services that were not rendered in compliance with the requirements of federal regulations pertaining to ESRD services. (Id. at ¶ 146).

Upon information and belief, the Veterans Administration would not have paid DCI's claims, had it been aware of the violations of state and federal regulations, including violations of the Medicare regulations for ESRD treatment, the low quality of care provided at the UDC facility, and of the significant risks to patient health which were created by UDC practices and non-compliance with regulatory criteria. (Id. at ¶ 161).

Upon information and belief, DCI's receipt of funds for Medicaid patients from New York State and Onondaga County constitutes a violation of 189 of the New York State Finance Law. (Id. at ¶ 173).


On April 30, 2010, defendant filed a motion to dismiss pursuant to Fed. R. Civ. P. 9(b) and 12(b)(6). (Dkt. No. 27). Plaintiff opposed the motion and filed a cross-motion for leave to file a second amended complaint. (Dkt. No. 30). In response to plaintiff's cross-motion, defendant filed a second motion to dismiss the second amended complaint for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1). (Dkt. No. 34).


The False Claims Act, 31 U.S.C. § 3729 et seq., empowers the United States, or private citizens on behalf of the United States, to recover treble damages from those who knowingly make false claims for money or property upon the United States, or cause to be made, or who submit false information in support of such claims. U.S. ex rel. Dick v. Long Island Lighting Co., 912 F.2d 13, 16 (2d Cir. 1990). The issue examined under the FCA is whether defendant presented a "false" or "fraudulent claim" to the government. Johnson v. The Univ. of Rochester

Med. Ctr., 686 F.Supp2d 259, 265 (W.D.N.Y. 2010) (citations omitted). Section 3729 provides, in pertinent part:

(a) Liability for certain acts.

(1) Any person who - -(A) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;

(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.

31 U.S.C. § 3729(a).

Under the qui tam provisions of the FCA, private persons may bring civil actions for violations of § 3729(a). U.S. ex rel. Woods v. Empire Blue Cross and Blue Shield, 2002 WL 1905899, at *4 (S.D.N.Y. 2002). These suits are brought in the name of the Government and the plaintiff, or "relator," must provide the Government with a copy of the complaint and written disclosure of all material evidence and information. Id. (citing 31 U.S.C. § 3730(b)(2)). The complaint remains under seal for at least 60 days; during that time the Government decides to either: a) proceed with the action; or b) notify the court that it declines to take over the action, leaving the relator with the right to conduct the action. Id. (citing 31 U.S.C. § 3730(4)). If the prosecution is successful, the relator is entitled to receive some of the proceeds. Id. (citing 31 U.S.C. § 3730(d)).


Upon receipt of defendant's motion to dismiss for failure to properly plead an action for fraud and/or failure to state a cause of action, plaintiff moved for leave to file a second amended complaint and in support, submitted a proposed second amended complaint as an exhibit to the motion. "Although leave to amend a pleading under the Federal Rules of Civil Procedure 'shall be

freely given when justice so requires,' such leave will be denied when an amendment is offered in bad faith, would cause undue delay or prejudice, or would be futile." Leonelli v. Pennwalt Corp., 887 F.2d 1195, 1198 (2d Cir.1989) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)).

Plaintiff submitted a proposed second amended complaint in an attempt to address the deficiencies in the amended complaint. Plaintiff has not asserted new causes of action and, in fact, defendant has already addressed the merits of the second amended complaint. Upon receipt of plaintiff's proposed second amended complaint, defendant submitted a Reply Memorandum and addressed the additional facts and allegations in the second amended complaint. Moreover, in further response to plaintiff's cross motion and proposed second amended complaint, defendant filed a second motion seeking an order dismissing the second amended complaint pursuant to Fed. R. Civ. P. 12(b)(1) for lack of jurisdiction. There has been no undue delay and no prejudice as defendant has not filed an answer. In this case, no undue prejudice will result in permitting plaintiff to file the second amended complaint. See Volovnik v. Benzel-Busch Motor Car Corp., 2010 WL 3629819, at *3 (S.D.N.Y.2010) (proposed amendment in response to motion to dismiss was not offered in bad faith or for a dilatory purpose); see also Melendez v. Int'l Serv. Sys., Inc., 1999 WL 187071, at *1 (S.D.N.Y. 1999); see also Baer v. Interim Occupational Health, Inc., 2000 WL 207163, at *3 (W.D.N.Y. 2000) ("to facilitate the orderly and prompt resolution of the pending motions and given that no defendant oppose[d] the cross-motion for leave to amend the complaint", the court granted the cross-motion for leave to amend, deemed the "Proposed Amended Complaint" filed and deemed the motions to dismiss to pertain to the Amended Complaint). Therefore, the Court will accept the second amended complaint and deem it filed. To promote judicial efficiency, the Court will now address defendant's motions to dismiss for lack of jurisdiction, failure to plead with particularity and failure to state a claim in relation to the allegations in the second amended complaint.


A. Legal Standard

Defendant moves for dismissal pursuant to Fed. R. Civ. P. 12(b)(1) for lack of jurisdiction. In contemplating a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), the Court must "accept as true all material factual allegations in the complaint[,]" Atl. Mut. Ins. Co. v. Balfour MacLaine Int'l Ltd., 968 F.2d 196, 198 (2d Cir. 1992) (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)), though "argumentative inferences favorable to the party asserting jurisdiction should not be drawn." Id. (citing Norton v. Larney, 266 U.S. 511, 515 (1925)). The Court may consider evidence outside the pleadings, e.g., affidavit(s), documents or otherwise competent evidence. See Kamen v. Am. Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir. 1986); Antares Aircraft v. Fed. Rep. of Nigeria, 948 F.2d 90, 96 (2d Cir. 1991). As the party "seeking to invoke the subject matter jurisdiction of the district court", plaintiff bears the burden of demonstrating that there is subject matter jurisdiction in this case by a preponderance of the evidence. Scelsa v. City Univ. of New York, 76 F.3d 37, 40 (2d Cir. 1996); Malik v. Meissner, 82 F.3d 560, 562 (2d Cir. 1996).

B. Section 3730(e)(4) and Jurisdiction

In cases of this nature, jurisdiction is limited by Section 3730(e)(4) which, "is intended to bar 'parasitic lawsuits' based upon publicly disclosed information in which would-be relators 'seek remuneration although they contributed nothing to the exposure of the fraud'". U.S. ex. rel. Kreindler & Kreindler v. United Tech. Corp., 985 F.2d 1148, 1157 (2d Cir. 1993). The relevant portions of section 3730 of the FCA provide, in pertinent part:

Certain actions barred - -

(4)(A) No court shall have jurisdiction over an action under [the FCA] based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B) For purposes of this paragraph, "original source" means an individual who (2) has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

U.S. v. ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94, 103 (2d Cir. 2010) (citing 31 U.S.C. §§ 3730(e)(4)(A), (4)(B)).*fn6

On a motion to dismiss for lack of jurisdiction, the Court must engage in a two-part analysis: (1) whether the information on which the allegation of fraud rests, was a "public disclosure" through one of the sources enumerated in the statute; and (2) whether the relator's allegations are based upon "allegations or transactions" disclosed to the public. See U.S. ex. rel. Mikes v. Straus, 931 F.Supp. 248, 259 (S.D.N.Y. 1996); see also Kirk, 601 F.3d at 103. If the aforementioned factors are established, a qui tam plaintiff may avoid dismissal by establishing that he was an "original source" with "direct and independent knowledge". Kirk, 601 F.3d at 103.

To qualify as an "original source", the plaintiff must have: (1) direct and independent knowledge of the information on which the allegations are based; (2) voluntarily provided such information to the government prior to filing suit; and (3) directly or indirectly been a source to the entity that publicly ...

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