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United States ex rel. Corporate Compliance Associates v. New York Society for The Relief of Ruptured and Crippled

United States District Court, S.D. New York

August 7, 2014



P. KEVIN CASTEL, District Judge.

Corporate Compliance Associates ("Corporate Compliance") is the relator in this qui tam action brought under the False Claims Act, 31 U.S.C. § 3729, et seq. (the "FCA"). Its Fourth Amended Complaint (the "Complaint") asserts that the defendants orchestrated several long-running schemes to defraud Medicare and Medicaid by falsely certifying legal compliance with certain regulatory and statutory obligations.

Corporate Compliance asserts that, under the direction of its then-CEO John. R. Reynolds, defendant Hospital for Special Surgery[1] (the "Hospital") paid excessive compensation to its physicians in order to induce in-house service referrals that inured to the Hospital's financial benefit. These alleged physician "kickbacks" came principally in the form of compensation arrangements that included variations in base salary tied to the physicians' referral volumes, and an annual across-the-board payment for administrative and teaching responsibilities that the Complaint deems to have been a sham. The claim is that the Hospital has linked physician compensation to the volume of in-Hospital service referrals, and, thus, violated two federal criminal laws: the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the Stark Act, 42 U.S.C. § 1395nn(a). According to the Complaint, the Hospital fraudulently certified in its government reimbursement forms that it complied with relevant laws and regulations, when in truth it was in violation of these two statutes. The Complaint also alleges that the hospital submitted codes that falsely indicated that certain procedures where performed in physicians' private offices and not at the Hospital, and sought reimbursement for radiological procedures at two unlicensed facilities. It further alleges that defendant Reynolds successfully solicited kickbacks from an outside billing company owned by defendant Michael H. Kemp.

The Complaint alleges that the defendants' conduct has caused damage to the United States in excess of $788, 000, 000, arising out of hundreds of thousands of false claims. It does not quantify the amount of damages incurred by the State of New York as a result of alleged Medicaid fraud. If the FCA's treble damages provision were to apply, 31 U.S.C. § 3729(a)(1), the Hospital could be liable for an amount well in excess of $2 billion. As the qui tam relator, Corporate Compliance would be entitled to a percentage of any damages it might recover on behalf of the United States of America and the State of New York, both of which have declined to intervene in this action.

The three defendants have filed motions to dismiss pursuant to Rules 9(b) and 12(b)(6), Fed.R.Civ.P. (Docket # 60, 64, 69.) For reasons that will be explained, the Court concludes that the Complaint fails to satisfy the pleading requirements of Rule 9(b). In reaching that conclusion, this Court joins others that have concluded that an FCA claim does not satisfy Rule 9(b) solely by allegations of a fraudulent scheme, but must set forth with particularity the circumstances constituting the fraud as to the claims themselves.

Defendants' motions to dismiss are therefore granted.


A. The Parties.

The Hospital is a not-for-profit corporation that operates a 172-bed orthopedic surgery center and teaching hospital located at 535 East 70th Street. (Compl't ¶ 29.) It was founded in 1863, is affiliated with the New York-Presbyterian Healthcare System and Weill Cornell Medical College, and has more than 3, 000 full-time employees. (Compl't ¶ 79.) The Complaint alleges that the Hospital participates in a competitive New York City healthcare market. (Compl't ¶¶ 80-81.)

Defendant John R. Reynolds was the Hospital's Chief Financial Officer from 1986 to 1997 and its Chief Executive Officer from 1997 to 2006. (Compl't ¶ 30.) According to the Complaint, Reynolds oversaw the implementation of several unlawful schemes in an attempt to boost the Hospital's revenue. Those alleged schemes are explained in greater detail below. The Complaint asserts that on July 11, 2013, Reynolds pleaded guilty to one count of wire fraud and one count of making false statements to a law enforcement agent. (Compl't ¶ 18.) According to the indictment in the criminal case, those schemes involved kickbacks of a different kind, which were made for Reynolds's personal gain and were concealed from the Hospital's board of directors; in other words, the Hospital was a victim of Reynolds's misdeeds.[2] The late Judge Harold Baer sentenced Reynolds to 18 months' imprisonment on November 7, 2013. (Compl't ¶ 18.) Corporate Compliance alleges that, due to Reynolds's misconduct, the Hospital submitted claims and cost reports to the United States and the State of New York that falsely certified that the Hospital and its physicians received Medicare and Medicaid reimbursements in compliance with governing laws. (Compl't ¶ 19.)

Defendant Michael H. Kemp is the former owner of Professional Billing Controls, Inc. ("PBC"), an outside firm that provided billing services to the Hospital. (Compl't ¶ 31.) As will be discussed in greater detail, Corporate Compliance alleges that Kemp and PBC paid monthly kickbacks to Reynolds in exchange for the Hospital's billing-services contracts. (Compl't ¶ 138.)

Corporate Compliance is the qui tam relator. Corporate Compliance describes itself as a Delaware general partnership, and makes no allegations as to its business or its operations; it does not allege any relationship to the Hospital. (Compl't ¶ 28.) It appears that its claims are based in part on information obtained from unnamed former officers employed by the Hospital, including its former Chief Compliance Officer and its former Associate Vice President of Physician Services.

B. Alleged Kickbacks to Solicit Physician Inducements for Hospital Referrals.

As noted, much of the Complaint is directed toward an alleged scheme whereby the Hospital paid excessive compensation to its physicians in order to induce them to make referrals for patient services within the Hospital. The Complaint alleges that the Hospital sought to enhance its profits by ensuring that lucrative procedures were performed within the Hospital's own facilities and not at other institutions. It again bears emphasizing that the Complaint's theory of liability is premised on the Hospital's legal certifications that its submissions for reimbursement complied with applicable laws.

According to the Complaint, the Hospital sought to increase its profits from facilities-based revenue. Corporate Compliances alleges that because the Hospital has a limited number of beds, it generates substantial revenue from offices visits, surgeries, diagnostic services and rehabilitation services. (Compl't ¶ 4.) The Hospital's physicians bill patients for services such as visits and surgeries, but, separately, the Hospital bills patients for the use of facilities associated with those services, such as access to operating rooms, diagnostic equipment and supplies. (Compl't ¶ 4.) Corporate Compliances labels the Hospital's facilities-based revenue as "derivative revenue." (Compl't ¶ 4.)

Corporate Compliance asserts that the Hospital provided monetary incentives to physicians in order to induce and encourage referrals that brought the Hospital derivative revenue. (Compl't ¶ 5.) In calculating such physician payments, the Hospital allegedly considered the value and volume of physician referrals. (Compl't ¶ 5.) The Hospital and the physicians then submitted claims to Medicaid and Medicare for reimbursement. (Compl't ¶ 5.)

The Hospital's compensation arrangements varied based on whether a doctor was classified as a "contract physician" or an "independent physician."

1. The Compensation Arrangement for Contract Physicians.

The Hospital paid contract physicians both a salary and a percentage of their billings. (Compl't ¶¶ 7, 92.) According to the Complaint, salary and billing percentage varied based on the amount of derivative revenue that the physician generated to the Hospital. (Compl't ¶ 8.) The base salaries of contract physicians ranged from $200, 000 to $750, 000. (Compl't ¶ 92.) Contract physicians received other on-the-job benefits, including payment of administrative costs and malpractice insurance. (Compl't ¶ 92.)

Because contract physicians referred "nearly 100% of their patients to [the Hospital's] operating rooms, " derivative revenue substantially underwrote physician salaries. (Compl't ¶ 9.) According to the Complaint, the Hospital heavily weighed the amount of derivative revenue generated by a contract physician when it calculated salaries. (Compl't ¶ 96.) The greater the derivative revenue, the higher the physician salary. (Compl't ¶ 96.) The Complaint names two specific physicians who allegedly received variable compensation in 2002 and 2003 based on the number of surgeries that they performed and the corresponding derivative revenue gained by the Hospital. (Compl't ¶¶ 98-100.) Were it not for physician referrals, the resulting derivative revenue and the corresponding reimbursement from Medicare and Medicaid, the Complaint alleges, the Hospital would have been "subsidizing" physician salaries, because the revenue generated solely through the physicians' professional billings was less than their salaries. (Compl't ¶¶ 9-10, 101-07.)

2. The Hospital's Use of Independent Physicians.

According to Corporate Compliance, the Hospital "tried to push" contract physicians who generated low derivative revenue into reclassification as "independent physicians." (Compl't ¶¶ 109-11.) Independent physicians received 100% of their own billings. (Compl't ¶¶ 12, 115.) Independent physicians also had access to hospital facilities and support staff. (Compl't ¶ 94.)

3. The Hospital's Use of CARA Payments.

Both contract physicians and independent physicians received annual payments of $80, 000 for work spent performing clinical, administrative, research and academic services - so-called "CARA Payments." (Compl't ¶ 120.) Corporate Compliance asserts that these payments amounted to kickbacks that were paid in exchange for physician referrals to the Hospital, and that the extra duties for which physicians received compensation did not warrant the $80, 000 annual payments.

According to the Complaint, the CARA payments themselves are evidence of FCA liability due to the Hospital's uniform use of them. (Compl't ¶ 121.) Each physician received an $80, 000 flat fee for CARA duties, despite variations in the amount of CARA work that each performed. (Compl't ¶ 121.) Corporate Compliance asserts that the "majority" of physicians did not perform CARA work to justify these payments, were not expected to do so, and that the Hospital did not account for the amount of time spent on CARA activities. (Compl't ¶¶ 122-23.) It alleges that the number of physicians receiving CARA payments continued to grow, even as the number of interns and residents requiring instruction held steady. (Compl't ¶ 124.) For instance, according to the Complaint, from 1996 to 2013, the Hospital increased its number of orthopedic surgeons from 40 to 100, while the number of interns and residents remained consistent. (Compl't ¶¶ 125-26.) During this time, all physicians continued to receive $80, 000 in annual CARA payments. (Compl't ¶ 127.)

Similarly, Corporate Compliance contends that as the number of surgeons available to perform clinical work with indigent patients grew dramatically, the volume of indigent clinical work at the Hospital declined. (Compl't ¶ 129.) Medical care for the indigent falls within the clinical duties for which doctors receive CARA payments. As evidence of the Hospital's declining work with indigent patients, Corporate Compliance asserts that Medicaid revenue decreased from 5.71% of overall Hospital revenue in 2000 to 2% in 2010. (Compl't ¶ 129.) The Complaint estimates that the Hospital provides less than half the volume of Medicaid clinical care than it did ten years ago while its number of available physicians more than doubled, with all physicians receiving CARA payments. (Compl't ¶ 131.)

4. The Hospital's Payments to Physicians with Administrative Titles.

Corporate Compliance also describes the Hospital as being "top-heavy' with executives and administrators." (Compl't ¶ 132.) The Hospital allegedly employed more administrators than peer institutions that offered a wider breadth of services. (Compl't ¶ 132.) According to the Complaint, approximately 12.9% of the Hospital's full-time employees are administrators, compared to 6.9% of employees at Montefiore Hospital. (Compl't ¶¶ 133-34.) The Complaint asserts that the Hospital's physicians received remuneration for job titles that included departmental "chief, " "head" or "director, " despite performing no additional services. (Compl't ¶ 135.) According to the Complaint, the Hospital's "Service Chiefs" were paid $160, 000 without shouldering additional responsibilities. (Compl't ¶ 136.) The Complaint asserts that the added compensation that came with these administrative titles induced more referrals to bring derivative revenue to the Hospital. (Compl't ¶ 137.)

C. Outside Billing Companies' Alleged Kickbacks to Reynolds.

Corporate Compliance asserts that Reynolds orchestrated an illegal kickback arrangement with PBC, an outside company that provided billing services to the Hospital. (Compl't ¶ 16.) It asserts that from 1990 through 2002, defendant Reynolds orchestrated a "pay to play scheme" wherein he solicited and received monthly payments from vendors in exchange for securing billing business to those vendors from the Hospital and its contract physicians. (Compl't ¶¶ 16-17.)

According to the Complaint, defendant Kemp, the owner of PBC, paid monthly kickbacks to Reynolds in exchange for an agreement to provide outside billing services to the Hospital. (Compl't ¶ 138.) This scheme ended in late 2002, when Kemp sold PBC to another firm. (Compl't ¶ 140.) Corporate Compliance alleges that in 2005, Kemp admitted to an officer at PBC's successor firm that he made monthly payoffs to Reynolds, beginning in the mid-1990s, and that Reynolds initiated the arrangement. (Compl't ¶ 141.) According to the Complaint, PBC issued monthly checks to a consulting company that Reynolds owned; Reynolds then endorsed the checks and deposited them in his consulting company's bank account. (Compl't ¶ 142.) The Complaint asserts upon information and belief that Reynolds had similar arrangements with other companies that provided billing services. (Compl't ¶ 144.) It asserts that the Hospital was negligent in failing to discover Reynolds's kickback schemes. (Compl't ¶ 145.) As a consequence, the Hospital paid artificially inflated billing services. (Compl't ¶ 148.)

D. Fees from Affiliated, Unlicensed Facilities.

Corporate Compliance asserts that the Hospital unlawfully received government reimbursement for work performed at unlicensed radiology facilities. (Compl't ¶¶ 20-21.) Specifically, the Hospital's physicians performed radiology procedures at two off-site facilities that the Hospital owned. (Compl't ¶¶ 153-55.)

According to Corporate Compliance, these facilities were not licensed under New York's Public Health Law Article 28 and its implementing regulations. (Compl't ¶¶ 20-21, 157.) The Complaint asserts that a facility licensed under Article 28 may bill and collect office-based fees and facility fees, but an unlicensed facility may collect only for office-based fees. (Compl't ¶ 156.) According to the Complaint, the Hospital was aware that these two off-site facilities were not Article 28-compliant, but it nevertheless allowed them to bill facilities fees for their radiology services. (Compl't ¶ 158-59.) At the same time, the Hospital was billing government healthcare programs for facilities fees that were incurred at these unlicensed facilities. (Compl't ¶ 160.) According to Corporate Compliance, by asserting that it was in compliance with governing laws and regulations, while performing radiology services at these two unlicensed facilities, the Hospital submitted false claims to Medicare and Medicaid in violation of the state and federal false claims acts. (Compl't ¶ 161.)

E. The Improper Use of Billing Codes.

The Center for Medicare and Medicaid Services (the "CMS"), an agency within the Department of Health and Human Services (the "HHS"), administers Medicare and Medicaid. (Compl't ¶¶ 26, 162.) Under CMS regulations, certain medical services are subject to different fees depending on the "place where the services are rendered." (Compl't ¶¶ 26, 162.) Physicians are paid more for services rendered in their private offices because they incur additional overhead costs that they would not incur in a hospital setting. (Compl't ¶ 162.) If a service is provided in a hospital or "hospital-based setting, " the hospital may receive a separate "facility fee" for reimbursement. (Compl't ¶ 162.) The CMS requires physicians and other Medicare Part B providers to submit a CMS-1500 Form as a condition for these reimbursements. (Compl't ¶ 163.)

Physicians and hospitals must make required factual representations on the CMS Form 1500. (Compl't ¶ 164.) They must specify a "place of service, " and identify whether it was an office, inpatient hospital or outpatient hospital. (Compl't ¶ 164.) According to the Complaint, in their CMS Form 1500 submissions, physicians employed by the Hospital stated that they rendered Medicare Part B services in private offices, and not in settings owned, operated and paid for by the Hospital. (Compl't ¶ 165.) Corporate Compliance asserts that the Hospital and its physicians deliberately misstated the place of service in order to receive higher reimbursement payments. (Compl't ¶¶ 165-66.) It estimates that from 1996 to 2006, the Hospital's physicians filed approximately 335, 000 CMS 1500 Forms, falsely stating that they performed medical services in private offices. (Compl't ¶ 167.) The Complaint alleges that Medicare over-reimbursed those physicians by approximately $8.5 million. (Compl't ¶ 167.) Corporate Compliance also asserts that the Hospital used false place-of-service codes to receive reimbursements from New York Medicaid using the same scheme. (Compl't ¶ 169-71.)

F. Claims Asserted in the Complaint.

According to the Complaint, from 1996 through 2008, the Hospital received $701, 656, 105 in Medicare Part A reimbursements and $87, 141, 892 in Medicare Part B reimbursements, for a total of $788, 797, 997 in reimbursements. (Compl't ¶ 183.) The Complaint does not allege the amount of reimbursements that the Hospital received from Medicaid. (Compl't ¶ 183.)

The Complaint alleges nine claims for relief. It asserts that the Hospital presented false claims for payment under Medicare and Medicaid, and made or used false records in seeking approval for those claims, thereby violating the False Claims Act, 31 U.S.C. § 3729(a)(1)(A)-(B). (Claims One and Two, Compl't ¶¶ 184-193.) It asserts that all defendants unlawfully engaged in illegal kickback schemes that violated the Anti-Kickback Statute and the Stark Act, thus violating the FCA, 31 U.S.C. § 3729(a)(1)(A), by certifying in Medicare and Medicaid reimbursement forms that defendants complied with state and federal laws. (Claim Three, Compl't ¶¶ 194-198.) Claims Four through Six assert that defendants conspired to violate the FCA, in violation of 31 U.S.C. § 3729(a)(1)(C). (Compl't ¶¶ 199-219.) Claims Seven through Nine assert that the defendants violated the New York False Claim Act, N.Y. Fin L. § 189(1)(a)-(b). (Compl't ¶¶ 220-34.)

G. Procedural History.

On January 12, 2007, Corporate Compliance filed this qui tam action pursuant to the FCA. (Docket # 1; Hospital Mem. at 1.) The Complaint remained under seal while the United States and the State of New York investigated the allegations. (Hospital Mem. at 1.) While the case was under seal, Corporate Compliance twice amended the Complaint. (Docket # 29, 58.) On June 11, 2013, the United States filed a notice of election to decline intervention, and the State of New York declined intervention on the following day. On July 11, 2013, this Court ordered the Complaint to be unsealed and served on the defendants within 30 days. (Docket # 25.) The pleadings remained sealed until October 30, 2013, and were served to the defendants on November 19, 2013. (Docket # 34.) Corporate Compliance filed its third amended complaint on November 18, 2013 and its Fourth Amended Complaint on January 8, 2014. (Docket # 29, 59.)

In its memorandum of law in opposition to the Hospital's motion, Corporate Compliance asserts that during the course of its investigation of the allegations, the United States issued a Civil Investigative Demand (the "CID") to the Hospital. (Opp. Mem. at 1.) Corporate Compliance states that it reviewed and analyzed these documents upon the government's request, and that the United States instructed Corporate Compliance not to undertake additional investigation while the Complaint was under seal. (Opp. Mem. at 1-2.) Once the United States completed its investigation, Corporate Compliance returned all CID materials, and followed the government's express instruction not to incorporate facts learned from the CID into the Complaint. (Opp. Mem. at 2.)

According to the Hospital, during the time between the filing of the United States's notice not to intervene and the unsealing of the complaint, Corporate Compliance unlawfully disclosed the existence of this action to at least three individuals, and unlawfully sought their assistance in ...

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