1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 United States of America, ex rel. Gregory No. CV-18-8040-PCT-DGC Kuzma, 10 ORDER Plaintiff, 11 v. 12 Northern Arizona Healthcare Corporation, 13 et al.,
14 Defendants.
15 16 Relator Gregory Kuzma alleges that Defendants Northern Arizona Healthcare 17 Corporation (“NAHC”), Northern Arizona Healthcare Foundation (“NAHF”), and 18 Flagstaff Medical Center, Inc. (“FMC”) violated the False Claims Act (“FCA”), 31 19 U.S.C. § 3729, et seq. Doc. 35. Defendants move to dismiss the amended complaint 20 pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Docs. 37 21 (NAHC and FMC), 39 (NAHF). The motions are fully briefed (Docs. 38, 40, 43-46), and 22 the Court held oral argument on September 25, 2020. While the Court finds that Relator’s 23 allegations state a plausible theory under the FCA, Relator has failed to plead with the 24 particularity required by Rule 9(b). The Court will grant the motions to dismiss without 25 prejudice and allow Relator to amend his complaint.1 26 27 1 Relator has filed a separate complaint against NAHC, FMC, and an additional Defendant (Northern Arizona Orthopedic Surgery Center, LLC) alleging unrelated FCA 28 violations arising out of the purchase of a surgery center. Doc. 40 (No. 18-cv-8041). The Court will also issue an order granting the motion to dismiss that case with leave to amend. 1 I. Background. 2 Regulatory Framework. 3 Medicaid is a healthcare assistance program jointly financed by the federal 4 government and the states, and administered by the states in accordance with federal 5 regulations. Doc. 35 ¶ 21. Arizona’s Medicaid program is administered by the Arizona 6 Health Care Cost Containment System (“AHCCCS”), a state agency. Id. ¶ 23; see A.R.S. 7 § 36-2901, et seq. The federal government funds a portion of Medicaid expenditures – a 8 portion called the Federal Financial Participation (“FFP”). Id. ¶ 22. 9 For state contributions to prompt the receipt of FFP payments under federal law, the 10 state contributions generally must consist of state or local public funds rather than 11 donations from private health care providers such as hospitals. See 42 U.S.C. 12 § 1396b(w)(1)(A); 42 C.F.R. § 433.54. Provider-related donations are permitted if they 13 are “bona fide,” meaning they have no “direct or indirect relationship” to Medicaid 14 payments the provider receives from the state or local government. See 42 U.S.C. 15 § 1369b(w)(2)(B); 42 C.F.R. § 433.54(a). Provider donations have a “direct or indirect 16 relationship” to Medicaid payments if the donations are returned to the provider under a 17 “hold harmless” arrangement. Id. § 433.54(b). Such an arrangement occurs where: (1) the 18 state or other unit of government provides for a direct or indirect Medicaid payment to the 19 provider or others making the donation, and the payment amount is positively correlated 20 to the donation; (2) all or any portion of the Medicaid payment to the donor varies based 21 only on the amount of the donation, including where the Medicaid payment is conditioned 22 on receipt of the donation; or (3) the state or other unit of government receiving the 23 donation provides for any direct or indirect payment, offset, or waiver that directly or 24 indirectly guarantees to return any portion of the donation to the provider or other parties 25 responsible for the donation. Id. § 433.54(c)(1)-(3). If a provider-related donation falls 26 within one of these hold harmless definitions, and therefore is not “bona fide,” the Centers 27 for Medicare & Medicaid Services (“CMS”) – the federal agency that administers the 28 1 Medicaid program – will deduct the amount of the donation from the FFP the state receives. 2 Doc. 35 ¶ 28; 42 C.F.R. § 433.54(e). 3 A state may fund its share of Medicaid and prompt the payment of FFP from the 4 federal government through an Intergovernmental Agreement (“IGA”). See 42 U.S.C. 5 § 1396b(w)(6)(A)-(B). An IGA is an agreement between the state Medicaid administrator 6 (in Arizona, AHCCCS) and a qualifying public entity, under which the public entity 7 transfers public funds to the Medicaid administrator for the state’s share of Medicaid. 8 Doc. 38 at 3.2 9 The restrictions on non-bona fide provider-related donations include not only 10 donations made by a provider to the state administrator, but also donations made by a 11 provider “to an organization, which in turn donates money to the State.” Id. § 433.52(4)(1). 12 Thus, any funds transferred by a qualifying public entity to AHCCCS pursuant to an IGA, 13 which AHCCCS then uses to claim FFP funds, cannot come from non-bona fide provider- 14 related donations. See 42 U.S.C. § 1396b(w)(6)(A) (allowing IGA transfers “unless the 15 transferred funds are derived by the unit of government from donations or taxes that would 16 not otherwise be recognized as the non-federal share”); 42 C.F.R. § 433.54(b). 17 AHCCCS may pay its share of Medicaid, plus the corresponding FFP, to a 18 qualifying hospital through the Disproportionate Share Hospital program (“DSH”). This 19 program provides supplemental Medicaid payments to hospitals that serve a 20 disproportionate share of uninsured individuals. See generally 42 C.F.R. § 412.106. 21 Relator’s Allegations. 22 The Court takes the factual allegations of Relator’s amended complaint as true for 23 purposes of the motions to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). 24 Relator worked for NAHC as its vice president and chief financial officer from 2004 to 25 2014. Doc. 35 ¶¶ 7-8. Since 2016, Relator has been employed as the chief financial officer 26 of North Country HealthCare (“North Country”), a private nonprofit health center that is a 27 28 2 Citations are to page numbers placed at the top of each page by the Court’s electronic filing system, not to original page numbers on the documents. 1 tenant in a building owned by the Williams Hospital District (“WHD”), a state entity. Id. 2 ¶¶ 9, 37. 3 In 2015, WHD asked NAHC to consider donating $3 million to fund the 4 construction of a new medical building, matching the amount WHD had collected through 5 a tax assessment. Id. ¶¶ 38-39. NAHC declined, and instead proposed that WHD pursue 6 a matching contribution under an IGA. Id. ¶ 40; see A.R.S. § 11-952. NAHC and FMC 7 held discussions with WHD regarding the proposed IGA and related transactions for 8 approximately one year, during which time NAHC formed NAHF, a nonprofit entity. Id. 9 ¶¶ 12, 47-48. NAHF was formed in part to facilitate the series of transactions discussed 10 below between NAHC, FMC, and WHD. Id. ¶ 48. 11 Relator became aware of the discussions between Defendants and WHD while 12 working for North Country and expressed concern about the legality of the proposed 13 transaction. Id. ¶¶ 49, 51. Relator had previously discussed the federal prohibition on 14 recycling of Medicaid funds with Rick Smith, a former NAHC employee who in 2016 15 became the president and CEO of NAHF. Id. ¶ 52. Smith explained that FMC was 16 considering participating in an IGA to obtain Medicaid funds, and Relator replied that there 17 were insufficient state and local funds to legally pursue the Medicaid opportunity. Id. ¶ 53. 18 In August 2016, Relator expressed his concern about the proposed funding 19 arrangement to a North Country colleague who was present for some of the ongoing 20 discussions between Defendants and WHD, and suggested that his colleague request a 21 “flow of funds” of the transaction at the next meeting. Id. ¶¶ 54-55. According to Relator’s 22 colleague, when asked for the flow of funds at the meeting, Jennifer Hidinger, an NAHC 23 employee who acted on behalf of all Defendants in the discussions, said “we can’t put 24 anything in writing.” Id. ¶ 56. 25 On February 1, 2017, WHD entered into an IGA with AHCCCS. Id. ¶ 58; Doc. 38-1 26 at 8. Attachment B to the IGA was an “Agreement to Reimburse Impermissible 27 Disproportionate Share Hospital Payments” signed by FMC as the hospital that would 28 receive the DSH payment. Id. at 10. The agreement required FMC to refund the DSH 1 payment if it was determined that the source of the funds was not permissible under federal 2 law. See id. Neither NAHC nor NAHF were parties to the IGA or signatories to its 3 attachments. Id. 4 Pursuant to the IGA, WHD transferred $2.2 million to AHCCCS and represented 5 that the funds constituted the non-federal share of a DSH payment to be made to FMC. 6 Doc. 35 ¶ 58. AHCCCS then requested and received $4,757,270 of FFP from the federal 7 government, and transferred the total received from WHD and the federal government 8 ($6,975,270) to FMC as a DSH payment. Id. ¶ 59. FMC in turn transferred $6 million of 9 this amount to NAHF, and NAHF gave a $6 million grant to WHD. Id. ¶¶ 58-60. Relator 10 alleges that this series of transactions had the effect of returning the original $2.2 million 11 that WHD had provided to AHCCCS, plus an additional $3.8 million. Id. ¶ 60. FMC 12 retained approximately $975,000. Id. ¶¶ 60, 62. 13 Relator filed this action on February 28, 2018. Doc. 1. Two years later, the United 14 States notified the Court of its decision not to intervene. Doc. 19. Relator amended his 15 complaint after conferring with Defendants about their planned motion to dismiss. 16 Docs. 30, 35. The amended complaint alleges that Defendants violated the FCA by 17 implementing the series of transactions described above. Doc. 35. Relator further alleges 18 that Defendants violated the FCA by failing to reimburse Medicaid for the impermissible 19 DSH payment to FMC. Id. 20 II. Relevant Legal Standards. 21 When analyzing a complaint for failure to state a claim to relief under Rule 12(b)(6), 22 the well-pled factual allegations are taken as true and construed in the light most favorable 23 to the nonmoving party. Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th Cir. 2009). A 24 successful motion to dismiss under Rule 12(b)(6) must show either that the complaint lacks 25 a cognizable legal theory or fails to allege facts sufficient to support its theory. Balistreri 26 v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990). A complaint that sets forth a 27 cognizable legal theory will survive a motion to dismiss as long as it contains “sufficient 28 1 factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” 2 Iqbal, 556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). 3 Because FCA claims involve allegations of fraud, they must comply with the 4 heightened pleading requirements of Rule 9(b). Cafasso ex rel. United States v. Gen. 5 Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054-55 (9th Cir. 2011). That rule requires a party 6 alleging fraud to “state with particularity the circumstances constituting fraud[.]” Fed. R. 7 Civ. P. 9(b). A “pleading must identify the who, what, when, where, and how of the 8 misconduct charged, as well as what is false or misleading about the purportedly fraudulent 9 statement, and why it is false.” Cafasso, 637 F.3d at 1055 (internal quotation marks 10 omitted). Rule 9(b) serves dual purposes: (1) to give defendants fair notice of the 11 allegations of fraud so they have an opportunity to rebut specific accusations; and (2) to 12 deter the harm caused by unsubstantiated fraud complaints. United States v. United 13 Healthcare Ins. Co., 848 F.3d 1161, 1180 (9th Cir. 2016). 14 III. Discussion. 15 Relator alleges violations of 31 U.S.C. § 3729(a)(1)(A) and (B), which create 16 liability for any person who “(A) knowingly presents, or causes to be presented, a false or 17 fraudulent claim for payment or approval” or “(B) knowingly makes, uses, or causes to be 18 made or used, a false record or statement material to a false or fraudulent claim.” The 19 elements of § 3729(a)(1)(A) and (B) are “virtually identical, with the only difference being 20 whether Defendants submitted a false claim or made a statement material to such a 21 claim[.]” McGrath v. Microsemi Corp., 140 F. Supp. 3d 885, 894 (D. Ariz. 2015), aff’d, 22 690 F. App’x 551 (9th Cir. 2017) (citation omitted). The Court must interpret the FCA 23 “broadly, in keeping with Congress’s intention to reach all types of fraud, without 24 qualification, that might result in financial loss to the Government.” Winter ex rel. United 25 States v. Gardens Reg’l Hosp. & Med. Ctr., 953 F. 3d 1108, 1116 (9th Cir. 2020) (quoting 26 United States v. Neifert-White Co., 390 U.S. 228, 232 (1968)). As a result, FCA liability 27 is not limited to those who present false claims to the government, but includes “any person 28 who knowingly assisted in causing the government to pay claims which were grounded in 1 fraud without regard to whether that person had direct contractual relations with the 2 government.” U.S. v. Mackby, 261 F.3d 821, 827 (9th Cir. 2001) (quoting U.S. ex rel. 3 Marcus v. Hess, 317 U.S. 537, 544- 45 (1943)) (emphasis in Mackby). A defendant may 4 be liable if it pursues a scheme that would ultimately result in the submission of a false 5 claim, even if the defendant did not participate in actual submission of the claim. U.S. v. 6 Bornstein, 423 U.S. 303, 309 (1976); Hess, 317 U.S. at 543-45; U.S. ex rel. Schmidt v. 7 Zimmer, Inc., 386 F.3d 235, 243-44 (3d Cir. 2004). 8 Relator also alleges a violation of the FCA’s reverse false claims provision. Doc. 35 9 ¶¶ 67-80. That provision creates liability for one who “knowingly makes, uses, or causes 10 to be made or used, a false record or statement material to an obligation to pay or transmit 11 money or property to the Government, or knowingly conceals or knowingly and improperly 12 avoids or decreases an obligation to pay or transmit money or property to the Government.” 13 31 U.S.C. § 3729(a)(1)(G); see United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 335 14 (9th Cir. 2017). 15 A. NAHC and FMC’s Motion to Dismiss (Doc. 37). 16 Defendants NAHC and FMC argue that Relator’s amended complaint does not 17 adequately allege a violation of the FCA under an implied certification theory in Counts 1 18 and 2, and does not adequately plead a reverse false claim in Count 3. The Court will 19 address these arguments separately.3 20 1. Counts 1 and 2 – Implied Certification. 21 To state a claim under 31 U.S.C. § 3729(a), Relator must allege that: (1) the 22 defendant presented or caused to be presented to an agent of the United States (2) a claim 23 for payment (3) that was false or fraudulent, (4) with knowledge that the claim was false 24
25 3 NAHC and FMC attach a copy of the IGA and two related letters as exhibits to 26 their motion. See Docs. 38-1, 38-2, 38-3. They assert that the Court may review documents forming the basis of Relator’s claims without converting the motion to dismiss into one for 27 summary judgment. Doc. 38 at 3 n.1 (citing Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 999, 1002 (9th Cir. 2018), cert denied sub nom Hagan v. Khoja, 139 S. Ct. 2615 28 (2019)). Relator does not object. See Doc. 44. The Court will consider the exhibits without converting the motion. 1 or fraudulent, and (5) the falsity was material to the government’s payment decision. 2 United States v. Corinthian Colleges, 655 F.3d 984, 992 (9th Cir. 2011). Under an “implied 3 certification” approach to the FCA, liability can arise “when an entity has previously 4 undertaken to expressly comply with a law, rule, or regulation, and that obligation is 5 implicated by submitting a claim for payment even though a certification of compliance is 6 not required in the process of submitting the claim.” Ebeid ex rel. U.S. v. Lungwitz, 616 7 F.3d 993, 998 (9th Cir. 2010). To assert the implied certification theory, two conditions 8 must be met: “first, the claim does not merely request payment, but also makes specific 9 representations about the goods or services provided; and second, the defendant’s failure 10 to disclose noncompliance with material statutory, regulatory, or contractual requirements 11 make those representations misleading half-truths.” Universal Health Servs., Inc. v. United 12 States ex rel. Escobar, 136 S. Ct. 1989, 2001 (2016). 13 Relator alleges that Defendants violated the FCA under an implied certification 14 theory “because NAH[C] and FMC failed to disclose violations of the Medicaid statute and 15 regulations regarding non-bona fide donations that they were required to comply with as a 16 prerequisite to the Government’s payment of matching federal funds.” Doc. 44 at 12-13 17 (citing United States ex rel. Baker v. Comm. Health Sys., No. 05-279 WJ/WDS, 2010 WL 18 11431465, at * 11-12 (D.N.M July 7, 2010)). Relator also alleges that “FMC knowingly 19 entered into an IGA for the sole purpose of securing federal matching funds that it could 20 recycle through NAHF back to WHD.” Doc. 35 ¶ 62. 21 a. Is A Violation Alleged? 22 NAHC and FMC argue that “even assuming the truth of [Relator’s] allegations . . . 23 Relator has not alleged that the DSH payment FMC received resulted from a non-bona fide 24 provider donation.” Doc. 38 at 7. They further contend that Relator’s complaint ignores 25 Escobar’s two requirements for asserting an implied certification theory. NAHC and FMC 26 make several arguments in support.4
27 4 NAHC and FMC’s reply brief arguments are structured quite differently than their 28 motion, making it difficult for the Court to keep track of all their assertions. Compare Docs. 38, 45. This order primarily will follow the organization of the reply brief. 1 First, although Defendants raised it only in a footnote in their motion (Doc. 38 n.7), 2 they contend that 42 U.S.C. § 1396b(w)(1)(A) – which requires the federal government to 3 reduce a state’s share by the amount of any non-bona fide provider-related donations before 4 calculating the federal share – does not apply to Arizona. Docs. 38 at 7 n.7, 45 at 3-4. 5 NAHC and FMC cite the definition of “State” in § 1396b(w), which “does not include any 6 State whose entire program under this subchapter is operated under a waiver granted under 7 section 1315 of this title.” 42 U.S.C. § 1396b(w)(7)(D); 42 U.S.C. § 1315 (implementing 8 provision as § 1115(a) of the Social Security Act); see also Spry v. Thompson, No. CV-03- 9 121-ST, 2003 WL 23411996, at *13 (D. Or. Dec. 8, 2003), aff’d in part, rev’d in part, 487 10 F.3d 1272 (9th Cir. 2007) (noting that according to § 1396b(w)(7), this definition applies 11 only to subsection § 1396b(w)). 12 But NAHC and FMC have not presented, and the Court has not found, any authority 13 suggesting that because AHCCCS operates under a series of § 1115 waivers, Defendants 14 are not required to comply with federal regulations governing DSH payments. Although 15 it appears to be true that § 1115 waivers were in place at all relevant times,5 the Court is 16 not convinced that Arizona’s “entire” Medicaid program is covered under a waiver as 17 required by the statute. See 42 U.S.C. § 1396b(w)(7)(D). AHCCCS’s waiver specifies 18 that funding must not be “derived from an impermissible source, including recycled 19 Medicaid payments, federal money precluded from use as state match, impermissible taxes, 20 and non-bona fide provider-related donations.” Centers for Medicare and Medicaid 21 Services Waiver List, Nos. 11-W-00275/09, 21-W-00064/9 (Arizona Medicaid Section 22 1115 Demonstration) at 50 (emphasis added).6 The waiver list also makes clear that “[a]ll 23 Medicaid . . . Program requirements expressed in law, regulation, and policy statement not 24 expressly waived or identified as not applicable in this list, shall apply to the demonstration
25 5 Medicaid.gov, Arizona Health Care Cost Containment System, https://www. 26 medicaid.gov/medicaid/section-1115-demo/demonstration-and-waiver-list/80976 (last visited August 26, 2020) (waivers effective 10/22/2011 and expiring 9/30/2021). 27 6 Centers for Medicare and Medicaid Services, Waiver List, https://www. 28 azahcccs.gov/Resources/Downloads/WaiverAnd%20ExpenditureAuthoritiesAnd%20ST Cs.pdf (last visited August 26, 2020). 1 project beginning October 1, 2016 through September 30, 2021, unless otherwise 2 specified.” Id. at 1. It would appear that § 1396b(w)(1)(A) is not expressly waived and 3 applies to Arizona. 4 Relator points to two documents that appear to acknowledge this. The CMS memo 5 to State Medicaid Directors states specifically that a donation is not considered bona fide 6 where an arrangement is “tied in any way, directly or indirectly, to Medicaid 7 reimbursement under the Medicaid state plan.” Doc. 38-3 at 5 (emphasis in original). 8 Similarly, AHCCCS’s 2010 memo to hospital systems in Arizona, including NAHC and 9 FMC, specifically alerts them to the limitations on provider-related donations, including a 10 prohibition on non-bona fide provider-related donations. See Doc. 38-2 at 2-5. Consistent 11 with these requirements, Attachment B to the IGA, signed by FMC, provides that “no 12 portion of the funds transferred to AHCCCS are derived from [] direct or indirect provider- 13 related donations (in cash or in kind), other than bona fide provider-related donations.” 14 Doc. 38-1 at 5. NAHC and FMC’s argument is not persuasive on this record. 15 Second, NAHC and FMC argue that the amended complaint “does not adequately 16 allege that a non-bona fide provider-related donation was used to obtain matching federal 17 funds.” Docs. 38 at 6-10, 45 at 4-7. Relator contends that WHD’s transfer was 18 impermissible because it was indirectly linked to the donation FMC made to NAHF after 19 FMC received DSH funds, and to the charitable grant NAHF then made to WHD for 20 construction of a new health clinic. Doc. 35 ¶¶ 4, 62. Relator characterizes these 21 transactions as “recycling” federal funds. Id. NAHC and FMC contend that there is no 22 concern about recycling funds because the initial source of the funding was WHD and not 23 a health care provider. Docs. 38 at 8-10, 45 at 5. The Court is not persuaded. 24 Construing the evidence in the light most favorable to Relator, the amended 25 complaint alleges that FMC indirectly funded the $2.2 million local share needed to obtain 26 the FFP funds. Cousins, 568 F.3d at 1067. Specifically, the amended complaint alleges 27 that FMC, after receiving a $6.975 million federal DSH payment, transferred at least $6 28 million to NAHF, and that NAHF – an entity created by NAHC partly to facilitate this 1 transaction – then made a $6 million grant to WHD. Doc. 35 ¶¶ 48, 54-64. Relator alleges 2 that this $6 million reimbursed WHD’s original $2.2 million contribution and provided an 3 additional $3.8 million in recycled federal Medicaid dollars. Doc. 44 at 15. Relator alleges 4 that these transactions occurred pursuant to a fraudulent scheme hatched between NAHC, 5 FMC, NAHF, and WHD to ensure that WHD would recoup its original donation through 6 a provider-related donation, and that Defendants would benefit from the $975,000 retained 7 by FMC and the good publicity associated with a grant to WHD. Doc. 35 ¶¶ 47-63. 8 The Court cannot conclude that this alleged scheme does not involve the “indirect” 9 payment of WHD’s $2.2 million contribution by FMC. Relevant regulations specifically 10 state that “[d]onations made by a health care provider to an organization, which in turn 11 donates money to the State, may be considered to be a donation made indirectly to the State 12 by a health care provider.” 42 C.F.R. § 433.52(4)(1). 13 FMC and NAHC argue that Relator’s alleged scheme has incorrect timing – that 14 WHD’s $2.2 million contribution would be improper only if FMC paid that amount to 15 WHD before WHD transferred it to AHCCCS. In support, NAHC and FMC cite 42 U.S.C. 16 § 1396b(w)(6)(A), which disallows FFP payments when “the transferred [state] funds are 17 derived by the unit of government from donations or taxes that would not otherwise be 18 recognized as the non-Federal share under this section.” (Emphasis added.) They also cite 19 42 C.F.R. § 433.52(4)(1), which states that “[d]onations made by a health care provider to 20 an organization, which in turn donates money to the State, may be considered to be a 21 donation made indirectly to the State by a health care provider.” (Emphasis added.) 22 Defendants argue that these laws include a temporal requirement – that funds transferred 23 by WHD to AHCCCS can be “derived” from an improper source only if the improper 24 source first transfers the funds to WHD, and that the words “in turn” show that the donation 25 must be made to WHD before it, in turn, donates the money to AHCCCS. NAHC and 26 FMC also cite § 4.5 of the IGA, which provides that FMC “will receive and retain one 27 hundred percent (100%) of all DSH payments and, except as provided in this Agreement 28 or as required by federal law or regulatory authority,” is “not required to return any portion 1 of the DSH payment to the State, AHCCCS, or the public entity.” Doc. 38-1 at 4 (emphasis 2 added). They argue that the reference to “return” of the funds implies that FMC has made 3 the donation before receiving the DSH payment. 4 Although the wording identified by NAHC and FMC provides some support for 5 their position, the Court concludes that these words cannot support the full weight of 6 Defendants’ argument at this stage of the litigation. First, Defendants cite no case law 7 supporting this interpretation. Second, Defendants’ narrow reading would allow a health 8 care provider to pay for WHD’s contribution to AHCCCS, under an intentional hold 9 harmless arrangement and contrary to the clear intent of the statute and regulations, by the 10 simple expedient of providing the donation to WHD after the DSH funds are received 11 rather than before. The Court cannot conclude that the law permits so easy an end-run 12 around its intent. Third, as noted above, the Ninth Circuit has instructed the Court to 13 interpret the FCA “broadly, in keeping with Congress’s intention to reach all types of fraud, 14 without qualification, that might result in financial loss to the Government.” Winter, 953 15 F. 3d at 1116 (citation omitted). 16 As Defendants themselves acknowledge: “Given the restriction on non-bona fide 17 provider-related donations, . . . a hospital cannot donate its own funds to a public entity 18 that the public entity donates to AHCCCS in order to obtain Medicaid payments for the 19 hospital.” Doc. 38 at 3. That is precisely what Relator alleges happened in this case. 20 Relator “pleads factual content that allows the court to draw the reasonable inference that 21 the defendant is liable” for indirectly funding the $2.2 million local share needed to obtain 22 the FFP funds that were paid to FMC and eventually found their way back to WHD. See 23 Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). 24 Third, NAHC and FMC argue that Relator does not adequately allege the existence 25 of a “hold harmless” arrangement between FMC and WHD. Docs. 38 at 8-9, 45 at 7. As 26 the relevant regulation states, a “hold harmless” arrangement exists where: (1) the state or 27 other unit of government provides for a direct or indirect Medicaid payment to the provider 28 or others making or responsible for the donation, and the payment amount is positively 1 correlated to the donation; (2) all or any portion of the Medicaid payment to the donor 2 varies based only on the amount of the donation, including where the Medicaid payment is 3 conditioned on receipt of the donation; or (3) the state or other unit of government receiving 4 the donation provides for any direct or indirect payment, offset, or waiver that directly or 5 indirectly guarantees to return any portion of the donation to the provider or other parties 6 responsible for the donation. 42 C.F.R. § 433.54(c)(1)-(3). Relator alleges that there is a 7 positive correlation between FMC’s direct receipt of Medicaid funds and its reimbursement 8 of WHD’s donation to AHCCCS, that FMC’s receipt of Medicaid funds was conditioned 9 on its agreement to reimburse WHD for the $2.2 million, and that FMC was guaranteed in 10 this scheme to receive all of the funds through Medicaid that it would channel to WHD 11 through NAHF. Doc. 35 ¶¶ 30-31, 58-63. 12 The Court declines to dismiss Counts 1 and 2 on the ground that the scheme alleged 13 in the amended complaint does not violate the provider-donation requirements of the 14 Medicaid statutes and regulations. FMC and NAHC also argue that the amended complaint 15 fails to allege facts sufficient to support scienter. Doc. 45 at 10. The Court rejects this 16 argument for the reasons stated below in the discussion of NAHF’s arguments. 17 b. Rule 9(b). 18 The Court agrees with Defendants’ argument that Relator has failed to allege the 19 elements of an implied certification claim. As noted above, two conditions must be met: 20 “first, the claim does not merely request payment, but also makes specific representations 21 about the goods or services provided; and second, the defendant’s failure to disclose 22 noncompliance with material statutory, regulatory, or contractual requirements make those 23 representations misleading half-truths.” Escobar, 136 S. Ct. at 2001. As will be discussed 24 more fully below, the amended complaint fails clearly to identify the false claim made in 25 this case, and certainly does not identify any “specific representations” the claim contained. 26 Nor does the amended complaint explain why the false claim’s omissions made the specific 27 representations misleading half-truths. This conclusion could be reached under either 28 1 Rule 9(b) or 12(b)(6), and is sufficient for dismissal of Counts 1 and 2. The Court 2 nonetheless will also address NAHC’s and FMC’s specific Rule 9(b) arguments. 3 A “pleading must identify the who, what, when, where, and how of the misconduct 4 charged, as well as what is false or misleading about the purportedly fraudulent statement, 5 and why it is false.” Cafasso, 637 F.3d at 1055 (internal quotation marks omitted). 6 Defendants correctly argue that a false claim is central to an FCA violation, and yet the 7 amended complaint does not clearly identify the false claim at issue in this case. It “does 8 not describe who made any submission to the federal government, when the submission 9 was made, what the content or form of the submission was, or how the submission was 10 evaluated by the federal government (materiality).” Doc. 38 at 12. Nor does it identify the 11 falsity in any submission. 12 The amended complaint alleges that AHCCCS sought FFP funds from the federal 13 government, but does not identify this act as the false claim. Doc. 35 ¶ 59. It alleges that 14 the IGA was “fraudulent,” and asserts that FMC “participated” and “entered into” it, but 15 does not clearly explain how the IGA was fraudulent or how this falsity was communicated 16 to the federal government. Id. ¶¶ 61-62. It asserts that “false and fraudulent claims” were 17 made “by WHD, AHCCCS and/or FMC for payment of $4.775 [sic] in federal Medicaid 18 funds,” but does not say when, how, what these claims said, or why they were false. Id. 19 ¶ 68. It alleges that “Defendants” used or made “false records or false statements material 20 to the foregoing [unidentified] false claims,” but does not describe the records or 21 statements. Id. ¶ 73. Later, it says the false records and statements “include, but are not 22 limited to, the fraudulent IGA entered into by FMC,” but again fails to describe how the 23 IGA was false and fraudulent. Id. ¶ 75. 24 NAHC and FMC also correctly argue that “Relator does not include particularized 25 allegations” against all Defendants. Doc. 38 at 13. Rule 9(b) requires that fraud be pled 26 with specificity as to each Defendant. Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th 27 Cir. 2007). The amended complaint does contain allegations about NAHC and FMC’s 28 involvement in the alleged scheme. Doc. 35 ¶¶ 54-64. FMC participated in the IGA to 1 secure the $4.775 million in FFP that it then granted to WHD through NAHF, and the grant 2 was not NAHF’s money, but rather funds the federal government had provided to FMC. 3 Id. ¶ 61. Further, FMC operates NAHC’s flagship hospital, NAHC created NAHF in June 4 2016 with a reversionary interest back to NAHC, NAHC created NAHF in part to serve as 5 an intermediary to facilitate the transfer of FMC’s DSH funds to WHD through a $6 million 6 grant, and all three Defendants engaged in discussions regarding the fraud. Id. ¶¶ 11-12, 7 47-48, 60-62. But the amended complaint says nothing about false claims or statements 8 made by FMC and NAHC, or specify how they otherwise assisted in some other entity’s 9 submission of a false claim. 10 The Court will grant NAHC and FMC’s motion to dismiss Counts 1 and 2 for failure 11 to plead with Rule 9(b) particularity. 12 2. Count 3 – Reverse False Claims. 13 NAHC and FMC contend that Count 3 must be dismissed because it is not “critically 14 distinct” and is “nothing more than an improper recasting of [Relator’s] affirmative 15 claims.” Docs. 38 at 15, 45 at 11. Relator agrees that Count 3 arises out of the same 16 scheme as Counts 1 and 2, but argues that the facts underpinning its theory of liability are 17 distinct. Doc. 44 at 21. He contends that “Defendants’ reverse false claim liability is rooted 18 in their decision to avoid an obligation to return money due and owing the Government as 19 specifically required under the IGA[.]” Id. NAHC and FMC argue that additional evidence 20 is required for reverse false claims liability, and cite a case from the Central District of 21 California which noted that “in cases where a plaintiff alleges a reverse false claim by 22 claiming that the defendant fraudulently overcharged the government and then failed to 23 repay the government, courts have consistently dismissed the claim as redundant of false 24 statement and presentment claims.” United States v. Kinetic Concepts, Inc., No. CV 08- 25 01885-BRO, 2017 WL 2713730, at *13 (C.D. Cal. Mar. 6, 2017) (collecting cases). 26 In response, Relator cites an Eastern District of Wisconsin case which takes a 27 different approach: 28 1 [A] direct FCA violation occurs not when the person receives money from the government, but when the person makes a false claim or statement. Thus, 2 a direct false-claim violation is complete as soon as the person submits the 3 false claim or makes the false statement. It is not unreasonable to think that if the person later receives money from the government based on his prior 4 false claim or statement and does not return it, he could be deemed to have 5 committed a second FCA violation. In this situation, the person has committed two wrongful acts: (1) submitting the false claim or making the 6 false statement, and (2) later avoiding an obligation to return money. 7 Congress may have intended to allow the government to pursue both direct and reverse false claims under these circumstances. 8 9 United States ex rel. Patzer v. Sikorsky Aircraft Corp., No. 11-C-0560 14-C-1381, 2018 10 WL 3518518, at *9 (E.D. Wis. July 20, 2018). 11 Even in Patzer, however, the claimant provided additional evidence – that the 12 defendant made false statements “designed to prevent the government from obtaining 13 repayment of the money.” Id. And the FCA itself recognizes a reverse false claim when a 14 defendant “knowingly makes, uses, or causes to be made or used, a false record or 15 statement material to an obligation to pay or transmit money or property to the 16 Government, or knowingly conceals or knowingly and improperly avoids or decreases an 17 obligation to pay or transmit money or property to the Government.” 31 U.S.C. 18 § 3729(a)(1)(G). Relator does not allege that Defendants made or used a false record or 19 statement material to their obligation to pay money to the federal government, or explain 20 how they knowingly concealed, avoided, or decreased such an obligation. Nor does he 21 explain how NAHC or NAHF (which joins this motion) retained any money they were 22 obligated to pay the federal government. Greater particularity is required, and the Court 23 accordingly will grant NAHC and FMC’s motion to dismiss Count 3. 24 B. NAHF’s Motion to Dismiss (Doc. 39). 25 NAHF, like NAHC and FMC, argues that Relator’s amended complaint does not 26 adequately plead an FCA violation in Counts 1 and 2 or a reverse false claim in Count 3. 27 Doc. 40 at 7. The Court agrees with the Count 3 argument for the reasons outlined above. 28 Relator has failed to allege any evidence that NAHF acted to prevent the government from 1 recouping federal funds that were fraudulently obtained, or that NAHF retained such funds. 2 The Court will grant NAHF’s motion to dismiss Count 3. 3 1. Counts 1 and 2. 4 NAHF joins the motion to dismiss filed by NAHC and FMC in its entirety. Doc. 40 5 at 1. The Court has addressed that motion above, with the exception of scienter, which 6 will be addressed below. 7 NAHF also contends that it cannot be liable under Count 1 because it is not a party 8 to the IGA or its attachments. Id. at 7. The Court does not agree that liability under the 9 FCA, in the scheme alleged by Relator, is limited to those who were parties to the IGA. 10 The amended complaint alleges that NAHF was created in part as a vehicle to facilitate 11 participation in the IGA; that NAHF and the other Defendants “assured” WHD that it could 12 trust the legality of the transaction; and that NAHF ultimately made a $6 million grant to 13 WHD – comprised of unlawfully obtained federal funds – to “return” WHD’s original 14 donation plus $3.8 million. Doc 35. ¶¶ 48, 54, 62. In other words, NAHF entered into a 15 scheme with the other Defendants to facilitate the IGA between WHD and AHCCCS, 16 despite knowing that the state’s share of DSH funds would ultimately be sourced from a 17 non-bona fide provider donation in violation of statutory, regulatory, or contractual 18 requirements. See id. ¶ 45; 42 C.F.R. § 433.52. As noted above, the FCA imposes liability 19 not only on any person who knowingly makes a false claim for payment, but also on 20 persons who cause such a claim to be made. 31 U.S.C. § 3729(a)(1); see also Mackby, 261 21 F.3d at 827 (“[T]he FCA reaches any person who knowingly assisted in causing the 22 government to pay claims which were grounded in fraud, without regard to whether that 23 person had direct contractual relations with the government.”). Relator alleges that NAHF 24 “assisted in causing” the government to pay matching federal Medicaid funds by entering 25 into the alleged fraudulent scheme. Doc. 35 ¶¶ 47-48; Mackby, 261 F. 3d at 827. That 26 NAHF was not a party or signatory to the IGA does not shield it from liability under the 27 FCA at this stage of the litigation. See 31 U.S.C. § 3729(a)(1). 28 1 2. Rule 9(b). 2 NAHF argues that the amended complaint does not differentiate between 3 Defendants and the role each played in the allegedly fraudulently scheme. Swartz, 476 F. 4 3d at 764-65. The Court reaches the same conclusion as above. The amended complaint 5 puts NAHF on notice of its role in the alleged scheme. See Doc. 35 ¶¶ 48, 50, 52, 60, 65. 6 But as noted above, the amended complaint fails to describe the false claim in this case, 7 why it was false, or how the falsity was communicated to the federal government. And it 8 says nothing about false claims or statements made by NAHF, or how NAHF assisted in 9 some other entity’s submission of a false claim. The amended complaint does not plead 10 fraud with the particularity required by Rule 9(b). 11 NAHF also contends that the amended complaint fails to meet the FCA’s scienter 12 requirement because it “fails to allege scienter with particularity as to NAHF.” Doc. 40 at 13 10. This misstates the legal standard. Under Rule 9(b), “scienter need not be pleaded with 14 particularity, but may be alleged generally.” Winter, 953 F.3d at 1022. “A complaint needs 15 only to allege facts supporting a plausible inference of scienter.” Id. 7 16 The amended complaint alleges that NAHF was a vehicle used to facilitate a 17 fraudulent scheme with NAHC, FMC, and WHD to receive FFP from the government. 18 Doc 35 ¶ 35. It further alleges that Relator made NAHF leadership aware that the proposed 19 arrangement violated Medicaid regulations, and that leadership refused to provide a “flow 20 of funds” because they wanted to avoid putting anything in writing. Id. ¶¶ 53-56, 65. This 21 supports a plausible inference of scienter. Winter, 953 F.3d at 1022. The Court similarly 22 finds that the allegations sufficiently allege scienter against NAHC and FMC. 23 IV. Leave to Amend. 24 The Court will dismiss Relator’s amended complaint without prejudice and grant 25 leave to file a second amended complaint. See Vess v. Ciba-Geigy Corp. USA, 317 F.3d
26 7 The FCA requires any false statement to have been made “knowingly.” 31 U.S.C. 27 § 3729(a)(1)(a)-(g). The statute defines “knowingly” as acting either with actual knowledge, in deliberate ignorance of the truth or falsity of the information, or in reckless 28 disregard of the truth or falsity of the information. Id. § 3729(b)(1)(A). There is no requirement of specific intent to defraud. Id. § 3729(b)(1)(B). 1 1097, 1108 (9th Cir. 2003). Relator is cautioned, however, that the Court likely will not 2|| allow a third amended complaint. If Relator cannot plead a viable claim in three attempts, || further attempts likely will be futile. 4 IT IS ORDERED that Defendants’ motions to dismiss (Docs. 37, 39) are granted. The amended complaint is dismissed without prejudice. Relator may file a second || amended complaint within 14 days of this order. If Defendants choose to file a motion to dismiss the second amended complaint, they shall file a single joint motion, within 14 days 8 || of the amended complaint, and shall limit the motion to 15 pages. Relator shall file a 9|| response within 14 days, also limited to 15 pages. Defendants shall file a reply within 7 || days, limited to 8 pages. The parties shall call the Court to advise it when briefing on the 11 || motion has been completed. 12 Dated this 30th day of September, 2020. 13 peed 6, Cane 15 6 . David G. Campbell Senior United States District Judge 17 18 19 20 21 22 23 24 25 26 27 28
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