United States of America v. Dynamic Medical Systems, LLC.

Opinion

----oo0oo---- UNITED STATES OF AMERICA AND THE No. 1:17-cv-01757 WBS SAB STATE OF CALIFORNIA ex rel. Plaintiffs, MEMORANDUM AND ORDER RE: DEFENDANTS’ MOTION TO DISMISS v. DYNAMIC MEDICAL SYSTEMS, LLC; JOERNS HEALTHCARE LLC; COVENANT CARE CALIFORNIA LLC; MARINER HEALTH CARE MANAGEMENT COMPANY; PLUM HEALTHCARE GROUP LLC; and CAMBRIDGE HEALTHCARE SERVICES, Defendants.

----oo0oo---- Relator Thomas Turner brings this qui tam action against Covenant Care California, LLC (“Covenant”), Mariner Health Care Management Company (“Mariner”), Plum Healthcare Group LLC (“Plum”), and Cambridge Healthcare Services (“Cambridge”), who manage skilled nursing facilities (collectively the “SNFs”); and Dynamic Medical Systems LLC and Joerns Healthcare LLC, who lease mattresses and bed frames to companies that manage skilled nursing facilities (collectively “Dynamic”1). (See generally Second Am. Compl. (Docket No. 141) (“SAC”).) Relator asserts various claims under the federal and California False Claims Acts (“FCA” and “CFCA,” respectively). The court now considers defendants’ motions to dismiss relator’s Second Amended Complaint.2 (Mots. (Docket Nos. 142, 144-46).) I. Procedural Background Due to the long history of this case and its recent assignment to the undersigned, the court briefly recites the procedural background in relevant part. Relator filed his First Amended Complaint (“FAC”) in March 2018. (Docket No. 7.) The FAC asserted four violations of the FCA (presenting false claims; making or using false records or statements; retaining proceeds not entitled to keep; and conspiracy) (Claims 1-4, respectively), and four violations of the CFCA (presenting false claims; making or using false records or statements; (in the alternative) inadvertently submitting false claims; and conspiracy) (Claims 5- 8, respectively). (See generally FAC.) Defendants then filed parallel motions to dismiss the FAC. (Docket Nos. 59, 60, 64, 67.) In January 2022, an order by Judge Drozd dismissed Claims 1, 2, 4, 5, 6, and 8 of the FAC,

1 Joerns, like Dynamic, is in the business of leasing mattresses to skilled nursing facilities. Joerns acquired Dynamic in 2015. (SAC ¶ 10-11.) For the purpose of this motion, they will be treated in common.

2 Relator incorrectly labels his Second Amended Complaint “First Amended Complaint.” which are based on false certification, Anti-Kickback Statute, and conspiracy theories, with leave to amend for failure to plead with particularity a false or fraudulent claim under Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”). (Order (Docket No. 135).) The order also dismissed Claims 3 and 7 without further leave to amend on the ground that they are based on an untenable reverse false claim theory. (Id.) Relator then filed his Second Amended Complaint, which re-pleads the six claims based on false certification, Anti- Kickback Statute, and conspiracy theories that were previously dismissed with leave to amend. (SAC Claims 1-5, 7.) The SAC also re-pleads the CFCA inadvertent submissions claim (i.e., Claim 7, which is now re-numbered Claim 6 in the SAC). Defendants then filed their second set of motions to dismiss. (Mots.) Thereafter, the case was transferred to the undersigned. (Docket No. 174.) II. Discussion3 The court previously dismissed the FAC because relator failed to plead with particularity a false statement or fraudulent course of conduct -- specifically, who made a false claim or certification, when, and how. (Order.) Dismissal of the FAC was pursuant to the “reliable indicia” pleading standard that the Ninth Circuit adopted in Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998-99 (2010) (Rule 9(b) satisfied with “particular details of a scheme to submit false claims paired 3 Except where further discussion is merited, the court does not revisit the applicable legal standards already set forth in the previous Order. with reliable indicia that lead to a strong inference that claims were actually submitted”). The court now examines, under this standard, only whether relator’s new allegations cure this defect by pleading the who, when, and how of a false claim with the particularity required by Rule 9(b).4 A. Who Submitted a False Claim (Claims 1, 2, 4, 5) The SAC pleads several new names of various officers and employees associated with defendants, along with their job descriptions. (See, e.g., SAC ¶¶ 59-72.) It further alleges that various of these now-identified individuals, among other things, “spearheaded the discriminatory billing practices,” “implemented [the fraudulent program],” “carried out the scheme,” were “instructed to search-out all SOC and Medi-Cal business in order to increase profits,” were “one of the drivers of differential billing,” or were “tasked with invoicing as many SOC patients as possible to increase profits.” (Id.) However, these new allegations still fail to allege the “who” with requisite particularity. In the FAC, relator alleged that Robert Husband and Laura Bailey, employees at Dynamic, corresponded about engaging in a fraudulent scheme to get “rid of competition” and push “the share of cost program.” (Order at 35.) This failed to allege that Husband and Bailey “were engaging in discriminatory billing 4 Dynamic also requests that the court take judicial notice of seven state and federal administrative documents in support of their motion to dismiss the SAC. (Docket No. 143.) The court need not rely on these documents in order to address the issues presented in defendants’ motions to dismiss. Accordingly, the court will deny Dynamic’s request to take judicial notice of the documents. (Docket No. 143.) on any comparable ‘service or article’ in violation of Medi-Cal’s low-price rules, nor d[id] any of relator’s allegations show that Husband and Bailey falsely certified or caused to be certified a claim for payment to the government.” (Id. at 36). The new allegations against the newly identified individuals are deficient for the same reasons. While the allegations implicate these individuals in the supposed underlying fraudulent scheme, they too fail to address the relevant question pursuant to an FCA claim: Who made false statements or omissions? See United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) (FCA attaches liability only “to the claim for payment,” not the “underlying fraudulent activity”). The closest thing to an answer that relator offers is an allegation that “[b]ills were submitted by Dynamic [] by various personnel in their billing departments,” SAC ¶ 42, but this still fails to “at a minimum identify [who] by title and/or job responsibility” submitted false claims or certifications. See United States ex rel. Modglin v. DJO Glob. Inc., 114 F. Supp. 3d 993, 1016 (C.D. Cal. 2015), aff’d 678 F. App’x 594 (9th Cir. 2017). Accordingly, the court will dismiss Claims 1, 2, 4, and 5 on this basis. B. When a False Claim was Submitted (Claims 1, 2, 4, 5) The SAC’s new allegations on when a false claim was submitted still establish only general stretches of time, despite the court’s prior admonition that Rule 9(b) requires more. (Order at 38-39.) See, e.g., SAC ¶ 57 (quid pro quo in contract provisions “[u]ntil at least 2018”); id. ¶ 59 (“Dynamic has carried out this scheme since at least 2006”); id. ¶ 60 (data showing that “in 2011 Dynamic/Invacare was clearly continuing to charge different rates for SOC patients . . . .”). Cf. Ryan v. Microsoft Corp., 147 F. Supp. 3d 868, 888 (N.D. Cal. 2015) (allegations that fraudulent conduct occurred “in 2011 and 2012” and “in approximately 2008” were insufficient under Rule 9(b)). Relator attempts to cure this defect by alleging that false claims and certifications were submitted “every month” during the relevant time periods, thereby “taint[ing] every single one of their claims to Medicare and Medi-Cal.” (SAC ¶ 5.) However, this still is not enough to allege “when” with sufficient precision. For one, the supposed timeframe of the “business relationship” between the SNFs and Dynamic, during which false claims and certifications were allegedly submitted every month, remains unspecified. (Id.) But even assuming a precise stretch of time for the alleged scheme, averments of “each” or “every” alleged occurrence, without more, fail to provide defendants sufficient notice about specific alleged misconduct to investigate and against which to prepare a defense. See Godecke v. Kinetic Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019) (fraud needs to be pled with particularity to allow defendant to defend against charge). In Knudsen v. Sprint Commc'ns Co., the relator similarly alleged a fraudulent scheme where the defendants submitted false claims every month during a 105-month contractual period. No. C13-04476 CRB, 2016 WL 4548924, at *9 (N.D. Cal. Sept. 1, 2016). The Knudsen court found that the basis of that allegation, which was an audit that the relator conducted on 3 months’ worth of services postdating the contractual period at issue, failed to provide any specific details about any of the 105 allegedly false claims. Id. Here, relator fails to plead any particular basis at all for his allegation that the entire set of claims, submitted monthly over a course of years, was fraudulent. Relator is not required to present a representative example of a false claim, but he still must allege “particular details of a fraudulent scheme to submit false claims” that credit allegations of routinized fraud. Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) (emphasis added). As another attempted remedy, relator attaches provider agreements between Dynamic and various skilled nursing facilities. (SAC Exs. A-C.) While these contracts contain specific execution dates, they fail to further identify when the allegedly fraudulent rates and terms contained within the contracts were actually charged, or when such charges were allegedly submitted to the government as a false claim or certification. See Eferton DMCC v. Asia-Glob. Renewable Energy Corp., No. CV 15-9295-R, 2016 WL 5886900, at *1 (C.D. Cal. Apr. 22, 2016) (“Mere general allegations of a multi-month period of various contracts and agreements does not suffice for Rule 9(b).”). Accordingly, the court will dismiss Claims 1, 2, 4, and 5 on this basis. C. How a False Claim was Submitted (Claims 1, 2, 4, 5) 1. Dynamic The SAC also fails to sufficiently establish how Dynamic submitted false claims and certifications to the government. Dynamic uses Form CMS-1500 to bill Medi-Cal directly for “qualifying wound” or “direct bill” patients. (SAC ¶ 41.) This form requires Dynamic to certify that the submission complies with all applicable federal and state laws, including (1) Medi-Cal’s low-price rules, and (2) the Anti-Kickback Statute. (Id. ¶ 41.) The SAC alleges that all of Dynamic’s CMS- 1500 submissions violate both. (Id. ¶ 42.) (a) Violation of Medi-Cal Low-Price Rules Medi-Cal’s low-price rules prohibit a provider from submitting a reimbursement request for a service that costs more than the “usual fee” charged to the “general public” for that service. (Id. ¶ 77.) Construing the SAC in the light most favorable to relator, Dynamic charges Medi-Cal the “usual fee,” which is $18.76 per day per patient, for specialty mattresses. (Id. ¶ 41; see also Order at 33 n.41.) At the same time, Dynamic allegedly charges skilled nursing facilities “a massively discounted price of between $3 and $6 per day” for “facility” patients whose entire cost of care is covered by the state. (Id. ¶ 43.) These discounts for the facility segment allegedly render every submission of Form CMS-1500 false because the discounted price falls far below the “usual fee” of $18.76. (Id. ¶ 78.) However, relator fails to further allege any reliable indicia supporting the inference that the “massively discounted” fees charged to the facility segment are the right comparator for the “usual fees” charged to Medi-Cal. Put another way, the SAC fails to answer three questions: (1) For what product or service does Dynamic charge Medi-Cal $18.76 per day? (2) For what product or service does Dynamic charge the skilled nursing facilities $3 to $6 per day? and (3) Are these products or services the same?5 See United States v. Chang, No. CV-13-3772-DMG-MRWx, 2017 WL 10544289, at *14-15 (C.D. Cal. July 25, 2017) (failure to specify whether “usual fee” charged to “general public” prevented doctor’s office from charging uninsured population less pursuant to Medi-Cal low-price rules); Physicians and Surgeons Labs., Inc. v. Dep’t of Health Servs., 6 Cal. App. 4th 968, 990 (2d Dist. 1992) (finding laboratory’s negotiated contract with discounted fees were not part of the “usual” fees charged to the “general public” and rejecting idea that “any time [a service provider] charged a lower fee, it would be required to charge Medi-Cal that same lower fee”); People v. Duz-Mor Diagnostic Lab., Inc., 68 Cal. App. 4th 654, 665-66 (2d Dist. 1998) (clinical laboratory provider discounts to private-pay patients, negotiated by physicians and HMOs, were not “charge to the general public” and thus did not violate low-price rules). Relator’s own allegations suggest that he requires the assistance of discovery to provide them: “[Dynamic is] in possession of detailed billing and reimbursement records that will easily identify each and every claim they submitted to Medi- Cal for ‘qualifying wound’ patients, including the identity of the patient, the date of service, the date the bill was submitted, the amount of the charge, and the amount reimbursed.” SAC ¶ 42. But this puts the cart before the horse. The FCA and

5 The provider contracts that relator attaches to the SAC further muddies this issue. Each contract contains a price list, which sets forth a grid of different prices based on the specific type and feature set of mattress and duration of the rental period. (SAC Exs. A-C.) Rule 9(b) “encourage insiders to disclose information necessary to prevent fraud on the government.” Ebeid, 616 F.3d at 999. They further require relators to “come to court with a claim in hand or with sufficiently detailed circumstantial evidence to establish that the defendant actually submitted a false claim.” United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314 F.3d 995, 1002 (9th Cir. 2002). Because relator fails to bring this information to court at the pleading stage, he fails to sufficiently allege a violation of Medi-Cal’s low-price rules. (b) Violation of Anti-Kickback Statute Relator also alleges a direct link between the purported differential pricing scheme between Dynamic and SNFs, on the one hand, and SNFs’ referral of qualifying wound patients to Dynamic, on the other hand. In support, the SAC alleges that “the quid pro quo is reflected and memorialized in the contractual agreements between [SNFs] and [Dynamic].” (SAC ¶ 53.) Relator points in particular to certain preferred vendor or exclusivity contract terms within that require SNFs to source all or most of their supplies from Dynamic. (Id. ¶¶ 53-56.) These contract terms allegedly form the kickback to Dynamic in exchange for Dynamic’s participation in SNFs’ discriminatory billing scheme. (Id.) However, the contract terms do not suggest a quid pro quo even viewed in a light most favorable to relator. First, the one “exclusivity” agreement that relator identifies (id. Ex. A (Dynamic-Plum contract)) acknowledges the skilled nursing facilities’ right to choose alternative providers as provided by law. (Id. ¶ 54.) Second, simply offering lower prices or bulk/loyalty discounts in exchange for volume of business is not enough to support an Anti-Kickback Statute violation.6 See United States ex rel. Dan Abrams Co. v. Medtronic, Inc., No. LA CV15-01212 JAK ASX, 2018 WL 5266863, at *8 (C.D. Cal. June 7, 2018) (dismissing Anti-Kickback Statute claims after finding allegations that defendants provided rebates to hospitals that purchased certain devices and that defendants knowingly caused claims to be submitted as a result were conclusory and “failed to allege a clear link between any alleged inducements and the false claims, any specific inducement, which products physicians were allegedly induced to purchase, or when and where any device was used as a result of a kick-back”). The SAC fails to allege any reliable indicia of a fraudulent scheme that Dynamic’s alleged participation in a discriminatory billing scheme was consideration for or inducement of these agreements. Without more, the SAC fails to allege how defendants’ agreements amounted to an illegal kickback scheme that, in turn, caused Dynamic’s Form CMS-1500 submissions to become false certifications. Accordingly, the court will dismiss Claims 1, 2, 4, and 5 against Dynamic on this basis. 2. Skilled Nursing Facilities SNFs bill Medicare Part A and Medi-Cal using Forms CMS- 1450 and 1500. (SAC ¶¶ 29-30.) Relator alleges that SNFs submit a consolidated bill, meaning that other entities also treating

6 Lowered prices may generally help support alleged violations of Medi-Cal’s low-price rules, but not in this case as discussed above. See supra. patients bill their services to SNFs. SNFs then include those charges along with their own charges in a unified bill that they then submit to the government. (Id.) The SAC alleges no additional details on what goes on the forms, how that information is organized on the forms so that any mistakes or fraud relating to specialty mattress prices can be detected, or what further conditions and certifications that the forms require. It also fails to allege that any information that SNFs transmitted to the government was in fact fraudulent, either intrinsically (i.e., submitting false dollar amounts) or by failing to comply with certain requirements as provided by the forms. As a result, the SAC fails to allege, either directly or circumstantially, how any Form CMS-1450 or 1500 submitted by SNFs was a false claim, either by falsely certifying to the government that specialty mattresses were being charged for in a manner consistent with all applicable laws and regulations, or by directly submitting false information. Accordingly, the court will dismiss Claims 1, 2, 4, and 5 against SNFs on this basis. D. Conspiracy (Claims 3, 7) Allegations about the contracts between Dynamic and the SNFs form the core of relator’s renewed attempt to plead conspiracy. (Id. ¶¶ 52-57, 104, 122.) However, combined with the failure to plead a false claim as outlined above, nothing about these contracts plausibly demonstrate any “meeting of the minds in an unlawful arrangement” required to establish a civil conspiracy. Gilbrook v. City of Westminster, 177 F.3d 839, 856 (9th Cir. 1999). The contracts in fact tend to do the opposite. Accordingly, the court will dismiss Claims 3 and 7. E. Motion to Strike (Claim 6) Defendants move to strike Claim 6 on the ground that the court’s previous order dismissed an identically-worded claim with prejudice. (Mots.) Relator argues that this was in error because the order mistakenly characterized Claim 6 as advancing a reverse false claim theory, a theory that the order found to be untenable even with amendment. (Docket Nos. 151-54.) Whether or not the court grants this request is irrelevant, as the SAC pleads Claim 6 with the same lack of particularity that afflicts all its other claims. Claim 6 invokes Cal. Gov. Code § 12651(a)(8), which provides that “a beneficiary of a claim who subsequently discovers the falsity of the claim, and fails to disclose the false claim to the state or the political subdivision within a reasonable time after discovery of the false claim[,] is liable under the California FCA.” United States v. Safran Grp., S.A., No. 15-cv-746-LHK, 2017 WL 235197, at *5 (N.D. Cal. Jan. 19, 2017) (internal quotation omitted). “[W]ith the exception of scienter and the timing of a defendant's discovery of the false claim,” which are not at issue here, “the elements of a claim under § 12651 (a)(8) are identical to the other federal and California FCA provisions.” United States v. Sutter Health, No. 14-CV-04100- KAW, 2021 WL 9182522, at *22 (N.D. Cal. Mar. 17, 2021). The analysis disposing of relator’s other claims applies with equal force to Claim 6. Relator fails to allege with the required particularity who discovered the falsity of any claim or statement, how he discovered and then subsequently failed to disclose it, and when. Claim 6 is therefore insufficient for the same reasons. Accordingly, the court will deny the motion to strike and dismiss Claim 6. F. Leave to Amend Leave to amend a pleading is generally freely granted and is within the discretion of the court. See Fed. R. Civ. P. 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). However, this “liberality does not apply when amendment would be futile.” Ebner v. Fresh, Inc., 838 F.3d 958, 968 (9th Cir. 2016). The SAC is relator’s third attempt to sufficiently plead claims under the FCA and CFCA. Relator has failed to remedy any of the FAC’s defects identified in the court’s previous order. For example, relator has been afforded countless opportunities to answer the basic question of whether the government and skilled nursing facilities were charged different prices for the same product. Relator’s repeated inability to answer that question with any specific examples, either in his pleadings or at oral argument, is telling. In addition, relator’s suggestion that billing and reimbursement records in Dynamic’s possession would salvage his claims, SAC ¶ 42, and his attachment of assorted provider agreements but no other documents which might indicate the submission of any false claim, compel the conclusion that a fourth attempt would be futile. The court will therefore dismiss relator’s SAC in its entirety without leave to amend. IT IS THEREFORE ORDERED that the Second Amended Complaint (Docket No. 141) be, and hereby is, DISMISSED WITH ee enn en en nnn nn nn enn nn nn nn EE OS OSE ED

PREJUDICE.? . « Dated: October 17, 2023 ob tle Ah fh bee WILLIAM B. SHUBB UNITED STATES DISTRICT JUDGE . 7 Dynamic’s request for judicial notice (Docket No. 143) is DENIED as moot. 15