The district court granted the government’s motion to dismiss a qui tam case over the relator’s objections, finding the request reasonable. Though the government previously agreed not to move for dismissal, the court noted the relator failed to narrow his claims, as he and the government had agreed, and therefore it was reasonable for the government to seek dismissal based on its initial reservations. Over the objections of the government, the court also ruled on summary judgment, also in favor of the defendant. Applying the standard set forth by the Supreme Court in Allina, the district court found that CMS had not properly received notice and comment on rules regarding inpatient reimbursement rates, and therefore the rules were invalid, meaning the defendant could not have violated them.
Jesse Polansky filed a qui tam action alleging that Executive Health Resources Inc. caused its client hospitals to fraudulently bill Medicare and Medicaid by falsely designating patient admissions as inpatient when they should have been marked as outpatient. The government moved to dismiss.
The government declined to intervene in the case, which alleged the defendants exploited the difference in reimbursement rates for inpatient and outpatient services under different standards based on rules in place at the time of the alleged violations. Initially, the government indicated that it would not seek to dismiss the case, provided the relator pursed a significantly narrowed theory. However, when the relator filed his third amended complaint, disagreements arose over what, if any, narrowing had occurred. Concluding that the relator continued to pursue initial claims that prompted the government to consider dismissal in the first place, the government moved to dismiss the complaint in full.
The court considered the government’s motion to dismiss and, over the objections of the defendant and the government, ruled on summary judgment.
First, the court held the government had the right to dismiss the case and had adequately justified its reasoning. The government argued the court should apply the unfettered discretion test in Swift v. United States, and the relator argued the more stringent standard in Sequoia was more appropriate, and that the government could not meet that test. The court held it need not reach a decision on which standard to apply, as it concluded the government had met both.
Applying the more stringent Sequoia test, the court found the government adequately argued that the litigation burden imposed by the relator’s case was no longer justified, and dismissal was rationally related to that interest because complete dismissal will eliminate the burden.
The court also found the relator failed to show that the government’s decision was arbitrary or capricious. The relator argued that the costs the government claimed it incurred predated its original decision not to dismiss and therefore should not be used to justify dismissal. However, the court noted the relator failed to hold up his end of that bargain when he failed to narrow his claims as agreed. Second, discovery recommendations that the government produce additional documents it had deemed privileged also factored into the government’s motion to dismiss, as this recommendation would lead to the outlay of government resources.
Next, the court considered summary judgment independent of the dismissal request. At issue wre the differing reimbursement rates authorized by the Centers for Medicare and Medicaid services for inpatient and outpatient services. Prior to 2013, CMS’ standard for inpatient reimbursement allowed services to be considered inpatient if the patient stayed at least overnight, even if it later developed that the patient could be released and did not actually use a hospital bed overnight. Under another standard, services could be considered outpatient if the patient stayed in the hospital fewer than 24 hours, even if the patient stayed overnight and was admitted to a hospital bed.
In 2013, CMS established a “Two Midnight” standard for determining whether services were inpatient or outpatient. In short, if a patient remained in the hospital past two consecutive midnights, CMS deems the services inpatient, and authorizes higher reimbursement. The relator alleged the defendants abused this distinction to obtain higher reimbursement, under the earlier time-based standard and under the Two-Midnight Rule.
However, the court held that the underlying time-based reimbursement criteria was a substantive legal standard under the Medicare Act, for which CMS did not receive notice and comment as required by Allina’s interpretation of the Medicare Act. In Allina, the Supreme Court invalidated a Medicare payment formula that substantially reduced payments to hospitals that served low-income patients, finding that posting the policy on the CMS website did not satisfy the requirement for CMS to give notice and a chance to comment, as required by the Medicare Act for “substantive legal standards.” Because the rule allegedly violated by the defendant had not been properly promulgated, the defendant could not have violated it or, be extension, the FCA.
The district court noted the Third Circuit had not yet adopted a definition of a “substantive legal standard” that triggers the requirement for notice and comment, but the D.C. Circuit had. According to the D.C. Circuit, the term substantive legal standard “at a minimum includes a standard that creates, defines, and regulates the rights, duties, and powers of parties.”
Adopting that standard, the district court concluded that CMS’s standards for inpatient and outpatient services were “subjective legal standards” under the Medicare Act. The court found the earlier policies affected a hospital’s right to payment, because they set the standard by which a hospital would be reimbursed.
Because CMS did not seek notice and comment before implementing the underlying time-based standards, the court held the rule – and the subsequent change made by the Two Midnight Rule – was invalid. Because the rule was invalid, the defendant could not have violated it.
