The district court denied the defendants’ motion to dismiss a complaint alleging that a group of healthcare entities fraudulently obtained federal reimbursements under the Medicaid program by using a series of financial transactions and intergovernmental agreements to disguise the original source and destination of the funds. The relator alleged that a state agency designated a payment to a private healthcare entity in order to trigger a federal reimbursement, which also was paid to the private entity. That hospital then made a donation to a nonprofit established to facilitate these transactions, which then made a grant in the same amount to the state agency. The defendants argued that the regulation governing provider-related donations was ambiguous and that their interpretation of the rule was reasonable, and therefore the relator could not demonstrate scienter. However, the court reasoned that the defendants’ interpretation would undercut the clear intent of the rule and noted that the defendants themselves acknowledged that the arrangement alleged by the relator was improper. The defendants also argued that imposing FCA liability was improper, because the government had wide latitude to enforce this regulation. However, the court found the regulation specifically addressed improper donations, without giving CMS leeway to interpret or enforce the rule. Finally, the court found the relator corrected the deficiency in his original complaint by specifically identifying the false statements and submissions the defendants made to claim funds.
Relator Gregory Kuzma alleged that Northern Arizona Healthcare Corporation, Northern Arizona Orthopedic Surgery Center LLC, and Flagstaff Medical Center Inc. sought and obtained Medicaid reimbursements from the federal government using a series of fraudulent financial transactions and a sham non-profit entity. The defendants moved to dismiss.
As background, the federal government funds a portion of state Medicaid expenditures, which is called the Federal Financial Participation. For state contributions to prompt the receipt of FFP payments under federal law, the state contributions generally must consist of state or local public funds rather than donations from private health care providers such as hospitals. Provider donations are allowed if they are bona fide, meaning they have no direct or indirect relationship to Medicaid payments the provider receives from the state or local government. If the donations are returned to the provider under a hold harmless arrangement, the donation is considered to have a direct or indirect relationship to the entity’s Medicaid payments and the amount of the donation is deducted from the FFP received by the state.
A direct or indirect relationship occurs when: (1) the state provides for a direct or indirect Medicaid payment to the provider or others making the donation, and the payment amount is positively correlated to the donation; (2) all or any portion of the Medicaid payment to the donor varies based only on the amount of the donation, including where the Medicaid payment is conditioned on receipt of the donation; or (3) the state receiving the donation provides for any direct or indirect payment, offset, or waiver that directly or indirectly guarantees to return any portion of the donation to the provider or other parties responsible for the donation. This applies whether the donation is made directly by a provider or by a provider via a third party.
The complaint also involved the use of intergovernmental agreements (IGAs), through which a state may fund its share of Medicaid and which prompt the payment of FFP from the federal government. An IGA is an agreement between state Medicaid and a qualifying public entity, under which the public entity transfers public funds to the Medicaid administrator for the state’s share of Medicaid. In addition, hospitals that serve a disproportionate share of uninsured individuals are eligible to receive payments through the Disproportionate Share Hospital program.
The relator worked for the Northern Arizona Healthcare Corporation as its vice president and chief financial officer from 2004 to 2014. Since 2016, Kuzma has been employed as the chief financial officer of North Country HealthCare, a private nonprofit health center that is a tenant in a building owned by the Williams Hospital District, a state entity.
In 2015, WHD asked NAHC to consider donating $3 million to fund the construction of a new medical building. NAHC declined, and instead proposed that WHD pursue a matching contribution using an IGA. NAHC and FMC held discussions with WHD regarding the proposed IGA and related transactions for approximately one year, during which time NAHC formed NAHF, a nonprofit entity, in part to facilitate the series of transactions discussed in this case.
When the relator became aware of these discussions, he expressed concern about the legality of the transaction. Kuzma had previously discussed the federal prohibition on recycling of Medicaid funds with Rick Smith, a former NAHC employee who in 2016 became the president and CEO of NAHF.
When Kuzma advised a colleague involved in the discussions to request a “flow of funds” of the transaction, the colleague was informed that the parties did not want to put anything in writing. He was also told that three months must elapse between FMC’s receipt of the funds and any MOU between WHD and NAHF.
In 2017, WHD entered into an IGA with the Arizona Health Care Cost Containment System (AHCCCS), the state’s Medicaid agency. Attachment B to the IGA was an “Agreement to Reimburse Impermissible Disproportionate Share Hospital (DSH) Payments” signed by FMC as the hospital that would receive the DSH payment. The agreement required FMC to refund the DSH payment if it was determined that the source of the funds was not permissible under federal law. Neither NAHC nor NAHF were parties to the IGA or signatories to its attachments.
Pursuant to the IGA, WHD transferred $2.2 million to AHCCCS and represented that the funds constituted the non-federal share of a DSH payment to be made to FMC. AHCCCS then requested and received $4,757,270 of Federal Financial Participation—the federal government’s portion of Medicaid costs—and transferred the total received from WHD and the federal government ($6,975,270) to FMC as a DSH payment. FMC in turn transferred $6 million of this amount to NAHF, and NAHF gave a $6 million grant to WHD.
According to the relator, this series of transactions had the effect of returning the original $2.2 million that WHD had provided to AHCCCS, plus an additional $3.8 million. FMC retained approximately $975,000. In essence, the relator alleged the parties improperly obtained federal matching funds by failing to disclose the nature of their financial transactions.
In June 2017, AHCCCS submitted to CMS a Quarterly Progress Report in which it claimed an allotment of $4,775,270, representing the federal share of the February 2017 DSH payment to FMC. The State of Arizona also claimed the February 2017 payment as a Medicaid expenditure in its quarterly Form-64, which AHCCCS certified and subsequently submitted to CMS for approval. AHCCC’s Form-64 package did not include the required Form 64.11 or Form 64.11A disclosures about provider-related donations.
In his complaint, the relator alleged various violations of the False Claims Act, including direct and reverse false claims. The defendants successfully moved to dismiss the First Amended Complaint and when the relator refiled, also moved to dismiss the SAC.
The defendants argued that the SAC must be dismissed because the ambiguity of the statute and regulations governing provider-related donations precludes an adequate allegation of scienter under the FCA and raises due process concerns. They also argued that the relevant statutes and regulations give the government broad powers and discretion to ensure compliance with Medicaid requirements, rendering the FCA an improper vehicle for redressing violations. Finally, they argued the complaint was not pled with the required particularity.
First, the court considered scienter. The SAC alleged that the defendants knowingly engaged in a fraudulent scheme to receive FFP from the government to which they were not entitled, and never committed their plan to writing because they knew it violated Medicaid regulations on non-bona fide provider-related donations. The defendants argued that the law is ambiguous about the timing requirements of non-bona fide donations, precluding an adequate allegation of scienter.
In short, the defendants asserted that the relevant statute regulations impose a sequential timing requirement for impermissible provider-related donations. According to the defendants, funds transferred by WHD to AHCCCS could have been “derived” from an improper source only if the improper source first transferred the funds to WHD. Because the alleged scheme in this case did not involve FMC’s transfer of funds to WHD before WHD made its donation to AHCCCS, the defendants argued that the transfer did not satisfy the sequential timing requirement in the statute and regulation and therefore could reasonably be viewed as not violating the law, precluding a plausible allegation of scienter.
The court found some support in the statutory and regulatory language, but found that such a narrow reading would allow a healthcare provider to pay for WHD’s contribution to AHCCCS, under an intentional hold harmless arrangement by the simple expedient of providing the donation to WHD after the DSH funds are received rather than before. The court reasoned this interpretation would go against the clear intent of the law—that a state not directly or indirectly reimburse a provider for a donation.
The court also found no case law supporting this reading, but the defendants argued this turned in their favor, as their interpretation was reasonable and had not been contradicted by case law or regulatory guidance. The defendants argued that a reasonable interpretation of an ambiguous regulations cannot be used as a basis for establishing FCA scienter.
The court was not persuaded, first noting that ambiguity in a rule or regulation did not necessarily preclude FCA liability. The court could not declare at this stage whether the defendants acted in good faith, nor that their interpretation was objectively reasonable. As the court already noted, the defendants’ interpretation of the regulation would create an easy end-run around the law’s intent. In fact, the defendants themselves acknowledged that “Given the restriction on non-bona fide provider-related donations, a hospital cannot donate its own funds to a public entity that the public entity donates to AHCCCS in order to obtain Medicaid payments for the hospital.” The court noted that this scenario was precisely what the relator alleged.
The court also found the relator had provided government guidance in support of his position. A 2014 letter from CMS to state Medicaid directors stated that a donation is not considered bona fide where it is “tied in any way, directly or indirectly, to Medicaid reimbursement under the Medicaid state plan.” The relator alleged that the donation by WHD was not only tied to Medicaid funds, but was reimbursed entirely through Medicaid funds. Accordingly, the court declined to dismiss the complaint on scienter grounds.
Next, the defendants argued that imposing FCA liability in this case would violate due process, which requires that a defendant be provided sufficiently clear notice prior to imposing penalties. However, the court found the relevant statute and regulations, as well as the relator’s CMS letter, could put a person of ordinary intelligence on notice that the alleged scheme was improper. Further, the SAC alleged facts suggesting the defendants knew the scheme was improper, including the relator’s alleged warnings, the fact that the defendants avoided putting their plans in writing, and the fact that they deliberately waited three months between receipt of DSH funds and any agreement between WHD and NAHF.
Next, the defendants argued that the FCA is an inappropriate vehicle for addressing the violations because the regulations already provide a remedy for impermissible donations. Under 42 C.F.R. § 433.54(e), CMS can offset a non-bona fide donation by deducting the donation from the state’s medical assistance expenditures before calculating FFP. Additionally, the IGA provided that AHCCCS will require hospitals to reimburse it, or deduct future AHCCCS payments, if it determines that the funds were not public funds under the federal regulations. According to the defendants, imposing FCA liability would usurp the discretion of those responsible for ensuring compliance.
The court acknowledged that violations of discretionary regulations can, in certain circumstances, preclude liability under the FCA, but found no support in the cases cited by the defendants. According to the court, the regulatory schemes at issue in those cases provided the government far more discretion to interpret and enforce. The court found the opposite true here. The regulations did not state that they were highly discretionary or otherwise provide the government with the type of sweeping authority that would be encroached upon by FCA liability. Instead, the regulations spelled out precisely which types of provider-related donations are bona fide and provided even more detail about which are not. The court found no language giving CMS broad remedial powers to address violations.
Finally, the defendants argued that the relator failed to plead his complaint with the required particularity.
The court disagreed, finding the relator remedied the deficiencies that resulted in dismissal of the FAC. While the FAC contained details about the defendants’ involvement in the alleged fraudulent scheme, it failed to identify the actual false claim, why it was false, which entity submitted the false claim, when the submission was made, and how the submission was evaluated by the federal government for materiality purposes. It also never specified how the defendants submitted false claims, or caused the submission of a false claim.
However, the SAC identified the false claim: the Form-64 submission to CMS seeking approval for federal funds drawn down by AHCCCS in February 2017, which contained both an affirmative false statement (the certification that “state and/or local funds” were used to match the state’s allowable expenditures, and that such funds were “in accordance with all applicable federal requirements for the non-federal share match of expenditures”), and a misleading omission (the required provider-related donation disclosures in Form 64.11 and 64.11A, which should have resulted in a reduction of FMC’s DSH payment by the amount of the donation).
The SAC also identified several false statements material to the false claim. For example, the defendants affirmed that WHD “agreed to transfer public funds in the amount specified [in the IGA] as the Non-Federal Share of DSH payments.” The relator alleged that this statement was untrue because the defendants and WHD knew WHD would be reimbursed for the transfer under its agreement with the defendants, thus ensuring that recycled federal funds—rather than state and/or local public funds—would fund the DSH payment.
Further, the IGA falsely stated that that eligible hospitals would receive and retain one hundred percent of all DSH payments except as required by law. The relator alleged that FMC did not retain one hundred percent of the DSH payment, but transferred most of it to WHD through NAHF. Finally, because the defendants’ scheme violated the federal prohibition on non-bona fide provider-related donations, a statement in the IGA attesting to statutory and regulatory compliance also was untrue.
The SAC also tied the defendants’ actions to the false statements and explained how the misrepresentations were material to the government’s payment decision. The court also noted the SAC identified each defendant’s role in causing the false claim and false statements to be made. While the relator did not identify specific WHD participants, the court noted that WHD is not a defendant in this action and that the SAC outlined WHD’s role in the scheme.
Finally, the defendants argued that the SAC failed to allege particularized facts concerning the existence of a hold harmless agreement violating the prohibition on non-bona fide provider-related donations. However, the court previously concluded that the FAC’s hold harmless allegations were sufficient to state a claim under the FCA, and found the SAC made the same allegations, in even greater detail. For example, the defendants argued the relator failed to allege with specificity that any donation to WHD to construct its new clinic—the purported provider-related donation—was conditioned on WHD’s $2.2 million donation to AHCCCS, as is required for a hold harmless practice to exist. The court found this clearly incorrect, and outlined the many details set out in the complaint supporting this allegation.
The court denied the motion to dismiss in its entirety.
