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United States ex rel. Conroy v. Select Medical Corp.

United States District Court, S.D. Indiana, Evansville Division

September 30, 2016

UNITED STATES OF AMERICA, ex rel. TRACY CONROY, PAMELA SCHENCK, and LISA WILSON, Plaintiffs-Relators,
v.
SELECT MEDICAL CORPORATION; SELECT SPECIALTY HOSPITAL-EVANSVILLE, INC.; SELECT EMPLOYMENT SERVICES, INC.; and DR. RICHARD SLOAN, Defendants.

          ENTRY ON DEFENDANTS' MOTIONS TO DISMISS

          RICHARD L. YOUNG, CHIEF JUDGE

         In April 2012, Tracy Conroy, Pamela Schenck, and Lisa Wilson (“Relators”) brought this qui tam action against their former employer, Select Specialty Hospital-Evansville (“Select-Evansville”); its parent company, Select Medical Corporation (“Select Medical”); a subsidiary of Select Medical, Select Employment Services, Inc. (“Select-Employment”) (collectively, “Select”); and Richard Sloan, M.D. (“Dr. Sloan”), Chief Medical Officer of Select-Evansville. In Count I of the Second Amended Complaint (“Complaint”), Relators allege that Select and Dr. Sloan perpetrated a scheme to defraud Medicare in violation of the False Claims Act (“FCA”), 31 U.S.C. §§ 3729- 3733. Counts II through VII assert claims against Select and Dr. Sloan for unlawful retaliation under the FCA and Indiana's statutory analogs, the Indiana False Claims Act (“Indiana FCA”), Ind. Code § 5-11-5.5 et seq., and the Indiana Medicaid False Claims and Whistleblower Protection Act (“Medicaid FCA”), Ind. Code § 5-11-5.7 et seq.[1] In June 2015, the government elected not to intervene in the lawsuit pursuant to 31 U.S.C. § 3730(b)(4)(B).

         This matter comes before the court on Select's motion to dismiss Relators' Complaint pursuant to Rules 12(b)(1), 12(b)(6), and 9(b) of the Federal Rules of Civil Procedure. Dr. Sloan separately moves to dismiss the claims against him pursuant to Rules 12(b)(6) and 9(b).[2] For reasons set forth below, the court GRANTS in part and DENIES in part each motion.

         I. Standard

         A motion to dismiss under Rule 12(b)(1) challenges the court's subject matter jurisdiction. The scope of the court's inquiry in evaluating a challenge to subject matter jurisdiction turns on the type of challenge. See Apex Dig., Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009). A facial challenge attacks the sufficiency of the allegations in the complaint as a basis for subject matter jurisdiction. Id. at 443. When evaluating a facial challenge, the court accepts all well-pleaded allegations as true and draws all reasonable inferences in the plaintiff's favor. Silha v. ACT, Inc., 807 F.3d 169, 173 (7th Cir. 2015) (citing Apex Dig., Inc., 572 F.3d at 443-44). By contrast, a factual challenge asserts that notwithstanding a formally sufficient pleading, the court in fact has no subject matter jurisdiction. Id. “In reviewing a factual challenge, the court may look beyond the pleadings and view any evidence submitted to determine if subject matter jurisdiction exists.” Id.

         To survive a Rule 12(b)(6) challenge, the complaint must contain sufficient factual allegations to state a claim upon which relief may be granted. See, e.g., Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2015). The court accepts all facts in the complaint as true and views them in the light most favorable to the plaintiff. Bonte v. U.S. Bank, N.A., 624 F.3d 461, 463 (7th Cir. 2010). But because the FCA is an anti-fraud statute, claims brought under it must satisfy the heightened pleading requirements of Rule 9(b). United States ex rel. Gross v. AIDS Research All.-Chi., 415 F.3d 601, 604 (7th Cir. 2005). Unlike Rule 8, which requires only “enough details about the subject-matter of the case to present a story that holds together, ” Swanson v. Citibank, N.A., 614 F.3d 400, 403 (7th Cir. 2010), Rule 9(b) instructs plaintiffs to “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). This heightened standard ordinarily requires allegations that describe the “who, what, when, where, and how” of the fraud. United States ex rel. Lusby v. Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009).

         II. Background

         Select-Evansville is a long-term acute care hospital (“LTCH”) in Evansville, Indiana. (Complaint ¶ 9). Patients admitted to LTCHs typically come from general acute care hospitals and often have serious medical conditions and specialized needs, but they generally require inpatient stays that exceed the typical length of stay at a general acute care hospital. (Id. ¶ 8). Select-Evansville's parent company, Select Medical, owns and operates more than one hundred LTCHs in thirty states. (Id. ¶¶ 8-9). Select Medical also wholly owns Select-Employment, which allegedly employed Relators at some point during the period relevant to this litigation. (Id. ¶ 10). As early as 2006, Dr. Sloan, a nephrologist, practiced medicine at Select-Evansville and became the facility's Chief Medical Officer in August 2009. (Id. ¶¶ 11, 37).

         Tracy Conroy began her employment at Select-Evansville as the Chief Nursing Officer from 1999 to 2001, when she accepted a promotion to Chief Executive Officer of Select-Evansville, a position she held until her termination in June 2012. (Id. ¶ 5; Filing No. 145-1 (“Conroy Decl.”) ¶ 5). As CEO, Conroy was charged with implementing Select Medical's policies for patient admission, length of stay, and discharge. (Conroy Decl. ¶ 7).

         Conroy's former employees, Pamela Schenk and Lisa Wilson, had similarly long tenures at Select-Evansville. Schenk served first as an admissions coordinator before assuming the role of case manager for eleven years until March 2012. (Complaint ¶ 6). Wilson began her employment as a staff nurse before accepting a promotion to Director of Marketing and the Director of Clinical Services. (Filing No. 145-3 (“Wilson Decl.”) ¶ 5). In 2006, Wilson became the Director of Case Management and served in that role until December 2011. (Id.).

         Relators' Complaint describes a system whereby the Defendants manipulated patient stays at the Select-Evansville facility to maximize Medicare reimbursements without regard to medical need. An understanding of the alleged scheme requires a brief summary of the law governing Medicare reimbursements.

         A. Medicare

         Medicare, a federally-funded health insurance program, generally covers the cost of reasonable and medically necessary services for persons over the age of 65, disabled persons, or persons who suffer from end stage renal disease. See 42 U.S.C. § 1395c; § 1395y(a)(1). Participating health care practitioners and providers must provide services “economically and only when, and to the extent, medically necessary.” 42 U.S.C. § 1320c-5(a)(1). Claims for excessive charges or unnecessary services rendered to patients can result in the health care provider's exclusion from the Medicare program. 42 U.S.C. § 1320a-7(b)(6). A provider's participation, therefore, requires certification that any claims made for reimbursement comply with all Medicare requirements. (Complaint ¶ 22). Providers submit payment claims to Medicare using a “CMS-1500” form, which requires the provider to certify that the services rendered were “medically . . . necessary to the health of the patient.” (Id. ¶ 21).

         Since 2002, Medicare has reimbursed LTCHs on a prospective payment system (“PPS”) referred to as LTCH-PPS. (Complaint ¶ 23). Under this system, payment an LTCH receives on a per-patient basis generally depends on the patient's illness and corresponding diagnosis related group (“DRG”). Depending on the DRG, the hospital receives a predetermined payment based on the average cost of treating that illness notwithstanding the duration of inpatient stay or the actual costs incurred. (Id. ¶ 24); see generally 42 C.F.R. § 412.523(a)-(c).

         The LTCH-PPS sets forth payment adjustments for certain outlier patients. For example, when a hospital discharges a patient with a length of stay less than five-sixths of the geometric mean for that patient's DRG, the system considers this a “short-stay outlier” for which the hospital receives less than the full DRG payment. See 42 C.F.R. § 412.529. Thus, a patient stay that reaches the five-sixths date for a specific DRG means the difference between a full DRG payment and the lesser payment for a short-stay outlier. (Complaint ¶¶ 25, 26). Due to the fixed nature of DRG payments, profits at LTCHs suffer the longer a patient requires treatment past the five-sixths date. (Id. ¶ 27).

         The LTCH-PPS also contains special payment provisions that apply when a patient leaves the LTCH for another designated facility but then returns. See 42 C.F.R. § 412.531. Payment for an interrupted stay depends on the type of facility that temporarily admits the patient and the duration of the interruption. If a patient goes to an acute care hospital, an inpatient rehabilitation facility (“IRF”), or a skilled nursing facility (“SNF”) and returns to the LTCH within three days, the LTCH receives only the one DRG payment. Id. § 412.531(b)(1)(ii). By contrast, if the interruption exceeds three days, the LTCH will receive two separate DRG payments if the inpatient stay exceeds certain “fixed day periods” set for different facilities. See Id. § 412.531(b)(4). For example, if a patient transfers to an acute care hospital and stays there for more than nine days before returning to the LTCH, the system considers this readmission a “new stay” that entitles the LTCH to another DRG payment. Id. § 412.531(b)(4)(i).

         B. The alleged schemes

         Relators allege that beginning as early as 2006, they witnessed firsthand as Dr. Sloan and Select effected a corporate-wide policy of extending or shortening patient stays depending on where patients fell with respect to the five-sixths date. (Complaint ¶ 37). This alleged policy tolerated neither short stay outliers nor patients who overstayed their welcome much past the five-sixths date. (See Id. ¶¶ 38, 41, 71-73). Relators also describe instances where Dr. Sloan transferred patients to acute care hospitals to undergo unnecessary treatments for the sole purpose of claiming additional DRG payments under the “interrupted stay” provisions. (See Id. ¶ 81). In essence, Relators allege, the maximization of Medicare payments-not patient wellbeing-drove medical care decisions.

         Relators allege multiple accounts of such manipulation. (See Id. ¶¶ 76, 81-82). For example, the Complaint states as follows regarding “Patient C”:

Patient C, a Medicare beneficiary, was admitted to [Select-Evansville] on September 22, 2010, under DRG 207, “Respiratory Diagnosis with Ventilator Support 96 Hours.” This DRG meant she would pass her 5/6 date after 28 days; Patient C initially stayed 37 days until she was discharged to Deaconess Hospital on October 29, 2010. Dr. Sloan discharged Patient C for Continuous Renal Replacement Therapy (“CRRT”), which was only offered at an acute care setting like Deaconess. Dr. Sloan, [Select-Evansville], and Select Medical knew [this treatment was] not medically necessary or appropriate. Patient C stopped receiving CRRT on October 31, 2010, within 3 days of her discharge. Patient C did not, however, return immediately to [Select-Evansville] when the CRRT treatments ended. She stayed at Deaconess until November 11, 2010, when she was readmitted [to Select-Evansville] . . . more than 9 days after her original discharge. The original discharge for CRRT was unnecessary, and Patient C should have remained at [Select-Evansville] under one [DRG] payment. During discharge, it was noted by a Deaconess employee that [a Select-Evansville] liaison had asked, “When can we take her back?” As a result, [Defendants] knowingly submitted or caused to be submitted false claims to the United States Government in connection with the care of Patient C.

(Id. ¶ 81(a)-(b)). Relators also allege several instances of Defendants falsely coding, or “up-coding, ” patient diagnoses to higher-paying DRGs despite the lack of supporting medical evidence. (See Id. ¶ 83). The net result of such acts, according to Relators, amounts to Defendants knowingly submitting false claims for payment to Medicare and thus committing fraud against the United States government. (Id. ¶ 40).

         Further, Relators allege that the practices of Dr. Sloan and Select-Evansville existed company-wide by design. Select Medical allegedly graded employees at its hospitals nationwide on common criteria: maintaining patient census; avoiding short-stay outliers; and discharging or transferring patients deemed “Medicare Exhaust” (i.e., when a patient's length of stay reaches the required five-sixths threshold for a DRG payment). (Id. ¶ 64). It allegedly recruited and retained physicians, such as Dr. Sloan, who committed to the corporate model of exhausting Medicare payments for each patient notwithstanding medical necessity. (Id. ¶ 65). Case managers responsible for monitoring patient care underwent corporate training on “outlier management, ” or, in other words, preventing discharges prior to the five-sixths date. (Id. ¶¶ 42-43). For patients at risk of early discharge, Select Medical trained its case managers to prescribe occupational therapy, speech therapy, or physical therapy at the LTCH as a means of keeping patients long enough to claim the DRG payment. (See Id. ¶¶ 43-46). Relators allege that Select Medical not only advocated such tactics but also held its employees accountable for failure to manage patient care in ways that achieve the five-sixths goals. (See Id. ¶¶ 42, 50-54).

         C. Retaliation against Relators

         As early as 2007, Conroy began voicing her concerns about Defendants' practices to her direct superiors, Select Medical's Chief Operating Officer, Patricia Rice, and Regional Vice President, Joe Gordon. (Id. ¶ 88). In 2009, Conroy began receiving complaints from her case managers and other staff at Select-Evansville about the alleged practices of Dr. Sloan, who had substantial control over discharge and admission for the majority of patients at Select-Evansville. (Id. ¶¶ 67, 89). In 2011, Conroy raised her concerns with Joe Gordon and again with a Select Medical Human Resources representative but to no avail. (Id. ¶¶ 91-92).

         In May 2011, Wilson and Schenk began gathering evidence of the fraudulent practices of Dr. Sloan and Select-Evansville. (Id. ¶ 94). Wilson subsequently had a meeting, which she believed to be confidential, with Patricia Rice and the Director of Compliance to discuss her concerns and to present evidence of the alleged fraud. (Id. ¶ 94-95). Dr. Sloan allegedly learned of the accusations levied against him and the retaliation ensued. (See Id. ¶ 96-101). Select Medical allegedly initiated unprecedented audits of case management at Select-Evansville and suddenly required Wilson and Schenk to submit weekly patient reports directly to the doctors. (Id. ¶¶ 97-99). Dr. Sloan also intensified his scrutiny of Wilson and Schenk, routinely inquiring about patient discharges, DRGs, and length of stays, and then reporting them to Conroy for poor job performance. (Id. ¶ 100-01).

         In early 2012, Conroy was informed that, as CEO of Select-Evansville, she needed to either terminate the case managers objecting to the company's business practices or find another job. (See Id. ¶ 102). In February 2012, Select Medical placed Conroy on a 90-day performance action plan and shortly thereafter informed her that she should transfer to a different Select Medical facility. (Id. ¶ 105-06). Working conditions allegedly worsened for Conroy, causing her to take a leave of absence. In June 2012, Conroy was terminated. (Id. ¶ 108-09).

         Relators Schenk and Wilson allege similar experiences following the May 2011 meeting. Schenk first raised her concerns to Conroy and then to Select Medical's Director of Case Management. (Id. ¶¶ 112-13). Schenk even confronted Dr. Sloan about his allegedly fraudulent practices and resulting harm caused to patients. (Id. ¶ 114). Schenk alleges that due to her objections, she suffered intolerable working conditions resulting in her constructive discharge in April 2012. (See Id. ¶¶ 116, 118-23). Likewise, Wilson raised her objections to Regional Vice President Joe Gordon, Conroy, and Dr. Sloan directly, but she, too, endured retaliation resulting in her constructive discharge in March 2012. (See Id. ¶¶ 125-32).

         D. Procedural background

         Relators filed this action under seal in April 2012, and, in June 2015, the government made its election not to intervene. Select then moved to dismiss the Complaint on grounds that (1) the FCA's public-disclosure bar requires dismissal; (2) Relators failed to plead fraud with particularity; (3) Relators cannot establish that clinical determinations were “objectively false”; and (4) Relators fail to state claims for retaliation. Dr. Sloan filed a separate motion to dismiss claims against him for (1) failure to plead fraud with particularity and (2) for failure to state a claim for retaliation under the FCA or Indiana law. Concurrently with the filing of Relators' responses in opposition to each motion, the government filed its own opposition to dismissal under the amended public-disclosure bar. See 31 U.S.C. § 3730(e)(4)(A) (2010). That provision, the government contends, authorizes a “government veto” of any dismissal that § 3730(e)(4)(A) would otherwise mandate. The government's opposition incited more briefing. By agreement, the parties submitted supplemental briefs on the constitutionality of the amended public-disclosure bar as the government interprets it.[3]

         III. Discussion

         The FCA proscribes the knowing submission of false claims for payment to the federal government and makes civil penalties and treble damages available as remedies. Cause of Action v. Chi. Transit Auth., 815 F.3d 267, 272 (7th Cir. 2016), petition for cert. filed, (U.S. July 27, 2016) (No. 16-131). It imposes liability upon any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval, ” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” to the government. 31 U.S.C. § 3729(a)(1)(A)-(B). The FCA also enlists the help of private persons-known as relators-to bring qui tam civil actions on behalf of the United States in exchange for a share in any recovery. United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 116 (D.C. Cir. 2015); 31 U.S.C. § 3730(b)(1).

         To guard against parasitic lawsuits, the FCA contains provisions that “limit qui tam suits to those that expose previously undiscovered fraud or provide new, helpful information to the government.” Heath, 791 F.3d at 116. One such provision is the public-disclosure bar, which disqualifies qui tam actions based on fraud already disclosed through certain enumerated sources. See 31 U.S.C. § 3730(e)(4)(A). Prior to undergoing some alterations in 2010, the public-disclosure bar stripped courts of subject matter jurisdiction over cases based on previously disclosed information. See Rockwell Int'l Corp. v. United States, 549 U.S. 457, 467-68, 127 S.Ct. 1397, 167 L.Ed.2d 190 (2007). In a 2010 amendment, Congress removed the explicit jurisdiction-removing language and thus raised doubt about whether Rule 12(b)(1) remains an appropriate basis for dismissal under § 3730(e)(4)(A). See United States ex rel. Absher v. Momence Meadows Nursing Ctr., Inc., 764 F.3d 699, 706 (7th Cir. 2014). Moreover, as noted above, the amended provision allows the government to oppose dismissal. See 31 U.S.C. § 3730(e)(4)(A) (“The court shall dismiss an action . . . unless opposed by the Government . . . .”).

         The parties vigorously dispute the ultimate effect of the government's new right. Relators and the government argue that the amendment made prior public disclosure a basis for dismissal under Rule 12(b)(6), rather than a bar on jurisdiction, and has granted the government authority to veto dismissal under § 3730(e)(4)(A). Select first contends that the public-disclosure bar remains jurisdictional. As such, to construe the provision as requiring the government's consent to a court's involuntary dismissal would violate separation of powers principles, the nondelegation doctrine, and due process. In the alternative, Select claims the “government veto” runs afoul of such constitutional principles even if § 3730(e)(4) no longer limits jurisdiction. Therefore, before turning to the sufficiency of Relators' allegations, the court must first ensure that it has subject matter jurisdiction. This threshold question turns on (1) whether the FCA's public-disclosure bar applies to Relators' claims; if so, (2) whether Relators fall under the original-source exception; and, if not, (3) whether the amended public-disclosure bar deprives the court of jurisdiction for claims arising from post-amendment conduct. Notwithstanding the jurisdictional nature of the public-disclosure bar, the court must also evaluate the constitutionality of the government veto.

         A. Subject matter jurisdiction

         Congress added the public-disclosure bar to the FCA to avoid the “risk that unnecessary ‘me too' private litigation would divert funds from the Treasury.” United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 934 (7th Cir. 2012). The pre-2010 version, enacted in 1986, provided as follows:

(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

31 U.S.C. § 3730(e)(4)(A) (2009). In Rockwell, the Supreme Court held that this version's explicit, jurisdiction-withdrawing language made clear that Congress intended to limit the power of courts to hear certain cases. 549 U.S. at 467-68. Thus, once information about alleged fraud becomes public, the court has no jurisdiction unless the Attorney General or a relator who qualifies as an original source brings the action. Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 913 (7th Cir. 2009).

         Congress amended the FCA, effective March 23, 2010, and significantly revised the public-disclosure bar. The post-amendment bar provides:

The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed-
(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;
(ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or
(iii) from the news media, unless the action is brought by the Attorney General or the person bringing the action is an ...

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