United States District Court, S.D. Indiana, Evansville Division
UNITED STATES OF AMERICA, ex rel. TRACY CONROY, PAMELA SCHENCK, and LISA WILSON, Plaintiffs-Relators,
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
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. In June 2015, the government elected not
to intervene in the lawsuit pursuant to 31 U.S.C. §
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). For reasons set forth below,
the court GRANTS in part and DENIES in part each motion.
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.
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).
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).
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.
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.).
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 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).
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. §
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).
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.
The alleged schemes
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.
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
(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).
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. ¶¶
Retaliation against Relators
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).
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. ¶
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. ¶
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.
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
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).
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 . . . .”).
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.
Subject matter jurisdiction
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).
amended the FCA, effective March 23, 2010, and significantly
revised the public-disclosure bar. The post-amendment bar
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