A former independent consultant to Beth Israel Medical Center (“BIMC”), Cleuza Colucci, brought a False Claims Act action against the hospital, alleging that it billed for and received inflated Medicare payments by purchasing Kings Highway and Doctors Hospital and then taking advantage of rate increases resulting from consolidation with BIMC for purposes of billing Medicare. The Government did not intervene, and the District Court for the Southern District of New York dismissed the case on defendants’ motion to dismiss. See United States ex rel. Colucci v. Beth Israel Medical Center, et al., Case No. 06 Civ. 5033, 2011 WL 1226267 (S.D.N.Y. Mar. 31, 2011). The District Court held that “[taking] advantage of the uncertainty in the regulations to maximize its Medicare billings..is not fraud.”

Colucci alleged that BIMC manipulated Medicare reimbursements by taking advantage of two factors: teaching hospitals, like BIMC, are able to bill for certain costs, such as salaries and overhead, that non-teaching hospitals, like Kings Highway and Doctors Hospital, cannot. Kings Highway and Doctors Hospital had a higher percentage of Medicare patients (referred to as Medicare Penetration), which results in higher Medicare reimbursement rates. BIMC consolidated the Medicare claims of Kings Highway and Doctors Hospital under BIMC’s Medicare provider number. However, according to Colucci, “the hospitals’ operations remained completely separate,” the consolidation did not increase “operating efficiencies,” and Medicare patients did not receive any additional services or a reduction in the cost of services. Colucci argued that BIMC’s claims submitted to Medicare were factually false and legally false based on false express certifications. The Court rejected each of Colucci’s arguments.

BIMC’s Claims Were Not Factually False

“A claim is factually false where the claimant supplies [1] an incorrect description of goods or services provided or [2] a request for reimbursement for goods or services never provided.” The allegations against BIMC do not fall within either category. Moreover, there are no Medicare regulations or statutes setting forth billing procedures or rates when teaching and non-teaching hospitals are consolidated. The Court, therefore, found no factual falsity, reasoning:

Hence, there is some uncertainty as to whether BIMC’s consolidation and subsequent submission of claims was permissible under Medicare. The worst that can be said of BIMC is that it took advantage of the uncertainty in the regulations to maximize its Medicare billings. This is not fraud… Simply put, Colucci has alleged nothing more than that BIMC took steps to maximize its Medicare reimbursements, pursuant to Medicare statutes and regulations.

BIMC’s Claims Were Not Legally False Based on a False Certification Theory

A claim is legally false “where a party certifies compliance with a statute or regulation as a condition to governmental payment.” Colucci relies on an express false certification theory. An express false certification is “a claim that falsely certifies compliance with a particular statute, regulation or contractual term, where compliance is a prerequisite to payment.”

In Institutional Cost Reports (ICRs) submitted to Medicare, BIMC certified the following: “I further certify that I am familiar with the laws and regulations regarding the provision of health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations.” The Court held that this certification is insufficient to create liability under a false certification theory because it is not a precondition of payment and does not certify compliance with a specified statute or regulation. Additionally, Colucci never even alleged a particular statute or regulation that was violated by BIMC.

BIMC Did Not Knowingly Submit False Claims

One necessary element of a violation of the FCA is that the defendant act “knowingly.” The claims against BIMC fail for the additional reason that the Complaint fails to allege that BIMC knew or should have known that their billing method was illegal. As the Court held:

Even assuming the claims submitted by BIMC were “false,” given the lack of clarity in the law, it cannot be said that defendants “knew” the claims were false. In the absence of a clear obligation on the part of BIMC to bill for each component separately, FCA liability is not appropriate, for the FCA is intended to punish only “wrongdoing,” not honest mistakes.

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This holding should be reassuring to defendants that, at least in this Court, the Government will not be permitted to stretch the FCA to reach every type of conduct of which it does not approve. Defendants should nonetheless beware that other courts, particularly outside of the Second Circuit, have interpreted the FCA more liberally.