This is our final post on United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-cv-00710 (N.D.N.Y. Jan. 19, 2011), a qui tam action against a dialysis treatment center based on alleged quality of care issues that was recently dismissed pursuant to Rules 9(b) and 12(b)(6). In the Dialysis Clinic case, the relator, a nurse who had been employed by the center from August 2007 until October 2008, alleged that the center violated certain state and federal standards and regulatory requirements by, e.g., failing to provide adequate staffing, using unqualified personnel, permitting personal care technicians to perform nursing functions, and failing to adequately train employees to handle emergency situations. The relator further claimed that these alleged deficiencies compromised patient care for beneficiaries under the Medicare, Medicaid, and Veterans’ Administration programs. The relator alleged violations of the False Claims Act based on worthless services and false certification theories of liability. The government declined to intervene in the action.
Today, we discuss the court’s ruling on the defendant’s Rule 12(b)(1) motion to dismiss the action for lack of subject matter jurisdiction under the False Claims Act’s public disclosure bar.
Public Disclosure – The Audit Report
In 2008, the New York State of the Medicaid Inspector General (“OMIG”) conducted an audit of defendant and reviewed payments made from the New York Medicaid program to the defendant from January 1, 2004 through December 31, 2005. On October 23, 2008, the OMIG issued an audit report, which was publicly available after that date. The audit consisted of a review of a random sample of 200 services which were reimbursed by Medicaid. The purpose of the audit was to determine whether: Medicaid reimbursable services were rendered for the dates billed; appropriate rate or procedure codes were billed for services rendered; patient related records contained the documentation required by the regulations; and claims for payments were submitted in accordance with Department regulations and the Provider Manuals for Clinics.
The audit report contained four findings concerning the defendant’s billing practices:
- In 12 instances, certain documentation was missing for kidney dialysis services.
- In 11 instances, service delivery documents were not signed by a licensed health professional.
- In 4 instances, a threshold visit was incorrectly billed for an incomplete treatment session.
- In 4 instances, no Explanation of Medical Benefits was found for a Medicare eligible patient.
The relator’s employment with the clinic ended two weeks before the audit report was issued. The relator was not aware of the audit report until after the report was posted on the internet.
The Public Disclosure Bar – Pre and Post-PPACA
The FCA contains a public disclosure bar which “is intended to bar ‘parasitic lawsuits’ based upon publicly disclosed information in which would-be relators ‘seek remuneration although they contributed nothing to the exposure of the fraud.’” United States ex rel. Kreindler & Kriendler v. United Tech. Corp., 985 F.2d 1148, 1157 (2d Cir. 1993). The FCA’s public disclosure bar is codified at 31 U.S.C. § 3730(e)(4). It was amended effective March 23, 2010, by the Patient Protection and Affordable Care Act (“PPACA”), Pub. L. No. 111-148, § 10104(j)(2), 124 Stat. 119, 901-02 (2010). For cases filed prior to March 23, 2010, the public disclosure bar operates as a jurisdictional defense. For those cases filed on or after March 23, 2010, the public disclosure bar can be asserted as a substantive defense.
The old version of § 3730(e)(4) provides:
(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.
(B) For purposes of this paragraph, “original source” means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.
The new version, effective March 23, 2010, provides:
(A) 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 original source of the information.
(B) For purposes of this paragraph, “original source” means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.
The amendment is not retroactive, so it is important to note which version of § 3730(e)(4) applies in a given case. For example, in United States ex rel. Wilson v. Graham County Soil & Water Conservation District, 130 S. Ct. 1396 (2010), the Supreme Court issued a decision which expanded the scope of the public disclosure bar to disclosures made in state and local proceedings as well as those in federal hearings, reports, audits, and investigations. However, Congress effectively overrode the Graham County case in enacting the PPACA, which expressly limits the public disclosure bar to federal proceedings and reports. The amended provision is not retroactive, so the expanded public disclosure bar announced in Graham County still applies to cases filed prior to March 23, 2010.
The Application of the Pre-PPACA Public Disclosure Bar to the Dialysis Clinic Case
The court held that the pre-PPACA version of 31 U.S.C. §3730(e)(4) applied because the complaint was filed before the amendment took effect. To determine whether the public disclosure bar applied, the court engaged in a two-part analysis to determine: (1) whether the information on which the allegation of fraud rests was a “public disclosure” through one of the sources enumerated in the statute; and (2) whether the relator’s allegations are based upon “allegations or transactions” disclosed to the public. If both parts of this test are met, a relator may avoid dismissal by establishing that he was an “original source” with “direct and independent knowledge.”
With respect to the first question, the relator conceded that the audit report was publicly disclosed within the meaning of the statute. The remainder of the court’s analysis focused on the second part of the test. The court observed that circuit courts are divided over the meaning of the phrase “based upon” as it is used in the pre-PPACA version of 31 U.S.C. § 3730(e)(4). The court noted that the Second Circuit follows the majority view and has repeatedly held that the relator’s claim is “based upon” the public disclosure if the allegations in the complaint are “substantially similar” to the publicly disclosed information.
The defendant argued that the public disclosure bar warranted dismissal because the allegations in the second amended complaint were substantially similar to those previously disclosed in the OMIG’s audit report. The relator claimed that the audit report disclosed “information” but not “allegations or transactions” that are contained in the second amended complaint. In support of this position, the relator claimed that there was nothing in the audit report that pertained to the actual treatment that was provided to patients, nor was there anything in the audit report relating to patient safety issues or violations of nursing practices and Medicare health and safety regulations.
The court agreed with the relator and held that while the audit report and the second amended complaint may have overlapped with respect to the general subject matter of Medicare/Medicaid billing, the allegations in the second amended complaint were not “substantially similar” to the audit report. In arriving at this conclusion, the court observed that the audit report did not discuss any alleged violations of medical procedures or risks to patient safety. Nor did it accuse the defendant of any fraudulent conduct. At best, the audit report revealed errors and irregularities in defendant’s billing practices. Based on this analysis, the court held that public disclosure bar did not apply, and an examination of whether the relator was an “original source” was thus unnecessary.
Despite the court’s denial of the defendant’s Rule 12(b)(1) motion in the Dialysis Clinic case, the defendant nevertheless received its happy ending when the court dismissed the complaint with prejudice under Rules 9(b) and 12(b)(6). Moreover, even though the defendant did not succeed on the basis of the public disclosure bar, many qui tam cases are dismissed at the pleading stage because of the public disclosure bar, so it is an important tool to understand and know how to effectively use. Accordingly, when faced with a qui tam complaint, and considering the weapons available for early dismissal, it is worth bearing in mind the potential 1-2-3 punch of filing motions to dismiss based on failure to plead fraud with particularity under Rule 9(b); failure to state a claim under Rule 12(b)(6); and the public disclosure bar contained in 31 U.S.C. 3730(e)(4). For pre-PPACA cases (i.e., those filed prior to March 23, 2010), the public disclosure bar can be asserted as a jurisdictional defense under Rule 12(b)(1), and for post-PPACA cases, the defense can be asserted as a substantive defense under Rule 12(b)(6).