On October 5, 2012, the Sixth Circuit held that a dialysis provider’s attempts to comply with ambiguous federal regulations regarding Method I and Method II reimbursements did not violate the False Claims Act.  United States v. Renal Care Group, Inc., 6th Cir., No. 11-5779, Oct. 5, 2012.  The court’s decision focused on whether Renal Care Group’s (RCG) wholly-owned subsidiary Renal Care Group Supply Company (RCGSC) was a separate entity for purposes of Method II reimbursement and whether the defendants acted with reckless disregard of Medicare regulations in submitting Method II claims.

RCG operates dialysis facilities and provides dialysis supplies and services to home dialysis patients with end stage renal disease, while RCGSC supplies only dialysis equipment to home dialysis patients.  Medicare reimburses dialysis facilities for all dialysis services, including home dialysis, under Method I reimbursement, a “uniform composite weighted payment.”  Pub. L. No. 97-35, § 2145(a), 95 Stat. 357, 799-800 (1981).  Method II reimbursement applies to independent companies that provide only equipment and supplies to home dialysis patients, such as RCGSC.  Method II payments are based on fee-for-service and are generally more expensive than Method I reimbursements.  See H.R. Conf. Rep. No. 101-386, reprinted in 1989 U.S.C.C.A.N. 3018, 3429.  42 U.S.C. § 1395rr(b)(4)(B) further restricts Method II reimbursements to suppliers who are “not under the direct supervision of an approved provider of services or renal dialysis facility.”  The purpose of this bifurcated scheme is to provide patients with a range of providers and the opportunity to engage in cost comparisons, while still having the option of home support services if needed.

In concluding that RCGSC was not the alter ego of RCG, the court focused on the fact that federal regulations suggest “an organization can be controlled by another and yet still be considered an ‘entity’ for purposes of Method II reimbursement.”  The court did not see any reason to punish a business simply for “seeking to maximize profits,” especially if the purposes behind the reimbursement schedules were not compromised.  In addition, the court noted that RCG and RCGSC had not acted in reckless disregard of the Method I and II regulations.  Specifically, the defendants sought legal counsel and clarification on the rules from CMS, with a positive response regarding the organizational structure from the government, and had disclosed RCGSC’s ownership structure to the OIG and CMS.  Finally, RCGSC was separately incorporated with its own Medicare supplier number, showing an attempt to comply with the separate entity requirement.  The court emphasized that the limited duty to inquire need only be “reasonable and prudent under the circumstances.”  S. Rep. 99-345, at 21, U.S.C.C.A.N. 5266, 5286.  Accordingly, the court concluded there was no evidence of a  violation of the False Claims Act.  The opinion is available here.