United States of America et al v. North East Medical Services

Filing 57

ORDER DENYING 35 MOTION TO DISMISS. Answer due by 5/9/2013. Signed by Judge Claudia Wilken on 4/26/2013. (ndr, COURT STAFF) (Filed on 4/26/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES OF AMERICA and
STATE OF CALIFORNIA ex rel. LOI
TRINH and ED TA-CHIANG HSU,

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Plaintiffs,

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ORDER DENYING
MOTION TO DISMISS
(Docket No. 35)

v.

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NORTHEAST MEDICAL SERVICES, INC.,

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Defendant.
________________________________/

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United States District Court
For the Northern District of California

No. C 10-1904 CW

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Plaintiffs United States of America and the State of

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California bring this action against Defendant Northeast Medical

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Services (NEMS) for violations of the federal False Claims Act

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(FCA), 31 U.S.C. §§ 3729 et seq., and the California False Claims

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Act (CFCA), Cal. Gov’t Code §§ 12650 et seq., and for various

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torts.

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jurisdiction and failure to state a claim.

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motion.

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argument, the Court denies the motion.

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BACKGROUND

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NEMS moves to dismiss for lack of subject matter
Plaintiffs oppose the

After considering the parties’ submissions and oral

NEMS is a non-profit health center that provides medical care

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to low-income communities throughout the San Francisco Bay Area.

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For the past four decades, NEMS has received federal funding for

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this work under § 330 of the Public Health Services Act.

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U.S.C. § 254b.

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medical services to communities with limited health care access

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and must not refuse services to any person based on that person’s

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inability to pay.

42

Under that provision, NEMS is required to provide

42 U.S.C. § 254b(a)(1).

As a further condition

1

of its funding, NEMS must provide services to any person enrolled

2

in Medicaid.

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42 U.S.C. § 254b(k)(3).

Medicaid is a federal program that offers participating

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states financial assistance to provide medical services to the

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poor.

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to participate in Medicaid, . . . those that choose to do so ‘must

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comply both with statutory requirements imposed by the Medicaid

8

Act and with regulations promulgated by the Secretary of [HHS].’”

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Managed Pharmacy Care v. Sebelius, 705 F.3d 934, 939 (9th Cir.

Cal. Welf. & Inst. Code § 10740.

While states “do not have

United States District Court
For the Northern District of California

10

2012) (citations omitted).

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participating states reimburse “Federally-qualified health

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centers” (FQHCs), like NEMS, for the services they provide to

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Medicaid enrollees.

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typically receive funding from both the federal government (under

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the Public Health Services Act for services they provide to the

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poor) and the State (under the Medicaid Act for services they

17

provide to Medicaid enrollees).

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One of these requirements is that

42 U.S.C. § 1396a(a)(15).

Thus, FQHCs

California participates in Medicaid through its Medi–Cal

19

program.

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required to reimburse NEMS for the organization’s costs in

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providing care to Medicaid enrollees.

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provides these reimbursements through a “managed care

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organization” called the San Francisco Health Plan (SFHP), with

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which the State has contracted to help administer Medi-Cal in the

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San Francisco area.

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are meant to estimate NEMS’s prospective costs for treating

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Medicaid enrollees for the upcoming fiscal year.

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every fiscal year, NEMS is required to report its actual costs to

Cal. Welf. & Inst. Code § 10740.

It is therefore

42 U.S.C. § 1396a(bb).

It

SFHP provides NEMS with regular payments that

2

At the end of

1

the Department of Health Care Services (DHCS), the agency tasked

2

with administering Medi-Cal, so that the agency can determine

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whether the SFHP’s prospective payments fully compensated NEMS for

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its Medicaid-related costs that year.

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If the report reveals that SFHP’s prospective payments exceeded

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NEMS’s actual Medicaid costs for the year, then NEMS must return

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any excess funding it received to DHCS.

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SFHP’s payments fell short of NEMS’s actual costs for the year,

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then DHCS must make up the shortfall by paying NEMS the

42 U.S.C. § 1396a(bb)(5).

If the report shows that

United States District Court
For the Northern District of California

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difference.

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FQHCs to complete, is known as the annual “reconciliation.”

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This process, which the Medicaid Act requires all

In the present case, the state and federal governments allege

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that NEMS knowingly underreported the amount of funding it

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received from SFHP on the reconciliation reports it submitted to

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DHCS between 2001 and 2010.

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Intervention ¶ 2.

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received inflated year-end payments from Medi-Cal.”

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Docket No. 26, Complaint-in-

As a result, the governments claim, “NEMS
Id.

Two former NEMS employees, Loi Trinh and Ed Ta-Chiang Hsu,

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initiated this action in May 2010 by filing a qui tam suit on

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behalf of the governments after they learned of the potential

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misreporting.

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allegations, the federal government elected to intervene in August

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2012, Docket No. 17, and the State followed suit in January 2013,

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Docket No. 24.

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governments filed their joint complaint-in-intervention, alleging

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violations of the FCA and CFCA and asserting claims for unjust

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enrichment, fraud, concealment of material facts, intentional

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misrepresentation, and negligent misrepresentation.

Id. ¶¶ 36-37.

After investigating Hsu and Trinh’s

Two weeks later, on January 15, 2013, the

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Compl.-in-

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Interv. ¶¶ 38-77.

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millions of dollars in inflated reconciliation payments from Medi-

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Cal.

Their complaint charges NEMS with extracting

Id. ¶¶ 31-33.

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LEGAL STANDARD
I.

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Subject Matter Jurisdiction
Subject matter jurisdiction is a threshold issue which goes

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to the power of the court to hear the case.

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matter jurisdiction must exist at the time the action is

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commenced.

Federal subject

Morongo Band of Mission Indians v. Cal. State Bd. of

United States District Court
For the Northern District of California

10

Equalization, 858 F.2d 1376, 1380 (9th Cir. 1988).

11

court is presumed to lack subject matter jurisdiction until the

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contrary affirmatively appears.

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Tribes, 873 F.2d 1221, 1225 (9th Cir. 1989).

A federal

Stock W., Inc. v. Confederated

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Dismissal is appropriate under Rule 12(b)(1) when the

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district court lacks subject matter jurisdiction over the claim.

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Fed. R. Civ. P. 12(b)(1).

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attack the sufficiency of the pleadings to establish federal

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jurisdiction, or allege an actual lack of jurisdiction which

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exists despite the formal sufficiency of the complaint.

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Publ’g Co. v. Gen. Tel. & Elecs. Corp., 594 F.2d 730, 733 (9th

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Cir. 1979); Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir.

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1987).

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II.

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A Rule 12(b)(1) motion may either

Thornhill

Failure to State a Claim
A complaint must contain a “short and plain statement of the

25

claim showing that the pleader is entitled to relief.”

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Civ. P. 8(a).

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state a claim, dismissal is appropriate only when the complaint

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does not give the defendant fair notice of a legally cognizable

Fed. R.

On a motion under Rule 12(b)(6) for failure to

4

1

claim and the grounds on which it rests.

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Twombly, 550 U.S. 544, 555 (2007).

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complaint is sufficient to state a claim, the court will take all

4

material allegations as true and construe them in the light most

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favorable to the plaintiff.

6

896, 898 (9th Cir. 1986).

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to legal conclusions; “threadbare recitals of the elements of a

8

cause of action, supported by mere conclusory statements,” are not

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taken as true.

United States District Court
For the Northern District of California

10

Bell Atl. Corp. v.

In considering whether the

NL Indus., Inc. v. Kaplan, 792 F.2d

However, this principle is inapplicable

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)

(citing Twombly, 550 U.S. at 555).

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DISCUSSION

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NEMS asserts four grounds for dismissing the governments’

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complaint-in-intervention.1

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“federal agency or instrumentality” and therefore is entitled to

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sovereign immunity.

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by the government action rule.

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government’s FCA claims are not timely.

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that the governments’ claims are not cognizable because they are

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based on a mistaken interpretation of the Medicaid Act.

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reasons explained more fully below, none of these arguments is

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persuasive.

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I.

First, it contends that it is a

Second, NEMS argues that the suit is barred
Third, it asserts that the federal
Finally, NEMS maintains

For

Subject Matter Jurisdiction

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A.

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NEMS argues that it enjoys sovereign immunity because it is

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“a federal agency or instrumentality . . . in possession of only

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federal funds.”

Sovereign Immunity

Docket No. 35, Mot. Dismiss 17.

Specifically, it

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NEMS has not moved to dismiss the relators’ complaint here.

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asserts that “its special status as a Section 330 grantee and

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federal designation as a [FQHC]” renders it immune from qui tam

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suits by the state and federal governments.

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Id. at 19.

The only other federal court to address whether § 330

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grantees enjoy sovereign immunity expressly concluded that they do

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not.

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Inc., a court in the Southern District of New York explained that

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the receipt of federal funds and the obligation to comply with

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federal regulations does not endow a § 330 health center with

In Nieves v. Community Choice Health Plan of Westchester,

United States District Court
For the Northern District of California

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sovereign immunity.

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federal regulation nor federal funding, even extensive or

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exclusive federal funding, is sufficient’ to transform an entity

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into an agency or instrumentality of the United States.” (quoting

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Kuntz v. Lamar Corp., 385 F.3d 1177, 1184 (9th Cir. 2004))).2

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2011 WL 5533328, at *10 (S.D.N.Y.) (“‘Neither

The Nieves court relied heavily on United States v. Orleans,

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425 U.S. 807, 816-18 (1976), which similarly cautioned against

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granting sovereign immunity to non-profit entities that receive

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substantial federal funding.

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that the defendant -- a non-profit community organization that

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received funding under the Economic Opportunity Act (EOA) -- could

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not invoke federal sovereign immunity as a defense even though it

In Orleans, the Supreme Court held

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NEMS argues that Nieves is inapposite because the defendant in
that case never explicitly invoked federal sovereign immunity as a
defense. This is not a legitimate reason for ignoring the Nieves
court’s reasoning and, even if it was, it overlooks the fact that the
Nieves defendant -- while being represented by NEMS’s counsel -subsequently raised sovereign immunity as a defense in another case
where the argument was again rejected. See Veneruso v. Mount Vernon
Neighborhood Health Ctr., 2013 WL 1187445, at *15 n.9 (S.D.N.Y.) (“Mount
Vernon’s assertion of sovereign status has already been rejected in this
district, albeit in a different context.” (citing Nieves, 2011 WL
5533328, at *10)).

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“received all of its monetary resources” from the federal

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government.

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funding reaches myriad areas of activity of local and state

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governments and activities in the private sector as well.

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inconceivable that Congress intended to have waiver of sovereign

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immunity follow congressional largesse and cover countless

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unidentifiable classes of ‘beneficiaries.’”

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Court further explained that, even though the EOA required the

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defendant to “comply with extensive regulations which include

Id. at 810.

The Court reasoned that “[f]ederal

Id. at 816.

It is

The

United States District Court
For the Northern District of California

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. . . accounting and inspection procedures, expenditure

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limitations, and programmatic limitations and application

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procedures,” these regulatory obligations did not transform the

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defendant into a federal instrumentality.

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(reasoning that the EOA regulations were “not concerned with the

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details of the day-to-day operations” of the organization).

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The same logic governs here.

Id. at 812, 817-18

Although NEMS receives

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considerable federal funding and must comply with an extensive

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regulatory regime, it still maintains independent control over its

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own day-to-day activities.

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law requires NEMS’s board to be controlled by members of the local

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community -- a clear marker of its independence.

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§ 254b(k)(3)(H); see also Orleans, 425 U.S. at 817 (“Further

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support for our conclusion that a community action agency is not a

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federal agency is the fact that the Economic Opportunity Act

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provides that a community action agency is to be administered by a

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Community action board composed of Local officials,

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representatives of the poor and members of business, labor, and

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other groups in the community.”).

Indeed, just as in Orleans, federal

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42 U.S.C.

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NEMS’s reliance on Wood ex rel. United States v. American

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Institute of Taiwan, 286 F.3d 526 (D.C. Cir. 2002), and Galvan v.

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Federal Prison Industries, 199 F.3d 461 (D.C. Cir. 1999) --

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neither of which was decided in this circuit -- is misplaced.

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Wood, the D.C. Circuit held that the American Institute in Taiwan,

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a non-profit organization functioning as the United States’ de

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facto embassy in Taiwan, enjoyed sovereign immunity because it

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effectively carried out American foreign policy on behalf of the

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federal government.

286 F.3d at 530-33.

In

Similarly, in Galvan,

United States District Court
For the Northern District of California

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the court found that a “wholly owned government corporation”

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tasked with administering vocational programs in federal prisons

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was immune from suit because “all money under [its] control [was]

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held by the U.S. Treasury.”

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does not carry out federal policy and maintains control of its own

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funds.

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corporate entities that the D.C. Circuit has held enjoy federal

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sovereign immunity.3

199 F.3d at 464.

NEMS, in contrast,

In short, NEMS does not resemble either of the unique

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B.

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The FCA imposes civil liability on anyone who presents the

Government Action Rule

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federal government with “a false or fraudulent claim for payment

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or approval.”

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F.3d 791, 794 (9th Cir. 2012).

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citizens to initiate suits on the government’s behalf if they

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learn of a potential FCA violation.

31 U.S.C. § 3729(a); Alderson v. United States, 686
The statute permits private

31 U.S.C. §§ 3730(a)-(b)(1).

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3

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At the hearing, the federal government argued that the Ninth
Circuit implicitly rejected NEMS’s federal sovereign immunity argument
in its recent decision in North East Med. Svcs. v. Cal. Dep’t Health
Care Svcs., 2013 WL 1339126, *5 & n.3 (9th Cir.). That decision
addresses Eleventh Amendment immunity and does not provide any clear
guidance as to how the Ninth Circuit would decide this issue.

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As an incentive for exposing such violations, these private

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citizens, typically called “relators,” are allowed to recover a

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share of the judgment if the suit is ultimately successful.

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§ 3730(d).

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Id.

To prevent private citizens from abusing this incentive

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system, the statute bars relators from filing copycat lawsuits

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against a suspected FCA violator who is already the defendant in a

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pending FCA action by the government.

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§ 3730(e)(3) provides: “In no event may a person bring [an FCA

Title 31 U.S.C.

United States District Court
For the Northern District of California

10

action] which is based upon allegations or transactions which are

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the subject of a civil suit or an administrative civil money

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penalty proceeding in which the Government is already a party.”

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Id. § 3730(e)(3).

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rule, creates a jurisdictional bar to any claims asserted in a

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prior FCA action in which the government has already intervened.

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The bar is “intended to prevent parasitic qui tam lawsuits that

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receive support from an earlier case without giving the government

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any useful return, other than the potential for additional

19

monetary recovery.”

20

Illinois, Inc., 528 F. Supp. 2d 861, 876 (N.D. Ill. 2007).

21

This provision, known as the government action

United States ex rel. Batty v. Amerigroup

NEMS contends that the government action rule precludes the

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federal government’s FCA claims here.

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government previously asserted these claims in an earlier FCA

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lawsuit, United States ex rel. Stahlhut v. Northeast Med. Servs.,

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Inc., Case No. 08-1307 EDL (N.D. Cal.), which the parties settled

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in June 2008.

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by private parties -- not the federal government -- this argument

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is unavailing.

It argues that the

Because the government action rule only bars claims

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As noted above, the whole purpose of the government action

2

rule is to prevent abuses of the FCA’s incentive system, which

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only applies to relators.

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government because the government does not stand to benefit from

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filing or intervening in redundant FCA suits.

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provision were applied to the federal government, it would serve

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merely the same function as existing doctrines of preclusion such

8

as res judicata and collateral estoppel.

It was never meant to apply to the

Indeed, if the

In any event, even if the government action rule were

10
United States District Court
For the Northern District of California

9

applicable here, NEMS has not produced any evidence to show that

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the government’s FCA claims in this action are actually the same

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as its claims in the prior FCA action.

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failed to provide a copy of the parties’ 2008 settlement

14

agreement.

15

case and was not included in NEMS’s request for judicial notice,4

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the Court cannot determine whether the FCA claims in this action

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are “based upon allegations or transactions which are the subject

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of [the prior] civil suit.”

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government’s FCA claims or allegations in this suit are, in fact,

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identical to the claims it settled in 2008, then NEMS may move for

21

summary judgment on these claims under one of the doctrines of

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preclusion identified above.

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II.

Most notably, it has

Because that agreement was never filed in the 2008

See 31 U.S.C. § 3730(e)(3).

If the

Failure to State a Claim

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A.

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The FCA’s statute of limitations prohibits any qui tam action

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Statute of Limitations

from being brought

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4

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Because NEMS failed to submit any documents from the 2008 case,
the Court examined the docket in that case independently.

10

1
2
3
4

more than 3 years after the date when facts
material to the right of action are known or
reasonably should have been known by the official
of the United States charged with responsibility to
act in the circumstances, but in no event more than
10 years after the date on which the violation is
committed.

5

31 U.S.C. § 3731(b).

6

affirmative defense, the defendant bears the burden of proving

7

that the plaintiff filed beyond the limitations period.”

8

Aramark Mgmt. Servs. LP, 495 F.3d 1119, 1122 (9th Cir. 2007).

9

“[B]ecause the statute of limitations is an

Payan v.

NEMS contends that the government’s FCA claims here are time-

United States District Court
For the Northern District of California

10

barred because the “state and federal governments first knew or

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reasonably should have known the facts material to this action” in

12

March 2006, when a former NEMS employee filed a CFCA action

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against NEMS in state court.

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action, NEMS’s former chief financial officer, Si Lan Stahlhut,

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alleged that NEMS had failed to report properly all of the

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payments that it received from SFHP between 2001 and 2004.

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of California ex rel. Stahlhut v. Northeast Med. Servs., Inc.,

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Case No. CGH-06-450352, Compl. ¶¶ 41-46 (S.F. Sup. Ct.).

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contends that, because it disclosed its contract with SFHP during

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that litigation -- including the per-visit payment rates it

21

received from SFHP -- the governments should have been aware of

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its misreporting in 2006, four years before this suit was filed.

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Mot. 23.

The relator in that

This argument fails for several reasons.

State

NEMS

First, NEMS has not

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produced any evidence to show that it turned over the SFHP

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contract -- or any other relevant information -- to the State in

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27
28
11

1

2006.5

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State’s subpoena but does not include NEMS’s response to that

3

subpoena.

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its request for judicial notice, it does not provide any sworn

5

evidence showing when -- or if -- it actually shared this

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information with the State.

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Its request for judicial notice includes a copy of the

Although NEMS provides a copy of the SFHP contract in

NEMS also fails to explain adequately why its disclosure of

8

the SFHP contract to the state government would have triggered the

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three-year limitations period to start running against the federal

United States District Court
For the Northern District of California

10

government.

11

NEMS’s misreporting “must be imputed to the federal government,”

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Mot. 24, it has not provided any authority for that assertion.

13

Although NEMS contends that the State’s knowledge of

Third, even assuming that NEMS’s disclosure of the SFHP

14

contract to the State could somehow be imputed to the federal

15

government, NEMS still has not explained how the SFHP contract,

16

standing alone, would apprise the government of NEMS’s reporting

17

failures.

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the government would need to know not only the per-visit payment

19

rates disclosed in the contract, but also the number of patients

20

NEMS treated under the contract.

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without more, would not have provided the governments with

22

sufficient information to determine the amount of money SFHP

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actually provided to NEMS.

24

much money SFHP provided NEMS every year -- as NEMS contends --

25

then the annual reconciliation process would have been

To determine how much money NEMS received from SFHP,

The per-visit payment rates,

Indeed, if the State knew exactly how

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27
28

5

NEMS also failed to produce the complaint from the 2006
litigation. The Court was able to obtain the document from the San
Francisco County Superior Court’s website.

12

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superfluous.

2

it has not met its burden of establishing that the FCA claims in

3

this suit are time-barred.6

Because NEMS has not shown that this was the case,

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B.

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NEMS contends that it is not required to report the full

FQHC Reporting Requirements under the Medicaid Act

6

amount of payments it receives from SFHP on its reconciliation

7

reports.

8

Act describing the reconciliation process, 42 U.S.C.

9

§ 1396a(bb)(5), which provides:

United States District Court
For the Northern District of California

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14

Its position is based on the provision of the Medicaid

In the case of services furnished by a Federallyqualified health center or rural health clinic pursuant
to a contract between the center or clinic and a managed
care entity [], the State plan shall provide for payment
to the center or clinic by the State of a supplemental
payment equal to the amount (if any) by which the amount
determined under paragraphs (2), (3), and (4) of this
subsection exceeds the amount of the payments provided
under the contract.

15

NEMS highlights the phrase “services furnished by a Federally-

16

qualified health center” to argue that it is only required to

17

report a portion of the SFHP funding to DHCS: specifically, the

18

portion of SFHP funding that it receives for FQHC services.

19

NEMS reads the Medicaid Act, it need not report any funding it

20

receives from SFHP for other services.

21
22

As

This argument is insufficient to justify dismissal of the
government’s FCA claims here.7

The Ninth Circuit has held that,

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25
6

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27
28

Even if NEMS had established that the government’s FCA claims
regarding NEMS’s pre-2006 reporting practices are time-barred, the
government’s FCA claims based on post-2006 reporting practices would
still survive. As noted above, the government’s FCA claims in this suit
are based on allegations that NEMS consistently underreported its SFHP
receipts between 2001 and 2010.

13

1

because the FCA does not expressly define the word “false,” courts

2

must decide “whether a claim is false or fraudulent by determining

3

whether a defendant’s representations are accurate in light of

4

applicable law.”

5

(9th Cir. 2008) (citing United States ex rel. Oliver v. Parsons

6

Co., 195 F.3d 457, 463 (9th Cir. 1999)).

7

specifically recognized that healthcare providers can be held

8

liable under the FCA for submitting false cost reports to

9

insurance companies in order to recoup inflated Medicare

United States v. Bourseau, 531 F.3d 1159, 1164

In Bourseau, the court

United States District Court
For the Northern District of California

10

reimbursements.

11

alleges that NEMS engaged in a similar scheme to recoup inflated

12

Medicaid reimbursements, it has stated a valid claim under the

13

FCA.

14

531 F.3d at 1164.

Because the federal government

According to the complaint-in-intervention, DHCS specifically

15

instructs FQHCs to “[r]eport all Medi-Cal Managed Care Plan

16

payments” on their reconciliation reports.

17

(quotation marks omitted; emphasis in original).

18

alleges that NEMS ignored this explicit instruction by

19

consistently underreporting the amount of funding it received from

20

SFHP.

21

correct, the governments have stated plausible claims under the

22

FCA and CFCA by alleging that NEMS made false statements on its

23

reconciliation reports.

24

allegation in its motion nor does it explain how its

Compl.-in-Interv. ¶ 21
The complaint

Thus, even if NEMS’s reading of the Medicaid Act is

NEMS does not respond to this specific

25
7

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27
28

NEMS does not expressly state whether it is moving to dismiss
both the CFCA and the FCA claims for failure to state a claim. In its
reply brief, however, it appears to focus on the pleading standard for
FCA claims. Reply 1. Accordingly, the Court assumes that this section
of NEMS’s motion is directed only at the FCA claims and not at the CFCA
claims in the governments’ complaint.

14

1

interpretation of the Medicaid Act would excuse its failure to

2

comply with the explicit reporting requirements of California’s

3

federally approved Medi-Cal plan.

4
5

CONCLUSION
For the reasons set forth above, Defendant’s motion to

6

dismiss (Docket No. 35) is DENIED.

7

by May 9, 2013 unless it seeks and obtains a stay pending its

8

appeal of this order.

9

Defendant must file its answer

IT IS SO ORDERED.

United States District Court
For the Northern District of California

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Dated:

4/26/2013

CLAUDIA WILKEN
United States District Judge

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17
18
19
20
21
22
23
24
25
26
27
28
15