United States of America v. Kernan Hospital

Filing 26

MEMORANDUM OPINION. Signed by Judge Richard D Bennett on 7/30/12. (bmhs, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
UNITED STATES OF AMERICA,

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PLAINTIFF

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CIVIL ACTION NO.: RDB-11-2961

V.

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KERNAN HOSPITAL,

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DEFENDANT.

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MEMORANDUM OPINION
The United States Government has filed this False Claims Act1 case alleging that the
Defendant Kernan Hospital of Baltimore, Maryland, orchestrated a scheme whereby it
inappropriately and fraudulently coded malnutrition as a secondary diagnosis in order to
increase its federally funded health care reimbursement. Kernan Hospital has moved, by
separate motions, to dismiss the Government‘s Complaint pursuant to Rule 12(b)(6) and
Rule 9(b) of the Federal Rules of Civil Procedure. This Court has reviewed the record, as
well as the pleadings and exhibits, and conducted a hearing on July 12, 2012 pursuant to
Local Rule 105.6 (D. Md. 2011). While the Defendant‘s motions are predicated on different
legal grounds, they are interrelated and will be addressed together. For the reasons that
follow, this Court finds that the Government has failed to adequately plead allegations of
fraud under the False Claims Act. Accordingly, the Defendant‘s motions to dismiss (ECF
Nos. 6 & 10) will be GRANTED and case will be DISMISSED WITHOUT PREJUDICE.

1

31 U.S.C. §§ 3729, et seq.
1

BACKGROUND & PROCEDURAL HISTORY
A. FACTS
The Government filed its Complaint on October 17, 2011, alleging five causes of
action: (1) presenting false or fraudulent claims under Section 3729(a)(1) of the False Claims
Act (Count I); knowingly presenting a false or fraudulent record under Section 3729(a)(2) of
the False Claims Act (Count II); breach of fiduciary duty (Count III); unjust enrichment
(Count IV); and payment under mistake of fact (Count V). In ruling on a motion to dismiss,
the factual allegations in the plaintiff‘s complaint must be accepted as true and those facts
must be construed in the light most favorable to the plaintiff. See, e.g., E.I. du Pont de Nemours
& Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011).
Broadly, the Government alleges that between 2005 and 2009, Kernan Hospital
(―Kernan‖) concocted a scheme to increase its Medicare, Medicaid, and Tricare
reimbursement by systematically increasing the complexity of its ―case mix.‖ Kernan‘s
reimbursement rate is a function of the nature and complexity of the various cases it treats—
the more complex the case mix, the more reimbursement it receives. Compl. ¶ 2.
To accomplish this increase in case mix complexity, the Government alleges that
Kernan engaged in ―systematic upcoding‖2 of secondary diagnoses concerning malnutrition.
In other words, the Government contends that Kernan artificially inflated the number and

2

―‗Upcoding,‘ a common form of Medicare fraud, is the practice of billing Medicare for medical
services or equipment designated under a code that is more expensive than what a patient actually
needed or was provided.‖ United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 342 F.3d 634, 637 n.3
(6th Cir. 2003) (citing Bonnie Schreiber et al., Health Care Fraud, 39 Am. Crim. L. Rev. 707, 750 n.331
(2002)).
2

severity of cases in which malnutrition was included as a secondary diagnosis, and did so
with the specific intent of defrauding the reimbursement system.
The State of Maryland sets the rate by which hospitals are reimbursed by the Health
Services Cost Review Commission3 (―HSCRC‖) for services rendered based on the
information hospitals provide to the HSCRC regarding the nature and severity of patients
treated during the preceding fiscal year.

Compl. ¶ 2, ECF No. 1.

This ―case mix‖

information is reported to the HSCRC through numerical coding of diagnoses governed by
the International Coding of Diseases, Ninth Revision Clinical Modification (hereinafter,
―ICD-9-CM‖). Id. ¶ 10. These ICD-9-CM codes are used by Medicare and Medicaid
funding recipients to describe the medical condition or diagnosis for which medical services
are rendered. See 42 C.F.R. §§ 424.3, 424.32.
In 2005, the HSCRC instituted a new reporting program for hospitals permitting the
inclusion of secondary diagnoses. This system, called the All Patient Refined – Diagnosis
Related Groups (―APR-DRG‖) ―looks to the principal diagnosis, the main reason the patient
was admitted to the hospital, and also captures each applicable secondary diagnosis in a
manner to define the severity of the diagnosis on a scale of 1 to 4, with 4 being the most
sever.‖ Compl. ¶ 13. According to the Government‘s Complaint, ―these APR-DRG rules
placed a premium on hospitals adding secondary diagnoses to each patient‘s coding profile,‖
because ―[t]he more applicable secondary diagnoses that the hospitals successfully entered
into the patient‘s profile, the more complex that patient would appear,‖ and ―the case mix

3

See MD. CODE ANN., HEALTH-GEN. §§ 19-201 et seq.; see also Insurance Com’r of State v. CareFirst of
Maryland Inc., 816 A.2d 126, 130 (Md. Ct. Spec. App. 2003) (discussing history and operation of the
Health Services Cost Review Commission).
3

would accordingly change and would lead to greater compensation for the hospital in the
coming year.‖ Id. ¶ 14. In other words, ―by making secondary diagnoses more important
the APR-DRG system gave hospitals the incentive to capture as many secondary diagnoses
as possible.‖ Gov. Opp‘n at 5, ECF No. 14.
According to the Government, ―Kernan reacted aggressively to the new system,
recognizing that its self interest lay in capturing as many secondary diagnoses as it could.‖
Gov. Opp‘n at 5. At issue in this case, are secondary diagnoses related to malnutrition, and
in particular, a severe form of malnutrition known as Kwashiorkor.4 In this regard, the
Complaint alleges that Kernan singled out malnutrition and Kwashiorkor for attention, and
developed a scheme to fraudulently report Kwashiorkor and malnutrition as secondary
diagnoses to the HSCRC in order to make its case mix appear more severe for
reimbursement purposes. Compl. ¶ 15.
The scheme, as alleged in the Complaint, was not a simple one. Rather, it included
numerous steps and moving pieces.

To wit: first, Kernan‘s Coding Documentation

Specialist (―CDS‖) reviewed every chart for evidence consistent with malnutrition. Id. ¶ 19.
When such evidence was found, as for example where a laboratory test result was consistent
with malnutrition, the CDS would use a sticky note affixed to the chart to query the
4

The Oxford English Dictionary defines Kwashiorkor as:
A wasting disease that is caused by an insufficient intake of protein by the body and
chiefly affects young children in tropical countries, producing apathy, edema of the
extremities, desquamation, and partial loss of pigmentation (and is generally
associated with diarrhea and stunted growth), and leading in severe cases to death.

Oxford English Dictionary (2d ed. 1989;
http://www.oed.com/view/Entry/104622.

online

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version

June

2012),

available

at

physician.

Id.

The sticky note would indicate that the patient may have ―Protein

Malnutrition‖ and would prompt the physician to include the secondary diagnosis if he or
she agreed with it. Id. Treating physicians did frequently agree with the query, and ―wrote
the words ‗Protein Malnutrition‘ in the chart in answer to the query and threw the sticky
note away.‖ Id. The coders would then code malnutrition for the patient by typing the
words ―Protein Malnutrition‖ into the computer system that included the ICD-9-CM
information. Id. ¶ 20. This led the coders to a drop down screen that listed Kwashiorkor as
the first choice at the top of the list. Id. The government alleges that coders were ―not to
independently assess the quality of the evidence that led to the coding of ‗Kwashiorkor,‘‖
and ―were instructed to select it automatically instead of considering any of the other
choices.‖ Id. In so doing, Kernan expected the coders to ―suspend [their] independent
judgment and code the most severe form of malnutrition as a default just because the
computer lists that most severe form at the top of a list of possible choices.‖ Id. ¶ 22. ―In
this way, a chart with a stray laboratory value—for example, a low prealbumin score, which
is not unique to malnutrition—could be falsely and fraudulently translated into a diagnosis of
the most severe kind of malnutrition.‖ Id. ¶ 21.
The coding of Kwashiorkor as a secondary diagnosis in Kernan‘s patient population
went from zero cases in 2004 to 287 cases in 2007. Id. ¶ 17. Lesser degrees of malnutrition,
coded as secondary diagnoses, saw similar increases. Id. ¶ 3. This sudden increase caused
the government to investigate. Through its investigation, the government determined that
twenty-three percent of the cases in which Kernan coded malnutrition as a secondary
diagnosis were inappropriate. Id. ¶ 18. By ―inappropriate,‖ the Government argues that

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Kwashiorkor was coded when the medical evidence in the chart: (a) did not justify that
diagnosis (i.e., the patient was not malnourished); or (b) contained contradictory, incomplete,
or ambiguous information. Id. ¶¶ 3, 18.
The Government alleges that Kernan took none of the industry-recognized steps to
monitor for quality control. More specifically, the Government contends that the abovedescribed scheme, and the resultant twenty-three percent error rate in malnutrition and
Kwashiorkor diagnoses, violated ―industry norms‖ and ―applicable standards‖ established by
the American Health Information Management Association (―AHIMA‖). Id. ¶ 23. An
AHIMA compliant system requires auditing, which the Government contends did not occur
at Kernan. Id. ¶ 24. According to the Government, the dramatic increase in secondary
diagnoses of Kwashiorkor and malnutrition should have triggered an inquiry by the hospital,
but in reality ―there was no effort at quality control, in complete violation of AHIMA
standards and guidelines,‖ and ―Kernan was deliberately indifferent to the operation of its
query process.‖ Id. ¶ 27. Moreover, the Government alleges that Kernan‘s query system
was leading—that is, the sticky note attached to the chart by the CDS was ―presumptive‖ in
that it ―told the doctor what the desired result was.‖ Id. ¶ 26. The leading nature of
Kernan‘s query system violated ―Coding Clinic precepts,‖ insofar as coders were supposed
to query the treating physician when a diagnosis for malnutrition or Kwashiorkor appeared
in patient‘s chart but not in the discharge summary. Id. ¶¶ 28, 30. According to the
Government, ―Kernan Hospital‘s practice of deliberately disregarding this industry standard
rendered the coding [at Kernan] false and fraudulent.‖ Id. ¶ 30. In sum, the Government
alleges that:

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[T]he Kernan Hospital computer system and the query process inappropriately
caused the inappropriate, false and fraudulent coding of malnutrition as a
secondary diagnosis in 23% of the cases at Kernan Hospital from 2005-20009
[sic] and caused the United States through the federally funded health benefit
programs administered by the Department of Health and Human Services and
the Department of Defense to pay Kernan Hospital $1,606,742 to which it
was not entitled.
Id. ¶ 32.
B. PROCEDURAL HISTORY
As previously noted, Kernan filed two separate motions to dismiss.

The first,

predicated on Federal Rule of Civil Procedure 9(b), seeks dismissal on the ground that the
Government‘s Complaint fails to satisfy Rule 9(b)‘s heightened pleading requirement for
allegations of fraud because the Complaint fails to: (1) identify a single false claim actually
submitted to the government; (2) identify any specific employee involved in the submission
of false claims; and (3) detail the contents of any false representations. Def.‘s 9(b) Mot.,
ECF No. 6.
The second motion to dismiss, predicated on Federal Rule of Civil Procedure
12(b)(6), seeks dismissal of Counts I, II, and III on the ground that the Complaint as pleaded
fails to state a cause of action under the False Claims Act. More specifically, the 12(b)(6)
motion argues that (1) any alleged noncompliance with industry standards by Kernan does
not amount to a false claim under the False Claims Act; (2) the Complaint fails to allege the
requisite scienter to establish liability under the False Claims Act; and (3) Count III, which
alleges a cause of action for breach of fiduciary duty, fails because Maryland does not
recognize such a cause of action. Def.‘s 12(b)(6) Mot., ECF No. 10.

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In support of its argument that the Complaint fails to state a claim under the False
Claims Act, Kernan attached four medical records to its motion to dismiss. These medical
records were not attached to the Government‘s Complaint, but were specifically referenced
therein. See Compl. ¶ 29. In response, the Government argued that because Kernan
attached those medical records, Rule 12(d) provides that Kernan‘s motion to dismiss should
be considered one seeking summary judgment.5 Gov‘t Opp‘n at 21-25, ECF No. 10.
Accordingly, the Government treated Kernan‘s motion as one requesting summary
judgment, and attached over 500 pages of exhibits to its opposition brief.
Kernan contends that its pending motion should not be viewed as a motion for
summary judgment. The Hospital maintains that because the Government‘s Complaint
specifically described the four patients for which Kernan attached medical records, those
records were ―central‖ to the Government‘s case and therefore could be attached without
converting the motion to one seeking summary judgment. Kernan thereafter filed a motion
to strike, arguing that the entire Government submission, including its brief, must be
stricken insofar as the 500 pages of exhibits, and references to those exhibits contained in
the brief, were not properly before the Court. See Kernan Mot. to Strike, ECF No. 16.

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Under Federal Rule of Civil Procedure 12(d), if ―matters outside of the pleading are presented to
and not excluded by the court,‖ then ―the motion must be treated as one for summary judgment
under Rule 56.‖ Sec’y of State for Defense v. Trimble Navigation Ltd., 484 F.3d 700, 705 (4th Cir. 2007).
In such a situation, the court must provide all parties a ―reasonable opportunity to present all
material made pertinent to such a motion.‖ Fed. R. Civ. P. 12(d). When a party is aware that
material outside the pleadings is before the court, the party is on notice that a Rule 12(b)(6) motion
may be treated as a motion for summary judgment.‖ Gay v. Wall, 761 F.2d 175, 177 (4th Cir. 1985);
see also Laughlin v. Metro. Washington Airports Auth., 149 F.3d 253, 261 (4th Cir. 1998) (commenting
that a court has no obligation ―to notify parties of the obvious.‖).

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At the hearing, conducted on July 12, 2012, this Court heard argument on Kernan‘s
motion to strike, and denied it as moot. See July 12 Order, ECF No. 22. It is well
established that under certain circumstances, a court may consider the type of documents
Kernan attached to its motion to dismiss without converting it to a motion for summary
judgment. As this Court explained in Fare Deals, Ltd. v. World Choice Travel.com, Inc., 180 F.
Supp. 2d 678 (D. Md. 2001), it may ―consider any documents referred to in the complaint
and relied upon to justify a cause of action—even if the documents are not attached as
exhibits to the complaint.‖ Id. at 683 (finding defendant‘s attaching correspondence and an
agreement that was relied upon in plaintiff‘s complaint to its motion to dismiss to be
proper); see also New Beckley Mining Corp. v. Int’l Union, United Mine Workers of Am., 18 F.3d
1161, 1164 (4th Cir. 1994) (deeming a complaint ―to include . . . any statements or
documents incorporated in it by reference‖ and permitting a defendant to produce such
materials when attacking the complaint)). In Fisher v. Maryland Dept. of Public Safety and
Correctional Servs., No. JFM-10-0206, 2010 WL 2732334 (D. Md. July 8, 2010), this Court
detailed the three options it has when a defendant attaches documents to a motion to
dismiss:
First, if the documents meet certain requirements, the court may consider
them when evaluating the motion to dismiss. If the documents do not qualify
for consideration at the motion to dismiss stage, the court has two other
alternatives: (1) it can either entirely disregard the attached documents; or (2)
under limited circumstances, it may convert the motion into a motion for
summary judgment and consider all attached documents.
Id. at *2.
In denying Kernan‘s motion to strike as moot, this Court essentially took the second
option and determined that it would disregard the attached documents (the Defendant‘s four
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medical records and the Government‘s voluminous exhibits). While the Court indicated that
the medical records attached to the Defendant‘s motion to dismiss were likely ―central‖ or
―integral‖ to the Government‘s Complaint insofar as they are referenced and relied upon in
that document, they were of little moment in analyzing the sufficiency of the Complaint. As
will be discussed infra, the Court‘s concerns with the Complaint do not stem from factual
disputes regarding the four medical records at issue—instead, the more fundamental inquiry
is whether the Government has sufficiently alleged that Kernan submitted false claims under
the False Claims Act.
Finally, in apparent response to questions posed to counsel during the July 12 hearing
by the Court, both parties submitted what can be termed ―position‖ letters clarifying issues
that were not exhaustively discussed at the hearing. See Gov. Ltr., ECF No. 24; Kernan Ltr.,
ECF No. 25. These letters, as well as the relevant briefing and argument made by the parties
have been considered, and the Court will proceed to analyze the remaining pending motions.
STANDARD OF REVIEW
A. RULE 12(B)(6)
Under Federal Rule of Civil Procedure 8(a)(2), a complaint must contain a ―short and
plain statement of the claim showing that the pleader is entitled to relief.‖ Rule 12(b)(6) of
the Federal Rules of Civil Procedure authorizes the dismissal of a complaint if it fails to state
a claim upon which relief can be granted; therefore, ―the purpose of Rule 12(b)(6) is to test
the sufficiency of a complaint and not to resolve contests surrounding the facts, the merits
of a claim, or the applicability of defenses.‖ Presley v. City of Charlottesville, 464 F.3d 480, 483
(4th Cir. 2006). In ruling on such a motion, this Court is guided by the Supreme Court‘s

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instructions in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S.
662 (2009) which ―require complaints in civil actions be alleged with greater specificity than
previously was required.‖ Walters v. McMahen, __ F.3d __, __, 2012 WL 2589229, at *2 (4th
Cir. July 5, 2012) (citation omitted). The Supreme Court‘s Twombly decision articulated
―[t]wo working principles‖ courts must employ when ruling on Rule 12(b)(6) motions to
dismiss. Iqbal, 556 U.S. at 678.
First, while a court must accept as true all the factual allegations contained in the
complaint, legal conclusions drawn from those facts are not afforded such deference. Id.
(―Threadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice‖ to plead a claim.) Second, a complaint must be dismissed if it
does not allege ―a plausible claim for relief.‖ Id. at 679. Under the plausibility standard, a
complaint must contain ―more than labels and conclusions‖ or a ―formulaic recitation of the
elements of a cause of action.‖

Twombly, 550 U.S. at 555.

Although the plausibility

requirement does not impose a ―probability requirement,‖ id. at 556, ―[a] claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.‖ Iqbal, 556 U.S.
at 663; see also Robertson v. Sea Pines Real Estate Cos., 679 F.3d 278, __ (4th Cir. May 14, 2012)
(―A complaint need not make a case against a defendant or forecast evidence sufficient to prove
an element of the claim. It need only allege facts sufficient to state elements of the claim.‖)
(emphasis in original) (internal quotation marks and citation omitted). In short, a court must
―draw on its judicial experience and common sense‖ to determine whether the pleader has
stated a plausible claim for relief.‖ Iqbal, 556 U.S. at 664.

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B. RULE 9(B)
A false claim allegation is an averment of fraud. Harrison v. Westinghouse Savannah River
Co., 176 F.3d 776, 783-84 (4th Cir. 1999) (―Harrison I‖). Therefore, a complaint alleging false
claims must comply with the heightened standard of Federal Rule of Civil Procedure 9(b),
which requires a pleader to ―state with particularity circumstances constituting fraud or
mistake.‖ Fed. R. Civ. P. 9(b). 6 The United States Court of Appeals for the Fourth Circuit
has held that ―time, place, and contents of the false representations, as well as the identity of
the person making the misrepresentation and what he obtained thereby‖ are the
circumstances that must be pled with particularity. U.S. ex rel. Wilson v. Kellogg Brown & Root,
Inc., 525 F.3d 370, 379 (4th Cir. 2008) (quoting Harrison I, 176 F.3d at 784). This set of
information is often referred to as the ―who, what, when, where, and how‖ of the alleged
fraud. Id. at 379 (internal quotation marks omitted). For example, a complaint is insufficient
if it fails to allege specific claims submitted to the government and the dates on which those
claims were submitted. U.S. ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1311
(11th Cir. 2002); U.S. ex rel. Brooks v. Lockheed Martin Corp., 423 F. Supp. 2d 522, 526-27 (D.
Md. 2006). Moreover, as to the ―what‖ requirement, ―a plaintiff must show a link between
allegedly wrongful conduct and a claim for payment actually submitted to the government.‖
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Four justifications for Rule 9(b)‘s heightened pleading standards are often invoked:
First, the rule ensures that the defendant has sufficient information to formulate a
defense by putting it on notice of the conduct complained of. . . . Second, Rule 9(b)
exists to protect defendants from frivolous suits. A third reason for the rule is to
eliminate fraud actions in which all the facts are learned after discovery. Finally, Rule
9(b) protects defendants from harm to their goodwill and reputation.

Harrison I, 176 F.3d at 784 (4th Cir. 1999); see also Banca Cremi, S.A. v. Alex Brown & Sons, Inc., 132
F.3d 1017, 1036 n.25 (4th Cir. 1997).

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U.S. ex rel. Dugan v. ADT Security Services, Inc., No. DKC-03-3485, 2009 WL 3232080, at *14
(D. Md. Sept. 29, 2009) (citing Clausen, 290 F.3d at 1311). By requiring a plaintiff to plead
circumstances of fraud with particularity and not by way of general allegations, Rule 9(b)
screens ―fraud actions in which all the facts are learned through discovery after the
complaint is filed.‖ Harrison I, 176 F.3d at 789 (citation omitted).
ANALYSIS
I. PRELIMINARY ISSUES

A. All Counts Are Subject to Rule 9(b)’s Heightened Pleading Standard
The Government‘s Complaint alleges five causes of action, of which only two are
asserted under the False Claims Act. As noted, it is clear that allegations arising under the
False Claims act are subject to Rule 9(b)‘s heightened pleading standard. See, e.g., Harrison I,
176 F.3d at 783-84; United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379
(4th Cir. 2008). However, Kernan‘s Rule 9(b) motion argues that because all five counts
alleged in the Government‘s Complaint are predicated on alleged false claims submitted by
Kernan, they are all subject to Rule 9(b)‘s heightened pleading standard. For example,
Count III alleges that Kernan breached a fiduciary duty owed to the government when it
―submitted or caused to be submitted false and fraudulent claims.‖ Compl. ¶ 49. Count IV
alleges unjust enrichment resulting from the submission of ―false and fraudulent claims‖ in
―connection with a scheme to defraud‖ government programs. Id. ¶¶ 53-54. Kernan argues
that because these counts are directly based on the alleged false claims at issue in Counts I
and II, they ―sound in fraud‖ and necessarily rise and fall with those counts.

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At the July 12 hearing, counsel for the Government conceded that all counts of the
Complaint are essentially based on its False Claims Act allegations. Essentially, because
every cause of action is directly predicated on the False Claims Act violations, Rule 9(b)
applies to the Government‘s common law claims as well. Accordingly, for reasons that will
become clear, this Court will focus on Kernan‘s motion to dismiss based on Rule 9(b). 7

B. Recent Amendments to the False Claims Act
The Government‘s Complaint alleges that Kernan violated 31 U.S.C. § 3729(a)(1)
(Count I), and 31 U.S.C. § 3729(a)(2) (Count II) of the False Claims Act. As noted by
Kernan, these statutory citations refer to the 1986 version of the False Claims Act. The
Fraud Enforcement Recovery Act of 2009 (―FERA‖), Pub. L. No. 111-21, § 386, 123 Stat.
1617 (2009), amended certain sections of the False Claims Act, including the sections at issue
in this case. FERA became law on May 20, 2009, and contains a retroactivity provision that
states:
The amendments made by this section shall take effect on the date of
enactment of this Act and shall apply to conduct on or after the date of
enactment, except that (1) subparagraph (B) of section 3729(a)(1) of title 31,
United States Code, as added by subsection (a)(1), shall take effect as if
enacted on June 7, 2008, and apply to all claims under the False Claims Act (31
U.S.C. 3729 et seq.) that are pending on or after that date.
FERA § 4(f), 123 Stat. 1625 (emphasis added).

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While Kernan filed separate motions to dismiss, Rules 9(b) and 8 are not to be considered in
isolation. Instead, ―[t]he particularity requirement of Rule 9(b) does not render the general
principals announced in Rule 8 entirely inapplicable in pleadings alleging fraud: both rules must be
read in conjunction with each other.‖ Kerby v. Mortgage Funding Corp., 992 F. Supp. 787, 800 (D. Md.
1998). Because both of Kernan‘s motions seek dismissal of the Government‘s Complaint on the
ground that it fails to adequately plead a claim on which relief may be granted, and because this
Court finds that the Government has not pleaded it‘s False Claims Act violations with the requisite
particularity, both motions will be granted.
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The Government filed its Complaint on October 17, 2011, but the conduct
complained of spans the time period 2005 through 2009. See Compl. ¶ 32. The specific
examples of alleged upcoding provided by the Government are not meant to be exhaustive
and generally occurred in 2007 and 2008. See id. ¶¶ 29-31. Accordingly, it is not clear
whether the amended or earlier version of 31 U.S.C. § 3729 applies. Although the statute‘s
retroactivity provision does not apply to Count I of the Complaint, the Complaint alleges
that Kernan engaged in conduct violative of the False Claims Act in 2009—and although the
Government provides no specific dates, it is possible that some of the ―conduct‖
complained of occurred after FERA‘s enactment.
Pursuant to FERA‘s Section 4(f), the amendment to § 3729(a)(2), now found at 31
U.S.C. § 3729(a)(1)(B), was made retroactive to June 7, 2008, and applies to ―all claims under
the False Claims Act . . . that [were] pending on or after that date.‖ FERA § 4(f), 123 Stat.
1625. Accordingly, the post-FERA amendments to the False Claims Act apply to Count II
of the Complaint if the ―claims‖ at issue were pending after that date. As Kernan aptly
notes, there appears to be a split of authority regarding whether the word ―claims‖ refers to
the alleged false claims at issue in the litigation, or whether ―claims‖ refers to the case or
cause of action under the False Claims Act. Compare United States ex rel. Steury v. Cardinal
Health, Inc., 625 F.3d 262, 267 n.1 (5th Cir. 2010) (applying the amended § 3729(a)(1)(B) to a
―complaint‖ pending on June 7, 2008) with Hopper v. Solvay Pharms., Inc., 588 F.3d 1318, 1327
n.3 (11th Cir. 2009) (construing FERA‘s ―claims‖ language to mean the alleged false claims
submitted to the government for payment). The Government did not address this issue in

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its opposition brief, and has not sought to clarify which version of the False Claims Act
applies.
The weight of authority appears to tip in favor of applying the post-FERA version of
§ 3729(a)(2), 31 U.S.C. § 3729(a)(1)(B), only if the actual false claims at issue were pending
after June 7, 2008. See United States ex rel. Bennett v. Medtronic, Inc., 747 F. Supp. 2d 745, 76364 (S.D. Tex 2010) (collecting cases).

However, this Court need not make that

determination today. First, this Court can discern no material difference between the earlier
or post-FERA versions of § 3729(a)(1) as the statute applies to this litigation. See id. at 764
n.17 (describing the differences between the pre- and post-FERA versions of § 3729).
Second, as will be discussed infra, the Complaint does not allege any dates on which false
claims were allegedly submitted by Kernan Hospital—thereby making a determination as to
when the claims were pending impossible.

Accordingly, for purposes of the pending

motions to dismiss, this Court will not differentiate between the different versions of the
False Claims Act. However, if and when the Government re-files its Complaint, this issue
may be revisited.
II. THE FALSE CLAIMS ACT
In pertinent part, the False Claims Act subjects to civil liability ―[a]ny person who
knowingly presents or causes to be presented, to . . . the United States Government . . . a
false or fraudulent claim for payment or approval,‖ 31 U.S.C. § 3729(a)(1), as well as ―[a]ny
person who knowingly makes, uses, or causes to be made or used, a false record or
statement to get a false or fraudulent claim paid or approved by the Government,‖ 31 U.S.C.

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§ 3729(a)(2).8 To state a claim under the False Claims Act, a plaintiff must prove ―(1) that
the defendant made a false statement or engaged in a fraudulent course of conduct; (2) such
statement or conduct was made or carried out with the requisite scienter; (3) the statement
or conduct was material; and (4) the statement or conduct caused the government to pay out
money or to forfeit money due.‖ U.S. ex rel. Harrison v. Westinghouse Savannah River Co., 352
F.3d 908, 913 (4th Cir. 2003) (―Harrison II‖).
The False Claims Act was enacted ―during the Civil War in response to overcharges
and other abuses by defense contractors [with the expectation that it] would help the
government uncover fraud and abuse by unleashing a posse of ad hoc deputies to uncover
and prosecute frauds against the government.‖ United States ex rel. Wilson v. Graham County
Soil & Water Conservation Dist., 528 F.3d 292, 298 (4th Cir. 2008) (quoting Harrison I, 176 F.3d
at 784). The False Claims Act imposes civil liability in the form of treble damages and
penalties of up to $10,000 per false claim claim for persons who knowingly submit false
claims to the government or use a false record to get a false claim paid by the government.
31 U.S.C. § 3729.
Given the ―essentially punitive‖9 nature of the damages available in False Claims Act
cases, ―[t]he Supreme Court has cautioned that the False Claims Act was not designed to
8

The quoted language from the False Claims Act corresponds to the pre-FERA amendments. As
previously noted, the parties have not argued, and this Court cannot discern, any material difference
between the two versions of the Act that would affect this litigation. See supra Section I.B. Because
the Government‘s Complaint references the earlier version of the statute, this Court will cite that
version for ease of reference.
9

Vermont Agency of Nat. Res. v. Stevens, 529 U.S. 765, 784 (2000) (―[T[he current version of the FCA
imposes damages that are essentially punitive in nature . . . .‖); see also Texas Indus., Inc. v. Radcliffe
Materials, Inc., 451 U.S. 630, 639 (1981) (―The very idea of treble damages reveals an intent to punish
past, and to deter future, unlawful conduct, not to ameliorate the liability of wrongdoers.‖); United
17

punish every type of fraud committed upon the government.‖ Harrison I, 176 F.3d at 785
(citing United States v. McNinch, 356 U.S. 595, 599 (1958)). The Act ―imposes liability not for
defrauding the government generally; it instead only prohibits a narrow species of fraudulent
activity: ‗present[ing], or caus[ing] to be presented . . . a false or fraudulent claim for payment
or approval.‖ United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 504 (6th Cir.
2007) (citation omitted); see also Harrison I, 176 F.3d at 785 (―The statute attaches liability, not
to the underlying fraudulent activity or to the government‘s wrongful payment, but to the
‗claim for payment.‘‖) (citation omitted, emphasis added). ―Therefore, a central question in
False Claims Act cases is whether the defendant ever presented a ‗false or fraudulent claim‘
to the government.‖ Harrison I, 176 F.3d at 785. In the oft-quoted parlance of the United
States Court of Appeals for the Eleventh Circuit, ―[t]he submission of a [false] claim is . . .
the sine qua non of a False Claims Act violation.‖ United States ex rel. Clausen v. Lab. Corp. of
Am., 290 F.3d 1301, 1311 (11th Cir. 2002) (citation omitted).
In Wilson, the Fourth Circuit stated that the ―time, place, and contents of the false
representations, as well as the identity of the person making the misrepresentation and what
he obtained thereby‖ are the circumstances that must be pled with particularity under Rule
9(b). U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008)
(quoting Harrison I, 176 F.3d at 784).

Here, the primary failure of the Government‘s

Complaint is its lack of specificity as to the precise false claims at issue in this litigation—in
fact, the Complaint does not identify a single false claim actually submitted to the
government for payment.
States ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702, 734 (10th Cir. 2006) (Hartz, J.,
concurring) (―[T]he False Claims Act is a punitive statute . . . .‖).
18

The Complaint alleges a complicated scheme in which the Government contends
Kernan sought to boost its case mix index in an effort to garner greater federal
reimbursement, but utterly fails to link this scheme with any claims actually submitted. At
the July 12 hearing, after being asked what specific false claims were at issue, counsel for the
Government proffered that the false claims were the cost reports submitted by Kernan to
the HSCRC. However, the Complaint does not identify a single cost report submitted to the
HSCRC, nor does it even explain the circumstances under which such reports are submitted.
Instead, the Complaint generally alleges that Kernan developed a scheme to increase
government funding, engaged in the fraudulent upcoding of Kwashiorkor and malnutrition
diagnoses, but is silent as to the next step or link in the False Claims Act liability
mechanism—namely, that these fraudulent diagnoses made their way to cost reports
submitted to the HSCRC and actually caused the HSCRC to pay Kernan for services not
rendered.
Two similar cases from the Eleventh Circuit serve to illustrate the Government‘s
failure to state with particularity the nature of the false claims it contends were submitted by
Kernan. In United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301 (11th Cir. 2002),
the Eleventh Circuit concluded that allegations regarding a detailed scheme to defraud,
absent specific allegations regarding the actual presentment of false claims, fail to satisfy Rule
9(b)‘s particularity requirement. In that case, the complaint ―allege[d] that [the company]
engaged in a multi-faceted, decade-long campaign to defraud the Government,‖ insofar as it
―performed unauthorized, unnecessary or excessive medical tests . . . and knowingly
submitted bills for [that] work to . . . the Government.‖ Id. at 1303. The qui tam relator

19

described in great detail the scheme allegedly engaged in by the defendant, identified specific
facilities at issue, patients, dates of testing, and testing procedures. Id. at 1315. However, his
complaint ultimately ―failed to meet the minimum pleading requirements for the actual
presentment of any false claims.‖ Id. (emphasis added). ―No amounts of charges were identified.
No actual dates were alleged. No policies about billing or even second-hand information
about billing practices were described . . . [and not one] copy of a single bill or payment was
provided.‖ Id. at 1312. In making this determination, the Clausen court noted that:
Rule 9(b)‘s directive that ―the circumstances constituting fraud or mistake
shall be stated with particularity‖ does not permit a False Claims Act plaintiff
merely to describe a private scheme in detail but then to allege simply and
without any stated reason for his belief that claims requesting illegal payments
must have been submitted, were likely submitted or should have been
submitted to the Government.
Id. at 1311. The court went on to conclude that ―if Rule 9(b) is to be adhered to, some
indicia of reliability must be given in the complaint to support the allegation of an actual false
claim for payment being made to the Government.‖ Id. (emphasis added).
In another case, United States ex rel. Atkins v. McInteer, 470 F.3d 1350 (11th Cir. 2006),
the allegations involved an elaborate upcoding scheme. The Eleventh Circuit affirmed the
district court‘s dismissal because ―the complaint fail[ed] rule 9(b) for want of sufficient
indicia of reliability to support the assertion that the defendants submitted false claims.‖ Id.
at 1358-59. Even though the plaintiff ―cite[d] particular patients, dates and corresponding
medical records for services that he contends were not eligible for government
reimbursement,‖ he ―fail[ed] to provide the next link in the FCA liability chain: showing that
the defendants actually submitted reimbursement claims for the services he describes. Instead,

20

he portrays the scheme and then summarily concludes that the defendants submitted false
claims to the government for reimbursement.‖ Id. at 1359 (first emphasis added).
As in Clausen and Atkins, the Government‘s Complaint in this case fails to provide
the crucial link between the alleged scheme and ultimate False Claims Act liability. In a
telling moment of candor, Government counsel at the July 12 hearing conceded that by
including a secondary diagnosis of Kwashiorkor in a patient‘s chart—even if the medical
record did not support that diagnosis—the hospital‘s funding would not necessarily increase.
In other words, some secondary diagnoses do not affect the hospital‘s compensation rate.
The Government explained this as ―an artifact of Kernan‘s case mix,‖10 but this fact is
important and further underscores the failure of the Government‘s Complaint to adequately
identify the false claims at issue.
As it stands, if some Kwashiorkor coding would not result in higher reimbursement,
then the Complaint utterly fails to explain under what circumstances the miscoding or
upcoding of malnutrition does result in a false claim being submitted to the government. The
Complaint avers that the Government‘s expert reviewed Kernan‘s billing records and found
that twenty-three percent of the cases in which Kernan coded malnutrition as a secondary
diagnosis were ―inappropriate.‖ Compl. ¶ 18. The rest of the Complaint does not explain
how the Government‘s expert conducted her analysis, what precisely makes a malnutrition
code ―inappropriate,‖ and generally does not provide enough information for Kernan to
identify which claims the Government contends were false. Put simply, the Complaint fails

10

According to both parties, Kernan Hospital, at least traditionally, was primarily a ―rehabilitation‖
hospital. In this regard, its patients differ from other hospitals insofar as Kernan‘s patients are often
sent to the hospital to recuperate or rehabilitate from serious injury, surgery, or illness.
21

to identify the ―who, what, when, where, and how‖ of the alleged fraud. Wilson, 525 F.3d at
379.
As the Fourth Circuit noted in Wilson, ―[t]o satisfy the first element of an FCA claim,
the statement or conduct alleged must represent an objective falsehood.‖ Id. at 376-77 (emphasis
added). ―As a result, mere ‗allegations of poor and inefficient management of contractual
duties‘ are ‗not actionable under the False Claims Act.‘‖ Id. at 377 (quoting Wilson I, 176
F.3d at 789).

Without the missing link in the chain—the objective and verifiable

falsehood—the Government has failed to sufficiently allege that by engaging in an upcoding
scheme, Kernan caused the submission of false claims and is liable under the False Claims
Act. The False Claims Act does not punish a system that might allow false claims to be sent
to the government—instead, it punishes actual claims containing objective falsehoods. To
state a claim under the Act in this case, the Government must describe what false statements
were submitted to the government, and more importantly, how those submissions affected
the hospital‘s reimbursement.11
CONCLUSION
Because this Court finds that the Government has failed to adequately plead
allegations of fraud under the False Claims Act, the Defendant‘s motions to dismiss (ECF

11

Because this Court concludes that the Government has failed to adequately plead the first
element of a False Claims Act violation—that a false of fraudulent claim was submitted to the
government—it need not conclusively evaluate the Defendant‘s other arguments for dismissal. The
Court only notes, however, that Kernan‘s argument that the Complaint must be dismissed because it
fails to identify the specific employee at Kernan alleged to have submitted false claims, is
unpersuasive. See United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 506-10 (6th Cir.
2007) (holding that where a corporation is a defendant in a False Claims Act action, the identity of
the natural person that submitted the false claim is not a mandatory pleading requirement.).
22

Nos. 6 & 10) will be GRANTED, and the Government‘s Complaint will be DISMISSED
WITHOUT PREJUDICE.

A separate Order follows.

Dated: July 30, 2012
/s/___________________
Richard D. Bennett
United States District Judge

23