United States Of America v. Narco Freedom, Inc.
Filing
142
OPINION AND ORDER: For the reasons explained above, the Government's motion for a preliminary injunction is granted. A separate order with the terms of the preliminary injunction will follow. (Signed by Judge John G. Koeltl on 4/2/2015) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
────────────────────────────────────
UNITED STATES OF AMERICA,
Plaintiff,
14 Cv. 8593 (JGK)
- against -
OPINION AND ORDER
NARCO FREEDOM, INC.,
Defendant.
────────────────────────────────────
JOHN G. KOELTL, District Judge:
The Government brought this action against Narco Freedom,
Inc. (“Narco Freedom”).
The Government alleges that Narco
Freedom is violating 42 U.S.C. § 1320a-7b, the “Anti-Kickback
Statute,” by providing below-market housing at Narco Freedom’s
“Freedom Houses” only to persons that attend Narco Freedom’s
Medicaid subsidized drug treatment programs.
The Government now has moved for a preliminary injunction
pursuant to 18 U.S.C. § 1345.
The preliminary injunction would
prohibit Narco Freedom from conditioning residence in the
Freedom Houses on enrollment in Narco Freedom drug treatment
programs, from requiring any individual residing in a Freedom
House to move within the first thirty days of establishing
residence, and from closing any Freedom House without advanced
notice.
The Government also requests that the Court impose
1
obligations on Narco Freedom involving recordkeeping, reporting,
and the terms of Narco Freedom’s relationships with its
patients.
On November 3, 2014, the Court issued—with the parties’
consent—a temporary restraining order enjoining the defendant
from evicting individuals who are participating in outpatient
programs not controlled by Narco Freedom and enjoining the
defendant from closing any Freedom House without advanced
notice.
Narco Freedom consented to continue the temporary
restraining order pending the Court’s decision on the
Government’s motion for a preliminary injunction.
From December
2, 2014, to December 4, 2014, the Court held an evidentiary
hearing.
At the request of both parties, the Court held the
case in abeyance while the parties discussed a possible
resolution.
On March 13, 2015, The New York State Attorney General
issued a superseding indictment against Gerald Bethea, Narco
Freedom’s then chief executive officer (“CEO”), Richard Gross,
Narco Freedom’s then Comptroller, and Narco Freedom itself
(among others).
arrested.
On March 18, 2015, Bethea and Gross were
On March 19, 2015, the Government filed an order to
show cause for the appointment of a temporary receiver.
2
On March 24, 2015, the New York Office of Medicaid
Inspector General (“OMIG”) informed Narco Freedom that a fifty
percent withhold had been placed on Narco Freedom’s current and
future Medicaid payments.
OMIG Letter Ex. B.
On March 26,
2015, OMIG informed Bethea and Gross that they would be excluded
from participating in the New York State Medicaid program,
effective March 31, 2015.
See OMIG Letter Ex. A.
And on April
1, 2015, OMIG informed Narco Freedom that it would be excluded
from the New York State Medicaid program, effective April 6,
2015.
See OMIG Letter Ex. C.
Having reviewed the record and assessed the credibility of
the witnesses, the Court now makes the following findings of
fact and reaches the following conclusions of law pursuant to
Rule 65 of the Federal Rules of Civil Procedure.
For the
reasons stated below, the Government’s motion is granted.
I.
A.
Narco Freedom provides drug treatment programs in the
Bronx, Queens, Brooklyn, and Long Island.
Narco Freedom serves
over 3,000 clients, many of whom are referred to Narco Freedom
by the New York City Department of Probation, the New York State
Division of Parole, the United States Parole Commission, and the
Brooklyn and Manhattan drug courts.
See Bethea Decl. ¶ 5;
Def.’s Ex. A at 1; Hr’g Tr. at 413.
Narco Freedom’s drug
3
programs include, among others, drug-free outpatient treatment
and methadone treatment.
Hr’g Tr. at 424.
The drug treatment
programs are regulated by the New York Office of Alcohol and
Substance Abuse Services (“OASAS”) and other federal and state
agencies.
Hr’g Tr. at 413.
For individuals enrolled in drug-
free outpatient programs, Medicaid reimburses all costs of up to
seventy-five treatments.
O’Connor Decl. ¶ 46. §
Narco Freedom also runs “three-quarter houses,” known as
“Freedom Houses,” for individuals who participate in Narco
Freedom’s outpatient treatment programs.
Hr’g Tr. at 339, 414.
These three-quarter houses do not provide in-house services to
tenants, are not licensed or regulated, and have no formal
arrangement with any government agency.
O’Connor Decl. ¶ 7;
Gov’t Ex. S (“Kent Decl.”) ¶¶ 11–12; Hr’g Tr. at 43.
The staff
members at the Freedom Houses do not have mental health
training, and some Freedom Houses staff as few as one employee
for every one hundred residents.
Hr’g Tr. at 470.
Narco Freedom has opened a total of twenty-one Freedom
Houses; at the time of the hearing, eighteen remained
operational.
Gov’t Ex. A.
live in the Freedom Houses.
Approximately 1,500 people currently
Bethea Decl. ¶ 4; Hr’g Tr. at 414.
And as of November 10, 2014, over 471 parolees resided in
Freedom Houses.
Gov’t Ex. T (“Herzog Decl.”) ¶ 9.
4
The sizes of
the Freedom Houses vary, with occupancy ranging from thirty to
two hundred people.
Hr’g Tr. at 390–91; Gov’t Ex. B.
The Freedom Houses receive funding from two sources.
First, many residents assign their monthly housing allowances
from the New York City Human Resources Administration (“HRA”),
currently $215 per month, to Narco Freedom.
Hr’g Tr. at 374–75.
Second, Narco Freedom uses the funds that it receives from its
other programs to cover the costs of the Freedom Houses.
Tr. at 428–29.
Hr’g
Although Narco Freedom employees testified that
the HRA allowances are insufficient to cover the costs of the
Freedom Houses, Hr’g Tr. at 314, 374–75, 429, Narco Freedom did
not submit documentary evidence showing the actual costs of
running the Freedom Houses.
Narco Freedom leases the Freedom Houses from third-party
realtors.
¶¶ 9–11.
See Gov’t Ex. C; Gov’t Ex. AA (“Deutchman Decl.”)
Jay Deutchman is the largest single owner of the
buildings that are leased to Narco Freedom.
¶ 15.
Deutchman Decl.
Deutchman testified that Alan Brand, the former CEO of
Narco Freedom, informed him that Brand used a formula to
determine whether to lease and open a Freedom House.
The
formula added the $215 per person per month from the HRA to the
Medicaid funds that Narco Freedom expected to receive from
providing drug treatment to the persons residing at the Freedom
Houses.
Brand would then subtract the costs—such as rent
5
payments and staff salary—to determine whether opening a new
Freedom House would be profitable.
Hr’g Tr. at 314–15; see also
Deutchman Decl. ¶¶ 16–17.
When explaining Brand’s business model, Deutchman
testified: “Well, there are two sides to it, and one side is you
can’t control your clients if you don’t know where they are.
And number two, it’s just a mathematical formula that if you’re
at the end of the day, after you look at all your income, and
you look at your expenses, and there will be a profit, then it
makes sense.
So the more you house, the more income you bring
in for the organization.”
Hr’g Tr. at 317. 1
B.
Narco Freedom provides housing only to patients that
participate in Narco Freedom’s drug treatment programs.
Tr. at 428–29.
Hr’g
Donna DeCicco, a consultant who provides
marketing services for Narco Freedom, testified that individuals
could not live in a Freedom House “unless [they] were a client
of Narco Freedom’s outpatient [treatment programs].”
at 347.
Hr’g Tr.
According to DeCicco, Brand hired her to fill the
1
Deutchman also declared that from 2006 to 2014, Brand asked
Deutchman to contribute to the “staffing” expenses of the
Freedom Houses. Deutchman obliged and paid “$13,300 per month
to one of four entities that Mr. Brand specified.” Deutchman
Decl. ¶ 22. Deutchman pleaded guilty in state court to criminal
charges related to this conduct. Hr’g Tr. at 237; Deutchman
Decl. ¶ 22.
6
Freedom Houses through outreach to potential referral sources.
Hr’g Tr. at 342.
She testified that “when I made my referrals,
they were people that needed a residence and outpatient
treatment.”
Id. at 344.
She also explained that when marketing
Narco Freedom to potential referral sources, “[i]t was pretty
clear when we went in there that we were there to represent an
outpatient treatment program that provided living for their
clients that needed somewhere to live.”
Hr’g Tr. at 348.
Dr. Kamala Greene, the clinical and administrative director
of addiction treatment at Bronx Lebanon Hospital Center (“BronxLebanon”), testified that Narco Freedom markets its housing to
the inpatient counselors at Bronx-Lebanon.
Hr’g Tr. at 251–52.
One promotional flyer from Narco Freedom heavily emphasizes the
Freedom Houses as an aspect of Narco Freedom’s clinical
services.
See Gov’t Ex. N.
Dr. Greene also testified that the
Bronx-Lebanon counselors contact DeCicco when they wish to find
housing for clients that complete inpatient programs.
See Hr’g
Tr. at 252–53.
Finally, Gerald Bethea, the CEO of Narco Freedom at the
time of the hearing, testified that Narco Freedom’s “budgetary
model” depends on requiring all Freedom House residents to
attend Narco Freedom’s substance abuse programs.
429.
7
Hr’g Tr. at
C.
When an individual arrives at a Freedom House, he or she
must sign a “Code of Conduct” and a “Waiver of Tenant[’]s
Rights.”
The Code of Conduct requires “[a]ll participants . . .
to attend one (1) group treatment or counseling session a day,
seven days a week, in their designated program with Narco
Freedom Inc., or as approved by Program Director.”
at 9.
Gov’t Ex. D,
The Waiver of Tenant’s Rights also states that “all
residents, as a pre-supposed condition in residing at the
program, will attend said resident[’]s designated outpatient
program.”
Gov’t Ex. E. ¶ 8.
The Waiver of Tenant’s Rights, as its name would suggest,
also limits the rights of Narco Freedom residents.
Paragraph
four provides that a “resident is excluded from all claims of
‘Landlord-Tenant Law it’s per uniform Landlord and Tenant Act:
set part 11, section 1.202(1) Residence as an institution.’
Therefore the resident does not have ANY claims of further stay
or rights unto the property if the resident is asked to leave
the program for any reason.”
Gov’t Ex. E ¶ 4.
Similarly, the Code of Conduct states that
“[p]articipants[’] assigned areas are changed every 28 days and
participants are required to prepare themselves and their
personal property, in advance, to enable them to be reassigned
8
and moved upon the 28th day to their new assigned area . . . .”
Gov’t Ex. D at 8.
This clause appears intended to skirt New
York City Administrative Code section 26-521(a), which provides
that “[i]t shall be unlawful for any person to evict or attempt
to evict an occupant of a dwelling unit who has lawfully
occupied the dwelling unit for thirty consecutive days or longer
. . . except to the extent permitted by law pursuant to a
warrant of eviction or other order of a court of competent
jurisdiction or a governmental vacate order . . . .”
D.
Current and former Freedom House residents submitted
declarations stating that they had no history of substance
abuse.
But they nonetheless attended Narco Freedom treatment
programs in order to live at a Freedom House.
See Gov’t Ex. FF
(“Porter Decl.”) ¶¶ 5–10; Gov’t Ex. II (“Rivera Decl.”) ¶¶ 5–11.
Narco Freedom disputes these allegations.
Bethea testified
that Narco Freedom clinicians interview every patient to
determine if he or she needs substance abuse counseling.
Hr’g
Tr. at 417–18; see also Def.’s Ex. E (Narco Freedom’s
Psychosocial History Form).
But Bethea did note that some
patients who have been referred to Narco Freedom arrive when the
clinical intake office is closed.
In those limited cases, the
prospective patient is allowed to stay at a Freedom House before
9
a clinician determines whether substance abuse treatment is
appropriate.
Id. at 432–34.
E.
Narco Freedom submitted evidence that stable housing is a
necessary condition for successful drug treatment.
Dr. Edward
Nunes, a recently appointed member of the Narco Freedom Board of
Directors, testified that “homelessness is very bad for any
effort to treat a substance use disorder,” Hr’g Tr. at 58, and
that tying housing to treatment provides an incentive for
patients to remain substance free.
Hr’g Tr. at 62–63, 81.
Similarly, Bethea testified that homeless people are unlikely to
complete drug treatment successfully.
Hr’g Tr. at 425–26.
And
Dr. Janet Lerner testified that there is a “tremendous
literature on the need for housing for people with addiction,
addictive behaviors, or behavioral health problems.”
at 490.
Hr’g Tr.
articles.
Narco Freedom submitted many of these scholarly
See Def.’s Ex. L–R, X.
The Government does not dispute that homelessness
undermines drug treatment or that homelessness is a problem for
people addicted to drugs.
But the Government does question the quality of housing
that Narco Freedom provides.
Rashwant Mack, a current Freedom
House resident, testified that the Freedom House where he lives
lacks sufficient bathrooms, has exposed asbestos, houses a
10
number of drug users, and is poorly staffed.
280–82.
Hr’g Tr. at 278,
The Government submitted declarations from other Narco
Freedom residents that corroborate Mack’s testimony.
See, e.g.,
Gov’t Ex. X (“Grant Decl.”) ¶¶ 5–7; Gov’t Ex. DD (“Rivera
Decl.”) ¶¶ 13–17.
Unsurprisingly, Narco Freedom strongly disagrees and
submitted a number of letters from past and current Freedom
House residents that positively describe Narco Freedom and the
Freedom Houses.
See Def.’s Ex. AH.
F.
Beginning in 2012, the Office of Inspector General for the
United States Department of Health and Human Services (“the
Office of Inspector General”) and the United States Attorney’s
Office for the Southern District of New York jointly
investigated whether Narco Freedom was violating 42 U.S.C.
§ 1320a-7b(b).
O’Connor Decl. ¶ 2.
On October 14, 2014, the
Government disclosed to counsel for Narco Freedom that it
believed Narco Freedom was perpetrating an unlawful kickback
scheme.
The Government also informed Narco Freedom that unless
it voluntarily severed the relationship between its substance
abuse programs and the Freedom Houses, the Government would
petition for injunctive relief.
Phillips Decl. ¶ 3.
In July 2014, Brand stepped down as the CEO of Narco
Freedom, and Bethea was appointed in his place.
11
Hr’g Tr. at
412–13.
In October 2014, Alan Brand and Narco Freedom were
indicted in New York state court on various criminal changes.
See Oct. 29, 2014, Hr’g Tr. at 9.
Christopher Shaw, the
Regional Director for the Medicaid Fraud Control Unit of New
York State, represented that the State of New York’s
investigation of Narco Freedom is ongoing.
Id.
In October
2014, OASAS also informed Narco Freedom that it intended to
appoint a temporary operator to oversee Narco Freedom’s
treatment programs.
Hr’g Tr. at 98.
On October 28, 2014, the Government brought an application
for a temporary restraining order.
On October 29, 2014, the
Court issued—with the parties’ consent—a temporary restraining
order prohibiting Narco Freedom from conditioning placement in
its Freedom Houses on participation in Narco Freedom’s drug
treatment programs.
The Government then moved for a preliminary
injunction, and the Court held an evidentiary hearing from
December 2, 2014, to December 4, 2014.
At the parties’ request,
the Court held this case in abeyance while the parties discussed
a resolution.
On March 13, 2015, The New York State Attorney General
issued a superseding indictment against Bethea, Gross, and Narco
Freedom (among others).
were arrested.
On March 18, 2015, Bethea and Gross
And on March 19, 2015, the Government filed an
order to show cause for the appointment of a temporary receiver.
12
On March 24, 2015, the New York Office of Medicaid
Inspector General (“OMIG”) informed Narco Freedom that a fifty
percent withhold had been placed on Narco Freedom’s current and
future Medicaid payments.
OMIG Letter Ex. B.
On March 26,
2015, OMIG informed Bethea and Gross that they would be excluded
from participating in the New York State Medicaid program,
effective March 31, 2015.
See OMIG Letter Ex. A.
And on April
1, 2015, OMIG informed Narco Freedom that it would be excluded
from the New York State Medicaid program, effective April 6,
2015.
See OMIG Letter Ex. C.
II.
Section 1345(a)(1)(C) of title 18 of the United States Code
provides that “[i]f a person is committing or about to commit a
Federal health care offense[,] the Attorney General may commence
a civil action in any Federal court to enjoin such violation.”
Section 24 of the same title provides that “the term ‘Federal
health care offense’ means a violation of, or a criminal
conspiracy to violate . . . section 1128B of the Social Security
Act (42 U.S.C. § 1320a-7b).”
And 42 U.S.C. § 1320a-7b(b)(2)(B)
provides:
(2) whoever knowingly and willfully offers or pays any
remuneration (including any kickback, bribe, or rebate)
directly or indirectly, overtly or covertly, in cash or
in kind to any person to induce such person . . . (B) to
purchase, lease, order, or arrange for or recommend
purchasing, leasing, or ordering any good, facility,
13
service, or item for which payment may be made in whole
or in part under a Federal health care program,
shall be guilty of a felony and upon conviction thereof,
shall be fined not more than $25,000 or imprisoned for
not more than five years, or both.
The Government argues that Narco Freedom is violating
§ 1320a-7b(b)(2)(B) because it is paying “remuneration” (belowmarket housing) to patients in order “induce such person[s]” to
“order” or “arrange for” a “service” (drug treatment counseling)
for which payment will be made under a federal health care
program (Medicaid). 2
A.
“A preliminary injunction is an extraordinary remedy never
awarded as of right.”
Winter v. Natural Res. Def. Council,
Inc., 555 U.S. 7, 24 (2008).
Generally, the party requesting a
preliminary injunction must demonstrate “(a) irreparable harm
and (b) either (1) likelihood of success on the merits or (2)
sufficiently serious questions going to the merits to make them
a fair ground for litigation and a balance of hardships tipping
decidedly toward the party requesting the preliminary relief.”
2
Subsection 1320a-7b(f) provides that a federal health care
program includes “any plan or program that provides health
benefits, whether directly, through insurance, or otherwise,
which is funded directly, in whole or in part, by the United
States Government (other than the health insurance program under
chapter 89 of Title 5).” Medicaid is such a program. See
United States ex rel. Kester v. Novartis Pharm. Corp., --- F.
Supp. 3d ---, No. 11cv8196, 2014 WL 4230386, at *14 (S.D.N.Y.
Aug. 7, 2014).
14
UBS Fin. Servs., Inc. v. W. Va. Univ. Hospitals, Inc., 660 F.3d
643, 648 (2d Cir. 2011) (internal quotation marks omitted)
(quoting Citigroup Global Mkts., Inc. v. VCG Special
Opportunities Master Fund Ltd., 598 F.3d 30, 35 (2d Cir. 2010)).
But when, as here, a statute authorizes the government to
seek preliminary injunctive relief but does not specifically
require proof of irreparable harm, no such showing is required.
See, e.g., City of New York v. Golden Feather Smoke Shop, Inc.,
597 F.3d 115, 120–21 (2d Cir. 2010) (interpreting 18 U.S.C.
§ 2346(b)(2)); CFTC v. British Am. Commodity Options, 560 F.2d
135, 141 (2d Cir. 1977) (interpreting 7 U.S.C. § 13a-1).
In
such cases, courts have either employed “a presumption of
irreparable harm based on a statutory violation,” Golden
Feather, 597 F.3d at 121, or held that the “plain meaning of the
statute” does not require a showing of irreparable harm.
See
United States v. William Savran & Assocs., Inc., 755 F. Supp.
1165, 1178 (E.D.N.Y. 1991).
Subsection 1345(a) provides that “the Attorney General may
commence a civil action in any Federal court to enjoin” a person
from committing a federal health care offense.
And § 1345(b)
states, in part, that “[t]he court . . . may, at any time before
final determination, enter such a restraining order or
prohibition, or take such other action, as is warranted to
prevent a continuing and substantial injury to the United States
15
or to any person or class of persons for whose protection the
action is brought.”
Neither subsection requires a showing of
irreparable harm.
Accordingly, when interpreting § 1345, federal courts
consistently have held that the government need not identify
irreparable harm for a preliminary injunction to issue.
Instead, the government must show that an injunction is
necessary to prevent a “substantial injury to the United States”
or to persons for “whose protection the action is sought.”
See,
e.g., United States v. Sriram, 147 F. Supp. 2d 914, 935–37 (N.D.
Ill. 2001); United States v. Fed. Record Serv. Corp., No.
99cv3290, 1999 WL 335826, at *16 (S.D.N.Y. May 24, 1999);
William Savran & Assocs., 755 F. Supp. at 1178–80; United States
v. Belden, 714 F. Supp. 42, 44–46 (N.D.N.Y. 1987).
Although proof of irreparable harm is not required,
concerns about fairness do not drop entirely from the equation.
A preliminary injunction is a form of equitable relief.
And the
Court therefore must consider the hardships that the public
currently faces and that the defendant will endure if the
injunction is granted.
As the Second Circuit Court of Appeals
explained when discussing the standard for injunctive relief
under the federal securities laws:
We scarcely mean to imply that judges are free to set to
one side all notions of fairness because it is the SEC,
rather than a private litigant, which has stepped into
16
court. . . . And, as we said in SEC v. Manor Nursing
Centers, Inc., 458 F.2d 1082, 1102 (2d Cir. 1972), “in
deciding whether to grant injunctive relief, a district
court is called upon to assess all those considerations
of fairness that have been the traditional concern of
equity courts.” But the statutory imprimatur given SEC
enforcement proceedings is sufficient to obviate the
need for a finding of irreparable injury at least where
the statutory prerequisite the likelihood of future
violation of the securities laws has been clearly
demonstrated.
SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808–09 (2d Cir.
1975).
However, if the Government establishes that the defendant
is violating § 1320a-7b, the balance of hardships likely weighs
in the Government’s favor.
Congress has determined that
violations of § 1320a-7b impose substantial costs on the public—
namely, unnecessary and unwarranted distributions of public
funds.
See United States v. Fang, 937 F. Supp. 1186, 1199–2000
(D. Md. 1996).
And a continuing violation of § 1320a-7b is a
continuing violation of a federal law that imperils the
integrity of a public benefit program.
B.
Courts differ concerning the Government’s burden of proof
under § 1345.
A number of courts have held that the Government
need only show by a preponderance of the evidence that there is
probable cause to believe that the defendant is committing or is
about to commit a federal health care offense for a preliminary
injunction to issue.
See, e.g., United States v. Weingold, 844
17
F.Supp. 1560, 1573 (D.N.J. 1994); William Savran & Assocs., 1165
F. Supp. at 1177; Belden, 714 F. Supp. at 45–46.
Other courts
have held that the Government instead must prove such a
violation by a preponderance of the evidence.
See, e.g., United
States v. Brown, 988 F.2d 658, 663–64 (6th Cir. 1993); Sriram,
147 F. Supp. 2d at 937-38; United States v. Barnes, 912 F. Supp.
1187, 1194-95 (N.D. Iowa 1996).
And one court explained that
these two standards are functionally the same.
See Fang, 937 F.
Supp. at 1195-97.
The Court need not resolve this issue.
Under the more
demanding standard—a preponderance of the evidence—the
Government has proven that Narco Freedom is committing a federal
health care offense.
III.
The Government alleges that Narco Freedom is violating
§ 1320a-7b(b)(2)(B).
In order to prove a violation of that
subsection, the Government must prove that Narco Freedom (1)
knowingly and willfully offers to pay any remuneration, in cash
or in kind, to any person, (2) to induce that person to
purchase, lease, order or arrange or recommend purchasing,
leasing, or ordering, (3) any good facility, service, or item
for which payment may be made under a federal health care
program.
18
Narco Freedom does not dispute that its substance abuse
programs are a service for which payment is made under a federal
health care program.
But Narco Freedom does dispute (1) that it
offered “remuneration” to its patients and (2) that the purpose
of the remuneration was to induce them to purchase of Medicaid
services.
The Court will address each issue in turn.
A.
Section 1320a-7b(b) defines remuneration to include “any
kickback, bribe, or rebate” and payments “in cash or in kind.”
Federal courts consistently have held that remuneration is not
limited to out-and-out bribes.
See, e.g., Hanlester Network v.
Shalala, 51 F.3d 1390, 1398 (9th Cir. 1995) (“The phrase ‘any
remuneration’ was intended to broaden the reach of the law which
previously referred only to kickbacks, bribes, and rebates.”);
Klaczak v. Consol. Med. Transp., 458 F. Supp. 2d 622, 678 (N.D.
Ill. 2006) (“Remuneration, for purposes of the AKS, is defined
broadly, meaning ‘anything of value.’”).
Residence at the Freedom Houses thus is a form of
remuneration: it is an in-kind benefit provided at below market
value to Medicaid beneficiaries.
Narco Freedom insists that reduced-priced housing does not
qualify as “remuneration,” relying on a notice of a proposed
rule change by the Office of Inspector General interpreting
§ 1320a-7a(i)(6)(F).
See Medicare and State Health Care
19
Programs: Fraud and Abuse, 79 Fed. Reg. 59,717 (Oct. 3, 2014).
Although creative, this argument is ultimately unpersuasive.
The Government brings this action pursuant to § 1320a-7b, the
provision of the statute dealing with criminal penalties, while
the proposed rule change discusses § 1320a-7a, a separate
section dealing with civil penalties.
This distinction makes a
difference.
Section 1320a-7a(a)(5) subjects to the imposition of a
civil monetary penalty any person who “offers to or transfers
remuneration to any individual eligible” for various state and
federal health care programs, where that person knows that the
remuneration “is likely to influence such individual in order to
receive” the health benefit.
Section 1320a-7a(i)(6) defines
remuneration for that subsection to include “the waiver of
coinsurance and deductible amounts (or any part thereof), and
transfers of items or services for free or for other than fair
market value.”
Section 1320a-7a(i)(6)(A)–(H), in turn, exempts a number of
practices from § 1320a-7a(i)(6)’s definition of remuneration.
Of relevance here, section 6402(d)(2)(B) of the Affordable Care
Act, Pub. L. No. 111-148, 124 Stat. 119, 758 (2010), added an
additional exception to the definition of remuneration in
§ 1320a-7a(a).
That section, codified in relevant part at
§ 1320a-7a(i)(6)(F), excludes “any other remuneration which
20
promotes access to care and poses a low risk of harm to patients
and Federal health care programs (as defined in section 1320a7b(f) of this title and designated by the Secretary under
regulations).”
The Office of Inspector General has solicited
comments to define the phrase “promotes access and poses a low
risk of harm to patients and Federal health care programs” in
§ 132a-7a(i)(6)(F).
See Medicare and State Health Care
Programs, 79 Fed. Reg. at 59,725.
Narco Freedom argues that
§ 1320a-7a(i)(6)(F) applies here.
But the exception at § 1320a-7a(i)(6)(F) applies to
§ 1320a-7a alone, and the Government brought this action to
enjoin a violation of § 1320a-7b.
Section 1320a-7b does cross-
reference one of the exceptions to the definition of
remuneration in § 1320a-7a(i)(6)(A)-(H), 3 but that exception is
not applicable here.
Thus, if Congress intended the exception
to remuneration in § 1320a-7a(i)(6)(F) to apply to § 1320a-7b’s
dentition of remuneration, it would have done so explicitly.
In fact, in the proposed rule change cited by Narco
Freedom, the Office of Inspector General explains that:
one exception to the definition of “remuneration” for
purposes of the beneficiary inducements [civil monetary
penalty rules] incorporates exceptions to the anti3
Section 1320a-7b(b)(3)(G) authorizes cost sharing by
pharmacies “if the conditions described in clauses (i) through
(iii) of section 1320a-7a(i)(6)(A) of this title are met with
respect to the waiver or reduction.”
21
kickback statute and the safe harbor regulations.
However, no parallel exception exists in the antikickback statute. Thus, the exceptions in section
1128A(i)(6) of the Act apply only to the definition of
“remuneration” applicable to section 1128A.
Medicare and State Health Care Programs, 79 Fed. Reg. at 59,724
(emphasis added); see also Ameritox, Ltd. v. Millennium Labs.,
Inc., 20 F. Supp. 3d 1348, 1356 (M.D. Fla. 2014) (“[T]he AKS
does not contain exceptions to the broad definition of
remuneration.”). 4
Even if the “low risk” exception in § 1320a-7a(i)(6)(F)
applied here, offering reduced-price housing poses more than a
“low risk” to the Medicaid program. 5
The Office of Inspector
4
A number of courts, without discussion, have cited the
definition of “remuneration” in § 1320a-7a(i)(6)—“transfers of
items or services for free or for other than fair market value”—
when interpreting § 1320a-7b(b). See, e.g., United States ex
rel. Bilotta v. Novartis Pharm. Corp., --- F. Supp. 3d. ---, No.
11cv71, 2014 WL 4922291, at *13 (S.D.N.Y. Sept. 30, 2014);
United States ex rel. Fair Lab. Practices Assocs. v. Quest
Diagnostics Inc., No. 05cv5393, 2011 WL 1330542, at *2 (S.D.N.Y.
Apr. 5, 2011), aff'd,734 F.3d 154 (2d Cir. 2013); United States
ex rel. Freedman v. Suarez-Hoyos, 781 F. Supp. 2d 1270, 1281
(M.D. Fla. 2011); United States v. Carroll, 320 F. Supp. 2d 748,
755-56 (S.D. Ill. 2004). But none of those opinions applied the
exceptions found in § 1320a-7a(i)(6)(A)-(H) to § 1320a-7b(b).
Indeed, § 1320a-7b includes its own set of “safe harbors,” which
are found at § 1320a-7b(b)(3) and the accompanying regulations.
Narco Freedom does not contend that any of those safe harbors
apply here.
5
The Government insisted at the preliminary injunction
hearing that § 1320a-7a(i)(6)(F) is not the “law.” Just because
the Office of Inspector General has not issued a regulation
interpreting that subsection does not mean § 1320a-7a(i)(6)(F)
lacks legal force.
22
General suggested that “low risk” remuneration: “(1) Is unlikely
to interfere with, or skew, clinical decision-making; (2) is
unlikely to increase costs to Federal health care programs or
beneficiaries
through
overutilization
or
inappropriate
utilization; and (3) does not raise patient-safety or quality-ofcare concerns.”
Medicare and State Health Care Programs, 79 Fed.
Reg. at 59,725.
Providing below-market housing to Medicaid recipients
increases costs to the Medicaid program through over- and
inappropriate utilization.
For those who need housing, the
prospect of nearly free housing creates a strong incentive to
overuse Narco Freedom’s drug treatment programs.
Indeed, Joan
Salmon, the Director of the Comprehensive Treatment Institute–
Bronx and Care Coordination Programs, testified that a number of
her patients had transferred to Narco Freedom in order to obtain
free housing, despite success in their current programs.
Tr. at 168–69.
Hr’g
And Freedom House residents submitted
declarations stating that they currently attend Narco Freedom’s
outpatient programs—despite not having a substance abuse
problem—in order to receive inexpensive housing.
See Porter
Decl. ¶¶ 5–10; Rivera Decl. ¶¶ 5–11.
Narco Freedom also cites two Office of Inspector General
advisory opinions interpreting §§ 1320a-7a(i)(6)(F) and 1320a7b.
Neither is apposite.
23
In the Office of Inspector General Advisory Opinion Number
11-16 (Nov. 8, 2011), a non-profit children’s hospital, which
does not bill for medical services, explained that it provides
housing and meal assistance for out-of-town families in
financial need.
Id. at 2–3.
The Office of Inspector General
concluded that the hospital’s program did not run afoul of
§§ 1320a-7a and 1320a-7b.
The advisory opinion reasoned that
the hospital “is reimbursed for less than a quarter of the costs
it expends,” that the hospital “focuses on the treatment and
cure of catastrophic diseases in children, [which] are not
susceptible to overutilization,” that “patients and their
families must travel or temporarily relocate to the Requestor's
metropolitan area,” that the services “are not advertised or
marketed to prospective patients, their families, or referring
physicians,” and that “none of the costs of the items . . . have
their costs shifted—either directly or indirectly—to the Federal
health care programs.”
Id. at 6–7.
The advisory opinion
concluded that these factors protected against the risk of fraud
and abuse.
Id. at 6.
The Office of Inspector General Advisory Opinion Number 1101 (Jan. 3, 2011), discussed a similar program.
This opinion
considered whether another non-profit children’s hospital could
provide free lodging and transportation to financially needy
“families of inpatients only in the context of recent spinal
24
cord or burn injuries; during hospital instruction of family
members on the patient's particular home care needs; and in
situations when the patient's condition requires family
accompaniment.”
Id. at 8–9.
The Office of Inspector General
concluded that the program “would pose a low risk of harm to
Federal health care programs”:
Services would only be provided under the proposed
Programs
in
the
context
of
a
financial
need
determination and when the Hospitals deem they are
merited by the patient's medical situation.
The
services would not be advertised or marketed, and, in
the case of the Lodging Assistance Program, the patient
would be informed by Hospital staff of its availability
after his or her acceptance for treatment. The Hospitals
would not promote Hospital programs in connection with
the Lodging Assistance Program or the Transportation
Assistance Program. Although the Programs would only be
available to patients of the Hospital, the Requestors
would not condition eligibility for the Programs on the
receipt
of
any
particularly
lucrative
services.
Finally, the costs related to the Programs would not
appear on any cost report or claim, and would not be
otherwise shifted to any Federal health care program.
Id. at 10.
The Freedom Houses are substantially different from these
two programs.
Medicaid reimburses Narco Freedom completely for
seventy-five drug treatment services per patient; the services
that Narco Freedom offers have a greater risk of overutilization
than the treatment of catastrophic diseases; Narco Freedom’s
patients do not temporarily relocate to a different metropolitan
area for emergency care; Narco Freedom advertises and promotes
25
its housing services; and Narco Freedom indirectly shifts the
costs of the Freedom Houses to Medicaid.
Therefore, the Court concludes that Narco Freedom provides
remuneration to Medicaid recipients in the form of below-market
housing.
B.
The parties next dispute whether the Government must prove
that the “primary purpose” or instead that “one purpose” of the
Freedom Houses is to induce Medicaid beneficiaries to enroll in
Narco Freedom’s drug treatment programs.
The Court adopts the
majority view that the Government must prove that “one purpose”
of the Freedom Houses is to induce Medicaid beneficiaries to use
Narco Freedom’s drug treatment programs.
Moreover, the Court
finds that Narco Freedom provides housing to induce patients to
enroll in Narco Freedom’s drug treatment programs.
1.
Section 1320a-7b(b)(2)(B) prohibits health care providers
from offering to provide any remuneration “to any person to
induce such person” to order a service for which “payment may be
made in whole or in part under a Federal health care program.”
Courts consistently have held that the Government need only
prove that “one purpose” of remuneration is to induce a person
to use a service for which payment is made under a federal
health care program.
See United States v. Borrasi, 639 F.3d
26
774, 781–82 (7th Cir. 2011); United States v. McClatchey, 217
F.3d 823, 834–35 (10th Cir. 2000); United States v. Davis, 132
F.3d 1092, 1094 (5th Cir. 1998); United States v. Kats, 871 F.2d
105, 108 (9th Cir. 1989) (per curiam); United States v. Greber,
760 F.2d 68, 71–72 (3d Cir. 1985).
And in a summary
disposition, the Second Circuit Court of Appeals also found no
error in the “one purpose” test.
United States v. Krikheli, 461
F. App'x 7, 10–11 (2d Cir. 2012).
United States v. Bay State Ambulance and Hosptial Rental
Service, Inc., 874 F.2d 20 (1st Cir. 1989), is not to the
contrary.
In that case, the district court instructed a jury
that “the Government has to prove that the improper purpose is
the primary purpose or was the primary purpose in making and
receiving the payments.”
Id. at 29.
The First Circuit Court of
Appeals declined to answer whether “any amount of inducement is
illegal . . . since, in this case, the district court instructed
that the defendants could only be found guilty if the payments
were made primarily as inducements.”
Id. at 30.
Narco Freedom also contends that in Krikheli, the district
court instructed the jury that “the prosecution had to prove
‘that the remuneration was offered or paid as a quid pro quo in
return for the referring of the patient.’”
461 F. App'x at 10–
11; see also Kats, 871 F.2d at 108 (approving the “the
admonition that the jury could [not] convict unless it found the
27
payment ‘wholly and not incidentally attributable to the
delivery of goods or services’”).
But even assuming Krikheli, an unpublished disposition,
endorsed some heightened standard of proof, the Government has
met it here.
Narco Freedom offers a “quid-pro-quo” to its
patients: they must use Narco Freedom’s drug treatment programs
to live in the Freedom Houses.
2.
There is no doubt that Narco Freedom runs the Freedom
Houses in part to induce Medicaid beneficiaries to enroll in
Narco Fredom’s outpatient programs.
Multiple witnesses—
including Bethea, Deutchman, and DeCicco—testified that Narco
Freedom’s business model for the Freedom Houses is based on the
receipt of Medicaid funds.
See Hr’g Tr. at 314–15, 347, 428–29.
And DeCicco testified that if a Freedom House resident fails to
attend Narco Freedom’s drug treatment programs, the resident
will face eviction.
Hr’g Tr. at 347; see also Gov’t Exs. D, E.
Narco Freedom insists that it provides housing solely to
help its patients remain drug free.
This finds no support in the record.
See Bethea Decl. ¶¶ 10–14.
To move into a Freedom
House, Narco Freedom requires clients enrolled in other
outpatient programs to switch to Narco Freedom for treatment,
regardless of their success in the previous programs.
See Hr’g
Tr. at 168–69; Gov’t Ex. KK (“Dommel Decl.”) ¶¶ 7–9; Gov’t Ex.
28
LL (“Grenngas Decl.”) ¶ 7–10.
This strongly suggests that a
major purpose of the Freedom Houses is to induce Medicaid
beneficiaries to use Narco Freedom’s drug treatment programs.
And by requiring patients to abandon a successful drug treatment
program to live in the Freedom Houses, Narco Freedom has
established a quid-pro-quo relationship with its patients.
3.
Narco Freedom does not dispute that absent an injunction,
it will continue conditioning residence in the Freedom Houses on
participation in Narco Freedom’s treatment programs.
Even after
the resignation of Brand as CEO, Narco Freedom continued to tie
residence in the Freedom Houses on attendance at Narco Freedom’s
outpatient programs.
See O’Connor Decl. ¶¶ 62–64.
And Narco
Freedom refused to change its policy despite having been
requested to do so by the Government.
5.
See Phillips Decl. ¶¶ 3,
Conduct that continues even after it is alleged to be
unlawful makes “the likelihood of future violations, if not
restrained, [] clear.”
British Am. Commodity Options, 560 F.2d
at 142.
Accordingly, the Government has proved by a preponderance
of the evidence that Narco Freedom is committing a violation of
§ 1320a-7b(b)(2)(B).
29
IV.
Because the Government has established an ongoing violation
of § 1320a-7b(b)(2)(B), the balance of hardship tips in the
Government’s favor.
But “[e]ven assuming the balance of
hardship[s] does not tip decidedly in favor of the Government,
the stronger the probability of the Government succeeding on the
merits, the greater its entitlement to preliminary injunctive
relief.”
Fung, 937 F. Supp. at 1199–1200.
Here, the cost to
the public is clear—by offering remuneration in exchange for the
purchase of Medicaid covered services, Narco Freedom promotes
the overuse of federally funded health care services.
Narco Freedom insists that a preliminary injunction would
undermine its treatment model and force it to close the Freedom
Houses.
However, Narco Freedom has failed to offer any
financial information to substantiate this claim.
Bethea
testified—without any supporting documentation—that the
viability of the Freedom Houses depends on conditioning
residence on enrollment in Narco Freedom’s treatment programs.
Hr’g Tr. at 429; see also Bethea Decl. ¶ 19.
Unsupported
assertions are insufficient to prove that a preliminary
injunction risks the closure of the Freedom Houses.
Indeed, the preliminary injunction does not prohibit Narco
Freedom from housing those that enroll in its drug treatment
programs.
Nor does it prohibit Narco Freedom from requiring
30
Freedom House residents to attend some form outpatient treatment
program.
And Narco Freedom offers no evidence to suggest that
unless each and every Freedom House patient attends Narco
Freedom’s programs, the Freedom Houses will become economically
unsustainable. 6
Accordingly, the Court concludes that equitable concerns do
not counsel against the imposition of a preliminary injunction.
V.
Finally, Narco Freedom argues that health care regulation
is traditionally an area regulated by the states. N.Y. State
Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.,
514 U.S. 645, 661 (1995). Therefore, absent clear evidence that
Congress intended to regulate substance abuse providers, Narco
Freedom argues that the Court should presume that § 1320a7b(b)(2)(B) does not apply here.
This argument lacks merit.
Section 1320a-7b “regulates” substance abuse programs by
prohibiting Medicaid providers from offering remuneration to
induce patients to participate in federally funded programs.
In
interpreting the statutory predecessor to § 1320a-7b, the Second
6
The parties dispute whether Narco Freedom could transition
to OASAS-certified housing models, such as community residential
services and supporting living services. Although the
government persuasively argues that a number of Narco Freedom
patients would qualify for such services, it is unclear whether
Narco Freedom has the resources—or the State of New York would
provide the resources—for such services.
31
Circuit Court of Appeals explained that “[we] do not question
the power of Congress to make such behavior criminal, and it has
recently done so with clarity.”
F.2d 912, 917 (2d Cir. 1978).
United States v. Zacher, 586
And Narco Freedom’s
interpretation would render § 1320a-7b meaningless for all cases
involving Medicaid, because it “is the state-level policy
discretion and experimentation that is Medicaid’s hallmark.”
Nat’l Fed'n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2633
(2012) (Ginsburg, J., concurring in part and dissenting in
part).
VI.
Section 1345 affords the Court broad equitable authority.
Specifically, it provides that the Court may “take such other
action, as is warranted to prevent a continuing and substantial
injury to the United States or to any person or class of persons
for whose protection the action is brought.”
§ 1345(b).
And
this section provides the Court with the flexibility and the
power to impose relief necessary to protect the public.
See,
e.g., United States v. Payment Processing Ctr., LLC, 435 F.
Supp. 2d 462, 464–68 (E.D. Pa. 2006); William Savran & Assocs.,
755 F. Supp. at 1182.
Although some of the provisions in the order granting
preliminary relief do not directly “prohibit” an ongoing
violation of § 1320a-7b(b)(2), those paragraphs are necessary to
32
ensure compliance with this Court’s order and protect the
public.
For example, paragraphs eight and nine—which prevent
Narco Freedom from closing the Freedom Houses without advanced
notice—will “prevent a continuing and substantial injury . . .
to any person or class of persons for whose protection the
action is brought.”
§ 1345(b).
For the same reason, paragraphs
twelve and eighteen require the Freedom Houses to be open to
inspection.
Paragraphs nine, ten, and eleven are necessary to
ensure that Freedom House residents receive notice of the
preliminary injunction order.
And paragraphs thirteen,
fourteen, eighteen, nineteen, twenty, and twenty-one guarantee
that Narco Freedom’s compliance is properly monitored.
CONCLUSION
For the reasons explained above, the Government’s motion
for a preliminary injunction is granted.
A separate order with
the terms of the preliminary injunction will follow.
SO ORDERED.
Dated:
New York, New York
April 2, 2015
____________/s/________________
John G. Koeltl
United States District Judge
33
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