UNITED STATES OF AMERICA, ex rel COMPLIN v. NORTH CAROLINA BAPTIST HOSPITAL et al
Filing
103
MEMORANDUM OPINION AND ORDER, signed by JUDGE WILLIAM L. OSTEEN, JR on 2/4/2018. ORDERED that the Magistrate Judge's Recommendation, (Doc. 83 ), is ADOPTED. FURTHER that Plaintiff's objections, (Doc. [[86 ]), are OVERRULED. FURTHER that Defendant NCBH's Motion to Dismiss Plaintiff's Second Amended Complaint, (Doc. 64 ), and Defendant CHS's Motion to Dismiss Plaintiff's Second Amended Complaint, (Doc. 67 ), are GRANTED and that Plaintiffs Second Amended Complaint, (Doc. 62 ), is DISMISSED WITH PREJUDICE.A Judgment dismissing this action will be entered contemporaneously with this Order. (Butler, Carol)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
UNITED STATES OF AMERICA,
ex rel. COMPLIN,
)
)
)
Plaintiff,
)
)
v.
)
)
NORTH CAROLINA BAPTIST HOSPITAL )
and THE CHARLOTTE-MECKLENBURG
)
HOSPITAL AUTHORITY, d/b/a
)
Carolinas Healthcare System,
)
)
Defendants.
)
1:09CV420
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
This matter is before the court for review of the
Memorandum Opinion and Recommendation (the “Recommendation”)
filed on December 28, 2016, by Magistrate Judge L. Patrick Auld,
(Doc. 83), in accordance with 28 U.S.C. § 636(b)(1), Fed. R.
Civ. P. 72(b), and Local Rule 72.1(a). The Recommendation
addressed the motions to dismiss filed by Defendant North
Carolina Baptist Hospital (“NCBH”), (Doc. 64), and Defendant The
Charlotte-Mecklenburg Hospital Authority, doing business as
Carolinas Healthcare System (“CHS”), (Doc. 67). In the
Recommendation, the Magistrate Judge recommended that each
Defendant’s motion to dismiss be granted and that Plaintiff/
Relator’s (“Relator”) Second Amended Complaint, (Doc. 62), be
dismissed with prejudice. Relator objected to the
Recommendation, (Doc. 86); Defendants responded, (Docs. 89, 90),
and Relator replied, (Docs. 101, 102). For the reasons set forth
herein, this court will adopt the Recommendation and will
overrule Relator’s objections to the Recommendation. Relator’s
Second Amended Complaint should be and will be dismissed with
prejudice.
I.
PROCEDURAL HISTORY
Relator initiated this case over nine years ago. On
June 11, 2009, Relator filed under seal his original qui tam
Complaint in this matter, alleging violations of the federal
False Claims Act (“FCA”), 31 U.S.C. § 3279 et seq., by Defendant
NCBH and one of Defendant CHS’s facilities, Carolinas Medical
Center. (Complaint (Doc. 1).) On July 26, 2010, Relator filed
his First Amended Complaint under seal, adding claims under
North Carolina’s FCA, N.C. Gen Stat. § 1-605 et seq. (Amended
Complaint (Doc. 16).) The case remained under seal for several
years following numerous orders issued by Magistrate Judge
Wallace W. Dixon, and then Magistrate Judge Auld, granting
numerous motions by the United States for an extension of time
to decide whether to intervene. (E.g., Docs. 26, 29, 38.) On
August 14, 2015, the United States declined to intervene. (Doc.
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48.) Shortly thereafter, on August 27, 2015, Magistrate Judge
Auld ordered the case unsealed and ordered Relator to serve the
then-operative Complaint on Defendants. (Doc. 49.) Counsel for
Defendants waived service. (Docs. 57, 58.)
On February 4, 2016, Relator filed the Second Amended
Complaint, (Doc. 62), which is the subject of the Magistrate
Judge’s Recommendation. (Relator revealed in the Second Amended
Complaint that Complin, a Delaware general partnership, was the
nominal plaintiff in this case and that Joseph H. Vincoli was
the real plaintiff/relator, (Second Amended Complaint (“Second
Am. Compl.”) (Doc. 62) ¶ 7); this court uses Relator to refer to
Vincoli.) In the Second Amended Complaint, Relator alleged under
Count One that Defendants NCBH and the Charlotte-Mecklenburg
Hospital Authority, d/b/a/ Carolinas Healthcare System (CHS),
violated the federal FCA through a complex Medicare
reimbursement scheme whereby Defendants presented false or
fraudulent claims for payment to the United States that
overstated the cost of health care provided to their own
employees under Defendants’ self-funded health benefit plans.
(See id. ¶¶ 2, 101-06.) Under Counts Two and Three, Relator
brought retaliation claims under the federal (Count Two) and
North Carolina (Count Three) FCAs against Defendant NCBH,
Relator’s former employer. (Id. ¶¶ 8, 107-20.)
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On April 8, 2016, Defendant NCBH moved to dismiss the
Second Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6)
for failure to state a claim. (Doc. 64.) As to Count One, NCBH
argued that: (i) Relator’s claims were barred by a signed
release; (ii) Relator failed to sufficiently allege scienter
under the federal FCA; and (iii) the Second Amended Complaint
failed to meet the heightened pleading requirements of Fed. R.
Civ. P. 9(b). (See Docs. 64-66.) As to Counts Two and Three,
NCBH argued that Relator could not recover for retaliatory
actions by NCBH that allegedly occurred after the termination of
his employment with NCBH and that Relator nevertheless failed to
allege a plausible retaliation claim. (See id.) Defendant CHS
likewise moved to dismiss for failure to state a claim, making
similar arguments as to Count One. (See Docs. 67, 68.) Relator
responded to both motions in a consolidated memorandum, (Doc.
73), and both Defendants replied, (Docs. 76; Doc. 77). Pursuant
to Magistrate Judge Auld’s order, (see Text Order dated July 12,
2016), Relator submitted a consolidated sur-reply, (Doc. 81).
On December 28, 2016, Magistrate Judge Auld issued his
Recommendation, (Doc. 83), in which he recommended that this
court grant Defendants’ motions to dismiss and dismiss the
Second Amended Complaint with prejudice, (id. at 1, 78). The
Magistrate Judge then granted Relator’s motion for an extension
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of time to respond to the Recommendation, (Text Order dated
Jan. 10, 2017), and Relator timely objected on January 18, 2017
(the “Objections”), (Obj. (Doc. 86); Declaration of Charles H.
Rabon, Jr. in Supp. of Obj. (“Rabon Decl.”), Ex. A (Doc. 87-1)).
Both Defendants responded. (Def. NCBH’s Resp. to Pl.’s Obj.
(“NCBH’s Resp.”) (Doc. 89); Def. CHS’s Resp. to Pl.’s Obj.
(“CHS’s Resp.”) (Doc. 90).) By two separate orders on
September 13, 2017, this court (i) permitted Relator to reply to
newly-raised matters in Defendants’ responses, (Doc. 99), and
(ii) denied Relator’s motion to strike the documents attached to
Defendants’ responses or in the alternative for an extension of
time to conduct discovery, (Doc. 100). On September 18, 2017,
Relator replied separately to each Defendant’s response to
Relator’s Objections. (Pl.’s Reply to CHS’s Resp. (Doc. 101);
Pl.’s Reply to NCBH’s Resp. (Doc. 102).)
II.
THE RECOMMENDATION AND RELATOR’S OBJECTIONS
Given the procedural posture of this case, this court will
only summarize the Recommendation and Objections.
A.
The Magistrate Judge’s Recommendation
As an initial matter, in connection with his termination
from NCBH, Relator and NCBH entered into a Settlement and Mutual
Release Agreement effective on either May 28, 2008 or May 30,
2008. (Recommendation (Doc. 83) at 17-18; Declaration of
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Philip J. Mohr in Supp. of NCBH’s Mot. to Dismiss (“Mohr
Decl.”), Ex. 1 (Doc. 65-1).) The Magistrate Judge recommended
that all claims arising before May 30, 2008, be dismissed
pursuant to that settlement agreement. (Recommendation (Doc. 83)
at 17-18.) Relatedly, the Magistrate Judge recommended
dismissing as time-barred Relator’s retaliation claims against
NCBH to the extent Relator seeks recovery from NCBH in
connection with a lawsuit NCBH filed against Relator in January
2011 for allegedly breaching the May 2008 settlement agreement.
(Id. at 18-19; see also Second Am. Compl. (Doc. 62) ¶ 88.)
The Magistrate Judge recommended that this court reject
Defendants’ arguments that Relator failed to identify with
sufficient particularity those individuals who perpetrated the
alleged fraud. (Recommendation (Doc. 83) at 34); see also Fed.
R. Civ. P. 9(b). Similarly, the Magistrate Judge rejected
Defendants’ arguments that, because Relator had no actual and
personal knowledge of the alleged fraud, Relator’s Second
Amended Complaint was not plausible and reliable as required by
Fed. R. Civ. P. 9(b). (Recommendation (Doc. 83) at 36-38 (“[I]n
the absence of an original source requirement . . . neither the
FCA nor Rule 9(b) mandates that a relator possess personal
knowledge of the alleged fraud.”).) Notwithstanding Relator’s
short term of employment at NCBH and the fact that Relator was
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never employed by CHS, Relator knew of the alleged self-dealing
relationship between Defendants and the entity they purportedly
co-own, MedCost Benefit Services, LLC (“MedCost”); he had
reviewed publicly available Medicare cost reports; and he
attached to the Second Amended Complaint a spreadsheet
indicating the particulars of the allegedly fraudulent
submissions – which included the approximate submission dates
and alleged overstatements for numerous claims. (Id. at 34-38;
Second Am. Compl., Ex. A (Doc. 62-1).)
The Magistrate Judge, however, found that Relator failed to
plausibly allege the requisite scienter by Defendants to survive
a motion to dismiss in a FCA case. (Recommendation (Doc. 83) at
53-54.) The Magistrate Judge rejected Relator’s argument that
circumstantial evidence permitted an inference of scienter. (See
id. at 39); see also United States ex rel. Wilson v. Kellogg
Brown & Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (citation
and internal quotation marks omitted) (“[A]n FCA plaintiff . . .
must set forth specific facts that support an inference of
fraud.”). The Magistrate Judge found – on several different and
alternative grounds – that Relator failed to sufficiently allege
Defendants’ knowledge in the FCA context.
First, Relator could not establish scienter by alleging
that the NCBH and CHS officials who certified the Medicare Cost
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Reports (the allegedly false claims) indicated “familiarity with
the laws and regulations regarding the provision of health care
services” when in fact they were either unaware of or recklessly
disregarded the Provider Reimbursement Review Board’s (nonbinding and non-precedential) decision in St. Francis Hosp.
Greenville v. Blue Cross Blue Shield Ass’n/Palmetto Gov’t
Benefits Adm’rs, Case No. 04-1774, 2007 WL 1774634 (P.R.R.B.
Apr. 19, 2007). (Recommendation (Doc. 83) at 41-42.)
Second, the Magistrate Judge declined to infer scienter
from Defendants’ motive and opportunity to defraud the United
States – an argument Relator took from the securities litigation
context and attempted to adapt to the qui tam context. (Id. at
42-43 (citing United States ex rel. K&R Ltd. P’Ship v. Mass.
Hous. Fin. Agency, 456 F. Supp. 2d 46, 62 (D.D.C. 2006), aff’d,
530 F.3d 980 (D.C. Cir. 2008)).)
Third, the Magistrate Judge rejected Relator’s argument
that the complexity of the structure of Defendants’ self-funded
employee benefit plans was itself evidence of an intent to hide
the fraud. (Recommendation (Doc. 83) at 43-44.) The Magistrate
Judge found that MedCost performed legitimate functions in
relation to the benefit plans. (Id. at 44-45.) Further, there
were no allegations that the NCBH and CHS employees who
allegedly falsely certified the Medicare Cost Reports either had
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any involvement in establishing MedCost or were aware that
MedCost might not have been a third-party administrator under
the plans, which was crucial to Relator’s fraud theory. (See id.
at 45.)
Fourth, Relator argued that sophisticated institutions like
Defendants could not have innocently or mistakenly claimed “a
billion dollars in fictitious costs.” (Id. at 46 (quoting Pl.’s
Mem. in Opp’n to Mots. to Dismiss (Doc. 73) at 6); see also
Second Am. Compl. (Doc. 62) ¶ 1.) The Magistrate Judge found
that whether those costs were fictitious was a legal
determination. (Recommendation (Doc. 83) at 46 (certain
citations omitted) (citing United States ex rel. Rostholder v.
Omnicare, Inc., 745 F.3d 694, 700 (4th Cir. 2014)).) Neither the
Magistrate Judge nor this court are bound by Relator’s
characterization of the costs as fictitious. (Recommendation
(Doc. 83) at 47 (citing United States ex rel. Nathan v. Takeda
Pharm. N. Am., Inc., 707 F.3d 451, 455 (4th Cir. 2013)).) The
Magistrate Judge stated that, even assuming arguendo the costs
were fictitious, the court would not infer that Defendants acted
knowingly based on that fact alone because the Medicare rules
were so complex and ambiguous. (See Recommendation (Doc. 83) at
47-48 (“[T]he relevant Medicare rules and regulations do not, by
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themselves, compel an inference that the [defendants] failed to
act ‘innocently’ in claiming the allegedly fictitious costs.”).)
The Magistrate Judge summarized the relevant Centers for
Medicare and Medicaid Services (“CMS”) instructions that specify
what costs hospitals with self-funded employee benefit plans may
claim for reimbursement. (Id. at 49.) He described what costs
those plans with a third-party administrator may claim and what
costs those without a third-party administrator may claim. (Id.)
Hospitals with self-funded plans that do not have a third-party
administrator may claim as allowable costs “the costs the
hospital incurs in providing services under the plan to its
employees and the hospital’s payment to unrelated health care
providers for services rendered . . . .” (Id. (quoting Medicare
Provider Reimbursement Manual (“MPRM”), Part II, § 4005.02, at
40-62).) Relator argued that Defendants’ self-funded plans had
no third-party administrator and that Defendants improperly
claimed amounts paid by MedCost – which was owned by Defendants
and thus not an “unrelated health care provider” – to them for
domestic care claims under the self-funded plans. Whether or not
those payments were proper appears to depend on MedCost’s status
as a third-party administrator. If MedCost was not a third-party
administrator, as Relator argued, then the allowable costs
should have been reduced because MedCost and Defendants are
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related parties. The Magistrate Judge found, however, that CMS
provided no specific criteria to govern how an entity is
qualified or categorized as a third-party administrator.
(Recommendation (Doc. 83) at 49 (citing MPRM Part II, § 4005.02,
at 40-62).) Further, in responding to Relator’s argument that
MedCost was not a true third-party administrator, the Magistrate
Judge noted that, according to a North Carolina Department of
Insurance Third Party Administrator Directory provided by NCBH,
(Mohr Decl. in Supp. of Defs.’ Mot. to Dismiss, Ex. A (Doc 78-1)
at 24), MedCost was a licensed third-party administrator in
North Carolina, (Recommendation (Doc. 83) at 50).
The Magistrate Judge agreed that MedCost was likely a
related party for purposes of the related-party rule. (See id.
at 51.) That rule is applicable to those self-funded plans
without a third-party administrator.1 It specifies that the
“costs applicable to services, facilities, and supplies
furnished” to Defendants by a related party can be reimbursed at
the cost to the related party but that cost must not exceed the
comparable market cost of such services, facilities, or
supplies. (Recommendation (Doc. 83) at 51 (quoting 42 C.F.R.
Relator makes this assertion repeatedly in his Objections
and related memoranda. (See, e.g., Obj. (Doc. 86) at 5 (“The
first prong of Section 4005 requires a hospital without a
[third-party administrator] to observe the related-party
rule.”).)
1
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§ 413.17(a)).) The Magistrate Judge suggested, however, that the
domestic care costs at issue here did not arise from “services,
facilities, [or] supplies” furnished by MedCost. (Recommendation
(Doc. 83) at 51.) The Magistrate Judge also found that certain
CMS guidance relied upon by Relator, i.e., MPRM, Part I,
§§ 332.1 and 2144.4, “lack[ed] clear applicability” to
Defendants’ allowable-cost determinations. (Id. at 51-52.)
Finally, the Magistrate Judge reiterated that, because the
Provider Reimbursement Review Board’s decision in St. Francis
Hospital had “no precedential weight,” even if Defendants’
certifying employees knew of that decision, it would not trump
the relevant Medicare rules and regulations that the Magistrate
Judge found did not compel an inference that Defendants acted
knowingly. (Id. at 52-53.)
All of these factors contributed to the Magistrate Judge’s
finding that the Second Amended Complaint failed to adequately
plead scienter. The Magistrate Judge also found that none of
Relator’s proposed amendments, which Relator requested leave to
file, (see Pl.’s Mem. in Opp’n to Mots. to Dismiss (Doc. 73) at
30), plausibly alleged that Defendants knowingly submitted false
claims to the United States, (Recommendation (Doc. 83) at 57).
As to the retaliation claims, the Magistrate Judge declined
to determine if 31 U.S.C. § 3730(h) and its North Carolina
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analog, N.C. Gen. Stat. § 1-613, applied to the alleged postemployment retaliation here. (Id. at 60.) Even assuming arguendo
that either or both of the statutes applied, Relator failed to
plausibly allege that Defendant NCBH caused the adverse
employment action – which was not even taken by NCBH. (Id.) The
Magistrate Judge credited Defendant NCBH’s argument that Relator
failed to sufficiently allege any link between Relator’s
termination from the North Carolina Department of Public Safety
and NCBH, let alone a link to NCBH’s specific knowledge that
Relator had initiated this qui tam proceeding. (Id. at 62.) The
temporal distance between the protected lawful act and the
allegedly adverse employment event was too great to establish
causation. (See id. (collecting cases).) The Magistrate Judge
found that NCBH became aware of Relator’s qui tam action in June
2011, Relator’s employment status was reclassified in October
2013, and he was terminated in December 2013. (Id. at 63.) The
more than two-year gap between NCBH’s knowledge of Relator’s
lawful act of initiating the qui tam suit and the alleged
retaliatory action suggested no causality between the former and
latter events. (Id. at 63-64.)
The Magistrate Judge similarly found no allegations linking
Representative Donny Lambeth to Relator’s firing. (Id. at 64.)
Assuming arguendo that such allegations existed, Relator did not
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plausibly allege that Representative Lambeth’s actions were
attributable to NCBH generally or to NCBH’s knowledge of this
qui tam action specifically. (Id.) Relator’s proposed amendments
did not cure these deficiencies. (Id. at 66.)
The Magistrate Judge likewise found that any alleged
retaliation connected to Relator’s reports to the North Carolina
State Health Plan of an alleged $1.34 million overpayment to
NCBH by the North Carolina State Health Plan were too temporally
distant to allow the Magistrate Judge to infer causation. (Id.
at 67-68.) Further, because the state of North Carolina
determined in 2011 that it lacked legal recourse against NCBH
regarding the alleged overpayment, Relator’s actions after that
date did not constitute protected activity because those actions
could not reasonably “lead to a viable FCA action” in the
future. (Id. at 69 (quoting Eberhardt v. Integrated Design &
Constr., Inc., 167 F.3d 861, 869 (4th Cir. 1999).)
Finally, the Magistrate Judge reiterated that Relator’s
proposed amendments were futile, found that certain of Relator’s
requests for leave to amend were procedurally unsound, and found
that Relator otherwise failed to satisfy the requirements for
leave to amend. (Recommendation (Doc. 83) at 71-77.)
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B.
Relator’s Objections2
Relator uses a significant portion of his Objections (and
later memoranda) to argue that the Recommendation is
fundamentally flawed because it is based on the Magistrate
Judge’s finding that MedCost was a third-party administrator
under Defendants’ self-funded employee benefit plans and MPRM
§ 4005. (See, e.g., Obj. (Doc. 86) at 1.) Relator argues that
the Magistrate Judge was, and this court is, required to accept
as true Relator’s well-pled allegation that NCBH designated
itself, and not MedCost, as the Plan Administrator. (Id. at
1-2.)
Relator directs the court to a Plan Supervisor
Administrative Services Agreement (“ASA”) between NCBH and
MedCost dated January 1, 2002, which is quoted in the Second
Amended Complaint, (Second Am. Compl. (Doc. 62) ¶ 29 & n.5), and
attached to his Objections, (Rabon Decl., Ex. A (ASA) (Doc.
87-1)). In the ASA, NCBH allegedly designated itself, and not
MedCost, as the Plan Administrator. (Obj. (Doc. 86) at 2.)
MedCost is allegedly designated as the Plan Supervisor in this
agreement. (Id. (citing ASA (Doc. 87-1) §§ 1.01, 2.01, 4.01,
7.01).) Relator argues that the contractual relationship between
This court notes Relator’s renewed request for oral
argument, (Obj. (Doc. 86) at 20 n.13), but finds oral argument
unnecessary for the court’s disposition of this case.
2
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MedCost and Defendants defines the roles of, and relationship
between, the parties, not only for purposes of the self-funded
plans themselves, but also more generally under the Employee
Retirement Income Security Act (ERISA), which governs the selffunded plans. (See id. at 2-3 & n.1.) Relator argues, therefore,
that the Magistrate Judge should not have relied on the North
Carolina Department of Insurance Third Party Administrator
Directory’s classification of MedCost as a third-party
administrator. (Id. at 5.)
Relator argues that the Magistrate Judge’s finding that
MedCost is a third-party administrator was a fundamental error.
(See id. at 4.) If Defendants’ self-funded employee benefit
plans have a third-party administrator, then, under MPRM § 4005,
they are exempt “from the strictures of the related-party rule
[, 42 C.F.R. § 413.17(a)].” (Id.) The related-party rule
“ordinarily requires a hospital [i.e., Defendants] contracting
with a related party [i.e., MedCost (or themselves)] to report
the costs incurred by the related organization rather than the
amounts purportedly charged in the related-party transaction.”
(Id.) According to Relator, because MPRM § 4005 requires
“hospital[s] without a [third-party administrator] to observe
the related-party rule . . . [and] exempts hospitals with a
[third-party administrator] from the related-party rule,” the
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alleged scheme depends on whether MedCost is a third-party
administrator. (See id. at 5.) Relator argues that MedCost is
not a third-party administrator pursuant to the ASA and could
not otherwise be a third-party administrator because, as an
entity co-owned by Defendants, it is not a true third-party.
(See id. at 5; see also Second Am. Compl. ¶ 29 n.5 (“[MedCost]
does not enjoy that degree of independence from oversight,
direction and control that would be required to make it a ‘third
party.’”).) And if Defendants themselves are the plans’
administrators, as the ASA suggests, they of course cannot be
third-party administrators to themselves. (Obj. (Doc. 86) at 5.)
Relator also argues that the Magistrate Judge erred in
finding that the related-party rule is inapplicable to the
relevant transactions. (Id. at 6-7.) This objection is
derivative of Relator’s objection to the Magistrate Judge’s
finding (as Relator sees it) that MedCost was a third-party
administrator. Relator recognizes as much: “While the use of a
[third-party administrator] precludes application of this rule,
MedCost did not serve that function in this case.” (Id. at 7.)
Relator takes issue with the Magistrate Judge’s finding that,
assuming MedCost was a related party (which seems clear), the
related-party rule does not apply here because MedCost did not
provide any “‘services, facilities, [or] supplies’” to the
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hospital, but rather performed only ministerial duties. (Id.
(quoting Recommendation (Doc. 83) at 51).) Relator asserts that
the issue is not whether MedCost was the party providing
services, facilities, or supplies for purposes of the relatedparty rule, but whether the Defendants themselves were, a
question which the Magistrate Judge never analyzed. (Id. at
7-8.)
As to the Magistrate Judge’s finding that Relator did not
plausibly allege scienter, Relator further argues that the
Magistrate Judge incorrectly found that Relator was required to
“allege and prove that the individuals who certified the cost
reports” were involved in establishing MedCost and its
relationship with Defendants and were aware that MedCost failed
to qualify as a third-party administrator. (Id. at 9-10 (citing
United States ex rel. Harrison v. Westinghouse Savannah River
Co., 352 F.3d 908, 918-20 (4th Cir. 2003)).) Relying on
Harrison, Relator argues that the FCA scienter requirement can
be met if any employee knew of facts that made a certification
false. (Obj. (Doc. 86) at 10-11.) As an example, Relator asserts
that, because NCBH President and CEO Len Preslar signed the ASA,
he “therefore knew the facts that made false the hospital’s
certification of its cost reports.” (Id. at 11.) Relator
acknowledges the Magistrate Judge’s correct statement of the law
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that a good faith claimant does not knowingly present a false
claim “where there are legitimate grounds for disagreement over
the scope” of the regulatory provisions. (Id. at 12 (citing
Recommendation (Doc. 83) at 16, 47 n.22, 53).) But Relator
argues that the “knowingly” inquiry is an evidentiary issue that
should not be decided at the motion to dismiss stage. (See Obj.
(Doc. 86) at 12.)
As to the retaliation findings, Relator argues that from
June 2011 to August 2013, he could only be fired for good cause
and his position could not be reclassified. (Id. at 18.) In
August 2013, North Carolina enacted legislation that allegedly
removed those barriers to Relator’s termination. (See id. at
18-19.) Therefore, Relator argues that the relevant period for
the causation analysis is only the two-month window from August
2013 to October 2013. (See id. at 19.)
Finally, Relator suggests that the Magistrate Judge
improperly viewed the United States’ non-intervention in this
case as “implying that CMS did not believe the related-party
issue was meritorious.” (Id. at 14-15.) And Relator takes issue
with the Magistrate Judge’s suggestion that Relator filed the
Second Amended Complaint in bad faith. (Id. at 16.)
Defendant NCBH responds to Relator’s Objections by arguing
that Relator’s interpretation of the ASA, and specifically
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Relator’s assertion that the self-funded plan has no third-party
administrator because NCBH is identified in the ASA as the
plan’s “administrator,” is contradicted by other documents
related to NCBH’s self-funded employee benefits plan. (NCBH’s
Resp. (Doc. 89) at 1.) Specifically, NCBH argues that the
General Plan Information sheets of the Summary Plan Description
(“SPD”) documents, which both NCBH and CHS attached to their
responses, identify MedCost as the third-party administrator.
(Id. at 7-9; Declaration of Philip J. Mohr & Ex. A (“NCBH
SPDs”), (Doc. 89-1); CHS’s Resp., Declaration of Philip J. Mohr
& Ex. A (“CHS SPDs”), (Doc. 90-1).) Further, NCBH argues that
Relator “confuses the term ‘administrator’ under ERISA with the
term ‘third party administrator’ under Medicare. (NCBH’s Resp.
(Doc. 89) at 6 (citation omitted).) NCBH asserts that the SPDs
identify NCBH as the Plan Administrator for ERISA purposes and
MedCost as the Third-Party Administrator. (Id. at 8; NCBH SPDs
(Doc. 89-1).) NCBH argues, therefore, that MedCost was in fact
the third-party administrator, (NCBH’s Resp. (Doc. 89) at 9),
that recipients of the plan’s summary description documents
would have known that, (id.), and most importantly, that Relator
did not allege that NCBH knew that it had not employed
(according to Relator) a third-party administrator, (id. at 1415). NCBH asserts that the ASA itself supports those contentions
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because it provides that the Plan Supervisor, i.e., MedCost,
“shall use the care and reasonable diligence of similarly
situated third party administrators in accordance with industry
standards and in the exercise of its powers and performance of
its duties hereunder.” (Id. at 9 (quoting ASA § 7.04).)
NCBH also responds to Relator’s objection to the Magistrate
Judge’s suggestion that the related-party rule did not otherwise
apply because MedCost did not provide “services, facilities,
[or] supplies” to NCBH. See 42 C.F.R. § 413.17(a). NCBH argues
that Relator’s interpretation – i.e., MedCost was not a thirdparty administrator and therefore NCBH was a related-party to
itself under the rule – has little support in precedential case
law or CMS guidance and cannot “form the foundation of an
objective falsehood,” as required to state an FCA claim. (See
NCBH’s Resp. (Doc. 89) at 11.)
Regarding retaliation, NCBH responds that Relator’s
argument that he could not be fired from June 2011 through
August 2013 requires the court to find that NCBH was “lying in
wait” for two years until NCBH “could flex its political muscle
and have him fired.” (Id. at 17.) NCBH argues that Relator
alleged no facts to support this new theory, and that it is
implausible. (Id.)
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CHS makes nearly identical arguments as NCBH in response to
Relator’s Objections. (See CHS’s Resp. (Doc. 90).) CHS
highlights the additional fact that Relator’s Objections focus
on NCBH identifying itself as an administrator in the ASA, which
is an agreement between NCBH and MedCost. (Id. at 2, 5.) CHS is
not a party to that ASA, and Relator neither connects CHS to
that ASA nor establishes any similarity between NCBH’s ASA and
one that CHS might have entered into with MedCost. (Id.)
After this court granted Relator leave to file a ten-page
reply to newly-raised matters in Defendants’ responses to
Relator’s Objection, (see Doc. 99), Relator replied separately
to each Defendant’s response, (Pl.’s Reply to CHS’s Resp. (Doc.
101); Pl.’s Reply to NCBH’s Resp. (Doc. 102)).
In reply to NCBH, Relator states that he is tendering
through a contemporaneous declaration an entire version of one
of the SPDs (excerpts of which NCBH and CHS attached to their
responses). (Pl.’s Reply to NCBH’s Resp. (Doc. 102) at 1.)
Relator argues that the document creates a genuine issue of
material fact as to whether MedCost served as a third-party
administrator. (Id.) It appears to the court that Relator filed
the referenced declaration and full SPD in support of Relator’s
motion to strike. (See Declaration of Charles H. Rabon, Jr., in
Supp. of Mot. to Strike, Ex. 1 (Doc. 94-1).) Nevertheless,
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Relator asserts that, while MedCost is designated as a ThirdParty Administrator and Claims Administrator on the one-page
sheets provided by Defendants, MedCost is only designated as a
“non-fiduciary Claims Administrator” in the remainder of the
SPD. (Pl.’s Reply to NCBH’s Resp. (Doc. 102) at 2.)
Relator also contends that the complete SPD and the ASA are
not the full universe of documents relevant to the issue of
MedCost’s status as a third-party administrator. (Id.) Relator
asserts that there is a “formal Plan document” as well, which he
does not have access to because discovery has not commenced in
this case. (Id.) Relator claims that the formal plan document,
not the SPD, controls as to the role of the Plan Sponsor,
Administrator, and other fiduciaries. (Id.) Relator asserts that
the ASA, however, controls as to the legal relationship between
the parties. (Id. at 2-4.) Relator asks the court to conclude
from the fact that Defendants did not attach copies of the full
plan documents to any of their memoranda that the full plan
documents do not name MedCost as a third-party administrator.
(Id. at 3.)
Even if the controlling plan documents appointed MedCost as
a third-party administrator, Relator argues, that appointment
alone would not be sufficient to make MedCost an administrator
because, under ERISA, administrators must meet the functional
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test for a fiduciary. (Id. at 5-6.) MedCost cannot do that
because it only performs ministerial duties. (Id. at 6.) Relator
spends the remainder of his reply to NCBH differentiating among
various roles, e.g., plan supervisor, plan administrator, thirdparty administrator, under ERISA and Medicare and reiterating
why MedCost is not a third-party administrator of Defendants’
self-funded plans. (Id. at 7-9.)
In reply to CHS, Relator argues that he was not required to
allege that any (hypothetical) administrative services agreement
between MedCost and CHS is identical to the ASA between MedCost
and NCBH. (Pl.’s Reply to CHS’s Resp. (Doc. 101) at 3.) He asks
this court to presume that any administrative services agreement
existing between MedCost and CHS is substantively the same as
the ASA between MedCost and NCBH because, if it was not, CHS
would have provided the agreement to the court. (Id. at 2.)
Relator also argues that he did not rely on the ASA “to request
a summary judgment,” so he therefore “objects to CHS’s attempt
to convert the pending motion to dismiss into a motion for
summary judgment by attaching [the one-page sheets from the
SPDs] prior to discovery, that are not referred to or
necessarily central to the SAC.” (Id.)
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III. STANDARD OF REVIEW
This court makes a de novo determination of those portions
of the Magistrate Judge’s Recommendation to which the parties
have specifically objected. 28 U.S.C. § 636(b)(1); Fed. R. Civ.
P. 72(b). “[T]he court may accept, reject, or modify, in whole
or in part,” the Magistrate Judge’s Recommendation, “or recommit
the matter to the [M]agistrate [J]udge with instructions.” 28
U.S.C. § 636(b)(1). This court applies a clearly erroneous
standard to those findings by the Magistrate Judge to which the
parties have not specifically objected. Diamond v. Colonial Life
& Accident Ins. Co., 416 F.3d 310, 315 (4th Cir. 2005) (citing
Fed. R. Civ. P. 72 advisory committee’s note to 1983 addition).
IV.
ANALYSIS
This court has reviewed those portions of the Magistrate
Judge’s Recommendation to which Relator objected. The court has
made a de novo determination that is in accord with the
Magistrate Judge’s Recommendation (including those findings not
summarized herein), subject to the discussion below. This court
finds no clear error in those portions of the Recommendation to
which Relator did not object. This court therefore adopts the
Magistrate Judge’s recommendation, and Relator’s Second Amended
Complaint will be dismissed with prejudice.
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Relator’s main objection is that “the entire
[Recommendation] is tainted by the Magistrate’s legally and
factually mistaken conclusion on the [third-party administrator]
issue.” (Obj. (Doc. 86) at 20.) This court is not convinced that
the Magistrate Judge “concluded that MedCost was a third-party
administrator for the Defendants’ employee benefit plans,” as
Relator argues. (Id. at 2 (emphasis added).) What the Magistrate
Judge concluded was that MedCost’s status as a third-party
administrator in its relationship with Defendants was
sufficiently ambiguous to preclude a finding that Relator
plausibly alleged that Defendants acted with the requisite
scienter. (See Recommendation (Doc. 83) at 48-50, 53-54.)
Because Relator’s fraud theory depends on MedCost’s status as a
third-party administrator, Relator needed to plausibly allege
that Defendants acted knowingly, which in the FCA context here
means actual knowledge that MedCost was not a third-party
administrator or deliberate ignorance or reckless disregard of
the truth of that information. See 31 U.S.C. §§ 3729(a)(1) and
(b)(1). The Magistrate Judge merely emphasized that the CMS
guidance to which Defendants’ employees could have
hypothetically looked to determine whether MedCost was a thirdparty administrator for purposes of allowable costs did not
clearly prohibit the costs as claimed. (See Recommendation (Doc.
- 26 -
83) at 50 (“[N]othing in the relevant CMS guidance indicates
that the [Defendants] lacked authorization to claim as allowable
costs the amounts that MedCost paid [them] . . . .”).) The North
Carolina Department of Insurance Third Party Administrator
Directory’s listing of MedCost as a licensed third-party
administrator in North Carolina further defeated an inference of
scienter, but it was not a finding that MedCost was in fact a
third-party administrator under Defendants’ plans. (See id. at
45-46 (finding that the Second Amended Complaint’s failure to
suggest that the certifying employees “bore any awareness” that
MedCost was not a third-party administrator “holds particular
significance given that the North Carolina Department of
Insurance identifies MedCost as a licensed ‘Third Party
Administrator’”).) Contrary to Relator’s assertion, the
Magistrate Judge did not “simply disbelieve[],” (Obj. (Doc. 86)
at 6), Relator’s allegations that Defendants’ self-funded
employee benefits plans did not have a third-party
administrator.
In support of his Objections, Relator submitted the ASA
between NCBH and MedCost. (ASA (Doc. 87-1).) Relator’s counsel,
Mr. Rabon, states in his declaration: “This is an agreement
referenced in the Second Amended Complaint in various places
including, inter alia, at paragraph 29 and following, and in
- 27 -
footnote 5 at page 14.” (Rabon Decl. (Doc. 87) ¶ 3.) The Second
Amended Complaint does not explicitly identify the ASA but does
so implicitly. (See, e.g., Second Am. Compl. (Doc. 62) ¶ 29 n.5
(“Despite loose language used by the Hospital Defendants, the
Relator and others referring to MedCost as a ‘TPA,’
contractually it is not a ‘third party administrator’ under its
agreements with the Hospital Defendants; it was intentionally
relegated to the lower status of a ‘plan supervisor’ with
ministerial duties only . . . .”). Defendants do not challenge
the authenticity of this document or Relator’s assertion that
the ASA qualifies as “an agreement referenced in the Second
Amended Complaint.”3 (Rabon Decl. (Doc. 87) ¶ 3; see NCBH’s Resp.
(Doc. 89) at 2, 9; CHS’s Resp. (Doc. 90) at 2, 5.) Defendants
tendered in response the SPD excerpts. (NCBH SPDs (Doc. 89-1);
CHS SPDs (Doc. 90-1).) Relator now argues to this court that he
“has not yet relied upon the ASA or any other document to
request a summary judgment and objects to CHS’s attempt to
convert the pending motion to dismiss into a motion for summary
judgment by attaching” the SPD excerpts. (Pl.’s Reply to CHS’s
Resp. (Doc. 101) at 2.)
CHS does challenge the relevance of NCBH’s ASA to CHS.
(See CHS’s Resp. (Doc. 90) at 5.)
3
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As should have been evident from this court’s orders
granting Relator’s motion to file a reply in support of his
Objection, (Doc. 99), and denying Relator’s motion to strike,
(Doc. 100), this court generally considers new evidence when
parties object to a magistrate judge’s recommendation. This
court is explicitly authorized to receive new evidence as part
of its de novo review of a recommendation. See 28 U.S.C.
§ 636(b)(1) (“The judge may also receive further
evidence . . . .”); Fed. R. Civ. P. 72(b)(3) (“The district
judge may . . . receive further evidence . . . .”); see also 12
Charles Alan Wright et al., Federal Practice and Procedure
§ 3070.2 (2d ed. 2018) (“The statute and the rule both confirm,
further, that the district judge is completely free to
supplement the record developed by the magistrate judge with
further evidence . . . .”).
The ASAs, SPDs, and the parties’ comprehensive memoranda
further support the Magistrate Judge’s finding that Relator
failed to plausibly allege that Defendants knowingly submitted
false claims. As Defendants note, the ASA indicates that MedCost
functions as a third-party administrator under the relevant
health care plan, undermining any inference of scienter. (See
ASA (Doc. 87-1) § 7.04 (“The Plan Supervisor [i.e., MedCost]
shall use the care and reasonable diligence expected of
- 29 -
similarly situated third party administrators in accordance with
industry standards in the exercise of its powers and performance
of its duties hereunder.”).) The one-page General Plan
Information sheets explicitly designate MedCost as the ThirdParty Administrator. (E.g., NCBH SPDs (Doc. 89-1) at 20, 28.)
The entire SPD tendered by Relator in support of his motion
to strike, (Rabon Decl., Ex. 1 (Doc. 94-1)), does create a
scintilla of doubt as to whether MedCost was truly a third-party
administrator or a “non-fiduciary Claims Administrator.” (Pl.’s
Reply to NCBH’s Resp. (Doc. 102) at 2.) But that scintilla of
doubt does not carry the day for Relator due to the extent of
the shortcomings in his scienter allegations. Neither Relator’s
argument that, because Defendants did not tender to the court
the full plan documents, those documents must not identify
MedCost as a third-party administrator, (id. at 3), nor
Relator’s assertion that, because NCBH President and CEO Len
Preslar signed the ASA, he knew the certifications were false,
(Obj. (Doc. 86) at 11), sway this court in determining that
Relator failed to sufficiently allege scienter. This court need
not accept as true such conclusory and unsupported allegations.
See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation and
quotation marks omitted) (reiterating the insufficiency of naked
assertions devoid of further factual enhancement); Takeda
- 30 -
Pharm., 707 F.3d at 455 (citation and internal quotation marks
omitted) (“[A]lthough we must view the facts alleged in the
light most favorable to the plaintiff, we will not accept . . .
unwarranted inferences, unreasonable conclusions, or
arguments.”).
Relator asserts in a derivative argument that the
Magistrate Judge erred in holding that the Medicare rules are
inapplicable, (see Obj. (Doc. 86) at 6-7); he again
misinterprets the Recommendation. The Magistrate Judge found
that the plain language of the related-party rule, 42 C.F.R.
§ 413.17(a), “suggests its inapplicability to the pertinent
transactions.” (Recommendation (Doc. 83) at 51 (emphasis added);
see also id. at 52 (emphasis added) (“[MPRM, Part I, §§] 332.1
and 2144.4 lack clear applicability to the determination of the
[Defendants’] allowable domestic care costs.”).) The Magistrate
Judge analyzed the Medicare rules and found that Relator did not
allege that Defendants acted with the requisite scienter because
the ambiguity of the rules’ application to the object
transactions did not compel an inference that Defendants acted
with knowledge, deliberate ignorance, or reckless disregard.
(Recommendation (Doc. 83) at 47-48); see 31 U.S.C. § 3729(b)(1).
To the extent that the Recommendation finds that MedCost
was in fact the third-party administrator or that, if MedCost
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was not, the related-party rule did not apply to any of the
transactions at issue, this court does not adopt these specific
findings.4 However, the lack of clarity on both of those
questions (and the applicability of the relevant Medicare rules
generally) easily convinces this court to adopt the
Recommendation’s finding that Relator insufficiently pled
scienter.
The parties spend much of their post-Recommendation briefs
attempting to litigate whether MedCost was the third-party
administrator to Defendants’ self-funded employee benefit plans.
It appears to this court that a negative answer to that question
is a necessary component of Relator’s fraud theory. But even
assuming arguendo that this court was persuaded that MedCost was
in fact not acting as a third-party administrator, that fact
alone is not sufficient to plausibly allege scienter in the FCA
context. The FCA scienter requirement is rigorous. Universal
Health Servs., Inc. v. United States, 579 U.S. ____, ____, 136
S. Ct. 1989, 2002 (2016). It requires actual knowledge of the
information or deliberate ignorance or reckless disregard of the
truth or falsity of the information. 31 U.S.C. § 3729(b)(1). It
was Relator’s burden to plausibly allege such scienter. See
This court also does not find independently one way or the
other on those issues.
4
- 32 -
Wilson, 525 F.3d at 379. After reviewing the Recommendation,
this court has made a de novo determination that Relator did not
plausibly allege Defendants’ scienter.
As to the retaliation claims, this court finds Relator’s
argument that Defendant NCBH waited two years to fire him
implausible. Further, Relator argues in the Objections that an
August 2013 statutory amendment enabled the October 2013
reclassification of his position as managerial exempt and led to
his December 2013 termination by eliminating his right to a
contested hearing to challenge his exempt designation. (See Obj.
(Doc. 86) at 18-19 (citing Vincoli v. State, ____ N.C. ____,
____, 792 S.E.2d 813, 815 (N.C. Ct. App. 2016)).) The court
notes that, notwithstanding this statutory amendment, Relator
apparently retained the right to a contested hearing to
challenge the exempt designation. See Vincoli, 792 S.E.2d at
818-19 (“[T]he plain language of N.C. Gen. Stat. § 126–5(h)
provides Vincoli with a statutory right to a hearing before [the
Office of Administrative Hearings] as to whether he is subject
to the Act, which would implicate addressing whether his exempt
designation was proper.”). The court has reviewed Relator’s
objections to the retaliation findings in the Recommendation and
made a de novo determination that accords with the
Recommendation.
- 33 -
Additionally, while the Fourth Circuit has not addressed
the issue, it appears clear to this court from the current case
law that 31 U.S.C. § 3780(h) does not contemplate a remedy for
post-termination retaliation. See, e.g., Potts v. Ctr. for
Excellence in Higher Educ., Inc., 244 F. Supp. 3d 1138, 1143
(D. Colo. 2017), aff'd, 908 F.3d 610 (10th Cir. 2018) (“[T]he
only reasonable interpretation is that the FCA's antiretaliation provision covers current employees to the exclusion
of former employees.”); Fitzsimmons v. Cardiology Assocs. of
Fredericksburg, Ltd., Civil Action No. 3:15CV72, 2015 WL
4937461, at *7 (E.D. Va. Aug. 18, 2015) (collecting cases) (“The
vast majority of courts to have considered [whether 31 U.S.C.
§ 3730(h) provides a remedy for post-termination retaliation]
have found, most even at the motion to dismiss stage, that
§ 3730(h) provides no remedy for [post-termination] retaliation
. . . .”); United States ex rel. Head v. Kane Co., 798 F. Supp.
2d 186, 208 (D.D.C. 2011) (“The plain language . . . clearly
establishes that Section 3730(h) applies only to the employment
context and, therefore, cannot extend to claims for retaliatory
action occurring solely after a plaintiff has been terminated
from his job.”).
This court has also reviewed Relator’s commentary as to the
Magistrate Judge “noting” the United States’ non-intervention in
- 34 -
the Recommendation. (Obj. (Doc. 86) at 14.) The Magistrate Judge
drew no improper inference from that non-intervention. Further,
the Magistrate Judge did not “conclu[de] that the SAC was filed
in bad faith,” (id. at 16); rather, the Magistrate Judge merely
noted – as one of several grounds to deny leave to amend – that
Relator’s current request for leave to amend suggested bad
faith, (see Recommendation (Doc. 83) at 74).
IT IS THEREFORE ORDERED that the Magistrate Judge’s
Recommendation, (Doc. 83), is ADOPTED.
It IS FURTHER ORDERED that Plaintiff’s objections, (Doc.
86), are OVERRULED.
IT IS FURTHER ORDERED that Defendant NCBH’s Motion to
Dismiss Plaintiff’s Second Amended Complaint, (Doc. 64), and
Defendant CHS’s Motion to Dismiss Plaintiff’s Second Amended
Complaint, (Doc. 67), are GRANTED and that Plaintiff’s Second
Amended Complaint, (Doc. 62), is DISMISSED WITH PREJUDICE.
A Judgment dismissing this action will be entered
contemporaneously with this Order.
This the 4th day of February, 2019.
____________________________________
United States District Judge
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