Opinion
Civil No. 98-1261 (RHK/SRN), Civil No. 99-1207 (RHK/SRN)
October 7, 2002
D. Gerald Wilhelm, Assistant United States Attorney, Minneapolis, Minnesota, for the United States.
Jonathan M. Bye, Lindquist Vennum, P.L.L.P., Minneapolis, Minnesota, for Defendants Best Care Home Health, Inc., and Nazneen Khatoon.
MEMORANDUM OPINION AND ORDER
Introduction
In 1998 and 1999, two separate individuals commenced the above-captioned related actions under the qui tam provisions of the False Claims Act against (1) Best Care Home Health, Inc. ("Best Care"), a Twin Cities-based entity providing home health care services; (2) Nazneen Khatoon, a shareholder in and agent of Best Care; (3) Grand Rapids Senior Care of Grand Rapids, Inc. ("GRSC"), a Minnesota corporation providing home health services and operating under the business name "Great River Care" ("GRC"); (4) Terrance Selb, a registered agent for and officer of GRSC; and (5) DeLyte and Carl Specht, residents of Minnesota who have provided home health services under the business name "Golden Heart Home Health Care" ("Golden Heart"). The United States elected to intervene in the cases on March 15, 2001, and served its complaints on the defendants in February, 2002. Those complaints are hereinafter referred to as "the operative complaints."
Presently before the Court are several motions. In lieu of an answer, Defendants Best Care and Khatoon have moved, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the complaints to the extent they are based on allegations that GRSC and GRC were uncertified sub-units of Best Care. Best Care and Khatoon's motions for partial dismissal target specific paragraphs in the operative complaints that describe one of six categories of alleged false claims. In the wake of Best Care and Khatoon's motions to dismiss, the United States has moved to amend the operative complaints. Best Care and Khatoon oppose these amendments on the grounds that the proposed amendments are futile and that, given the history of events involving the United States and Best Care prior to this litigation, the United States deserves no further chances to amend. In support of their resistance to the motions to amend, Best Care and Khatoon have filed a declaration from Khatoon presenting numerous facts beyond the four corners of the proposed amended complaints. The United States moves to strike the Khatoon Declaration.
Background I. "The Operative Complaints"
The complaints filed by the United States in these actions relate to claims that Best Care submitted for payment to Medicare and Medicaid for home health care services. The Government alleges that six categories of claims did not qualify for reimbursement under Medicare or Medicaid:
Best Care Manor House Claims Period (Branch Office/Sub-unit Claims)
Best Care at Manor House Claims Period (Claims Non-reimbursable for other reasons)
Golden Heart Manor House Claims Period
Best Care Copperfield Hills Claims Period
Golden Heart at Copperfield Hills
Best Care Medicaid Fraud (PCA Services)
After describing these six categories of Medicare/ Medicaid claims, each operative complaint asserts thirty causes of action, including counts for violations of the False Claims Act, unjust enrichment, payment by mistake, and common law recoupment. Best Care and Khatoon's motions for partial dismissal involve allegations pertaining to only the first category of claims, the "Best Care Manor House Claims Period (Branch Office/ Sub-Unit Claims)," described below.
II. The Factual Allegations at Issue
Between January 1, 1996 and October 31, 1997, GRSC and GRC provided home health services (or caused them to be provided) to residents of Manor House, an assisted living facility in Grand Rapids, Minnesota. (Bernard Third Am. Compl. ¶¶ 22, 24(d) (e)). GRSC and GRC provided such services pursuant to one or more agreements entered into between Best Care and GRSC and GRC. (Id. ¶¶ 17, 23, 24(d).) For its part, Best Care, by and through Khatoon, agreed to bill Medicare and Medicaid for the home health services that GRSC and GRC provided (or caused to be provided) to Manor House residents, and agreed to divide the reimbursement received for the services with Selb. (Id. ¶¶ 18, 23.) Grand Rapids is more than two hundred miles from Robbinsdale, where Best Care has its home office, and Best Care did not customarily provide home health services in the Grand Rapids area. (Id. ¶ 24(f) (g).)
All citations to the operative complaints in the above-captioned matter are taken from the "Third Amended Complaint" in U.S. ex rel. Bernard v. Best Care Home Health Inc., Civ. No. 99-1207 (RHK/SRN). The Court has compared the operative complaints in the two above-captioned actions and concludes that they are, in all material respects, identical.
The Government alleges that the home health services GRSC and GRC provided to Manor House residents were not eligible for Medicare reimbursement because those services did not conform to applicable federal regulations. (Id. ¶ 24.) The controversy concerning the Manor House claims pertains to the ability of a home health services provider that is certified by Medicare and has a Medicare provider number (in this case, Best Care (see id. ¶ 20)), to have certain services provided to Medicare beneficiaries "under arrangement" with a second home health services provider that is not certified by Medicare and has no Medicare provider number (in this case, GRSC and GRC (id. ¶ 24(i)). The operative complaints reference regulations that apply to the provision of home health services "under arrangement" (id. ¶ 24(a)) and by "branch offices" and "sub-units" (see id. ¶¶ 24(b) (c) (citing 42 C.F.R. § 484.2)).
The provision cited at paragraph 24(a) is 42 U.S.C. § 442.14. This appears to be a typographical error, the correct citation being 42 U.S.C. § 484.14. Section 442.14 of the regulations promulgated by the Centers for Medicare and Medicaid Sevices ("CMS") addresses the effect of a change in ownership on the criteria for payments to nursing care facilities and intermediate care facilities for the mentally retarded.
The United States alleges that, due to the large distance between Best Care's home office in Robbinsdale and Manor House in Grand Rapids, "Best Care could not and did not share administration and supervision on a daily basis with GRSC and GRSC d/b/a GRC in providing home health care services at Manor House" between January 1, 1996 and October 31, 1997. (Id. ¶ 24(h).) The United States further alleges that GRSC and GRC were "uncertified sub-units" of Best Care (as opposed to branch offices), and that the claims submitted under Best Care's provider number for the home health services GRSC and GRC provided were not properly reimbursable. (Id. ¶¶ 24(j) (k).)
III. The Relevant Factual Allegations of the Proposed Amended Complaint
In response to Best Care and Khatoon's motions for partial dismissal, the United States moves to amend the operative complaints by modifying the allegations pertaining to the "Best Care Manor House Claims Period." The proposed amendments represent a definite shift in the United States' theory as to why home health services provided by GRSC and GRC to Manor House residents between January 1, 1996 and October 31, 1997 were not reimbursable.
Gone from the proposed amended complaints are references to "branch offices," "sub-units," and 42 C.F.R. § 484.2. Instead, the United States asserts that home health services provided by a home health agency that does not have a Medicare provider number (here, GRSC and GRC) "under arrangement" with an agency that does have a provider number (Best Care) are eligible for Medicare reimbursement only if the agency having the Medicare provider number (Best Care) furnishes at least one "qualifying service" directly through its own employees. (Proposed Am. Compl. ¶ 24(b) (citing 42 U.S.C. § 484.14(a)).) The United States complains that Best Care did not provide any of the qualifying services directly (see id. ¶ 24(f)) and, furthermore, failed to supervise the administration of qualifying services that GRSC and GRC provided, as required by law (id. ¶ 24(g) (citing 42 C.F.R. § 484.14(f))).
The United States specifically alleges that GRSC and GRC agreed to put one of its employees — a registered nurse — on Best Care's payroll so that it would appear that a Best Care employee was providing at least one qualifying service for Manor House residents. (Id. ¶ 24(c) (d).) GRSC and GRC allegedly reimbursed Best Care for that nurse's salary, however, so that the nurse remained "in truth and in fact" an employee of GRSC and GRC. (Id. ¶ 24(c) (e).) Therefore, the United States contends, Best Care failed to provide a "qualifying service" to the Manor House residents. (Id. ¶ 24(f).)
Analysis I. The United States' Motion to Strike Khatoon's Declaration
In opposing the United States' motions to amend the operative complaints, Best Care and Khatoon submitted the Declaration of Nazneen Khatoon. The United States objects to the Court's consideration of the Khatoon Declaration in connection with the pending Rule 12(b)(6) motions. It further objects to the Court's consideration of the Khatoon Declaration with respect to the motions to amend.
To deny a plaintiff leave to amend under Rule 15(a) based on the futility of the proposed amendment, a district court must find that the amended complaint fails to state a claim upon which relief can be granted. United States ex rel. Gaudineer Comito, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001), cert. denied, 122 S.Ct. 2593 (2002). Thus, the proposed amended complaint is examined using the same standard applied for motions to dismiss under Rule 12(b)(6). Generally, Rule 12(b)(6) does not allow the consideration of matters outside the pleadings when assessing the legal sufficiency of the complaint: "If, on a motion . . . to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56 . . . ." Fed.R.Civ.P. 12(b)(6).
The Court concludes that it is appropriate to exclude the Khatoon Declaration from consideration of the Defendants' motions for partial dismissal. As for the United States' motions to amend, Best Care and Khatoon have provided no authority under the Federal Rules of Civil Procedure for converting a "futility" analysis under Rule 15 into a consideration of whether a genuine issue of material fact exists under Rule 56. At this stage of the proceedings, the appropriate scope of the inquiry is whether any set of facts consistent with the facts alleged in the proposed amended complaints would entitle the United States to relief. The Court will not consider the Khatoon Declaration in connection with the Defendants' arguments based on futility.
To the extent Best Care and Khatoon contend that the Court should deny the United States' motions to amend due to the Government's past conduct vis-a-vis Best Care, the Declaration and its attachments document proceedings before the Provider Reimbursement Review Board ("PRRB") involving HCFA's allegations that Medicare had overpaid Best Care during the fiscal year ending December 31, 1997. The Court determines that it is appropriate to consider those facts in determining whether it would be unduly prejudicial to the Defendants to permit the United States to amend. Accordingly, the Court will deny the United States' motions to strike the Declaration of Nazneen Khatoon.
II. The Motions to Amend the Operative Complaints
The United States moves to amend pursuant to Rule 15(a) of the Federal Rules of Civil Procedure, which provides in pertinent part:
A party may amend the party's pleading once as a matter of course at any time before a responsive pleading is served . . . . Otherwise, a party may amend the party's pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires.
Fed.R.Civ.P. 15(a). The United States served the operative complaints in February, 2002. Defendant Selb filed an Answer on June 20, 2002, denying the allegations of the operative complaints and raising affirmative defenses. Defendants Best Care and Khatoon filed the pending motions to dismiss on July 19, 2002. The Spechts, appearing pro se, filed a letter-answer on July 30, 2002, denying the allegations against them. On July 31, 2002, the Court entered a pretrial scheduling order that set a deadline for amending the complaints of December 31, 2002. (July 31, 2002 Scheduling Order (Doc. No. 42 in Civ. No. 98-1261 and Doc. No. 36 in Civ. No. 99-1207).)
Given the procedural posture of the above-captioned cases, the United States cannot amend its pleadings as a matter of course; it must obtain leave of the Court. Although a spirit favoring amendment underlies the intent and judicial construction of Rule 15(a), see generally Moore's Federal Practice, § 15.14[1] at 15-26 (3d ed. 2001), "denial of leave to amend may be justified by `undue delay, bad faith on the part of the moving party, futility of the amendment or unfair prejudice to the opposing party.'" United States ex rel. Gaudineer Comito, 269 F.3d at 936 (quoting Sanders v. Clemco Indus., 823 F.2d 214, 216 (8th Cir. 1987)). Best Care and Khatoon oppose the United States' motions on two grounds. First, they contend that the proposed amendments are futile. Second, they argue that the United States has had an adequate opportunity to identify the laws and regulations Best Care allegedly violated. Further they assert that, having failed to do so to date, they should not be permitted to amend.
The Court considers each argument in turn.
A. The Proposed Amendments Would Be Futile
Defendants Best Care and Khatoon argue that the proposed amended allegations regarding services provided to Manor House residents cannot state a claim upon which relief can be granted because Best Care's arrangement with GRSC and GRC complied with the requirements for providing services "under arrangement." They contend that the question of whether a home health agency ("HHA") meets the "Conditions of Participation" found at § 484.14 of the regulations and which are set out for purposes of Medicare certification, is separate and distinct from whether the services provided to a particular patient or at a particular location are reimbursable.
The Court disagrees. Section 409.41 of the Medicare regulations provides that, for home health services to qualify for payment under the Medicare program, all of the following requirements must be met.
(a) The services must be furnished to an eligible beneficiary by, or under arrangements with, an HHA that —
(1) Meets the conditions of participation for HHAs at part 484 of this chapter; and
(2) Has in effect a Medicare provider agreement as described in part 489, subparts A, B, C, D, and E of this chapter.
(b) The physician certification and recertification requirements for home health services described in § 424.22.
(c) All requirements contained in §§ 409.42 through 409.47.
42 C.F.R. § 409.41. Among the "conditions of participation for HHAs at part 484" are the following:
Organization, services furnished, administrative control, and lines of authority for the delegation of responsibility down to the patient care level are clearly set forth in writing and are readily identifiable. Administrative and supervisory functions are not delegated to another agency or organization and all services not furnished directly, including services provided through sub-units, are monitored and controlled by the parent agency. . . .
(a) Standard: Services furnished. Part time or intermittent skilled nursing services and at least one other therapeutic service (physical, speech, or occupational therapy; medical social services; or home health aide services) are made available on a visiting basis, in a place of residence used as a patient's home. An HHA must provide at least one of the qualifying services directly through agency employees, but may provide the second qualifying service and additional services under arrangements with another agency or organization.
* * * *
(h) Standard: Services under arrangements. Services furnished under arrangements are subject to a written contract conforming with the requirements specified in paragraph (f) of this section and with the requirements of . . . 42 U.S.C. § 1395x(w).42 C.F.R. § 484.14 (emphasis added). Accordingly, for the home health services that Best Care (an HHA having a Medicare provider agreement) provided to Manor House residents "under arrangements" to qualify for payment under Medicare, Best Care was required to meet the "Conditions of Participation" in part 484 — including those of § 484.14. The questions are not separate and distinct. An alleged violation of the requirements of § 484.14 is relevant to whether home health services qualify for payment under Medicare.
The Defendants also argue that the United States' proposed amendments to paragraphs 17 through 26 are futile — to the extent they allege that Best Care failed to supervise the administration of the qualifying services as required by law — because they do not satisfy the pleading requirements of Rule 9(b). "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). Causes of action under the False Claims Act are subject to the pleading requirements of Rule 9(b). United States v. Napco Int'l, Inc., 835 F. Supp. 493, 495 (D.Minn. 1993).
The Eighth Circuit has interpreted the term "circumstances" of fraud to include the "time, place, and contents of false representations, as well as the identity of the person making the false representation, and what was obtained or given up thereby." . . . Put another way, the complaint must read like the opening paragraph of a newspaper article: it must contain the "who, what, when, where and how" of the alleged fraud.
United States ex rel. Alsaker v. CentraCare Health System, Inc., Civ. No. 99-106 (JRT/RLE), 2002 WL 1285089, *3 (D.Minn. June 5, 2002) (Tunheim, J.) (citations omitted). Best Care and Khatoon complain that the United States has failed to plead with particularity the extent to which supervision was required, when such supervision was required, and in what particulars it was not provided. The United States responds by presenting an extensive discussion of Best Care's obligations as a "cost-reporting entity" to submit annual cost reports to a government contractor that reviews the costs Best Care has expended in connection with the reimbursable services provided to Medicare beneficiaries. The United States argues that, in submitting such cost reports, Best Care (through Ms. Khatoon) must certify that the services identified in the report were provided in compliance with the laws and regulations governing Medicare. Citing no supporting statutes, regulations or cases, the United States contends that "`[f]alse certification' is a legal theory of liability, not a factual allegation which is necessary to give the defendants fair notice of the conduct of which they are accused." (Gov't's Reply Brief Re: Futility at 5.)
Assuming arguendo that a "cost report" certification can be a "false record or statement" that can be used to get a false or fraudulent claim paid in violation of § 3729 of the False Claims Act, the Court finds a fundamental problem with the Government's response. The circumstances surrounding the cost reports are readily identifiable and pleading them would clearly satisfy the requirements of Rule 9(b). The document itself satisfies the "where" element, and the "when" and "by whom" elements appear to be ascertainable from the face of the documents themselves. The United States acknowledges that the proposed amended complaints contain no references to "false certifications" in the cost reports. If the United States had intended to proceed on a theory that the cost reports were relevant to violations of the False Claims Act, it could have and should have pleaded those facts. The Government cannot amend a pleading indirectly, through a memorandum, having failed to do so under the rules of civil procedure.
The United States attached to its reply brief on the issue of futility a copy of Best Care's cost report for the 1996 calendar year. That document bears the signature of Best Care's representative and a date. Nothing suggests that similar information would not be available for 1997.
Turning from that detour into cost reports back to the contents of the proposed amended complaints, the United States also contends that it has pleaded the circumstances of fraud with adequate specificity vis-a-vis Best Care and Khatoon's alleged violations of the "under arrangement" rules. The Court agrees. The False Claims Act provides that it is unlawful for any person to knowingly present or cause to be presented a false or fraudulent claim for payment or approval. 31 U.S.C. § 3729(a)(1). The United States alleges in the proposed amended complaints that, between January 1, 1996 and October 31, 1997, Best Care did not provide at least one qualifying service directly through its own employees and did not perform the requisite supervision of the home health services that GRSC and GRC provided "under arrangements." Specifically, the United States alleges that an employee who purportedly worked for Best Care to provide at least one qualifying service and to supervise the additional services provided in the Grand Rapids area "under arrangements" was not, in fact, a Best Care employee. Those circumstances allegedly violated the requirements for qualifying home health services for payment under Medicare and claims submitted to Medicare during that time period were allegedly false. The Court concludes that the United States has pleaded the circumstances surrounding the alleged falsity of claims submitted to Medicare for payment on home health services at Manor House with adequate particularity.
Finally, Best Care and Khatoon argue that the United States' proposed amendments are futile because Best Care in fact provided adequate supervision for services provided to Manor House residents. Relying on the Khatoon Declaration, the Defendants contend that it had employed a full-time, registered nurse in Grand Rapids to process medical referrals, do Medicare assessments, and provide supervision of Medicare services on a daily basis. Khatoon avers that she does not know who the United States is referring to in paragraphs 24(c) through 24(e) of the proposed amendments when it alleges that GRSC and GRC reimbursed Best Care for the salary of an individual who was purportedly an employee of Best Care. Best Care and Khatoon's argument is highly factual, going far beyond the four corners of the proposed amended complaint. As set forth above, in section II, factual matters beyond the allegations of the proposed pleading are not a proper basis for considering whether to deny leave to amend on the grounds of futility. The Court will not consider the Khatoon Declaration and rejects the Defendants' futility arguments to the extent they are based upon it.
B. The Government Deserves No Further Chances to Amend
Best Care and Khatoon alternatively contend that the United States should be denied the opportunity to amend at this time because it has already been involved in and settled lengthy administrative proceedings concerning Medicare's payments to Best Care for services provided in Grand Rapids. The Defendants contend that, therefore, the United States has had ample opportunity to articulate a legal theory under which claims for home health services at Manor House were improper. In support of this argument, the Defendants rely on Egerdahl v. Hibbing Community College, 72 F.3d 615 (8th Cir. 1995), in which the Eighth Circuit held that a district court "may refuse to grant leave to amend if the plaintiff had an earlier opportunity to cure a defect in her complaint but failed to do so." Egerdahl, 72 F.3d at 620.
The district court in Egerdahl dismissed the plaintiff's claims in her first amended complaint against several community college professors under §§ 1981 and 1983 because she had failed to sue them in their personal capacities. Id. at 619. The district court also denied the plaintiff's request for leave to amend her complaint a second time to correct the deficiency. Id. The court of appeals observed that Egerdahl had been served with a motion to dismiss by the professors (in their official capacity) six days before she filed her first amended complaint. Id. That motion had raised her failure to sue the professors in their personal capacities as a grounds for dismissal, yet Egerdahl did nothing to correct the deficiency. Id. The Eighth Circuit concluded that the plaintiff's lack of diligence warranted the district court's refusal to grant her leave to amend. Id.
Egerdahl is distinguishable. Best Care and Khatoon here seek to preclude the United States from amending its complaints based on prior administrative proceedings. Yet those proceedings involving the reasonableness of the staffing costs Best Care incurred when it decided to staff Manor House with "leased employees available on an as-needed basis." (Khatoon Decl. Ex. F (Provider's Final Position Paper before PRRB) at 1.) The issue presented to the PRRB was whether staffing Manor House with leased home health aides was the cheapest available option under the circumstances. (Id. at 1-2.) Best Care informed the PRRB that it had leased staff from Manor House itself, which had qualified staff available on site. (Id. at 7.) Neither Best Care's position paper nor Blue Cross/ Blue Shield's position paper (as financial intermediary) mentioned either GRSC or GRC. (Id.; Khatoon Decl. Ex. E (Intermediary's Position Paper).) In 2001, Best Care responded to Blue Cross/ Blue Shield's additional allegations that Best Care had been improperly operating a branch office in Grand Rapids. (Khatoon Decl. Ex. G (May 30, 2001 Letter from Sanders to Talbert).)
Neither Best Care's letter, contending that it had operated the Grand Rapids Office as a branch office, nor Blue Cross/ Blue Shield's response (Khatoon Decl. Ex. H (Aug. 20, 2001 Letter from Talbert to Bye and Sanders)), made any reference to Best Care's provision of home health care services "under arrangements" with GRSC or GRC.
Best Care and Khatoon have not clearly demonstrated that the same issue raised in the United States' proposed amended complaints was before the Government during the administrative proceedings before the PRRB. Furthermore, unlike Egerdahl, the United States Attorney's office here promptly sought leave to amend after receiving the Defendants' motions for partial dismissal. Mindful of the generally liberal policy in favor of permitting the amendment of pleadings, the Court determines that it is appropriate under these circumstances to permit the United States to amend its complaints.
Whether the United States would be allowed to amend the pleadings again at some later time is not an issue before the Court now, but it would not be unreasonable for the Government to anticipate that such a motion would not be favorably received.
Conclusion
Based on the foregoing, and all of the files, records and proceedings herein, IT IS ORDERED:1. The United States' Motions to Strike the Declaration of Nazneen Khatoon (Doc. No. 50 in Civ. No. 98-1261; Doc. No. 46 in Civ. No. 99-1207) are DENIED;
2. The United States' Motions to Amend the Complaint (Doc. No. 44 in Civ. No. 98-1261; Doc. No. 40 in Civ. No. 99-1207) are GRANTED.
3. Defendants Best Care Home Health Inc. and Nazneen Khatoon's Motions to Dismiss Portions of the Operative Complaint (Doc. No. 39 in Civ. No. 98-1261; Doc. No. 30 in Civ. No. 99-1207) are rendered MOOT by the leave granted the United States to amend the operative complaints and are therefore DENIED.
IT IS FURTHER ORDERED that the United States shall file and serve its amended complaints on all of the defendants forthwith.