Opinion
Civ. No. H-95-2241.
September 1999.
MEMORANDUM AND ORDER
Pending in this civil action is the motion of plaintiff United States to dismiss or sever defendants' amended third party complaint. The motion has been fully briefed, and no hearing is necessary for a decision. See Local Rule 105.6. For the reasons stated herein, the government's motion to dismiss the amended third party complaint will be granted.
I Background
As discussed in various previous rulings, this is an action brought by the government against numerous defendants under the False Claims Act ("FCA"). Discovery is under way pursuant to the Revised Scheduling Order of April 23, 1999. On February 5, 1999, defendants filed a third party complaint against thirteen Medicare carriers (the "Carriers"). The third party complaint contained six counts and sought indemnification or contribution from the Carriers for any liability of defendants adjudicated in this case. The third party complaint alleges that the Carriers audited and reviewed the defendants' billing practices for years, but that they never recognized that defendants' billing practices were wrongful and never so informed defendants. Defendants assert that these failures amounted to a breach of the Carriers' contractual and statutory duties to inform defendants of any wrongful billing practices.
These counts are as follows: breach of contract (Count I), breach of fiduciary duty (Count II), intentional misrepresentation (Count III), gross negligence (Count IV), contribution (Count V) and indemnification (Count VI).
Defendants allege that the Carriers owe them contractual duties because they are "third party beneficiaries" to contracts between the Health Care Financing Administration ("HCFA") and the Carriers.
On May 12, 1999, the government filed a motion to dismiss or alternatively to sever defendants' third party complaint pursuant to Rules 14(a) and 42(b), F.R.Civ.P. The government contended that, as a matter of law, FCA defendants have no right to seek contribution or indemnity from the Carriers. Rather than respond to that motion, defendants filed an amended third party complaint which included four additional counts. These additional counts restate many of the allegations made in the earlier complaint, and assert that the damages claimed are "independent of any False Claims Act liability."
By Order dated May 28, 1999, this Court denied the government's earlier motion to dismiss or sever as moot and directed the government, if it wished to do so, to address the new allegations contained in the amended third party complaint by way of a motion to dismiss the amended third party complaint. Accordingly, the government has now filed a new motion to dismiss, incorporating by reference its earlier memorandum. The government contends that the amended third party complaint must be dismissed (1) because the new counts in the amended complaint still improperly seek what amounts to indemnification or contribution from the Medicare carriers, and (2) because defendants' third party claims are barred by official immunity. If the Court allows the third party claims to go forward, the government in the alternative contends that they should be severed from this action because confusion, prejudice and delay will result if they are tried together with the government's FCA claims.
In response, defendants argue that the damages claimed in the third party complaint are "wholly independent" of defendants' alleged FCA liability. They claim further that the carriers are not entitled to sovereign immunity because they committed fraudulent and grossly negligent acts and/or omissions. Defendants suggest that these arguments find substantial support in the Carriers' and the United States' own documents.
II Discussion
At the outset, the Court would note the dubious nature of defendants' third party claims. Defendants seek to shift responsibility for their allegedly fraudulent billing practices to the Carriers for failing, despite numerous audits, to identify and/or notify them of instances of wrongful billing. According to defendants, these failures, without more, demonstrate that the Carriers engaged in outright fraud and were grossly negligent and that the Carriers breached statutory and contractual obligations owed to defendants.
On the record, the Court has concluded that the motion to dismiss of the United States should be granted, as a matter of law, for two independently sufficient reasons. First, defendants' characterizations notwithstanding, the amended third party complaint seeks in essence indemnification and contribution for the defendants' wrongful acts, which is relief not allowed in a FCA case. Second, the Carriers are entitled to official immunity for their role in the processing of Medicare claims.
(a) Indemnification and Contribution
Defendants apparently concede that FCA defendants generally cannot seek contribution or indemnification because it would frustrate the purposes of the Medicare Act to punish and deter fraud. They contend, however, that their amended third party complaint falls within an exception to this general rule because they seek damages that are "wholly independent" of their alleged FCA liability. For support, they rely principally on United States ex rel. Madden v. General Dynamics Corp . , 4 F.3d 827 (9th Cir. 1993).
In Madden , the Ninth Circuit reversed a district court which had applied a blanket rule prohibiting counterclaims in FCA actions. The Ninth Circuit held that a defendant's compulsory counterclaims asserted in a FCA case against a qui tam relator could go forward insofar as the counterclaims "were not dependent" on defendant's FCA liability. Id . at 831; see also Burch v. Piqua Engineering, Inc . , 145 F.R.D. 452, 456 (S.D. Ohio 1992) (permitting compulsory counterclaims which related to alleged wrongful discharge); United States ex rel. Prabhu v. Farmer , 1994 W.L. 761237 (D. Nev.) (permitting counterclaims for libel and malicious prosecution but dismissing third party claims); but cf . Mortgages, Inc. v. United States Dist. Court for the Dist. of Nev . , 934 F.2d 209 (9th Cir. 1991) (holding that neither contribution nor indemnity is available in a qui tam action under the FCA, even if qui tam plaintiff participated in wrongdoing); United States ex rel. Rodriguez v. Weekly Publications , 74 F. Supp. 763 (S.D.N.Y. 1947) (dismissing a counterclaim for indemnification asserted against a qui tam relator under the FCA).
Madden , however, is distinguishable from the case at bar for three important reasons. First, Madden involved a compulsory counterclaim against a relator, while this case involves third party claims asserted against entities administering the federal Medicare program on behalf of the United States. Consequently, the public policy considerations supporting the general bar against counterclaims or third party claims in FCA cases are more strongly implicated in this particular case.
Second, Madden and the cases applying Madden involved compulsory counterclaims, and the opinions in those cases emphasized that the failure to permit such claims threatened the defendants' due process rights. By contrast, this case involves a voluntary third party complaint and thus does not in any way implicate due process concerns.
Finally, the third party claims alleged in this case are not truly independent. As the United States points out in its brief, the nature of the defendants' third party claims has not been changed in the amended third party complaint, only their characterization. But merely labeling these claims "independent" will not make them so. In their amended third party complaint, defendants assert that they have sustained the following damages:
[A] substantial decrease in the value of the [cancer treatment] Centers, the costs of administrative appeals, losses in business opportunities, losses of profits, inability to sell the Centers and related expenses, inability to recruit and retain physicians and employees to keep the Centers operational, and loss of reputation, all [of] which derive from the filing of this false claims suit.Defendants suggest that these damages are independent because they stem from the filing of this FCA suit, rather than from a finding of FCA liability. This distinction is not persuasive. All of the claims alleged in the amended third party complaint are inextricably intertwined with the government's allegations of Medicare fraud. Absent the claims of Medicare fraud asserted by the government, defendants could not reasonably pursue their third-party claims against the Carriers. Were the Court to allow these third party claims to go forward and were defendants and third party plaintiffs to prevail on such claims, the effect would be to offset the liability of the defendants under the FCA proven at the trial. Every FCA defendant in a Medicare fraud case would thereby be encouraged to attempt to shift their liability to Medicare carriers, a result not permitted by the applicable authorities. Neither the FCA nor federal common law provides a right to contribution or indemnification in a FCA action. See generally Prabhu , 1994 WL 761237, *1 (dismissing third party complaints that would have the effect of offsetting defendants' FCA liability). To permit a third party complaint like the one at issue here to go forward would unnecessarily cloud the issues, complicate the case and frustrate the statutory scheme that Congress has established to identify and to prosecute Medicare fraud. Cf . Mortgages, Inc . , 934 F.2d at 213 ("The FCA is no way intended to ameliorate the liability of wrongdoers by providing defendants with a remedy against a qui tam plaintiff with `unclean hands.'") Accordingly, since defendants' amended third party complaint essentially seeks a recovery for contribution and indemnification, it must be dismissed.
(b) Official Immunity
In opposing the government's pending motion, defendants contend that official immunity does not insulate the Carriers from suit because in Richardson v. McKnight , 521 U.S. 399, 408-09 (1997), the Supreme Court rejected a "functional" approach to determining the breadth of official immunity. Defendants argue that the Carriers are private contractors and are thus not immune from suit, even if they were performing an administrative function. Alternatively, defendants claim that immunity does not attach because the Carriers exceeded the scope of their statutory authority by acting fraudulently or with gross negligence.
There is no merit to either of these arguments. In Richardson , the Supreme Court addressed a narrow question of qualified immunity arising in the context of a § 1983 action brought against prison guards employed by a private, for-profit firm with limited governmental supervision. In answering the immunity question narrowly in the context in which it arose, the Court explicitly declined to endorse the sort of broad principle urged here by defendants. See id . at 413. Unlike the circumstances in Richardson , there is in this case a considerable amount of governmental supervision of the Carriers who operate under cost-based contracts which generally do not allow the recovery of profit for claims administration.
A number of courts have explicitly recognized that Medicare carriers are entitled to official immunity in administering the Medicare program. See Pani v. Empire Blue Cross Blue Shield , 152 F.3d 67, 76 (2d Cir. 1998); Matranga v. Travelers Ins. Co . , 563 F.2d 677, 678 (5th Cir. 1977); Group Health Inc. v. Blue Cross Assoc . , 739 F. Supp. 921, 932 (S.D.N.Y. 1990); see also Bushman v. Seiler , 755 F.2d 653, 655 (8th Cir. 1985) (holding that a consultant to a Medicare carrier is entitled to official immunity); cf . Margold v. Analytic Services, Inc . , 77 F.3d 1442, 1446 (4th Cir. 1996) (granting immunity to a defense contractor that answered questions in the course of an official governmental investigation). As the court in Pani observed, allegations that "boil down to assertions that [a Medicare carrier] misapplied the Medicare rules and regulations . . . are not subject to judicial review." 152 F.3d at 76. To subject fiscal intermediaries to suit "whenever they render an incorrect opinion would disrupt the proper functioning of the Medicare program as it is currently structured." Group Health , 739 F. Supp. at 932-33 .
Defendants argue that the principles of these decisions are inapplicable when Carriers have acted fraudulently or have been grossly negligent. According to defendants, under circumstances like those present here, entities like the Carriers have acted beyond the scope of their official authorization and are subject to suit for their misdeeds. For support, defendants rely primarily on two cases, Rochester Methodist Hospital v. Travelers Ins. Co . , 728 F.2d 1006, 1013-16 (8th Cir. 1984), and City of Worcester v. HCA Management Co . , 753 F. Supp. 31, 37-38 (D. Mass. 1990). The court in Rochester Methodist rejected a Medicare carrier's claim of sovereign immunity because the carrier had engaged in fraud and thus acted beyond the scope of its authority. 728 F.2d at 1016. That case is distinguishable. There is no evidence in this record of fraud or gross negligence on the part of the Carriers indicating that they have acted beyond the scope of their authority.
In City of Worcester , a city brought a negligence and breach of contract action against the company that managed the municipal hospital. The defendant management company filed a third party complaint, containing allegations similar to those of defendants in this case: "`[i]f it is determined that duplicate of [ sic ] otherwise improper or inaccurate Medicare payments were made to Worcester City Hospital, then such payments were the result of the unauthorized and negligent actions or omissions of Blue Cross.'" 753 F. Supp. at 39. (Emphasis in original). The district court denied the Medicare carrier's motion to dismiss, concluding that the bare allegation quoted above was enough to survive the carrier's motion. Id .
The principles of City of Worcester will not be applied in this case. First, defendants' theory in this case is based on a non sequitur . The Carriers' alleged failure to identify instances of wrongful billing, without more, does not mean that the Carriers intended to "defraud" defendants or that they were reckless in their administration of the Medicare program. Although they have filed various exhibits in support of their opposition to the government's motion, defendants have pointed to no facts in the record here which would support their theories other than the Carriers' apparent failure to discover that defendants submitted fraudulent or erroneous claims for Medicare reimbursement. But conclusory allegations that such failures constituted fraud and gross negligence cannot support defendants' third party claims. See , e.g . , Bethlehem Plaza v. Campbell , 403 F. Supp. 966, 971 (D. Pa. 1975). In the absence of supporting facts, the truth of conclusory allegations of the sort advanced by defendants cannot be assumed by this Court.
The theories of fraud and gross negligence alleged by the defendants are logically unsupportable. To succeed under those theories, defendants would have to show that the Carriers wilfully or recklessly failed to inform them of fraudulent or wrongful billing practices because the Carriers wanted the defendants to be subjected to FCA liability. As this Court has previously observed, the Carriers' approval of the defendants' Medicare claims does not amount to actionable misrepresentation, let alone fraudulent or reckless conduct. (See Memorandum and Order of June 4, 1999, slip op. at 5.)
Defendants rely on a number of documents in support of their claims. Following its review of these documents, the Court is satisfied that they do not show what the defendants claim they show. Defendants rely on (1) favorable Carrier audits and reviews of certain billing practices of the defendants, and (2) documents relating to a separate criminal case in which Xact Medicare Services ("Xact") was indicted for Medicare fraud. Nevertheless, as the Court has noted previously, a few favorable audits by the Carriers do not definitively establish that all of defendants' claims for Medicare reimbursement were proper. Similarly, it is in no way relevant to defendants' third party claims that Xact engaged at one time in a scheme to defraud the government. Defendants have not shown that there is any link between that criminal case and Xact's processing of defendants' claims for reimbursement.
Second, even assuming for purposes of argument that defendants could prove at trial that the Carriers were liable for wrongful acts short of fraud or gross negligence (e.g., simple negligence, misrepresentation, or breach of contract), the United States would be required by law to reimburse the Carriers for any recovery against them. See Medicare Carriers Manual § 5300, 42 C.F.R. § 421.5(b) . This would lead to an absurd result, in effect requiring the United States Treasury to make payments to the very Medicare providers that the United States has accused of fraud. Payment of a judgment from the public treasury is the touchstone of sovereign immunity, and consequently a claim of this sort cannot be maintained. See Larson v. Domestic Foreign Corp . , 337 U.S. 682, 687 (1948) ("The issue here is whether [the] suit is not also, in effect, a suit against the sovereign. If it is, it must fail. . . ." On the record here, this Court has concluded that the defendants have not adequately alleged or shown that the Carriers acted outside of the broad statutory authority granted to them by 42 U.S.C. § 1395u(a) when they approved defendants' claims for reimbursement. Accordingly, the Carriers are entitled to sovereign immunity, and the amended third party complaint must be dismissed for lack of subject matter jurisdiction.
These provisions insulate the Carriers from liability for actions taken in administering the Medicare Program on the government's behalf. The Carriers must reimburse the government only if their conduct is found to be criminal, fraudulent, or grossly negligent.
Since the government's motion to dismiss defendants' amended third party complaint must be granted, it is not necessary to consider the government's alternative request that if the third party complaint is to go forward, it should be severed pursuant to Rule 42, F.R.Civ.P.
III Conclusion
For the foregoing reasons, the motion of the United States to dismiss the amended third party complaint must be granted. Accordingly, it is this ______ day of September, 1999 by the United States District Court for the District of Maryland,ORDERED:
1. That the motion of the United States to dismiss the amended third party complaint is hereby granted; and
2. That the third party complaint of defendants is hereby dismissed.