United States v. Kindred Healthcare, Inc.

Full title: UNITED STATES of America, State of California, State of Colorado, State of…

Court: United States District Court, E.D. Pennsylvania.

Date published: Jun 29, 2020

469 F. Supp. 3d 431 (E.D. Pa. 2020)

Opinion

CIVIL ACTION NO. 16-683

06-29-2020

UNITED STATES of America, State of California, State of Colorado, State of Connecticut, State of Georgia, State of Indiana, State of Montana, State of Nevada, State of New Hampshire, State of North Carolina, State of Tennessee, State of Washington, State of Wisconsin, Commonwealth of Massachusetts, and Commonwealth of Virginia, ex rel. Timothy Sirls, Plaintiffs, v. KINDRED HEALTHCARE, INC., Kindred Healthcare Operating, Inc., Kindred Healthcare Services, Inc., Kindred Nursing Centers East, LLC, Kindred Nursing Center West, LLC, Kindred Nursing Centers South, LLC, and Kindred Nursing Centers North, LLC, Defendants.

Thomas W. Sheridan, Sheridan & Murray, Fort Washington, PA, James C. Shah, Shepherd Finkelman Miller & Shah LLC, Philadelphia, PA, for Plaintiffs State of California, State of Colorado, State of Connecticut, State of Georgia, State of Indiana, State of Montana, State of Nevada, State of New Hampshire, State of North Carolina, State of Tennessee, State of Washington, State of Wisconsin, Commonwealth of Massachusetts, Commonwealth of Virginia. Natalie Finkelman Bennett, James C. Shah, Bruce D. Parke, Michael P. Ols, Shepherd Finkelman Miller & Shah LLC, Philadelphia, PA, James E. Miller, Shepherd Finkelman Miller & Shah, LLP, Chester, CT, Nathan C. Zipperian, Shepherd Finkelman Miller & Shah LLP, Fort Lauderdale, FL, for Plaintiff Timothy Sirls. Andrew H. Struve, Matthew I. Lahana, Hooper Lundy & Bookman PC, San Diego, CA, Jeffrey S. Adler, Stephen Purcell, William J. Mundy, Burns White & Hickton, West Conshohocken, PA, Jordan C. Kearney, Scott J. Kiepen, Hooper Lundy & Bookman PC, San Francisco, CA, for Defendants.

DuBois, J.

Thomas W. Sheridan, Sheridan & Murray, Fort Washington, PA, James C. Shah, Shepherd Finkelman Miller & Shah LLC, Philadelphia, PA, for Plaintiffs State of California, State of Colorado, State of Connecticut, State of Georgia, State of Indiana, State of Montana, State of Nevada, State of New Hampshire, State of North Carolina, State of Tennessee, State of Washington, State of Wisconsin, Commonwealth of Massachusetts, Commonwealth of Virginia.

Natalie Finkelman Bennett, James C. Shah, Bruce D. Parke, Michael P. Ols, Shepherd Finkelman Miller & Shah LLC, Philadelphia, PA, James E. Miller, Shepherd Finkelman Miller & Shah, LLP, Chester, CT, Nathan C. Zipperian, Shepherd Finkelman Miller & Shah LLP, Fort Lauderdale, FL, for Plaintiff Timothy Sirls.

Andrew H. Struve, Matthew I. Lahana, Hooper Lundy & Bookman PC, San Diego, CA, Jeffrey S. Adler, Stephen Purcell, William J. Mundy, Burns White & Hickton, West Conshohocken, PA, Jordan C. Kearney, Scott J. Kiepen, Hooper Lundy & Bookman PC, San Francisco, CA, for Defendants.

MEMORANDUM

DuBois, J. I. INTRODUCTION

This is a qui tam action brought on behalf of the United States under the False Claims Act ("FCA") and on behalf of California, Colorado, Connecticut, Georgia, Indiana, Montana, Nevada, New Hampshire,¹ North Carolina, Tennessee, Washington, Wisconsin, Massachusetts, and Virginia under their analogous false claims laws² by relator, Timothy Sirls, against defendants Kindred Healthcare, Inc.; Kindred Healthcare Operating, Inc.; Kindred Healthcare Services, Inc.; Kindred Nursing Centers East, LLC; Kindred Nursing Centers West, LLC; Kindred Nursing Centers South, LLC and Kindred Nursing Centers North, LLC. Presently before the Court is defendants' Motion to Dismiss. For the reasons set forth below, defendants' Motion is granted in part and denied in part.

1 In his Memorandum of Law in Opposition to Motion to Dismiss, relator voluntarily dismisses the claims asserted on behalf of New Hampshire. Opp'n 1 n.1. Accordingly, those claims (Counts 20 & 21 of the Amended Complaint) are dismissed without prejudice.

2 These claims are brought pursuant to the California False Claims Act, Cal. Gov't Code § 12651(a)(1) (Count 3); Colorado Medicaid False Claims Act, Colo. Rev. Stat. § 25.5-4-303.5 (1)(a)-(b) (Counts 4 & 5); Connecticut False Claims Act, Conn. Gen. Stat. § 17B-301b(a)(1)(2) (Counts 6 & 7); Georgia False Medicaid Claims Act, Ga. Code Ann. § 49-4-168.1(a)(1)-(2) (Counts 8 & 9); Georgia Taxpayer Protection False Claims Act, Ga. Code Ann. § 23-3-121(a)(1)-(2) (Counts 10 & 11); Indiana False Claims and Whistleblower Protection Act, Indiana Code § 5-11-5.5-2(b)(1)-(2) (Counts 12 & 13); Massachusetts False Claims Act, Mass. Ann. Laws Ch. 12, § 5(B)(a)(1)-(2) (Counts 14 & 15); Montana False Claims Act, Mont. Code Ann. § 17-8-403(1)(a)-(b) (Counts 16 & 17); Nevada False Claims Act, Nev. Rev. Stat. § 357.040(1)(a)-(b) (Counts 18 & 19); New Hampshire Medicaid Fraud and False Claims, N.H. Rev. Stat. Ann. § 167:61-b(1)(a) (Counts 20 & 21); North Carolina False Claims Act, N.C. Gen. Stat. § 1-605(a)(1)-(2) (Counts 22 & 23); Tennessee Medicaid False Claims Act, Tenn. Code Ann. § 71-5-182(a)(1)(A)-(B) and Tennessee False Claims Act, Tenn. Code Ann. § 4-18-103(a)(1)-(2) (Counts 24 & 25); Virginia Fraud Against Taxpayers Act, Va. Code Ann. § 8.01-216.3(A)(1)-(2) (Counts 26 & 27); Washington Medicaid Fraud False Claims Act, Rev. Code Wash. § 74.66.020(1)(a)-(b) (Counts 28 & 29); and Wisconsin False Claims Act, Wis. Stat. § 20.931(2)(a)-(b) (Counts 30 & 31).

II. BACKGROUND

The facts below are drawn from relator's Amended Complaint and matters of public record.³ The Court construes the complaint in the light most favorable to relator, as it must in ruling on a motion to dismiss.

3 Defendants filed a Request for Judicial Notice with their Motion to Dismiss (Document No. 49, filed August 22, 2019). In evaluating a Motion to Dismiss, the Court may look beyond the pleadings to "items subject to judicial notice." Buck v. Hampton Twp. Sch. Dist. , 452 F.3d 256, 260 (3d Cir. 2006) (internal citation omitted). Defendants specifically cite public records published by CMS, a complaint filed in a prior lawsuit, and various relevant news reports. Judicial notice of these documents is proper as the Court may take judicial notice of public records such as those issued by CMS, as well as court filings that are publicly filed on the docket of a district court. See Carroll v. Prothonotary , No. 08-1683, 2008 WL 5429622, at *2 (W.D. Pa. Dec. 31, 2008). Courts may also take judicial notice of news reports to evaluate "what was in the public realm" at a given time. See Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital Mgmt. L.P. , 435 F.3d 396, 401 n.15 (3d Cir. 2006)

Relator, Timothy Sirls, worked as the Director of Nursing Services at Heritage Manor Healthcare Center in Mayfield, Kentucky, between April 2014 and June 2014. Am. Compl. ¶ 7. Heritage Manor is a nursing facility that was operated by Kindred Nursing Centers, LP from November of 2005 to December of 2015. Am. Compl. Ex. 1. Kindred Nursing Centers, LP is one of several wholly-owned subsidiaries through which defendant Kindred Healthcare, Inc. operated a network of nursing facilities around the country. Am. Compl. 1 n.1, ¶¶18-19. Kindred Healthcare, Inc. is a healthcare services conglomerate that operates through its subsidiary companies in 46 states and Puerto Rico. Id. ¶ 18. Among those subsidiaries are defendants Kindred Nursing Centers East, LLC; Kindred Nursing Centers West, LLC; Kindred Nursing Centers North, LLC; and Kindred Nursing Centers South, LLC. Id. ¶ 23. These entities owned and operated nursing facilities identified by relator in exhibits attached to the Amended Complaint. Am. Compl. Exs. 1, 2. Each of these entities were owned by defendant Kindred Healthcare Operating, Inc., which itself is a subsidiary of Kindred Healthcare, Inc. Id. ¶¶ 18-19, 22-26.

Relator alleges that defendants⁴ exerted "top down" pressure on their nursing facilities to "recruit residents with high acuity levels (i.e. , residents who were extremely dependent upon staff for their most basic care needs)" while intentionally understaffing the facilities in order to "reap higher Medicare and Medicaid reimbursements." Id. ¶¶ 2, 7. According to relator, defendants thus engaged in a "nationwide false claim scheme ... to obtain payment from Medicare and Medicaid for necessary resident care that it claimed to have provided, but, in fact, did not provide." Id. ¶ 1. Relator avers that, as a result, the nursing facilities identified in Exhibits to his Amended Complaint "engaged in a routine pattern and practice of presenting false claims or causing the same to be presented to federal and state governments." Id. at 1 n.1.

4 In his Amended Complaint, relator frequently refers to the defendants collectively as "Kindred." Am. Compl. 2. The sufficiency of such collective allegations are considered infra , Section IV.A.vi.

Before the Court considers these allegations in greater detail, a review of the Medicare and Medicaid programs is required.

A. Overview of Medicare Reimbursement

Medicare is a federal health insurance program administered by the Centers for Medicare & Medicaid Services ("CMS"), a division of the U.S. Department of Health and Human Services ("HHS") that, in part, provides federally-funded insurance benefits for skilled nursing facilities. See 42 U.S.C. § 1395, et seq. Medicare reimburses skilled nursing facilities using a prospective payment system. Defs.' Req. Judicial Notice, Ex. E, Medicare Program Integrity Manual 6.1; Am. Compl. ¶ 37. The prospective payment system pays a per diem , per patient amount at a rate that is based on the Resource Utilization Group to which a resident is assigned. See United States v. Long Grove Manor, Inc. , 315 F. Supp. 3d 1107, 1110 (N.D. Ill. 2018). The Resource Utilization Group "uses measures of staff time and service frequency, variety, and duration to classify patients." Prospective Payment System and Consolidated Billing for Skilled Nursing Facilities, 63 Fed. Reg. 26,252, 26,258 (proposed May 12, 1998). "[Resource Utilization Group] levels also consider a person's capacity to perform activities of daily living (‘ADL’) such as ‘bed mobility, toilet use, transfer from bed to chair, and eating.’ " United States v. Life Care Centers of America, Inc. , 114 F. Supp. 3d 549, 553 (E.D. Tenn. 2014) (quoting 63 Fed. Reg. 26,252 ).⁵

5 The Resource Utilization Group classification is specifically based on the self-performance and support provided for those four "late loss" ADLs—bed mobility, toilet use, transfer, and eating. Defs.' Req. Judicial Notice, Ex. C at 6-24.

Skilled nursing facilities use a clinical assessment tool referred to as the Minimum Data Set ("MDS") to periodically determine each beneficiary's Resource Utilization Group classification. See 42 C.F.R. §§ 413.337, 413.343 ; Medicare Program Integrity Manual 6.1. An MDS is completed for each resident upon admission to a facility and periodically throughout the resident's stay. See 42 C.F.R. §§ 413.337, 413.343, 483.20. To conduct these assessments, facility staff evaluate the preceding seven days—the "look-back period"—and report the resident's self-performance of ADLs, as well as the level of staff assistance that was required by and provided to the resident. Defs.' Req. Judicial Notice Ex. C, Centers for Medicare & Medicaid Services, Long-Term Care Facility Resident Assessment Instrument User's Manual Version 3.0 (Oct. 25, 2013), at G-3. Skilled nursing facilities are instructed to identify "what the resident does for himself during each episode of each ADL activity definition as well as the type and level of staff assistance provided." Id. These facilities are specifically instructed to code for the most support provided by staff over the course of the look-back period—"even if that level of support only occurred once." Id. This information is specifically coded in Section G of the MDS form. Id. According to relator, such facilities expressly certify in each MDS form that "the accompanying information accurately reflects resident assessment information." Am. Compl. ¶¶ 10, 35, 53.

B. Overview of Medicaid Reimbursement

Medicaid is a health insurance program for low-income people that is jointly funded by the federal and state governments. See 42 U.S.C. § 1396, et seq. Medicaid covers long-term care in nursing facilities.⁶ Id. § 1396a. Both federal and state statutes and regulations apply to the state-administered Medicaid programs. See id.

6 Relator avers that all nursing homes specifically listed in his Amended Complaint qualified as both "skilled nursing facilities" covered by Medicare and "nursing facilities" covered by Medicaid. Am Compl. ¶ 27; see also Northport Health Servs. of Ark., LLC v. United States Dep't of Health & Human Servs. , 438 F.Supp.3d 956, 961 n.2 (W.D. Ark. 2020) ("The Medicare statute refers to ‘skilled nursing facilities,’ and the Medicaid statute refers to ‘nursing facilities.’ Despite this difference in terminology, the requirements placed on these facilities by each statute are materially identical"). The Court will use the terms "nursing facility" or "facility" to refer to the facilities referenced in relator's Amended Complaint.

Each state Medicaid program has its own payment system. Am. Compl. ¶¶ 38, 123. As such, Medicaid reimbursement for nursing facilities varies from state to state. Relator alleges that the Medicaid programs in Colorado, Georgia, Indiana, Massachusetts, Montana, Nevada, New Hampshire, North Carolina, Virginia, Washington, and Wisconsin mirror the Medicare reimbursement system by adjusting the per diem rate based on the facilities case-mix index. Id. ¶ 123. According to relator, "[i]n a case-mix adjusted payment system, the amount of reimbursement to a nursing home is based on the resource intensity of the resident as measured by items on the MDS, including in Section G." Id. ¶ 121. Relator claims that the remaining states—California, Connecticut, and Tennessee—have Medicaid programs that also pay nursing facilities a per diem rate but "do not use a case mix index in making adjustments to the per diem rate." Id. ¶ 38.

C. Relator's Factual Allegations

Relator alleges that, from at least 2008 to the filing of the Amended Complaint, defendants knowingly presented or caused to be presented false or fraudulent claims and certifications through the submission of "false MDS forms" and "false claims for [prospective payment system] payments for thousands of nursing home residents." Am. Compl. ¶¶ 112, 114. Relator alleges that these false claims were the direct result of the staffing policies strictly imposed by defendants on their nursing facilities and the pressure exerted by defendants to recruit high acuity residents. Id. ¶ 7. Relator describes a scheme in which defendants "exerted pressure from the top down" on nursing facilities "to recruit highly-dependent residents who required assistance with labor-intensive ADL care," "deliberately employed a non-acuity-based staffing scheme," and "refused to increase staffing levels or decrease the number of heavy care residents in the subject facilities" despite an "awareness of the care deprivations its staffing and resident recruitment practices caused." Id. Relator describes that, during his time at Heritage Manor, he was denied "discretion to determine or control" staffing levels, which were set by corporate policy. Id. ¶¶ 76-77.

Relator claims that the intentional understaffing of defendants' nursing facilities made it impossible "for Kindred to deliver the ADL services that it claimed ... were provided to residents." Id. ¶ 5. "Kindred knew it was humanly impossible for the limited workforce in its facilities to provide: (a) the essential bedside care required by the high acuity residents it purposely recruited; and (b) essential bedside care and staff support it claimed to have actually provided in Section G of each resident's MDS." Id. ¶ 100. Relator thus alleges that defendants presented or caused the submission of "false MDS forms"—while falsely certifying their accuracy—that "directly influenced the amount of ... Medicare and most Medicaid payments." Id. ¶¶ 10, 112, 114, 122. Specifically, the Amended Complaint states that defendants presented or caused to be presented false claims for payment, "usually via the CMS 1450, 837I, 1450 [sic] and 1500 forms,"⁷ using "false and inflated [Resource Utilization Group] and Health Insurance Prospective Payment System (‘HIPPS’) billing codes." Id. ¶ 115.⁸ Relator further alleges that defendants caused their facilities to falsely certify compliance with federal laws and regulations. According to relator, each of defendants' facilities was required to enter into a Medicare Enrollment Application for Institutional Providers (CMS-855A), which certified compliance with laws, regulations, and programs instructions as a condition of payment. Id. ¶ 42. The Amended Complaint also states that, in order to qualify for Medicare payments, facilities were required to sign and execute Health Insurance Benefit Agreements (CMS-1561), which conditioned payment on compliance with federal regulations. Id. ¶ 43. Further, relator alleges that "[e]ach Kindred nursing home also signed a Medicaid Provider Agreement agreeing that the provider is only entitled to be reimbursed for furnishing covered services when all federal and state laws, regulations and program rules have been followed by the provider." Id. ¶ 47. Finally, relator states that these certifications were made false by the facilities' noncompliance with federal laws and regulations governing staffing and allocation and use of Government funds. Id. ¶ 117.

7 The 837I form is the form used by institutional providers to "transmit health care claims electronically." See Centers for Medicare & Medicaid Services, Medicare Billing: Form CMS-1450 and the 837 Institutional (June 2018), at 3. The CMS-1450 form, also referred to as UB-04, is the standard claim form used for claims submitted in paper form when permitted. Id. Defendants dispute relator's allegations that the facilities submitted CMS-1500 claim forms because those forms are used for "professional services" and nursing facilities submit "institutional claims rather than professional claims." Reply 4. Notwithstanding this denial, the Court must accept relator's allegations in deciding defendants' Motion to Dismiss.

8 The Resource Utilization Group billing code is incorporated into a Health Insurance Prospective Payment System ("HIPPS") code when facilities submit Medicare claims. Am. Compl. ¶¶ 127-26.

D. Procedural Background

Relator initiated this action on February 11, 2016. On April 3, 2019, the United States and the plaintiff states declined to intervene in the action (Document No. 15). On the same day the Court ordered that the Complaint be unsealed and served on the defendants by relator (Document No. 16). On June 28, 2019, relator filed an Amended Complaint (Document No. 18).

On August 22, 2019, defendants filed a Motion to Dismiss and a Request for Judicial Notice (Document Nos. 48 & 49). Relator responded on September 20, 2019 (Document No. 51). Defendants filed a Response in Support of Motion to Dismiss on September 30, 2019 (Document No. 53). The Motion is thus ripe for decision.

III. LEGAL STANDARDS

A. Rule 12(b)(1)

Federal Rule of Civil Procedure 12(b)(1) provides that a court may dismiss a complaint for "lack of jurisdiction over the subject matter" of a case. The plaintiff has the burden of establishing subject matter jurisdiction. See Carpet Group Int'l v. Oriental Rug Imp. Ass'n , 227 F.3d 62, 69 (3d Cir. 2000) (citing Mortensen v. First Fed. Sav. & Loan Ass'n , 549 F.2d 884, 891 (3d Cir. 1977) ). "Without jurisdiction the court cannot proceed at all in any case." Steel Co. v. Citizens for a Better Env't , 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (citation omitted).

In evaluating a Rule 12(b)(1) motion, the Court must first determine whether the motion "presents a ‘facial’ attack or a ‘factual’ attack." Long v. Se. Pa. Transp. Auth. , 903 F.3d 312, 320 (3d Cir. 2018). A facial attack "considers a claim on its face and asserts that it is insufficient to invoke the subject matter jurisdiction of the court." Id. When ruling on a facial attack, the Court "considers only the complaint, viewing it in the light most favorable to the plaintiff." Id. By contrast, a factual attack is an argument that challenges the "factual allegations underlying the complaint's assertion of jurisdiction, either through the filing of an answer or ‘otherwise presenting competing facts.’ " Davis v. Wells Fargo , 824 F.3d 333, 346 (3d Cir. 2016). When ruling on a factual attack, the Court weighs the evidence and must satisfy itself as to the existence of its power to hear the case. Id.

B. Rule 12(b)(6)

The purpose of a 12(b)(6) motion to dismiss is to test the legal sufficiency of the complaint. Liou v. Le Reve Rittenhouse Spa, LLC , No. CV 18-5279, 2019 WL 1405846, at *2 (E.D. Pa. Mar. 28, 2019) (DuBois, J.). To survive a motion to dismiss, a plaintiff must allege "sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal citations omitted). "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678, 129 S.Ct. 1937. In assessing the plausibility of a plaintiff's claims, a district court first identifies those allegations that constitute nothing more than mere "legal conclusions" or "naked assertion[s]." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 557, 564, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Such allegations are "not entitled to the assumption of truth." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937. The Court then assesses "the ‘nub’ of the plaintiff['s] complaint—the well-pleaded, nonconclusory factual allegation[s]"—to determine whether it states a plausible claim for relief. Id. at 680, 129 S.Ct. 1937. "In deciding a Rule 12(b)(6) motion, a court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents." Mayer v. Belichick , 605 F.3d 223, 230 (3d Cir. 2010). The Court may also consider "any ‘matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, [and] items appearing in the record of the case.’ " Buck , 452 F.3d at 260 (quoting 5B Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 (3d ed. 2004) ).

"[I]f a complaint is subject to a Rule 12(b)(6) dismissal, a district court must permit a curative amendment unless such an amendment would be inequitable or futile." Phillips v. County of Allegheny , 515 F.3d 224, 245 (3d Cir. 2008). Nevertheless, a court may dismiss a claim with prejudice based on "bad faith or dilatory motives, truly undue or unexplained delay, repeated failures to cure the deficiency by amendments previously allowed, or futility of amendment." Lorenz v. CSX Corp. , 1 F.3d 1406, 1414 (3d Cir. 1993).

C. Rule 9(b)

FCA relators are required to satisfy Rule 9(b)'s heightened pleading standard. The Third Circuit has held that "it is sufficient for a plaintiff to allege ‘particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’ " Foglia v. Renal Ventures Mgmt., LLC , 754 F.3d 153, 155 (3d Cir. 2014) (quoting United States ex rel. Grubbs v. Kanneganti , 565 F.3d 180, 190 (5th Cir. 2009) ). A relator is not required to show "the exact content of the false claims in question" to survive a motion to dismiss, id. , but must allege "all of the essential factual background that would accompany the first paragraph of any newspaper story—that is, the who, what, when, where, and how of the events at issue," U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC , 812 F.3d 294, 307 (3d Cir. 2016) (quoting In re Rockefeller Ctr. Props., Inc. Sec. Litig. , 311 F.3d 198, 217 (3d Cir. 2002) ).

IV. DISCUSSION

In their Motion to Dismiss, defendants argue: (1) relator's allegations fail to state a claim under the FCA and analogous state laws, (2) relator fails to allege the basis of defendants' liability for facility conduct, and (3) relator's action is barred by the FCA's public disclosure bar. The Court addresses each argument in turn.

A. Relator's Claims Under the FCA

The FCA imposes liability if a defendant (1) "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval," or (2) "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. § 3729(a)(1)(A)-(B). To plead an FCA violation, a relator must allege three elements: causation, falsity, and scienter. United States ex rel. Jackson v. DePaul Health System , No. 15-020, 454 F.Supp.3d 481, 492–93 (E.D. Pa. April 15, 2020). Since the Supreme Court decision in Universal Health Servs., Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 195 L.Ed.2d 348 (2016), the Third Circuit has held that a relator must also allege materiality—i.e. , that the alleged misrepresentation was material to the Government's payment decision. See United States ex rel. Doe v. Heart Solution, PC , 923 F.3d 308, 317-18 (3d Cir. 2019) ("[M]ateriality is an element of all FCA claims").

The Court considers the sufficiency of relator's allegations supporting each element.

i. Element One: Causation

Defendants argue that they are not liable for allegedly false Medicare or Medicaid claims because all such claims were submitted by the nursing facilities—not defendants. Mot. Dismiss 15. Defendants assert that, to the extent relator alleges that defendants caused claims to be presented, he has not sufficiently supported those allegations. Id. at 15-16. The Court disagrees with defendants on this issue.

In the Third Circuit, courts have held that, even where one party files a false claim or certification, " ‘this is not inconsistent with a conclusion that [another party] caused that filing’ when the latter party's scheme was a ‘substantial factor in bringing about’ the false filings." United States v. Exec. Health Res., Inc. , 196 F. Supp. 3d 477, 495 (E.D. Pa. 2016) (quoting U.S. ex rel. Schmidt v. Zimmer. Inc. , 386 F.3d 235, 244 (3d Cir. 2004) ). Moreover, a defendant may be liable under the FCA if it implements a policy that causes others to present false claims. See, e.g., United States v. Teeven , 862 F. Supp. 1200, 1223 (D. Del. 1992) (defendants liable where policy to withhold refunds to students caused inflated default claims to the Government).

Relator alleges that the submission of false claims and certifications by defendants' nursing facilities was the direct result of the staffing policies strictly imposed by defendants and the pressure exerted to recruit high acuity residents. Am. Compl. ¶ 7. Relator describes a scheme by which defendants "refused to increase staffing levels or decrease the number of heavy care residents in the subject facilities" despite an "awareness of the care deprivations its staffing and resident recruitment practices caused." Id. Relator specifically states that defendants "knew it was humanly impossible for the limited workforce in its facilities to provide ... essential bedside care and staff support it claimed to have actually provided in Section G of each resident's MDS." Id. ¶ 100. Based on these averments, the Court concludes that relator has plausibly alleged that the false claims and certifications submitted by defendants' nursing facilities were "a normal consequence of the situation created by [defendants'] scheme." Schmidt , 386 F.3d at 245.

ii. Element Two: Falsity

"There are two categories of false claims under the FCA: a factually false claim and a legally false claim." U.S. ex rel. Wilkins v. United Health Grp., Inc. , 659 F.3d 295, 305 (3d Cir. 2011). The second category, legally false claims, is further subcategorized into two theories of liability: "express false certification" and "implied false certification." U.S. ex rel. Portilla v. Riverview Post Acute Care Center , No. 12-1842, 2014 WL 1293882, at *14 (D.N.J. Mar. 31, 2014).

Relator's allegations of falsity fall into three categories: (1) factually false claims based on inflated Resource Utilization Group classifications, (2) express false certifications of accuracy in MDS forms, and (3) express and implied false certifications of compliance with federal laws and regulations governing staffing and allocation and use of Government funds. The Court considers in turn the sufficiency of relator's allegations under all three categories and the alleged materiality of the misrepresentations.

a. Factually False Claims

"A claim is factually false when the claimant misrepresents what goods or services that it provided to the Government." Wilkins , 659 F.3d at 305. Defendants argue that relator's allegations of factual falsity are inconsistent with Medicare's reimbursement scheme. Mot. Dismiss 10. Defendants emphasize that nursing facilities do not submit claims for particular "ADL services" provided to residents. Id. at 11. Rather, defendants contend that, "because the MDS is completed before any resident care or ‘ADL services’ are provided," it "could not represent how many services would be provided." Id. Defendants further argue that because relator has not alleged "a scheme to misrepresent the actual condition of the Facilities' residents and their ability to perform [ADLs]," he has not alleged "any scheme to inflate [Resource Utilization Group] scores or the HIPPS codes." Id. at 13. The Court disagrees with defendants on this issue.

"Courts have found claims for fixed payments and related cost reports to constitute claims under the FCA for medical care provided in connection with the procedures for which reimbursement is sought." United States ex rel. Simpson v. Bayer Corp. , 376 F. Supp. 3d 392, 402 (D.N.J. 2019). However, in cases involving fixed-rate Medicare reimbursement through the prospective payment system, courts have held that there is no FCA liability where a falsely-claimed service or item does not affect the rate of reimbursement. See, e.g., U.S. ex rel. Stephens v. Tissue Science Laboratories, Inc. , 664 F. Supp. 2d 1310, 1317-18 (N.D. Ga. 2009). For example, under Medicare's prospective payment system, hospitals are reimbursed at a predetermined rate based on a patient's diagnosis. See United States ex rel. Digiovanni v. St. Joseph's/Candler Health Sys., Inc. , No. 04-190, 2008 WL 395012, at *6 (S.D. Ga. 2008). Where relators have alleged fraud in connection with a hospital's claims for Medicare reimbursement, courts have frequently found a lack of materiality and held that FCA liability cannot attach without "a causal relationship between the alleged falsehood and amount the government paid." United States ex rel. Kennedy v. Aventis Pharms., Inc. , No. 03-2750, 2008 WL 5211021, at *3 (N.D. Ill. 2008).

However, courts have recognized that the Government is harmed by false statements that fraudulently inflate fixed payments from Government programs. See, e.g., United States ex rel. Hunt v. Merck–Medco Managed Care, L.L.C. , 336 F. Supp. 2d 430, 442 (E.D. Pa. 2004) (refusing to dismiss Government's FCA claim where payment was a "statistically weighted average of the past years' subscription costs" and defendant's "false claims wrongly inflated subscription costs"). A relator may thus allege FCA liability based on the submission of factually false claims if the rate of reimbursement was inflated as the direct result of a defendant's false statements. See, e.g., United States ex rel. Ruckh v. CMC II LLC , No. 11-1303, 2016 WL 7665187, at *2-3 (M.D. Fla. Dec. 1, 2016) (recognizing claims of factual falsity based on alleged "false inflation of ADL scores to increase [Resource Utilization Group] scores (and, hence, to falsely increase Medicare payments)"). In such cases, relators are required to plead a connection "between the false claims and the increase in payouts"—i.e. , the "causal chain that affected payment from the program." Portilla , 2014 WL 1293882 at *15 ;

For example, in Portilla , the court considered allegations similar to those advanced in this case: "1) [defendant] represented certain patient conditions on its MDS entries, but 2) did not provide services commensurate with the level to be expected of those patients." 2014 WL 1293882 at *16. In that case, the relator specifically alleged that "bed alarms and abdominal binders" were not provided to residents who required them. Id. at *15. The court dismissed the relator's claims, concluding that she had not adequately pled the connection between the missing items and a particular "[Resource Utilization Group] classification" and per diem rate of reimbursement. Id. at *15-16.

In contrast, relator in this case has alleged the "causal chain that affected payment from the program." Portilla , 2014 WL 1293882 at *15. As clearly set forth in the MDS form itself and explained by CMS' manuals for providers, the assistance provided to residents by facility staff in performing ADLs is reported in the MDS assessment and directly impacts the residents' Resource Utilization Group classifications and corresponding rate of reimbursement. Facilities are instructed to identify "what the resident does for himself during each episode of each ADL activity definition as well as the type and level of staff assistance provided." Defs.' Req. Judicial Notice, Ex. C at G-3. Notwithstanding the fact that facilities are not reimbursed for specific services provided to residents and that staff are instructed to code for the "most support" provided to the resident during the look-back period, the amount of reimbursement per resident is determined in part by reference to the level of assistance reported in Section G of the MDS. Relator thus plausibly alleges liability under the FCA when he states that defendants caused their facilities to falsely report the level of support provided to residents in Section G of their MDS assessments and thus inflate Resource Utilization Group classifications and corresponding rates of reimbursement. Am. Compl. ¶¶ 100, 112, 122. As the alleged misrepresentations in this case directly affected the amount of reimbursement, the Court concludes that relator has sufficiently alleged their materiality.

b. Legally False Claims

"[A] claim is legally false when the claimant knowingly falsely certifies that it has complied with" a material statute, regulation, or contractual provision. Wilkins , 659 F.3d at 305. A false certification may be either express or implied. "Under the ‘express false certification’ theory, an entity is liable under the FCA for falsely certifying that it is in compliance with regulations which are prerequisites to Government payment in connection with the claim for payment of federal funds." Id. (quoting Rodriguez v. Our Lady of Lourdes Med. Ctr. , 552 F.3d 297, 303 (3d Cir. 2008) ). Implied false certification liability "attaches when a claimant seeks and makes a claim for payment from the Government without disclosing that it violated regulations that affected its eligibility for payment." Id. ; see also Universal Health Servs., Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S. Ct. 1989, 1995, 195 L.Ed.2d 348 (2016).

Relator makes allegations under both theories of legal falsity. The alleged false certifications fall into two categories: (1) express false certifications of accuracy in MDS forms submitted by defendants' facilities and (2) express and implied false certifications of compliance with federal laws and regulations governing staffing and allocation and use of Government funds. The Court considers both categories in turn.

(1) Express False Certifications of Accuracy

As discussed supra , relator alleges that defendants' facilities submitted false MDS forms. Am Compl. ¶ 10. Courts have held that the submission of false MDS forms supports an FCA claim under the theory of express false certification. See DePaul Health System , 454 F.Supp.3d at 498 ("The submission of a false or inaccurate MDS form constitutes an express false certification because nursing home facilities must complete these documents and certify that they are accurate.") (citing United States ex rel. Absher v. Momence Meadows Nursing Ctr., Inc. , 764 F.3d 699, 713 (7th Cir. 2014) ).⁹

9 In his Opposition to the Motion to Dismiss, relator also identifies allegedly false certifications of accuracy in CMS-1500 forms submitted by defendants' facilities. Opp'n 8-9. However, relator's Amended Complaint only alleges express false certifications of accuracy in MDS forms submitted by the facilities. Accordingly, the Court will not consider these new allegations related to CMS-1500 forms. See Hughes v. UPS , 639 F. App'x 99, 104 (3d Cir. 2016) ("[I]t is axiomatic that the complaint may not be amended by the briefs in opposition to a motion to dismiss.").

(2) Express and Implied False Certification of Compliance with Federal Laws and Regulations¹⁰

10 Relator does not distinguish between the two theories of legal falsity when alleging that defendants' facilities failed to comply with federal laws and regulations, but rather argues that the distinction is irrelevant after the Supreme Court's decision in Escobar. Opp'n 23-25. Courts in this district have maintained the distinction between express and implied false certifications even after the Escobar decision. See, e.g., DePaul , 454 F.Supp.3d at 498–99. This Court concludes that relator's allegations fall into both categories as relator has identified express certifications of compliance with federal laws and regulations and contends that all of the Medicare and Medicaid payments received by the facilities were conditioned on compliance with the identified laws and regulations. Am. Compl. ¶ 117.

Relator also alleges that defendants' facilities expressly certified compliance with federal laws and regulations when filing Medicare Enrollment Applications (CMS-855A), Health Insurance Benefit Agreements (CMS-1561), Medicaid Provider Agreements, and CMS-1500 forms. Am. Compl. ¶¶ 42, 43, 47, 116; Opp'n 8-9. According to relator, these certifications were made false by the facilities' noncompliance with federal statutes and regulations governing staffing and allocation of Government funds. Am. Compl. ¶ 117.

In particular, relator cites a CMS regulation requiring nursing facilities to "provide services by sufficient numbers of ... personnel on a 24-hour basis to provide nursing care to all residents in accordance with resident care plans." 42 C.F.R. § 483.35(a)(1).¹¹ Section 483.35 further provides that:

11 Relator's Amended Complaint uses an outdated citation for this regulation. Relator cites to 42 C.F.R. § 483.30, but the regulation was moved to § 483.35 in 2016. See Reform of Requirements for Long-Term Care Facilities, 80 Fed. Reg. 42,168, 42,199 (proposed July 16, 2015) ("Under the proposed reorganization, requirements for nursing services currently located at § 483.30 would be located at proposed § 483.35."); Mot. Dismiss 13 n.9.

The facility must have sufficient nursing staff with the appropriate competencies and skills sets to provide nursing and related services to assure resident safety and attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident, as determined by resident assessments and individual plans of care and considering the number, acuity and diagnoses of the facility's resident population in accordance with the facility assessment required at § 483.70(e).

Id. In addition, relator cites provisions of the Social Security Act that require nursing facilities to provide services "to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident" in fulfilling resident care plans. 42 U.S.C. § 1395i-3(b)(4)(A)(i) ; 42 U.S.C. § 1396r-(b)(4)(A)(i).

Relator alleges that the above statutory provisions and regulations require every nursing facility to "have sufficient numbers of nursing staff ... to provide all nursing and related care services to each resident as defined by and in accordance with his/her MDS and individualized care plan." Am Compl. ¶ 74. According to relator, defendants must staff their facilities "based on the resident acuity, including the ADL services defined in MDS Section G that are required by each home's unique resident population." Id. Relator claims that defendants "deliberately ignored" this obligation to staff based on resident acuity. Id. ¶ 75.

Defendants contend that relator provides no basis "for his belief that the Facilities failed to comply with staffing requirements in a manner that rendered any claim false." Defs.' Resp. 9. According to defendants, relator's allegations with respect to staffing policies do not violate any state's specific requirements for average nursing hours per resident. Mot. Dismiss 6-7, 14. The Court rejects defendants' argument that relator has failed to allege violations of the relevant federal laws and regulations governing staffing.

United States ex rel. Scharber v. Golden Gate National Senior Care involved allegations similar to those at issue in this case—specifically that the defendants had "determined staffing levels by preset budgets, rather than the residents' actual needs" and "consistently did not have enough staff working to provide the required level of care to ... residents." 135 F. Supp. 3d 944, 951 (D. Minn. 2015). The Scharber court refused to dismiss the claims because the fixed budgets allegedly "led to substandard care and unnecessarily high Medicare reimbursements" in violation of federal regulations governing nursing facilities. Id. at 962. Similarly, in this case, the Court concludes that relator has sufficiently alleged noncompliance with federal staffing requirements based on his particularized description of defendants' staffing policies and the substandard care that resulted.¹² Relator also alleges that Medicare and Medicaid payments were conditioned on compliance with regulations governing "nursing home allocation and use of government funds," and claims that defendants fraudulently diverted Medicare and Medicaid funds from their nursing home operations. Am. Compl. ¶¶ 117, 130. In the Amended Complaint, relator specifically cites 42 C.F.R. § 483.75 as governing this issue. Id. This is an erroneous citation as § 483.75 relates to the "quality assurance and performance improvement (QAPI) program." 42 C.F.R. § 483.75. In responding to defendants' Motion to Dismiss, relator attempts to correct this error by claiming that 42 C.F.R. § 483.35 supports his claims regarding the allocation and use of funds. Opp'n 26. However, § 483.35 makes no reference to the allocation or use of Government funds. The Court thus concludes that relator fails to state a claim based on the implied and express false certification of compliance with regulations governing allocation and use of Government funds and grants defendants' Motion to the extent it seeks to dismiss such claims. This decision is without prejudice to relator's right to file a second amended complaint within fifteen days asserting those claims if warranted by the facts and applicable law as set forth in this memorandum.

12 Some of the allegations in the Amended Complaint suggest that relator intends to proceed on a worthless services theory of liability. See Am. Compl. ¶¶ 44-45, 116. Courts have recognized that "a nursing home that does not care for its residents in a way that promotes their quality of life may be liable under a worthless services theory," but "more than mere regulatory noncompliance is required for liability to attach." DePaul , 454 F.Supp.3d at 495. Rather, the "noncompliance must be so great that effectively no services were provided." Id. ; see also In re Genesis Health Ventures, Inc. , 112 F. App'x 140, 143 (3d Cir. 2004). The Court concludes that relator has not asserted a claim based on a worthless services theory of liability in the Amended Complaint—he has not stated that the care at defendants' facilities was so substandard as to be tantamount to "no services." Id.

(3) Materiality of the Alleged False Certifications

Defendants argue that relator has not adequately alleged that compliance with the cited federal staffing requirements was material to the Government's payment decision. Defs.' Resp. 9. Defendants say nothing in their Motion to Dismiss about the materiality of the alleged false certifications of accuracy in MDS forms submitted by defendants' facilities. This Court notes that courts have held that the submission of inaccurate MDS forms is material as the forms "specifically affirm that reimbursement is ‘conditioned on the accuracy and truthfulness of [the] information’ contained in the forms" and "payment per patient is based on the information contained in the MDS forms." DePaul Health System , 454 F.Supp.3d at 502 (quoting Absher , 764 F.3d at 713 ). The Court agrees with defendants, however, that relator has not adequately alleged that compliance with the cited federal staffing requirements is material to the Government's payment decision.

In Escobar , the Supreme Court affirmed that "a misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act." Id. at 2002.¹³ The Supreme Court further held that a "misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment." Escobar , 136 S. Ct. at 2003. While such a label is "relevant," it is not dispositive. Id. The Supreme Court also rejected the argument that "any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation." Id. at 2004.

13 The Supreme Court made clear that the materiality inquiry is "demanding" but not "too fact intensive" for courts to apply at the dismissal stage. Escobar , 136 S. Ct. at 2003, 2004 n.6

Rather, the Supreme Court focused the materiality inquiry on the "effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Id. at 2002 (quoting 26 R. Lord, Williston on Contracts § 69:12, p. 549 (4th ed. 2003) ). Courts should consider "evidence that the defendant knows that the Government consistently refuses to pay claims ... based on noncompliance with the particular statutory, regulatory, or contractual requirement." Id. "Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material." Id. In line with this reasoning, courts have held, post- Escobar , that the Government's decision not to intervene in the action weighs against materiality. See Polansky v. Exec. Health Resources, Inc. , 422 F. Supp. 3d 916, 938-39 (E.D. Pa. 2019) (collecting cases).

Relator alleges that compliance with federal staffing requirements is a "condition of Medicare/Medicaid reimbursement." Am. Compl. ¶ 40. Relator cites CMS' State Operations Manual, which states that "[s]killed nursing facilities and nursing facilities must be in compliance with the requirements in 42 CFR Part 483, Subpart B to receive payment under Medicare or Medicaid." Zipperian Decl. Ex. E § 7200; Am. Compl. ¶ 36. Relator also cites the Medicare Enrollment Application (CMS-855A), which states that payment of Medicare claims is "conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions." Am. Compl. ¶ 42; Zipperian Decl., Ex. A § 15.A(3).

The Court concludes that relator has not sufficiently alleged the materiality of the staffing requirements cited in the Amended Complaint. Relator's references to boilerplate language conditioning payment under Medicare and Medicaid on compliance with all laws and regulations are not sufficient to satisfy the demanding standard established in Escobar. See United States ex rel. Porter v. Magnolia Health Plan, Inc. , No. 18-60746, 810 Fed.Appx. 237, 241 (5th Cir. April 15, 2020) (describing provision in Medicaid contract requiring party to adhere to "applicable federal and state law ..., regulations and standards" as too general to support an FCA claim). Relator pleads no other facts to support his allegation that the staffing requirements in 42 C.F.R. § 483.35(a)(1) or the Social Security Act are material to the Government's payment decision under the Escobar standard.

The Court thus grants defendants' Motion to the extent it seeks to dismiss relator's claims based on implied and express false certification of compliance with federal staffing requirements. This decision is without prejudice to relator's right to file a second amended complaint within fifteen days asserting those claims if warranted by the facts and applicable law as set forth in this memorandum.

iii. Element Three: Scienter

Defendants argue that relator "has not and cannot allege that any Defendants knew the law, violated the law, and knowingly submitted false claims." Reply 10. The Court disagrees with defendants on this issue.

Knowledge is an essential element of a relator's claim under the FCA. See 31 U.S.C. § 3729(a)(1)(A)-(B). The FCA defines "knowing" as "actual knowledge," "deliberate ignorance of the truth or falsity of the information," or "reckless disregard of the truth or falsity of the information." Id. § 3729(b)(1)(A)(i)-(iii). "Proof of specific intent to defraud" is not required. Id. § 3729(b)(1)(B). Moreover, under Rule 9(b), "allegations of knowledge may be alleged generally and need not be pled with particularity." Exec. Health Res. , 196 F. Supp. 3d at 503. In support of his factual falsity allegations, relator alleges that defendants knew that staffing levels they mandated and enforced "made it impossible to provide for the Section G needs of residents." Id. ¶ 96. Relator avers that defendants were aware that the "core care services" required by high acuity residents "vastly exceeded the physical work capacity" of the facilities' limited staff. Id. In support of his remaining express false certification allegations, relator alleges that defendants knew that payment under Medicare and Medicaid "was conditioned on the accuracy and truthfulness of the information contained in" the MDS form. Id. ¶ 10. The Court concludes that relator has sufficiently alleged scienter in support of his remaining factual falsity and legal falsity theories of liability.¹⁴

14 Because the Court has concluded that relator does not sufficiently allege FCA liability under a theory of false certification of compliance with federal staffing requirements, it need not consider defendants' argument that relator cannot allege scienter because CMS' staffing standard—that a facility must have "sufficient" staffing—is "inherently ambiguous." Mot. Dismiss 16. Nevertheless, the Court notes that it is unpersuaded by defendants' contention that, in the absence of a federally mandated staffing ratio or minimum number of hours of nursing care, the requirements set forth in 42 C.F.R. § 483.35 are ambiguous. Indeed, in proposing amendments to the regulation in 2016, CMS made clear that it was refusing to require specific numbers of staff or hours of nursing care out of concern that doing so "could result in staffing to that number rather than to the needs of the resident population." Reform of Requirements for Long-Term Care Facilities, 80 Fed. Reg. 42,168, 42,201 (proposed July 16, 2015).

iv. State Law Claims

Defendants contend that, to the extent that the Medicaid programs in Colorado, Georgia, Indiana, Massachusetts, Montana, Nevada, North Carolina, Virginia, Washington, and Wisconsin utilize the same Resource Utilization Group-based reimbursement methodology as Medicare, relator's Medicaid fraud claims under the laws of those states (Counts 4-5, 8-23, 26-31) fail for the same reason as his FCA claims. Mot. Dismiss 12; Defs.' Resp. 8. The Court disagrees with defendants on this issue. The Court has ruled that relator has stated a claim for relief under the FCA based on the submission of false MDS forms and inflation of Resource Utilization Group billing codes. It also concludes that relator states claims for relief under the laws of states that employ Medicaid reimbursement systems that adjust reimbursement based on the MDS assessment.

Defendants further argue that, "[a]s to any Medicaid programs that deviate from Resource Utilization Group-based and/or Medicare-based reimbursement methodologies, Relator has presented no theory as to how any facility submitted a false claim to such program." Mot. Dismiss 12. Relator acknowledges that the California, Connecticut, and Tennessee Medicaid programs "do not use a case mix index in making adjustments to the per diem rate." Am. Compl. ¶ 38. Defendants thus contend that relator has failed to plead how their practices "violated the state Medicaid program's reimbursement rules" in those particular states. Mot. Dismiss 12.

The Court agrees with defendants that, absent specific allegations of how reimbursement in California, Connecticut, and Tennessee was affected as a result of the falsification of MDS forms, relator has failed to sufficiently allege factual falsity under the laws of California, Connecticut, or Tennessee. Relator has further failed to allege how express false certifications of accuracy in MDS forms submitted in those states were material. As discussed supra , courts have upheld the materiality of such false certifications of accuracy in the Medicare context in part because "payment per patient is based on the information contained in the MDS forms." DePaul , 454 F.Supp.3d at 502. Relator fails to explain how falsified MDS forms are material to payment under Medicaid programs that do not adjust reimbursement based on the allegedly falsified information in the MDS form beyond claiming that submitting accurate MDS information is a condition of payment under Medicaid. Am. Compl. ¶¶ 46, 53. As Escobar makes clear, a "misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment." Escobar , 136 S. Ct. at 2003. Accordingly, the Court grants defendants' Motion to the extent it seeks to dismiss relator's remaining claims on behalf of California, Connecticut, and Tennessee based on factual falsity and express false certifications of accuracy in MDS forms in Counts Three, Six, Seven, Twenty-Four, and Twenty-Five. Such claims are dismissed without prejudice.

v. Rule 9(b)

Defendants contend that relator "does not make a single allegation that distinguishes between Defendants" and thus fails to satisfy Rule 9(b). Mot. Dismiss 17. Defendants argue that relator has "generically lump[ed] each individual together as one entity by referring only to ‘defendants’ collectively." Id. (quoting Esposito v. I-Flow Corp. , No. 10-3883, 2011 WL 5041374, at *4 (E.D. Pa. Oct. 24, 2011) ).¹⁵

15 Defendants note that relator's specific allegations arise from the time he worked at Heritage Manor—a nursing facility relator alleges was operated by Kindred Nursing Centers, LP. Am. Compl. Ex. 1. Neither Heritage Manor nor Kindred Nursing Centers, LP are named as defendants. Defendants also emphasize that, according to relator's allegations, the staffing levels dictated by corporate policy were higher than the staffing practices observed at the Heritage Manor facility. Mot. Dismiss 18; Am. Compl. ¶¶ 75, 79, 83, 85. However, as the Court concludes that relator has sufficiently alleged a top-down corporate scheme to defraud the Government by Kindred Healthcare, Inc. and its subsidiary companies, his specific allegations about practices in one of the facilities in Kindred's network are sufficient to allege a nationwide scheme. See U.S. ex rel. Tahlor v. AHS Hosp. Corp. , No. 08-02042, 2014 WL 4494793, at *4 (D.N.J. Sept. 10, 2014) ("[C]ourts have accepted, for purposes of a motion to dismiss, that a defendant violating the FCA in one location was engaging in the same conduct in another location."). This ruling is without prejudice to defendants' right to raise the issue after completion of discovery by motion for summary judgment and/or at trial if warranted by the facts and applicable law as stated in this Memorandum.

To satisfy Rule 9(b) in the context of FCA claims in the Third Circuit, "it is sufficient for a plaintiff to allege ‘particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’ " Foglia , 754 F.3d at 155 (quoting Grubbs , 565 F.3d at 190 ). The Third Circuit has explicitly refused to apply a higher standard—as adopted in other circuits—that a plaintiff must show "representative samples" of the alleged fraudulent conduct, "specifying the time, place, and content of the acts and the identity of the actors." Id. at 155. A relator is not required to show "the exact content of the false claims in question" to survive a motion to dismiss, id. , but must allege "all of the essential factual background that would accompany the first paragraph of any newspaper story—that is, the who, what, when, where, and how of the events at issue," Majestic Blue Fisheries , 812 F.3d at 307 (quoting In re Rockefeller Ctr. Props., Inc. Secs. Litig. , 311 F.3d at 217 ). "Rule 9(b) does not allow a complaint to merely lump multiple defendants together but requires plaintiffs to differentiate their allegations when suing more than one defendant and inform each defendant separately of the allegations surrounding his alleged participation in the fraud." U.S. v. Corinthian Colleges , 655 F.3d 984, 997-98 (9th Cir. 2011). However, in cases where the alleged fraud was "perpetrated by sophisticated corporate entities that are related to each other" and plaintiffs allege that defendants were alter egos of each other, courts have held that collective allegations are sufficient to put defendants on notice. Ponzio v. Mercedes-Benz USA, LLC , No. 18-12544, 447 F.Supp.3d 194, 226–27 (D.N.J. Mar. 11, 2020) (quoting Gray v. BMW of N. Am., LLC , No. 13-3417, 2014 WL 4723161, at *2 (D.N.J. Sept. 23, 2014) ). Moreover, if a relator "has pled some evidence that each [defendant] had some role in the alleged scheme," he is "not required to allege more specific proofs." Negron v. Progressive Casualty Ins. Co. , No. 14-577, 2016 WL 796888, at *10 (D.N.J. Mar. 1, 2016). As long as that requirement is satisfied, "[t]he discovery process will flush out the [several] entities' individual conduct." United States v. Medco Health Sys., Inc. , No. 12-522, 2014 WL 4798637, at *11 n.12 (D.N.J. Sept. 26, 2014).

Relator alleges the who, what, when, where, and how of the fraudulent scheme and the role played by each defendant in the scheme. According to relator, Kindred Healthcare, Inc.'s wholly-owned subsidiaries owned and operated a network of nursing facilities, and each were "merely an instrumentality or conduit through which Kindred did business and operated the facilities." Am. Compl. ¶ 26. Relator further states that "[d]efendants exerted pervasive and continual control over the nursing homes ... such that the nursing homes were mere agents, instrumentalities and conduits through which Defendants did business." Id. Defendants enforced strict staffing budgets and pressured facilities to admit as many residents as possible. Id. ¶¶ 92-93, 95, 115. In addition, relator makes specific allegations from his time spent at Heritage Manor, which, under the "relaxed" Rule 9(b) pleading standard applied in the Third Circuit, is enough to establish a "nationwide inference of fraud." U.S. ex rel. Spay v. CVS Caremark Corp. , 913 F. Supp. 2d 125, 174-75 (E.D. Pa. Dec. 20, 2012) ; see also Tahlor , 2014 WL 4494793 at *4 ("[C]ourts have accepted, for purposes of a motion to dismiss, that a defendant violating the FCA in one location was engaging in the same conduct in another location."). The Court therefore concludes that relator's collective allegations satisfy Rule 9(b).

B. Liability for Facility Conduct

Defendants argue that relator "has not established why the entities he has sued should be liable for conduct at the facility level, particularly the conduct of the facility where he worked for three months"—Heritage Manor. Mot. Dismiss 17-18. The Court disagrees with defendants.

To establish a parent corporation's liability for its subsidiary's actions in an FCA action, a "[r]elator must be able to demonstrate either that [the parent corporation] is liable under a veil piercing or alter ego theory, or that it is directly liable for its own role in the submission of false claims." U.S. ex rel. Hockett v. Columbia/HCA Healthcare Corp. , 498 F. Supp. 2d 25, 60 (D.D.C. 2007). Relator alleges both direct and alter ego liability. Am. Compl. ¶¶ 132, 133. The Court addresses each theory in turn. i. Direct Participation

A parent corporation can be held liable for the conduct of its subsidiary "if it was directly involved in submitting false claims or causing them to be submitted to the government." Hockett , 498 F. Supp. 2d at 62 ; see also Exec. Health Res. , 196 F. Supp. 3d at 513 ("Numerous courts have held that some level of direct involvement in causing the submission of false claims to the government is necessary for direct liability under the FCA.").

Relator avers that defendants directly participated in FCA violations by "determining and controlling at each Kindred nursing home: (i) the numbers of staff and hours of labor at each facility, (ii) the expenditures for labor, (iii) the revenue targets, census targets and payor-mix targets, and (iv) resident recruitment strategies and discharge practices"; "overriding the decisions of nursing home administrators, department heads and licensed nursing staff charged with the legal responsibility for determining the staffing necessary to meet the needs of residents"; and "centrally controlling the claims and reimbursement process at each nursing home." Id. ¶ 132. Based those averments, the Court concludes that Relator has sufficiently alleged the direct participation of defendants in causing the submission of false or fraudulent claims and certifications by defendants' nursing facilities.

ii. Alter Ego Liability

Relator also alleges that defendants and their nursing facilities were "alter egos of one another." Am. Compl. ¶ 28. Defendants contend that relator's allegations of alter ego liability are insufficient. Mot. Dismiss at 18. According to defendants, relator has merely described "common practices and processes expected of a parent-subsidiary structure" and fails to allege that failure to disregard the corporate form would result in an injustice. Id. at 20-21. The Court disagrees with defendants on this issue.

"[F]ederal common law (rather than the law of the state where a corporation is incorporated), governs the veil-piercing question in a FCA case." U.S. ex rel. Dekort v. Integrated Coast Guard Sys. , 705 F. Supp. 2d 519, 546 (N.D. Tex. 2010) ; see also United States v. Pisani , 646 F.2d 83, 86 (3d Cir. 1981). A party seeking to pierce the corporate veil must "essentially demonstrate that in all aspects of the business, the two corporations actually functioned as a single entity and should be treated as such." Pearson v. Component Tech. Corp. , 247 F.3d 471, 485 (3d Cir. 2001). Courts examine the following factors in deciding whether to pierce the corporate veil:

gross undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of debtor corporation, siphoning of funds from the debtor corporation by the dominant stockholder, nonfunctioning of officers and directors, absence of corporate records, and whether the corporation is merely a facade for the operations of the dominant stockholder.

Id. at 484–85. Further, the case "must present an element of injustice or fundamental unfairness, but a number of these factors can be sufficient to show such unfairness." United States v. Pisani , 646 F.2d 83, 88 (3d Cir. 1981). In FCA cases, courts have held that courts can "pierce the corporate veil to prevent circumvention of a statute or avoidance of a clear legislative purpose." Id. at 88.

In support of alter ego liability, relator alleges that defendants "exerted pervasive and continual control over the nursing homes ... such that the nursing homes were mere agents, instrumentalities and conduits through which Defendants did business." Am. Compl. ¶ 133. Specifically, relator claims that defendants "treated the funds of one entity as the funds of another"; "collected, distributed and shared the revenues, profits, and assets of its nursing homes"; "continually siphoned all the revenues from each of the individual nursing homes including those listed in ... into a centralized master account." Id. ¶ 135. Based on these allegations, relator claims that defendants' nursing facilities "were entirely dependent on Defendants for their continued existence and ongoing operations" and were "grossly undercapitalized with essentially all cash generated by the nursing homes' operations swept into accounts controlled by Defendants." Id. ¶ 136.

The Court concludes that relator's allegations of undercapitalization and siphoning of funds are sufficient to allege alter ego liability between defendants and their nursing facilities. In this case, piercing of the corporate veil is appropriate where "the parent so dominated the subsidiary that it had no separate existence." Pearson , 247 F.3d at 484. Moreover, as the Third Circuit has held, the corporate veil can be pierced where "the Medicare statute can be circumvented [the defendant] is not personally liable." Pisani , 646 F.2d at 88. In this case, failing to hold defendants liable for facility conduct would circumvent the statute by preventing full recovery because the nursing facilities are grossly undercapitalized and entirely dependent on defendants. The Court's decision is without prejudice to defendants' right to raise the issue after completion of discovery by motion for summary judgment and/or at trial if warranted by the facts and applicable law as stated in this Memorandum.

C. Public Disclosure Bar

The FCA's public disclosure bar provides that a qui tam suit shall be dismissed "if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed," unless "the person bringing the action is an original source of the information." 31 U.S.C. § 3730(e)(4). The FCA enumerates the particular sources of public disclosures: (1) "Federal criminal, civil, or administrative hearing in which the Government or its agent is a party"; (2) "congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation"; and (3) "the news media." Id. § 3730(e)(4)(A)(i)-(iii). An "original source" is defined as an individual who "has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section." Id. § 3730(e)(4)(B).¹⁶ The Third Circuit has explained the doctrine in the form of an equation: "[i]f X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e. , the conclusion that fraud has been committed." United States ex rel. Zizic v. Q2Administrators, LLC , 728 F.3d 228, 236 (3d Cir. 2013). "Where the fraud has been publicly disclosed—either because the public documents set out the allegation of fraud itself [Z] or its essential elements [X+Y]—a relator's claim will be barred." Omnicare , 903 F.3d at 84 ; see also United States ex rel. Atkinson v. Pa. Shipbuilding Co. , 473 F.3d 506, 519 (3d Cir. 2007) ("To be ‘based upon’ the publicly revealed allegations or transactions the complaint need only be ‘supported by’ or ‘substantially similar to’ the disclosed allegations and transactions.").

16 The provisions setting forth the public disclosure bar were amended on March 23, 2010 and, because the amendment is not retroactive, "claims based on conduct occurring before March 23, 2010 are still governed under the prior jurisdictional version of the statute." United States v. Omnicare, Inc. , 903 F.3d 78, 83 n.5 (3d Cir. 2018). Significant changes to the bar included limiting "civil hearings" to "federal civil hearings in which the government or its agent is a party." Compare 31 U.S.C. § 3730(e)(4)(A) (2006) to 31 U.S.C. § 3730(e)(4)(A)(i) (2010). The amendments also expanded the definition of "original source" by removing the prior requirement that the relator have "direct knowledge." See United States ex rel. Denis v. Medco Health Sols., Inc. , 299 F. Supp. 3d 610, 613 (D. Del. 2017). The Third Circuit has held that the final relevant change—"that the relator's alleged fraud need only be ‘substantially the same’ as, rather than ‘based on,’ the publicly disclosed allegations or transactions in order to trigger the public disclosure bar—merely codified the law as it already existed in [the Third] Circuit." Omnicare , 903 F.3d at 83 n.6.

Defendants cite a series of sources that they argue trigger the public disclosure bar: (1) federal investigations and reports on staffing and resident acuity at nursing facilities, (2) filings from prior lawsuits involving similar allegations of insufficient staffing at Kindred facilities, and (3) news media reporting Kindred's settlement of those lawsuits. Mot. Dismiss 25-31. The Court summarizes each group of disclosures in turn before evaluating whether they publicly disclose allegations with respect to relator's remaining claims—that defendants' facilities submitted false MDS reports and claims for payment based on inflated Resource Utilization Group billing codes.

i. Federal Administrative Investigations and Reports

First, defendants argue that the level of staffing and their facilities "relative to resident acuity and case-mix" is "routinely disclosed in federal administrative investigations and reports." Mot. Dismiss 25. Defendants point out that "both staffing and acuity data is reported to the government, synthesized by CMS, and publicly disclosed on CMS' Nursing Home Compare website." Id. at 26; Defs.' Req. Judicial Notice Ex. B at 8. Second, defendants argue that "any staffing issues" were "disclosed to the government" through the government's annual surveys conducted by CMS in coordination with the state governments. Mot. Dismiss 27. Third, defendants cite CMS' 2001 report to Congress as publicly disclosing "the philosophy that Relator pushes here"—that "high staffing leads to better care." Id. at 27.

ii. Civil Hearings

Defendants next contend that relator's Amended Complaint merely "parrots information previously disclosed in civil hearings, in some cases directly quoting from publicly disclosed materials, including depositions transcripts and affidavits." Mot. Dismiss 28. Defendants cite three specific actions that trigger the public disclosure bar: Walsh v. Kindred Healthcare , No. 11-00050 (N.D. Cal. 2011); Sande v. Kindred Healthcare, Inc., et al. , No. 10-00329 (W.D. Wa. 2010); Duffy v. Kindred Hosps. East, LLC , No. 03-6655 (E.D. Pa. 2004).¹⁷

17 As the Government was not a party to any of the civil actions cited by defendants, they can only serve to bar the pre-March 23, 2010 claims. Opp'n 16-17.

Duffy was an employment action in which the plaintiff alleged he was wrongfully discharged by Kindred Hospitals East, L.L.C. because of his "refusal to willingly participate or condone Kindred's utilization of an hours per patient day staffing model." Duffy v. Kindred Hospitals East, L.L.C. , 2004 WL 1490339, at *1 (E.D. Pa. June 30, 2004). However, Duffy was initiated in 2003 and therefore predates the particular staffing policy at issue in this case, which relator alleges was implemented in April of 2006. Opp'n 40; Am. Compl. ¶ 75.

Walsh was a class action that alleged that various Kindred entities including Kindred Healthcare, Inc., Kindred Operating, Inc. and Kindred Nursing Centers West, L.L.C. had not "provided sufficient staffing of nurses at skilled nursing facilities ... in California" in accordance with California's specific staffing requirements for nursing facilities. See Walsh v. Kindred Healthcare , 798 F. Supp. 2d 1073, 1079 (N.D. Cal. 2011). The plaintiffs averred that defendants failed to maintain "statutorily-mandated nursing staff levels" and, as a result, the plaintiffs "suffered several indignities and other harms as a result of inadequate nurse staffing." Id.

Sande was a malpractice action brought against Kindred Healthcare, Inc., Kindred Healthcare Operating, Inc., Kindred Healthcare Services, Inc., Kindred Nursing Centers West, LLC, and certain other entities and employees. See Defs.' Req. Judicial Notice Ex. A, First Amended Complaint, Sande v. Kindred Healthcare, Inc., et al. , No. 2:10-cv-00329-JLR (W.D. Wa. 2010). The Sande plaintiff also alleged that defendants directed a single facility "to maximize revenues by: (a) increasing its occupancy rates/census by targeting high acuity, high rate of pay residents even though the needs of such residents exceeded the care capabilities of the nursing home's employees; and (b) staffing it with dangerously low numbers of competent direct care givers." Mot. Dismiss 36. The Sande plaintiff similarly alleged that defendants "refused to implement policies, procedures and systems to ensure that: (a) the acuity levels and needs of residents were consistent with the numbers and qualifications of direct caregivers; and (b) needed care and treatment was provided in accordance with laws and professional standards." Id. at 39.

iii. News Reports

Defendants contend that staffing issues at their facilities "have been disclosed by the news media and online." Mot. Dismiss 29. Defendants cite news sources recapping the settlement of the Walsh class action mentioned above. Id. at 30. Defendants also cite an anonymous posting on an online forum—AllNurses.com—in which allegations of unsafe staffing ratios were described.¹⁸ Defs.' Req. Judicial Notice Exs. G-K.

18 Anonymous postings on online forums have not been recognized as "news media" within the meaning of the FCA. See U.S. ex rel. Simpson v. Bayer Corp. , No. 05-3895, 2013 WL 4710587, at *7 (D.N.J. Aug. 30, 2013), abrogated on other grounds by United States ex rel. Petratos v. Genentech Inc. , 855 F.3d 481 (3d Cir. 2017) ("Unlike an article on a website maintained by a recognized news outlet, a trade journal, or even a promotional website geared toward the dissemination of information, the anonymous postings in this case an amounted to nothing more than vague allegations in an informal forum discussion without any indicia of reliability or substantiation."). Defendants' attempt to distinguish Simpson by arguing that AllNurse.com is a trusted news source is unavailing. Defs.' Resp. 17-18. The anonymous posts themselves do not qualify as "news media."

iv. Conclusion

The public disclosure bar requires the Court to consider whether the identified documents bar relator's remaining claims of factual falsity and express false certification based on the alleged submission of false MDS forms and claims for payment containing inflated Resource Utilization Group billing codes.¹⁹ The Court concludes that they do not. While the sources cited by defendants broadly disclose staffing issues and defendants' failure to staff based on resident acuity, they disclose neither the specific allegations that defendants' facilities submitted false MDS reports and falsely inflated Resource Utilization Group billing codes nor the essential elements of that alleged fraud.

19 The Court need not consider whether the cited public disclosures bar plaintiff's claims under a theory of false certifications of compliance with federal staffing requirements, because the Court has concluded that relator has not sufficiently alleged such claims, and those claims have been dismissed.

V. CONCLUSION

For the foregoing reasons, the Court grants in part and denies in part defendants' Motion to Dismiss. The Court grants defendants' Motion to the extent it seeks to dismiss relator's claims under the laws of California, Connecticut, and Tennessee in Counts Three, Six, Seven, Twenty-Four, and Twenty-Five of the Amended Complaint, and dismisses those claims without prejudice to relator's right to file a second amended complaint within fifteen (15) days asserting those claims if warranted by the facts and applicable law as set forth in this Memorandum. The Court grants defendants' Motion to the extent it seeks to dismiss relator's claims under the FCA and analogous state laws based on the implied and express false certification of compliance with federal laws and regulations governing staffing and allocation and use of Government funds in Counts One, Two, Four, Five, Eight through Nineteen, Twenty-Two, Twenty-Three, and Twenty-Six through Thirty-One of the Amended Complaint, and dismisses those claims without prejudice to relator's right to file a second amended complaint within fifteen (15) days asserting those claims if warranted by the facts and applicable law as set forth in this Memorandum. Relator's claims asserted on behalf of New Hampshire in Counts Twenty and Twenty-One are voluntarily dismissed without prejudice by relator. The Motion to Dismiss is denied in all other respects.

Relator's remaining claims are as follows: (1) claims based on the alleged express false certifications of accuracy in MDS forms and (2) claims based on the alleged factual falsity of claims submitted under the FCA and analogous laws of Colorado, Georgia, Indiana, Montana, Massachusetts, Nevada, North Carolina, Virginia, Washington, and Wisconsin in Counts One, Two, Four, Five, Eight through Nineteen, Twenty-Two, Twenty-Three, and Twenty-Six through Thirty-One of the Amended Complaint.

An appropriate order follows.

ORDER

AND NOW , this 29th day of June, 2020, upon consideration of defendants' Notice of Motion and Motion to Dismiss (Document No. 48, filed August 22, 2019), Request for Judicial Notice (Document No. 49, filed August 22, 2019), Memorandum of Law in Opposition to Motion to Dismiss (Document No. 51, filed September 20, 2019), and Response in Support of Motion to Dismiss (Document No. 53, filed September 30, 2019), for the reasons stated in the Memorandum dated June 29, 2020, IT IS ORDERED that defendants' Motion to Dismiss is GRANTED IN PART and DENIED IN PART as follows:

1. That part of defendants' Motion to Dismiss seeking dismissal of relator's claims under the California False Claims Act (Count Three), Connecticut False Claims Act (Counts Six & Seven), Tennessee Medicaid False Claims Act, and Tennessee False Claims Act (Counts Twenty-Four & Twenty-Five) is GRANTED and all such claims are DISMISSED WITHOUT PREJUDICE to relator's right to file a second amended complaint within fifteen (15) days asserting those claims if warranted by the facts and applicable law as set forth in the accompanying Memorandum dated June 29, 2020.

2. That part of defendants' Motion to Dismiss seeking dismissal of relator's claims, among others, based on the theory express and implied false certification of compliance with federal laws and regulations governing staffing and allocation and use of Government funds in Counts One, Two, Four, Five, Eight through Nineteen, Twenty-Two, Twenty-Three, and Twenty-Six through Thirty-One is GRANTED and all such claims are DISMISSED WITHOUT PREJUDICE to relator's right to file a second amended complaint within fifteen (15) days asserting those claims if warranted by the facts and applicable law as set forth in the accompanying Memorandum dated June 29, 2020.

3. Defendants' Motion to Dismiss is DENIED with respect to relator's remaining claims based on the theories of factual falsity and express false certification of accuracy in MDS forms in Counts One, Two, Four, Five, Eight through Nineteen, Twenty-Two, Twenty-Three, and Twenty-Six through Thirty-One.

IT IS FURTHER ORDERED THAT relator's claims asserted on behalf of New Hampshire in Counts Twenty and Twenty-One are VOLUNTARILY DISMISSED WITHOUT PREJUDICE by relator.

IT IS FURTHER ORDERED that an Initial Pretrial Conference will be scheduled in due course. Discovery may proceed in the interim.