U.S. ex Rel. Alsaker v. Centracare Health System

Full title: UNITED STATES OF AMERICA, ex rel. and JULIE ALSAKER, and LUANNE CATON…

Court: United States District Court, D. Minnesota

Date published: Jun 5, 2002

Civil No. 99-106 (JRT/RLE) (D. Minn. Jun. 5, 2002)

Opinion

Civil No. 99-106 (JRT/RLE)

June 5, 2002

D. Gerald Wilhelm, Assistant United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Minneapolis, MN, for the United States.

Gary Leo Manka, KATZ MANKA, Minneapolis, MN, for plaintiffs Julie Alsaker and Luanne Caton.

Kevin J. Hughes, Paul R. Harris and Kathleen M. Premo, HUGHES MATHEWS, P.A., St. Cloud, Minnesota, Douglas A. Kelley, William Michael, Jr. and Steven E. Wolter, DOUGLAS A. KELLEY, P.A., Minneapolis, MN, for defendants.

MEMORANDUM OPINION AND ORDER

JOHN R. TUNHEIM, United States District Judge:

This is a fraud action brought against defendants CentraCare Health System Inc., and St. Cloud Hospital pursuant to the qui tam provisions of the False Claims Act, 31 U.S.C. § 3729 et seq. Plaintiffs allege that defendants prepared and submitted false and/or fraudulent claims for home health aid visits in violation of 31 U.S.C. § 3729. The government intervened in the action pursuant to 31 U.S.C. § 3730(b)(4)(A). Defendants have moved the Court for an order dismissing all counts of the relators' complaint and Counts I, II and III of the government's amended complaint for failure to comply with Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendants also move to strike certain paragraphs of the amended complaint. For the reasons that follow, the motion to strike is granted in part and denied in part. The Court also grants defendants' motion to dismiss for failure to plead fraud claims with sufficient particularity under Rule 9(b), but will grant plaintiffs leave to file a second amended complaint to cure these deficiencies.

BACKGROUND

On January 25, 1999, plaintiffs qui tam relators Julie Alsaker and Luanne Caton ("relators") filed this action under seal pursuant to the qui tam provisions of the False Claims Act ("FCA"). Alsaker was employed at one of defendants' facilities from 1993 through 1996. Caton is the daughter of a resident who lived at one of the facilities owned and operated by defendants. The complaint alleges that since at least 1992, defendants submitted claims for reimbursement of services provided by home health aides where the aides were not trained and certified in accordance with the provisions of 42 C.F.R. § 484.36(A)(1). Relators also allege that defendants submitted false bills to Medicare for home health aid visits that were not properly reimbursable either because the claims included "padded" time records or the services provided were custodial in nature and were not related to treatment of the beneficiary's illness or injury. Complaint at ¶¶ 18-23.

The government intervened on March 16, 2001, and shortly thereafter, the case was unsealed. The government served its amended complaint on defendants on October 17, 2001, after United States Magistrate Judge Raymond L. Erickson directed the government to do so or face a recommendation of dismissal for failure to effectuate proper service and for failure to prosecute. October 11, 2001 Order at 3.¹ The amended complaint alleges six counts, three counts of alleged violations of the FCA and one count each of Unjust Enrichment, Payment By Mistake, and Common Law Recoupment. It alleges that St. Cloud Hospital, acting through its agents, from "at least" 1992 to the present, filed or caused to be filed claims for home health services which were not eligible for reimbursement under the Medicare and Medicaid programs for, among other reasons, the following:

1 The government did not file its amended complaint within the prescribed time period because the parties had agreed to defer service of the complaint until January 2002 in order to attempt to settle the claims. However, the parties failed to notify the court of this extension and in August 2001, the Magistrate Judge issued an order to show cause why the complaint had not been filed 120 days after the government intervened in the action.

a. claims were inflated by adding fifteen-minute increments of time so as to increase the amount claimed and reimbursed for personal care attendant services under Medicaid. Relator Julie Alsaker was directed by agents of Defendant St. Cloud Hospital, acting within the scope of their agency, to "pad" the time she spent providing services;

b. The claims submitted were for custodial services unrelated to any need for skilled nursing services, which makes the claims non-reimbursable under Medicare. Relator Julie Alsaker was directed by agents of the Defendant St. Cloud Hospital to provide such services to Medicare beneficiaries, and knows that those services were billed to Medicare and/or Medicaid.

Am. Complaint ¶ 22. The government undertook an investigation in June 1999 and caused a small sample of claims submitted to Medicare to be selected from among those filed for residents of one of the residential facilities owned and operated by defendants during calendar year 1995. Am. Complaint ¶ 26. This sample was reviewed for compliance with Medicare requirements and when the analysis was completed in November 1999, the fiscal intermediary determined that of the total of approximately $100,000 paid by Medicare for these claims, about $82,000 in claims were non-reimbursable for various reasons outlined in Exhibit A attached to the complaint. Id. In March 2000, the fiscal intermediary completed a Comprehensive Medical Review of defendants' home health claims submitted during January and early February 2000. Upon such review, the fiscal intermediary determined that approximately 42% of the claims submitted to Medicare were not reimbursable for a variety of reasons, including lack of medical necessity and missing documentation.

The government thus maintains that the claims which have so far been audited and were submitted to Medicare and Medicaid were false when submitted either because the service provided was not medically necessary; the service was not supported by a plan of care as required by regulation; the beneficiary receiving the service was not eligible to receive the service; the service was not provided as claimed; and/or the service represented personal care attendance not reimbursable by Medicare. Am. Complaint ¶ 33. The government further maintains that defendants knew the claims were false when submitted. Id. ¶ 34. Defendants responded to the government's amended complaint by filing this motion to dismiss and motion to strike.

DISCUSSION

Defendants move to dismiss all counts of the relators' complaint and Counts I, II, and III of the amended complaint for failure to state a claim.² Defendants also move to strike certain paragraphs pursuant to Rule 12(f). The Court first addresses the motion to strike.

2 Although defendants also move to dismiss all counts of the relators' complaint, only the amended complaint is legally relevant. "It is well-established that an amended complaint supercedes an original complaint and renders the original complaint without legal effect." Atlas Van Lines, Inc. v. Poplar Bluff Transfer Co., 209 F.3d 1064 [ 209 F.2d 1064], 1067 (8th Cir. 2000); Kenney v. Musgreves, Nos. 00-2394, 00-2775, 00-2305, 00-2396, 2000 WL 1665077 at *1 (8th Cir. Nov. 7, 2000). The government concedes as much in its response brief. Gov't Response to Motion to Dismiss at 1-2.

I. Motion to Strike

Defendants move to strike certain paragraphs from the amended complaint pursuant to Rule 12(f) of the Federal Rules of Civil Procedure. Rule 12(f) authorizes courts to strike "redundant, immaterial, impertinent or scandalous matter" from parties' pleadings. Specifically, defendants object to paragraphs 28-30 and 34(e) of the amended complaint on the basis that these paragraphs improperly describe confidential settlement discussions in violation of Rule 408 of the Federal Rules of Evidence.

Under Rule 408, evidence of conduct or statements made in compromise negotiations is inadmissible to prove liability. Fed.R.Evid. 408. Although this is a rule of evidence, courts have routinely granted motions to strike allegations in pleadings that fall within the scope of Rule 408. Austin v. Cornell Univ., 891 F. Supp. 740, 750-51 (N.D.N.Y. 1995) (granting defendant's motion to strike paragraph of complaint that alludes to settlement negotiations and falls within scope of 408), rev'd on other grounds, Walsh v. City of Auburn, 942 F. Supp. 788, 797 n. 5 (N.D.N.Y. 1996); Kelly v. L.L. Cool J., 145 F.R.D. 32, 40 (S.D.N.Y. 1992) (granting defendant's motion to strike portions of complaint that refer to settlement discussions under Rule 408 as immaterial and potentially prejudicial); Braman v. Woodfield Gardens Assocs. Realcorp Investors I ¶ 715 F. Supp. 226, 230 (N.D.Ill. 1989) (same). Upon review of the paragraphs in question, the Court agrees with defendants that these paragraphs improperly discuss settlement negotiations prohibited by Rule 408. Paragraph 28 of the amended complaint provides, in relevant part, that "defendants were contacted by the United States by letter, and invited to engage in discussions relating to settlement of potential claims." Paragraph 29 states that, "during that meeting, counsel for defendants conceded that significant issues existed concerning the reimbursability of claims filed by defendants for home health services." Paragraph 34(e) states that "attorneys for defendants, during the discussions described herein, admitted that the billing practices of defendants for home health services were deficient, and had been so at varying levels for a number of years." Accordingly, the Court grants the motion to strike these paragraphs.³

3 Defendants also object to paragraph 31 which recounts a s tatus conference between the Magistrate Judge and counsel. While the information contained in this paragraph does not directly advance plaintiff's allegations of fraud, it does provide context to the underlying action. The statement is thus not completely immaterial. The Court therefore denies this portion of defendant's motion.

II. Motion to Dismiss

Defendants argue that plaintiffs have not stated a claim for fraud with sufficient particularity. Rule 9(b) requires that "[i]n all averments of fraud, or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The Eighth Circuit has interpreted the term "circumstances" of fraud to include the "time place and contents of false representations, as well as the identity of the person making the false representation, and what was obtained or given up thereby.'" Commercial Prop. v. Quality Inns, 61 F.3d 639, 644 (8th Cir. 1995). Put another way, the complaint must read like the opening paragraph of a newspaper article: it must contain the "who, what, when, where and how" of the alleged fraud. Bennett v. Berg, 685 F.2d 1053, 1062 (8th Cir. 1982), adhered to on reh'g, 710 F.2d 1361 (8th Cir.) (en banc). One of the primary purposes of the rule is to ensure that a defendant can adequately respond and prepare a defense to charges of fraud. Greenwood v. Dittmer, 776 F.2d 785, 789 (8th Cir. 1985). As a result, "conclusory allegations that a defendant's conduct was fraudulent and deceptive are not sufficient to satisfy the rule." Commercial, 61 F.3d at 644; Parnes v. Gateway 2000, Inc., 122 F.3d 539, 549 (8th Cir. 1997).

Defendants maintain that the false claim allegations contained in both complaints fail to specify the times of occurrence of the alleged fraudulent activity (the "when"), the specific identity of the fraudulent agents (the "who") and do not describe any specific circumstances constituting fraud in specific cases. Such generic pleading, defendants argue, is clearly insufficient as cases like United States ex rel. Robinson v. Northrop Corp. ¶ 149 F.R.D. 142 (N.D.Ill. 1993), United States ex rel. Minnesota Assoc. of Nurse Anesthetists, Civ. No. 4-96-734 (ADM/JGL) at 21-23 (D.Minn. Mar. 3. 1997) ("MANA"), United States ex rel. Clausen v. Laboratory Corp. of America, Inc., 198 F.R.D. 560 (N.D. Ga. 2000), and United States ex rel. Cox v. Iowa Health Sys., 29 F. Supp.2d 1022, 1024-25 (S.D.Iowa 1998), make clear.

The government argues that the particularity requirement should be relaxed because this case involves a "complex scheme of fraud over an extended period of time."⁴ MANA, Mar. 3 1997 Order at 22 ("Less specificity in the complaint can be permitted when the fraudulent activity involves numerous transactions or the fraud occurred over a long period of time."); Clausen, 198 F.R.D. at 562 (noting that the specificity requirements are applied less stringently where the fraud occurred over an extended period of time and consisted of numerous acts); United States ex rel. Johnson v. Shell Oil Co., 183 F.R.D. 204 (E.D.Tex. 1998). Under these circumstances, the government maintains that its complaint satisfies the notice pleading standard.

4 The government also suggests that a lesser pleading standard should apply because the information is "uniquely within the control of the defendants." Am. Complaint ¶ 32. The Court disagrees. Julie Alsaker is a former employee and is alleged to have direct knowledge of the fraudulent activity and to have "witnessed" fraudulent conduct. Presumably, she would have more specific information to offer than has been plead so far. Additionally, the government has subpoena power to obtain documents, and in fact, previously exercised this power when it conducted the first of two studies to assess the merits of relators' complaint.

Having reviewed the amended complaint and the relevant caselaw, the Court concludes that the amended complaint fails to provide the sufficient level of particularity to satisfy Rule 9(b). The amended complaint suffers from many of the same deficiencies identified in cases mentioned above. For instance, the amended complaint pleads that "Relator Julie Alsaker was directed by agents of Defendant St. Cloud Hospital, acting within the scope of their agency, to `pad' the time she spent providing services" and to provide "custodial services unrelated to any need for skilled nursing services, which makes the claims non-reimbursable under Medicare." Am. Complaint ¶ 22(a), (b) (emphasis added). The complaint's generalized reference to "agents of defendant St. Cloud Hospital" is as deficient as was plaintiffs' reference to "a Northrup engineer" in Robinson, or to "defendant anesthesiologists" in MANA. Remarkably, the government suggests that this type of pleading is sufficient because defendant St. Cloud Hospital was Alsaker's employer and therefore knows with whom she had daily contact. However, the burden rests with the government, not the defendants, to plead their fraud allegations.

The Court presumes, and counsel for plaintiff acknowledged at oral argument, that Alsaker can identify the specific "agents" who directed her to "pad" her hours and to conduct non-reimbursable custodial services. These specifics are not peculiarly within the control of the defendant and they should be disclosed in the complaint.

The Court recognizes that plaintiffs' allegations involve over 30,000 claims submitted by defendants over an approximately eight-year period. For this reason, a lower standard of pleading the fraud allegations is appropriate. Nonetheless, a less stringent standard does not alleviate the plaintiffs' burden to allege any specifics of the fraud. As the district court in MANA explained:

The Court recognizes that plaintiffs allege a general practice of fraud that covers an extensive period of time. Clearly plaintiffs are not required to recite specifics for all 28,000 allegedly fraudulent transactions. Nevertheless, plaintiffs must provide some representative examples of the fraud which detail the specifics of who, where and when. Plaintiffs complaint does not once describe a single instance of the fraudulent conduct that names a specific anesthesiologist on an exact date at a particular hospital with reference to either the procedure, patient or bill. Failure to plead no specifics is insufficient to satisfy Rule 9(b), even given a lesser pleading standard for allegations of extensive fraud.

MANA, Mar. 3, 1997 Order at 23 (emphasis in original). The Court agrees with this statement and finds that the complaint must at least provide some representative examples of the alleged fraud. Counts I, II and III of the amended complaint do not accomplish this and accordingly must be dismissed for failure to comply with Rule 9(b). The Court will, however, dismiss those counts of the amended complaint without prejudice and allow the government an opportunity to file a second amended complaint which complies with the requirements of Rule 9(b). This practice is consistent with the procedure followed by other courts under similar circumstances. Robinson, 149 F.R.D. at 146 (dismissing plaintiffs' complaint without prejudice but granting plaintiffs leave to amend their complaint to bring it into compliance with Rule 9(b)); MANA, Mar. 3, 1997 Order at 24.

Because the Court finds that the complaint is subject to dismissal under 9(b), the Court will not now address defendants' arguments under Rule 12(b)(6) raised in the latter part of defendants' reply brief. Defendants may renew their motion under 12(b)(6) if plaintiffs file a second amended complaint which satisfies the pleading requirements of Rule 9(b). However, the Court pauses to remind defendants of the deferential standard of review that must be accorded plaintiffs on such a motion. The Court also notes that most of the cases relied on by defendants in support of this portion of their motion were before the court on motions for summary judgment, not motions to dismiss. See United States ex rel. Minnesota Assoc. of Nurse Anesthetists v. Allina Health Sys. Corp., Civ. No. 4-96-734, Mar. 17, 1999 (order granting summary judgment);⁵ United States ex rel. Lowell Quirk v. Madonna Towers, Inc., 278 F.3d 765 (Feb. 4, 2002) (appeal of order granting summary judgment); United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1263 (9th Cir. 1996) (appeal of district court order granting summary judgment); United States v. Adler, 623 F.2d 1287 (8th Cir. 1980) (post-trial motions).⁶

5 In addition, the Eighth Circuit recently overturned the district court's grant of summary judgment for the defendants. United States ex rel. Minnesota Assoc. of Nurse Anesthetists v. Allina Health Sys. Corp, 276 F.3d 1032, 1052-56 (8th Cir. Jan. 17, 2002), reh'g and reh'g en banc denied, Mar. 25, 2002.

6 At oral argument, the government raised objection to the submission of exhibits by defendants in their reply brief. Because the Court does not reach the issues relating to defendants' motion under Rule 12(b)(6), to which the exhibits in question pertain, the Court need not resolve that objection at this time.

ORDER

Based on the foregoing, the submissions of the parties, and all of the files, records, and proceedings herein, IT IS HEREBY ORDERED that:

1. Defendants' motion to strike [Docket No 22] is GRANTED in part and DENIED in part. The motion is GRANTED as to paragraphs 28-30 and 34(e) and they are accordingly STRICKEN from the amended complaint [Docket No. 19]. Defendants' motion to strike is DENIED in all other respects.

2. Defendants' motion to dismiss [Docket No. 22] is GRANTED and Counts I, II and III of the government's first amended complaint [Docket No. 19] are DISMISSED WITHOUT PREJUDICE. Plaintiffs shall have thirty (30) calendar days from the date of this Order to file a second amended complaint in this action, Civil File No. 99-106 (JRT/RLE), and defendants may thereafter respond in a manner authorized by the Federal Rules of Civil Procedure.