Opinion
Criminal No. 03-321(1-8) ADM/AJB
February 10, 2004
Michael J. Quinley, Esq., and Christopher A. Buscagalia, Esq., appeared for and on behalf of Plaintiff
B. Todd Jones, Esq., David J. Wallace-Jackson, Esq., and Alien A. Slaughter, Jr., Esq., Robins, Kaplan, Miller Ciresi L.L.P., Minneapolis, MN, appeared for and on behalf of Defendants Arizant, Inc. and Augustine Medical, Inc.
Andrew J. Luger, Esq., and William J. Otteson, Esq., Greene Espel, P.L.L.P., Minneapolis, MN, appeared for and on behalf of Defendant Paul S. Johnson
William B. Michael, Jr., Esq., and Mark D. Larsen, Esq., Lindquist Vennum P.L.L.P., Minneapolis, MN, appeared for and on behalf of Defendant Timothy W. Hensley
John W. Lundquist, Esq., and Dulce J. Foster, Esq., Fredrikson Byron, P.A., Minneapolis, MN, appeared for and on behalf of Defendant Scott D. Augustine
Jeffrey Springer, Esq., Springer and Steinberg, P.C., Denver, CO, appeared on behalf of Defendants Phillip C. Zarlengo and Health Finance and Marketing, Inc., aka PCZ Marketing and Finance Corporation, dba Strategic Reimbursement
William J. Mauzy, Esq., and Amos Cohen, Esq., Law Office of William J. Mauzy, Esq., Minneapolis, MN, appeared for and on behalf of Defendant James Randall Benham
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
On January 20, 2003, the parties in the above-entitled action came before the undersigned United States District Judge for oral argument on the Defendants' Motions to Dismiss the Superseding Indictment [Docket Nos. 125, 148]. Defendants assert their conduct during the relevant time frame did not violate any Medicare statute, rule or regulation and therefore cannot be considered criminal. Further, they contend the reticulated Medicare requirements create a legal scheme that is unconstitutionally vague to support indictment for the crimes alleged in this case. For the reasons stated below, Defendants' Motions to Dismiss are denied.
II. BACKGROUND
This prosecution arises from Defendants' indirect submission of claims to Medicare for reimbursement for a product called Warm-Up Active Wound Therapy ("Warm-Up"). Warm-Up is an FDA-approved wound care system, designed for local management of wounds. See Superseding Indict. ("Indictment") ¶¶ 12-16 [Docket No. 56]. Warm-Up is comprised of three main components, the Wound Cover is warmed by the heater card, which is connected to a heater control unit. Id. ¶ 12.
A. The Defendants
The individual Defendants each have some relation to the manufacture, marketing or distribution of the product. Augustine Medical, Inc. ("Augustine"), now known as AMI, is a Minnesota corporation that manufactures and sells Warm-Up. Dr. Scott D. Augustine ("Dr. Augustine") is the founder of Augustine and the inventor of Warm-Up. Paul S. Johnson ("Johnson") was Director of Reimbursement for Augustine's Wound Care Division, and Timothy W. Hensley ("Hensley") was Vice President of this Division. Phillip C. Zarlengo ("Zarlengo") is an independent consultant who contracted with Augustine to provide analysis and advice regarding Medicare reimbursement. Health Finance and Marketing, Inc., doing business as Strategic Reimbursement, is the corporate entity under which Zarlengo provided his services. James Randall Benham ("Benham") was General Counsel for AMI.
Defendant Arizant, Inc., the parent corporation of Augustine, was formed after the time of the alleged conspiracy.
B. The Medicare Program and Defendants' Billing Pathway
Through the Medicare program, the federal government reimburses certain health care costs of eligible persons for specified items and services, so long as the items and services are medically "reasonable and necessary." 42 U.S.C. § 1395y(a)(1)(A). The Secretary of the Department of Health and Human Services ("HHS") is charged with making Medicare benefit determinations. Id. § 1395ff(a). The Centers for Medicare and Medicaid Services ("CMS"), an arm of HHS, administers the Medicare Program. Indict. ¶ 19. Medicare is divided into two parts: Part A covers heath care providers' allowable costs for treatment of Medicare patients, while Part B establishes voluntary supplemental insurance for covered benefits. CMS contracts with insurance agencies called Fiscal Intermediaries ("FIs") and "Carriers" to process claims, payments and applications for codes and coverage determinations. FIs process Part A, and certain Part B claims, and Carriers handle most Part B submissions.
FI claims are submitted on what is referred to as "UB-92" forms, on which the health care provider indicates a "revenue code" for the item or service furnished. Id. ¶ 21. Defendants instructed providers to use Revenue Code 270 for Warm-Up, the code for Medical Surgical Supplies. Id. ¶¶ 21. 47, 59, 73. Additionally, both FIs and Carriers use codes from the Health Common Procedure Coding System ("HCPCS") to identify certain items and services for which providers are seeking reimbursement. Id. ¶ 23.
Three billing issues that arise from this process are coverage, categorization and coding of an item or service. Generally speaking, coverage determinations are expressed in National Coverage Decisions, Local Medical Review Policies promulgated by Medicare contractors, or on a claim-by-claim basis. Similarly, categorization may be broken down into three general groups: dressings, Durable Medical Equipment, and medical supplies. Coding refers to selection of the appropriate revenue and HCPCS codes. Defendants' "recommended billing pathway" instructed categorization of Warm-Up as a medical supply, use of Revenue Code 270, and case-by-case adjudication.
C. The Indictment
The Indictment alleges that from July 1997 to July 2001, Defendants promoted "a fraudulent Medicare reimbursement scheme based on materially misleading communications with healthcare providers and Medicare representatives." Indict. ¶ 1. Defendants are accused of counseling those responsible for billing the Medicare system to apply for reimbursement in such a way as "to conceal Warm-Up from Medicare."Id. ¶ 3. This was necessary, the government contends, because "defendants believed that if the true nature of Warm-Up were disclosed, then either Medicare would not pay for the new device or" would pay "at a significantly lower payment level than the defendants desired." Id. ¶ 2. The Indictment avers that Defendants' accomplished their objectives by making false statements to providers about the device and how to properly code it, despite knowledge of repeated coverage denials by Medicare contractors. Id. ¶¶ 28-40, 45, 50-52, 63-64. Based on these and related allegations, the Indictment charges Defendants with Conspiracy to Defraud the United States in violation of 18 U.S.C. § 2, 371 (Count One), with Healthcare Fraud in violation of 18 U.S.C. § 2, 1347 (Count Two), and with three counts of Mail Fraud, in violation of 18 U.S.C. § 2, 1341 (Counts Three, Four and Five). Count Six is a Forfeiture count seeking the proceeds traceable to violations of the substantive counts of the Indictment.
III. DISCUSSION
Rule 12(b) of the Federal Rules of Criminal Procedure provides that "[a] party may raise by pretrial motion any defense, objection, or request that the court can determine without a trial of the general issue." Fed.R.Crim.Pro. 12(b)(2). In reviewing a 12(b) motion to dismiss the indictment, the Court does not entertain an evidentiary inquiry, but rather accepts the allegations of the Indictment as true.United States v. Ferro, 252 F.3d 964, 968 (8th Cir. 2001) (internal citation omitted). An indictment sufficiently states a crime if it contains each element of the offense charged and fairly apprises the defendants of the charges against which they must defend See United States v. Morris, 18 F.3d 562, 568 (8th Cir. 1994) (quotingHamling v. United States, 418 U.S. 87, 117 (1974)). Generally, an indictment is considered sufficient "unless no reasonable construction can be said to charge the offense." United States v. Peterson, 867 F.2d 1110, 1114 (8th Cir. 1989).
Defendants argue the Indictment fails to state a crime because the government has not articulated any Medicare rule or regulation that proscribed Defendants' billing practices or compelled any other action by Defendants. The prosecution counters that the Indictment sufficiently alleges Defendants knowingly made material false statements in violation of federal statutes prohibiting fraud.
The crux of Defendants' argument is that because no national or local non-coverage policy existed for Warm-Up during the relevant time, and reimbursement claims were adjudicated on a case-by-case basis, the government cannot assert the product was not covered by Medicare. If Warm-Up was potentially covered and the government can point to no Medicare violations in Defendants' coding and categorization choices, Defendants contend, there has been no breach of an explicit rule and hence, no crime has been committed. Defendants cite the doctrine of legal impossibility, asserting that taking all allegations of the Indictment as true, even assuming Defendants carried out the specified actions, such conduct did not constitute a violation of any law.
Acknowledging the complexity and fluctuating nature of Medicare regulations, Defendants' focus on the specifics of the regulatory scheme obscures the present inquiry. The issue at this juncture is merely whether or not the Indictment states a crime. Here, the Indictment charges Defendants with three distinct offenses and avers with sufficient particularity the means by which they allegedly violated these provisions of the United States Criminal Code. The Indictment asserts manipulation of the system by making material omissions and false statements regarding the Warm-Up product and its characteristics and use, so as to permit providers to obtain reimbursement where they would otherwise not have been reimbursed or in an amount significantly greater than they would otherwise have received. E.g. Indict. ¶¶ 52-55, 68, 73, 79. While the government has retreated from some of its original assertions, such as the impropriety of using Revenue Code 270 without HCPCS codes or a product description, the Indictment continues to sufficiently set forth the crimes of conspiracy to defraud the United States, healthcare fraud and mail fraud.
Citing other Medicare-related cases, Defendants contend that if the government cannot show Defendants' coding and categorization methods were technically inaccurate under Medicare, the case must fail. Though the opinions relied on by Defendants have some similarities to the case at bar, each decision is distinguishable.United States v. Porter, 591 F.2d 1048 (5th Cir. 1979), involved a service routinely covered by Medicare where defendants caused the government no pecuniary loss and made no false statements.Id. at 1051, 1055. The case centered on the meaning of "kickback or bribe" under the charged Medicare provision. Id. at 1052-54. In United States v. Bobo, 344 F.3d 1076 (11 th Cir. 2003), the indictment contained no allegations of how defendant's conduct, directed at a third-party, operated to defraud, harm, or even adversely affect the government. Id. at 1084-85. Here, the Indictment avers that if Defendants had not lied about the product, they would not have received the amount of Medicare reimbursements they in fact received Finally,United States ex rel. Scott v. McKenna, No. SA CV 99-117 DOC (C. D. Cal. May 23, 2001), is a civil false claims case that involved the claiming of distinct surgical procedures under the appropriate billing codes to recover reimbursement for a type of surgery not expressly covered by Medicare. The defendant surgeon's summary judgment motion was granted because under such facts the relator could not prove a false claim defendant knew to be false. Id. at 4, 11 (Luger Aff. Ex. B). The opinion contains no indications of allegations of misleading statements or concealment in the face of coverage denials, as does the present Indictment. See Indict. ¶¶ 25, 28, 40, 45, 46, 54, 55.
Referencing government pronouncements and opinions regarding the coding system and Warm-Up specifically, Defendants maintain the ambiguity and imprecision in the applicable rules and definitions requires dismissal of the Indictment. An open avenue for abuse, however, does not render a defendant's actions necessarily legal. Even the stupidity of leaving one's keys in the ignition with the motor running does not excuse a car thief from criminal liability. The Indictment does not allege innocent mistaken billing, but rather an intentional, orchestrated scheme to counsel providers to categorize and code Warm-Up in such a way as to circumvent and evade Medicare review and evaluation of the device. Because there is no "automatic" coverage under Medicare law, this Court cannot say, as Defendants urge, that they are conclusively absolved in the absence of a local or national non-coverage decision. See 42 U.S.C. § 1395y(a)(1)(A) ("Notwithstanding any other provision of this subchapter, no payment may be made . . . for any expenses incurred for items or services . . . not reasonable and necessary for the diagnosis or treatment of illness or injury. . . .");but cf. McKenna, supra (no policy does not mean non-coverage policy). As the parties agree, most coverage decisions are made on a claim-by-claim basis. It is for the jury to determine whether Defendants knew the product was not covered during the period they instructed others how to bill it to Medicare, and whether they made false statements to effect such billing with the intent to profit financially. This is the conduct alleged in the Indictment and which is made criminal by fraud statutes. See Indict. ¶¶ 1, 2, 83; 18 U.S.C. § 371, 1347.
Reports and recommendations of the government's own agencies highlight the invitation for abuse created by the coding pathway used by Defendants, which allowed supplies to be billed without identifying descriptions, and therefore caused FIs "to pay medical supply claims without knowing specifically what they are being asked to pay for." 1995 GAO Report at 5 (Luger Aff. Ex. K).
Defendants' cogent and well-researched arguments may prove to provide a valid defense before a jury, but at this stage "[t]he government is entitled to marshal and present evidence at trial and, and to have its sufficiency tested by a motion for acquittal pursuant to Federal Rule of Criminal Procedure 29." Ferro, 252 F.3d at 968.
Defendants also seek dismissal under the void-for-vagueness doctrine, arguing that the Medicare Act and its regulations are impermissibly vague and ambiguous. The doctrine, embodied in the Fifth Amendment's due process clause, requires that "laws provide fair notice of what is prohibited, as well as standards of enforcement." D.C. v. City of St. Louis. Mo., 795 F.2d 652, 653 (8th Cir. 1986). A statute violates due process if people of average intelligence "must necessarily guess at its meaning and differ as to its application. . . ." Connally v. General Const. Co., 269 U.S. 385, 391 (1926).
Defendants' emphasis on the intricacies of the Medicare Act and its regulations does not thwart the Indictment because the government does not argue that Defendants violated a specific Medicare provision. Similarly, the government does not claim that there was a single, correct way for Defendants' to bill their product. Instead, the government alleges that Defendants intentionally manipulated the Medicare system which allowed providers to obtain payments for Warm-Up. In its most basic terms, the Indictment claims that Defendants conspired to commit fraud and in fact defrauded the government under circumstances where they knew that their actions were illegal. See Indict. ¶¶ 1-84.
Dismissal under the void-for-vagueness doctrine is not warranted in this case. While Medicare regulations are admittedly complex, the statutes Defendants are charged with violating state relatively straightforward descriptions of fraud and conspiracy to commit fraud, and thus provide Defendants with sufficient notice as required by the Fifth Amendment. See 18 U.S.C. § 371, 1341, 1347. These statutes do not specify the myriad of fraud schemes one might devise. However, a statute "can be unambiguous without addressing every interpretive theory offered by a party," so long as "the statute encompasses the conduct at issue."Salinas v. United States, 522 U.S. 52, 60 (1997). Further, the requirement that a statute provide notice of proscribed behavior "cannot be used as a shield by one who is already bent on serious wrongdoing."United States v. Cueto, 151 F.3d 620, 631 (7th Cir. 1998) (citations omitted). Therefore, Defendants' Motion to Dismiss on vagueness grounds is denied.
IV. CONCLUSION
Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY ORDERED that Defendants' Motions to Dismiss the Superseding Indictment [Docket Nos. 125, 148] are DENIED.