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Inc. v. Lancaster General Hospital

United States District Court, E.D. Pennsylvania

September 12, 2019



          SCHMEHL, J.

         The Racketeer Influenced & Corrupt Organization Act (“RICO”), enacted in 1970 as Title IX of the Organized Crime Control Act of 1970, and codified at 18 U.S.C. §§ 1961-1968, provides both criminal and civil remedies. The case before us focuses solely on the civil remedies set forth in 18 U.S.C. § 1964(a), (b), and (c). Plaintiffs St. Luke's Health Network, Inc., Saint Luke's Hospital of Bethlehem, Pennsylvania, St. Luke's Quakertown Hospital, Carbon-Schuylkill Community Hospital, and Blue Mountain Hospital (“Plaintiffs”) allege that Defendants Lancaster General Hospital, Lancaster General Health, University of Pennsylvania Health System, Trustees of the University of Pennsylvania, John Doe 1, and John Doe 2 conspired to defraud the Tobacco Settlement Act's Extraordinary Expense Program which was created for hospitals in Pennsylvania providing charity care to its neediest citizens. The issue is whether Plaintiffs can recover from Defendants under civil RICO. Because the causal link between the the alleged predicate wrong and the harm is too attenuated, Plaintiffs have no civil RICO claim against Defendants. As the RICO claims against Defendants are dismissed, we also decline to exercise supplemental jurisdiction over Plaintiffs pendent state law claims. Plaintiffs may refile in the appropriate state court.


         In 1998, Pennsylvania and 45 other states entered into a master settlement agreement which released certain cigarette manufacturers from specific claims for over 25 years. (ECF Docket No. 1, ¶ 24.) These funds were to be distributed to these states to cover the tobacco-related health care costs incurred following the settlement. (Id.) In 2001, the Pennsylvania General Assembly enacted the Tobacco Settlement Act, P.L. 755, No. 77, as amended, 35 Pa. Cons. Stat. § 5701.101 et seq. (“the Act”), which allocated the tobacco settlement funds to hospitals providing charity care to Pennsylvania's neediest citizens. (Id. at ¶ 25.) The Act established two programs to allocate the funds: (1) the Hospital Uncompensated Care Program (“the UC Program”); and (2) the Hospital Extraordinary Expenses Program (“the EE Program”). (Id. at ¶ 26.) The UC Program compensates hospitals that meet certain statutory criteria, and the EE Program makes funds available to hospitals that do not receive funding under the UC Program. (Id. at ¶¶ 27-28.)

         As this case involves only the EE Program, we will focus on its procedures. The EE Program reimburses hospitals that do not receive funding under the UC Program for “extraordinary expenses” incurred when they treat patients without health insurance. (Id. at ¶ 28.) “Extraordinary expenses” is defined as “the cost of hospital inpatient services provided to an uninsured patient which exceeds twice the hospital's average cost per stay for all patients.” (Id.) (citing 35 Pa. Cons. Stat. § 5701.1102.) The Act also specifies how EE Program funds are distributed to participating hospitals, which shall equal the lesser of: “(1) the hospital's extraordinary expenses or (2) the prorated amount of each hospital's percentage of extraordinary expense costs as compared to all eligible hospitals' extraordinary expense costs, as applied to the total funds available in the Hospital Extraordinary Expense Program for the fiscal year.” (Id. at ¶ 29.) (citing 35 Pa. Cons. Stat. § 5701.1105(d)). To apply for these funds, participating hospitals must submit their extraordinary expense data through an Internet portal to the Pennsylvania Health Care Cost Containment Council (“the PHC4 or “the Council”). (Id. at ¶ 30.) The claims are submitted on a quarterly basis and may be adjusted for accuracy 18 months after the final quarterly submission for a given fiscal year. (Id.) Under the Act, hospitals are prohibited from: submitting invalid or overstated extraordinary expense claims; being compensated for invalid or overstated extraordinary expense claims; and receiving more money from the EE Program than the hospital is entitled to receive. (Id. at ¶ 31.) The Act also restricts payments to participating hospitals exceeding the aggregate cost of services to patients with extraordinary expenses.[1] (Id.)

         Overseeing the EE Program are the Pennsylvania Department of Human Services- formerly the Department of Public Welfare (collectively “the Department”)-and the Pennsylvania Auditor General. (Id. at ¶ 32.) After a claim is submitted, the Department allocates the EE Program funds and the Auditor General then reviews the accuracy of the claims and allocations. (Id.) In some past fiscal years, the Department has used the results of the Auditor General's report to claw back and redistribute funds that were incorrectly overpaid to participating hospitals. (Id.) However, the Department ended this practice in 2014. (Id. at 83.) In May 2014, the Auditor General's report on Fiscal Year 2010 announced that the Department would no longer require hospitals that were overpaid during Fiscal Years 2010 to 2012 to pay back the overpayments for reallocation to hospitals that were underpaid. (Id.) While the Auditor General made this announcement, the Department did not definitively decide that it would not require such reallocations until around 2016. (Id.) As the Auditor General conducted audits several years after funds were initially distributed to the requesting hospitals, many hospitals were unaware of the underpayments or overpayments. (Id. at ¶ 84.) For example, hospitals that were overpaid in Fiscal Year 2008 were not required to pay back the overpayments until January 2011, and hospitals that were overpaid in Fiscal Year 2009 were not required to pay back the overpayments until June 2012. (Id.) Given the latency period between hospitals' extraordinary expense claims, the Auditor General's report, and the requirement the hospitals pay back the overpayments, hospitals were unaware “whether they were underpaid or overpaid, and whether other hospitals including Lancaster General Hospital were overpaid, in any given Fiscal Year until after the release of the audit report for the particular Fiscal Year.” (Id.)

         After the May 2014 report discontinuing the Department's claw back procedures, Plaintiffs “demanded that Defendants pay them their pro rata share of the amount by which Lancaster General was overpaid, and by which Plaintiffs were underpaid.” Defendants rejected this request. (Id. at ¶¶ 87-88.) Yet, according to Plaintiffs, Defendants misled Plaintiffs “into believing that Lancaster General had no intention of retaining any overpaid funds for Fiscal Years 2010 to 2012, and that Lancaster General would instead pay those funds back to Plaintiffs and the Plaintiff Class once the Auditor General completed its audit of the relevant fiscal year.” (Id. at ¶ 92.) Defendants allegedly caused Plaintiffs and the Plaintiff Class to “relax their vigilance and deviate from their right of inquiry into the facts, ” which caused them to be “unaware of their claims, notwithstanding their exercise of reasonable diligence, until Lancaster General refused in 2017 and 2018 to repay the money by which it had been overpaid.” (Id. at ¶ 93.)

         According to Plaintiffs, Defendants submitted “massively inflated extraordinary expense claims, ” which unjustly enriched Lancaster General by about $9 million for Fiscal Years 2010 through 2012. (Id. at ¶ 41.) As early as 2008, Plaintiffs allege John Doe 1, an employee at Lancaster General, “developed a plan whereby the hospital would pad the claims it submitted to the Commonwealth through the PHC4 Internet portal and thereby secure for Lancaster General more than its lawful funding under the EE Program.” (Id. at ¶ 43.) More specifically, “John Doe 1 instructed John Doe 2-another Lancaster General employee-to prepare and submit through the PHC4 portal materials purporting to show that, during Fiscal Year 2008, Lancaster General Hospital was entitled to $2.8 million under the EE Program.” (Id.) And Plaintiffs allege more specifically, “John Doe 1 and John Doe 2 knew that the Fiscal Year 2008 submissions were false, and each transmission of information over the Internet through the PHC4 portal for Fiscal Year 2008 constituted a separate act of wire fraud.” (Id.)

         Plaintiffs maintain that John Doe 1 and John Doe 2 engaged in a years-long practice of submitting invalid and overinflated EE Program claims to the Commonwealth. (Id. at ¶ 53.) From Fiscal Years 2010 through 2012, Lancaster General Hospital submitted a total of 596 claims. According to Plaintiffs, 456 of those claims were rejected as invalid by the Auditor General. (Id. at ¶ 54.) “The circumstances surrounding Lancaster General's EE Program reimbursement requests make plain that John Doe 1 and John Doe 2 knew that they were making false representations.” (Id. at ¶ 55.) Specifically, the Plaintiffs also allege the “aim of this scheme was to defraud the Department, the Auditor General, the PHC4, the citizens of Pennsylvania, and Plaintiffs and the Plaintiff Class-i.e., the dozens of law-abiding hospitals that provide care to Pennsylvania's neediest citizens.” (Id. at ¶ 56.)


         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim satisfies the plausibility standard when the facts alleged “allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Burtch v. Millberg Factors, Inc., 662 F.3d 212, 220-21 (3d Cir. 2011) (citing Iqbal, 556 U.S. at 678). While the plausibility standard is not “akin to a ‘probability requirement, '” there nevertheless must be more than a “sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). “Where a complaint pleads facts that are ‘merely consistent with' a defendant's liability, it ‘stops short of the line between possibility and plausibility of entitlement to relief.'” Id. (quoting Twombly, 550 U.S. at 557).

         The Court of Appeals requires us to apply a three-step analysis under a 12(b)(6) motion: (1) “it must ‘tak[e] note of the elements [the] plaintiff must plead to state a claim;'” (2) “it should identify allegations that, ‘because they are no more than conclusions, are not entitled to the assumption of truth;'” and, (3) “[w]hen there are well-pleaded factual allegations, [the] court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.” Connelly v. Lane Construction Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quoting Iqbal, 556 U.S. at 675, 679); see also Burtch, 662 F.3d at 221; Malleus v. George, 641 F.3d 560, 563 (3d Cir. 2011); Santiago v. Warminster Township, 629 F.3d 121, 130 (3d Cir. 2010).

         In our analysis of a motion to dismiss, the Court of Appeals allows us to also consider documents “attached to or submitted with the complaint, and 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 v. Hampton Tp. School Dist., 452 F.3d 256, 260 (3d Cir. 2006) (quoting 5B Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 (3d ed. 2004)).

         III. ANALYSIS

         The Racketeer Influenced and Corrupt Organizations Act (“RICO”) prohibits certain conduct involving a “pattern of racketeering activity.” 18 U.S.C. § 1962. The statute requires proof of the existence of a RICO enterprise and defendants engaging in a pattern of racketeering activity known as “predicate acts.” Gates v. Ernst & Young, 1994 WL 444709, at *1 (E.D. Pa. 1994). Although Title 18 of the U.S. Code does not typically provide for a private right of action, one of RICO's enforcement mechanisms grants a private right of action to “[a]ny person injured in his business or property by reason of a violation” of RICO's substantive restrictions under 18 U.S.C. § 1964(c).[2]Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 453 (2006). A private right of action under ยง ...

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