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United States ex rel. Bookwalter v. UPMC; University of Pittsburgh Physicians

United States Court of Appeals, Third Circuit

September 17, 2019

UNITED STATES OF AMERICA, ex rel. J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J. SCLABASSI, M.D.; ANNA MITINA
v.
UPMC; UNIVERSITY OF PITTSBURGH PHYSICIANS, d/b/a UPP DEPARTMENT OF NEUROSURGERY J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J. SCLABASSI, M.D.; ANNA MITINA, Appellants

          Argued January 10, 2019

          On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 2:12-cv-00145) District Judge: Honorable Cathy Bissoon

          Patrick K. Cavanaugh Stephen J. Del Sole Del Sole Cavanaugh Stroyd LLC Three PPG Place Gregory M. Simpson [ARGUED] Simpson Law Firm Andrew M. Stone Stone Law Firm Counsel for Appellants.

          Kirti Datla Jonathan L. Diesenshaus Jessica L. Ellsworth [ARGUED] Mitchell J. Lazris Sarah C. Marberg Hogan Lovells U.S. Counsel for Appellees.

          Before: AMBRO, BIBAS, and FUENTES, Circuit Judges.

         Table of Contents

         I. Background .......................................................................... 7

         A. Factual Background ........................................................ 7

         1.The University of Pittsburgh medical system ............. 7

         2. The neurosurgeons' compensation structure ............... 7

         3.The neurosurgeons' alleged fraud and its effects on salaries and revenues ....................................................... 8

         B. Procedural History .......................................................... 9

         II. Standards of Review and Pleading ................................... 10

         III. The Stark Act and the False Claims Act ......................... 11

         A. The Stark Act ................................................................ 11

         1. Forbidden conduct ..................................................... 11

         2. Exceptions ................................................................. 13

         3. No built-in cause of action ........................................ 13

         B. The False Claims Act .................................................... 14

         IV. The Relators Plead Stark Act Violations ........................ 14

         A. The surgeons referred designated health services to the hospitals ............................................................................. 15

         B. The relators' complaint alleges an indirect compensation arrangement ....................................................................... 17

         1. An unbroken chain of entities with financial relationships connects the surgeons with the hospitals. 17

         2. The surgeons' compensation varies with, or takes into account, the volume and value of their referrals ........... 18

         3. The hospitals knew that the surgeons' compensation varied with, or took into account, referrals ................... 32

         V. The Relators Plead False Claims Act Violations ............. 34

         A. The pleadings satisfy all three elements of the False Claims Act ......................................................................... 34

         B. The pleadings satisfy Rule 9(b) .................................... 36

         C. Pleading Stark Act exceptions under the False Claims Act ..................................................................................... 37

1. The burden of pleading Stark Act exceptions stays with the defendant under the False Claims Act ............ 37
2. Even if the relators bore this pleading burden, they have met it ..................................................................... 38

         D. Practical concerns ......................................................... 39

         VI. Conclusion ....................................................................... 40

          OPINION

          BIBAS, CIRCUIT JUDGE

         Healthcare spending is a huge chunk of the federal budget. Medicare and Medicaid cost roughly a trillion dollars per year. And with trillions of dollars comes the temptation for fraud.

         Fraud is a particular danger because doctors and hospitals can make lots of money for one another. When doctors refer patients to hospitals for services, the hospitals make money. There is nothing inherently wrong with that. But when hospitals pay their doctors based on the number or value of their referrals, the doctors have incentives to refer more. The potential for abuse is obvious and requires scrutiny.

         The Stark Act and the False Claims Act work together to ensure this scrutiny and safeguard taxpayer funds against abuse. The Stark Act forbids hospitals to bill Medicare for certain services when the hospital has a financial relationship with the doctor who asked for those services, unless an exception applies. And the False Claims Act gives the government and relators a cause of action with which to sue those who violate the Stark Act.

         Here, the relators allege that the defendants have for years been billing Medicare for services referred by their neurosur-geons in violation of the Stark Act. The District Court found that the relators had failed to state a plausible claim and dismissed their suit.

         This appeal revolves around two questions: First, do the re-lators offer enough facts to plausibly allege that the surgeons' pay varies with, or takes into account, their referrals? Second, who bears the burden of pleading Stark Act exceptions under the False Claims Act?

         The answer to the first question is yes. The relators' complaint alleges enough facts to make out their claim. The surgeons' contracts make it very likely that their pay varies with their referrals. And the relators also make a plausible case that the surgeons' pay is so high that it must take referrals into account. All these facts are smoke; and where there is smoke, there might be fire.

         The answer to the second question is the defendants. The Stark Act's exceptions work like affirmative defenses in litigation. The burden of pleading these affirmative defenses lies with the defendant. This is true even under the False Claims Act. And even if that burden lay with the relators, their pleadings meet that burden here.

         We hold that the complaint states plausible violations of both the Stark Act and the False Claims Act. So we will reverse.

         I. Background

         A. Factual Background

         1. The University of Pittsburgh medical system.

         On this motion to dismiss, we take as true the facts alleged in the second amended complaint: The University of Pittsburgh Medical Center is a multi-billion-dollar nonprofit healthcare enterprise. The Medical Center is the parent organization of a whole system of healthcare subsidiaries, including twenty hospitals. The Medical Center is the sole member (owner) of each hospital.

         More than 2, 700 doctors, including dozens of neurosur-geons, work at these hospitals. The doctors are employed not by the hospitals, but by other Medical Center subsidiaries. Three of these subsidiaries matter here: University of Pittsburgh Physicians; UPMC Community Medicine, Inc.; and Tri-State Neurological Associates-UPMC, Inc.

         These three subsidiaries employed many of the neurosur-geons who worked at the Medical Center's hospitals during the years at issue, from 2006 on. Pittsburgh Physicians' Neurosur-gery Department employed most of the surgeons at issue. Tri-State employed two, and Community Medicine employed one. The Medical Center owns all three subsidiaries. In short, the Medical Center owns both the hospitals and the companies that employ the surgeons who work in the hospitals.

         2. The neurosurgeons' compensation structure.

         The surgeons who worked for the three subsidiaries here all had similar employment contracts. Each surgeon had a base salary and an annual Work-Unit quota. Work Units (or wRVUs) measure the value of a doctor's personal services. Every medical service is worth a certain number of Work Units. The longer and more complex the service, the more Work Units it is worth. Work Units are one component of Relative Value Units (RVUs). RVUs are the basic units that Medicare uses to measure how much a medical procedure is worth.

         The surgeons were rewarded or punished based on how many Work Units they generated. If a surgeon failed to meet his yearly quota, his employer could lower his future base salary. But if he exceeded his quota, he earned a $45 bonus for every extra Work Unit.

         3. The neurosurgeons' alleged fraud and its effects on salaries and revenues.

         This compensation structure gave the surgeons an incentive to maximize their Work Units. And the incentive seems to have worked. The surgeons reported doing more, and more complex, procedures. So the number of Work Units billed by the Neurosurgery Department more than doubled between 2006 and 2009.

         Much of this increase allegedly stemmed from fraud. The relators accuse the surgeons of artificially boosting their Work Units: The surgeons said they acted as assistants on surgeries when they did not. They said they acted as teaching physicians when they did not. They billed for parts of surgeries that never happened. They did surgeries that were medically unnecessary or needlessly complex. And they did these things, say the relators, "[w]ith the full knowledge and endorsement of" the Medical Center. App. 184 ¶ 190.

         Fraud can be profitable. And here it allegedly was. With these practices, the surgeons racked up lots of Work Units and made lots of money. Most reported total Work Units that put them in the top 10% of neurosurgeons nationwide. And some received total pay that put them among the best-paid 10% of neurosurgeons in the country.

         The surgeons' efforts proved profitable for the Medical Center too. The Medical Center made money off the surgeons' work on some of the referrals. And to boot, healthcare providers bill Medicare for more than just the surgeons' own Work Units. Whenever a surgeon did a procedure at one of the hospitals, the Medical Center also got to bill "for the attendant hospital and ancillary services." App. 166 ¶ 104. This part of the bill could be four to ten times larger than the cost of the surgeon's own services. So when the surgeons billed more, the Medical Center made more. "Indeed, in 2009," the Neurosur-gery Department "was the single highest grossing neurosurgical department in the United States, with Medicare charges alone of $58.6 million." App. 163-64 ¶ 91.

         B. Procedural History

         The relators first filed suit in 2012. They alleged that the Medical Center, Pittsburgh Physicians, and a bevy of neurosur-geons had submitted false claims for physician services and for hospital services to Medicare and Medicaid. Four years later, the United States intervened as to the claims for physician services. The government settled those claims for about $2.5 million. It declined to intervene as to the claims for hospital services, but it let the relators maintain that part of the action in its stead.

         After the government intervened, the District Court dismissed the first amended complaint without prejudice for failure to state a claim. The relators then filed their current complaint, asserting three causes of action against the Medical Center and Pittsburgh Physicians under the False Claims Act:

(1) one count of submitting false claims,
(2) one count of knowingly making false records or statements, and
(3) one count of knowingly making false records or statements material to an obligation to pay money to the United States.

         The District Court again dismissed for failure to state a claim, this time with prejudice. The relators now appeal.

         II. Standards of Review and Pleading

         We review a district court's dismissal for failure to state a claim de novo. Vorchheimer v. Philadelphian Owners Ass'n, 903 F.3d 100, 105 (3d Cir. 2018). Our job is to gauge whether the complaint states a plausible claim to relief. Ashcroft v. Iq-bal, 556 U.S. 662, 678 (2009). Plausible does not mean possible. If the allegations are "merely consistent with" misconduct, then they state no claim. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). There must be something in the complaint to suggest that the defendant's alleged conduct is illegal. Id. at 557.

         But plausible does not mean probable either. Our job is not to dismiss claims that we think will fail in the end. See id. at 556. Instead, we ask only if we have "enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of" each element. Id.

         This is the baseline pleading standard for all civil actions. Fed.R.Civ.P. 8; Iqbal, 556 U.S. at 684. But the relators allege claims for fraud. So they must also meet Rule 9(b)'s heightened pleading requirement. United States ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 306-07 (3d Cir. 2016). That rule says that a party alleging fraud "must state with particularity the circumstances constituting fraud." Fed.R.Civ.P. 9(b).

         III. The Stark Act and the False Claims Act

         A. ...


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