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Polansky v. Executive Health Resources Inc.

United States District Court, E.D. Pennsylvania

November 5, 2019



          BAYLSON, J.


         Jesse Polansky (“Relator”) brings this False Claims Act qui tam[1] action on behalf of the United States alleging that Executive Health Resources, Inc. (“Defendant”) caused its client hospitals to fraudulently bill Medicare and Medicaid by falsely designating patient admissions as inpatient when they should have been marked as outpatient.

         This case, which was filed over seven years ago, has an extensive procedural history. Presently before the Court is the Government's Motion to Dismiss, as well as the briefs submitted by the parties following the Court's Order of September 26, 2019, (ECF 550), invoking Fed.R.Civ.P. 56(f) and giving notice of possible entry of summary judgment on other grounds.


         A. Case History[2]

         Relator filed his Complaint under seal on July 26, 2012 in accordance with the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq. (ECF 1.) Relator twice amended his Complaint, (ECF 9; ECF 12) before the Government declined to intervene on June 27, 2014, (ECF 19.) Thereafter, pursuant to the FCA, Relator served the then-operative Complaint on Defendant and proceedings commenced before the Honorable Thomas O'Neill, who issued an extensive Memorandum and Order denying the Defendant's Motion to Dismiss on July 26, 2016. (ECF 103.) The following year, after Judge O'Neill's death, the case was transferred to the undersigned. (ECF 141.)

         The core of Relator's theory of liability is that Defendant exploited the difference in reimbursement rates for inpatient and outpatient services, [3] causing hundreds of thousands of claims for medical services to be billed as inpatient when they should have been billed as outpatient.[4] It became obvious to the Court, and was not seriously contested by Relator or Defendant, that the best way to adjudicate this case was to hold a bellwether trial on a limited number of claims.[5] Following multiple submissions and conferences, the Court entered an order requiring the parties to select a limited number of claims for discovery, following which a smaller number of claims would be selected for a bellwether trial. (ECF 240.) The Court eventually held that each party would select specified claims for itself and other claims would be chosen randomly for discovery. This procedure was designed to result in a jury trial where the jury would answer interrogatories as to whether Relator had proven Defendant violated the FCA by seeking and accepting improper reimbursements, and the Court would enter judgment on all other claims encompassed by the jury verdict after the bellwether trial.

         For pretrial management, the case was divided into two segments. The first segment, “Phase I, ” was designed to adjudicate reimbursement claims certified by Defendant from January 1, 2009 to October 1, 2013.[6] The second segment, the “Two Midnight” phase, was designed to address Relator's reimbursement claims for events that occurred after October 1, 2013, on which date the Centers for Medicare and Medicaid Services (“CMS”) implemented a new reimbursement regime-the Two Midnight Rule.[7] In short, the Two Midnight Rule requires that, to admit an individual as an inpatient, the admitting physician expects that the patient's stay will cross two midnights.[8]

         Extensive discovery proceeded with several motions filed by both parties, which the Court attempted to resolve fairly and promptly.[9] During the course of this discovery, Relator's conduct interrupted the intended discovery; his behavior was material and plays a role in the final disposition of this case.

         First, Relator belatedly revealed that he located a DVD disk in his personal possession containing approximately 14, 000 documents. Relator testified about this discovery and the surrounding circumstances on January 15, 2019, (ECF 357), but the Court found that he was not completely credible. Relator's counsel admitted that a large number of the documents contained on the disk were relevant to Phase I. The unearthing of the disk caused a disruption in the proceedings. The Court allowed for discovery on the circumstances under which the DVD was found and why the documents on it, at least those relevant to this case, had not been turned over. Defendant subsequently moved for sanctions, which the Court granted in part. (ECF 400.)

         Second, Relator unilaterally purported to change the settled method for selection of claims that had been painstakingly arrived at after several pretrial conferences without offering any explanation as to why he failed to seek court approval. This attempted change was never satisfactorily explained by Relator. See ECF 460, June 26, 2019 Memorandum at 2 (warning that Relator's actions “may have significance in future Court rulings in this case”).[10]

         These two events-the revelation of Relator's DVD disk and Relator's attempt to change the selection of cases for the bellwether trial-caused serious prejudice to Defendant and unnecessary delays in pretrial proceedings.

         B. Government's Notification of Intent to Seek Dismissal

         On February 21, 2019-while the parties were litigating Defendant's sanctions motion- the Government notified Relator and Defendant via email that it intended to dismiss the case. (ECF 403, Ex. A.) The parties and the Government entered into negotiations directly, and without any involvement by the Court. On May 9, 2019, the Government notified the Court that it did not intend to exercise its dismissal authority, provided that Relator would proceed on claims under a significantly narrowed framework, and that it did not anticipate pursuing dismissal before the Court ruled on summary judgment motions. (ECF 430.) According to the Government, Relator's offer to narrow his claims “substantively and materially changed the … cost/benefit analysis concerning the exercise of … Section 3730(c)(2)(A) dismissal authority.” (Id. at 4.) However, the Government noted that it intended to “reserve[] the right to evaluate whether dismissal is warranted in the future based on further developments, including arguments raised by the parties, further factual and evidentiary developments, and associated discovery burdens.” (ECF 454 at 4.)

         C. Third Amended Complaint

         On May 2, 2019, Relator moved for leave to file a Third Amended Complaint, (ECF 429), that purported to adhere to the narrowing criteria the Government had agreed to. The Court ordered that the Third Amended Complaint, attached as Exhibit A to the Motion, be deemed filed as of May 10, 2019. (ECF 433.) The Third Amended Complaint is the operative complaint in this litigation.

         Despite the previous indications that the Government and Relator concurred in the narrowing of Relator's claims, further events revealed that disagreements remained as to exactly what, if any, narrowing of the claims had taken place. This issue was never finally resolved. See ECF 543, Government Reply Memorandum at 7 (“[R]elator has dismissed no bellwether claims and does not appear to have narrowed how he is pursuing this case.”); ECF 460 at 3 (identifying “at least one contradiction between Relator's interpretation of the narrow[ing] criteria and the Government's”); ECF 456, June 24, 2019 Hr'g Tr. at 11:22-23 (acknowledging that Polansky's counsel's view of the claims that would proceed was different from “the scope that the government is envisioning”). The divergence between the views of the Government and those of Relator regarding the extent to which Relator's claims were narrowed suggests that the concerns underlying the Government's intent to support dismissal in February are still present.

         Several developments related to the merits of Relator's claims and the parties' respective discovery obligations occurring during the summer months leading up to the Government's filing. The Special Master recommended that the Government produce, as confidential discovery material, “all documents withheld on the basis of the deliberate process privilege that are dated 2015 or earlier.” (ECF 510 at 6.) The Special Master also recommended the Government be required to produce responsive documents for additional custodians. (Id. at 9.) Finally, on August 7-8, 2019, Relator was deposed by Defendant. (ECF 540, Def. Memorandum in Supp. of Government Mot. to Dismiss at 8.) The Government participated in Relator's deposition telephonically. (Government Reply Memorandum at 8.)

         D. Government's Renewed Motion to Dismiss

         On August 20, 2019, the Government filed a Motion to Dismiss Relator's Third Amended Complaint pursuant to its authority under 31 U.S.C. § 3730(c)(2)(A). (ECF 526.) Because the Court had previously set a dispositive motion deadline for August 30, 2019 (shortly after the Government's filing), all discovery and other dates were stayed pending the Court's resolution of the Government's Motion. (ECF 529.) On September 6, 2019, Relator filed a response in opposition to the Government's Motion to Dismiss. (ECF 533.) On September 13, 2019, Defendant filed a memorandum in support of the Government's right to seek dismissal of the case. (ECF 540.) The Government filed a reply memorandum on September 17, 2019. (ECF 543.) The Court scheduled oral argument for September 25, 2019 and transmitted to the parties a list of questions to be discussed at the hearing. (ECF 544; ECF 547.)

         The day after the hearing, on September 26, 2019, the Court invoked Fed.R.Civ.P. 56(f), ordering Relator and Defendant to submit briefs addressing the applicability of two recent Supreme Court decisions[11] and allowing the Government to file a brief limited to its view of the substantive merits of Relator's claims as they relate to the decision to seek dismissal. (ECF 550.) The Government filed its supplemental brief on October 11, 2019, (ECF 554), as did Relator, (ECF 555), and Defendant, (ECF 556.)


         The Discussion will proceed as follows. First, in Part III.A, the Court discusses the split of authority on the standard of review applicable to 31 U.S.C. § 3730(c)(2)(A) and concludes that because the Government's decision to dismiss is sufficiently reasoned and supported, the Government is entitled to dismissal under either the rational relationship test or the unfettered discretion test.

         Second, in Part III.B, the Court articulates additional reasons that support dismissal, independent of the Government's motion. As to the Phase 1 claims, the Court concludes that summary judgment is proper because the 24-hour policy-the time-based reimbursement standard prior to implementation of the Two Midnight Rule-did not go through notice and comment rulemaking procedures, as required by the Medicare Act. As to the Two Midnight claims, the Court notes, without deciding, that summary judgment may be proper because Relator has not established Defendant's alleged misconduct was “material” to the Government's reimbursement decision.

         At oral argument on September 25, 2019 and reiterated in their post-hearing memoranda, both the Government and Defendant strenuously objected to the Court deciding whether to grant summary judgment in addition to or instead of granting the Government's Motion to Dismiss. See, e.g., ECF 554, Government Suppl. Memorandum in Supp. of Mot. to Dismiss Relator's Third Am. Compl. at 1 (“Government Suppl. Memorandum”); ECF 552, Sept. 25, 2019 Hr'g Tr. 45:19-21. Given the many years of work that have gone into this case, it is appropriate to document findings and conclusions on the other issues raised.[12] Although rare, it is not unprecedented for a court to consider a Section 3730(c)(2)(A) dismissal motion at the same time as summary judgment arguments. See, e.g., Stierli v. Shasta Servs. Inc., 440 F.Supp.2d 1108, 1109 (E.D. Cal. 2006) (granting government motion to dismiss after hearing argument on Section 3730(c)(2)(A) motion and cross motions for summary judgment filed by Relator and defendant); see also Stierli v. Shasta Servs. Inc., No. 2:04-cv-1955-MCE-PAN (E.D. Cal. May 22, 2006), ECF 68, Minute Order (noting that government motion to dismiss and cross claims for summary judgment would be heard in one hearing).

         Moreover, the Third Circuit has acknowledged that “[i]t is well-settled that [Fed. R. Civ. P. 56(f) permits] district courts [to] grant summary judgment sua sponte, so long as the losing party is given notice when summary judgment is being contemplated.” Forrest v. Parry, 930 F.3d 93, 110-11 (3d Cir. 2019). The Court gave ample notice to the parties in the September 26, 2019 Order of the possibility that it would consider summary judgment based on the two recent Supreme Court cases and permitted supplemental briefing on the additional issues. Therefore, the Court's consideration of summary judgment on these questions is proper.

         A. Government Dismissal under 31 U.S.C. § 3730(c)(2)(A)

         1. Statutory Authority for Government Dismissal

         The False Claims Act imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim [to the United States] for payment or approval.” 31 U.S.C. §§ 3729(a)(1)(A); 3729(b)(2). The FCA is unique because it permits a private person-a “relator”-to litigate the action if the government declines to intervene. Id. § 3730(b)(1). The FCA incentivizes relators by guaranteeing financial compensation; the amount of compensation varies depending on whether the Government intervenes. Id. § 3730(d)(1)-(2).

         While the FCA permits a relator to proceed on a claim the Government declines to prosecute, the government, as the injured party and ultimate beneficiary of any recovery that results, retains authority to exercise control over the litigation. Under 31 U.S.C. § 3730(c)(2)(A), the Government has the right to dismiss a qui tam action “notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”[13]

         Although Section 3730(c)(2)(A) establishes the Government's authority to dismiss a qui tam action, the FCA does not explicate a standard of review for courts to apply to Government dismissal motions. This is in contrast to other provisions of the FCA that both reserve certain rights to the Government and set forth the standard that the court should use. See, e.g., id. § 3730(c)(2)(B) (“The Government may settle the action notwithstanding the objections of the [relator] if the court determines, after a hearing, that the proposed settlement is fair, adequate, and reasonable under all the circumstances.”). The FCA's apparent silence on the standard applicable to Section 3730(c)(2)(A) has led to a circuit split, with the Ninth and Tenth Circuits taking the rational relationship approach and the District of Columbia Circuit adopting the unfettered discretion test.

         2. Circuit Split on Standard of Review Applicable to Government Dismissal

         Appellate courts have adopted two different standards for assessing government dismissal under Section 3730(c)(2)(A): (a) the Ninth and Tenth Circuits have adopted the slightly more rigorous rational relationship test;[14] and (b) the District of Columbia Circuit has adopted the unfettered discretion test. The Third Circuit has expressly declined to take a side in this circuit split. Two district court judges in the Eastern District of Pennsylvania have opined on how to analyze a government motion to dismiss a declined qui tam action.

         a. Ninth and Tenth Circuit “Rational Relationship” Test [Sequoia]

         Under the Ninth and Tenth Circuit's rational relationship approach, a two-step analysis is used to test the government's justification for dismissal under Section 3730(c)(2)(A). Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998). This test requires that the government identify (1) a valid government purpose supporting dismissal; and (2) a rational relation between dismissal and accomplishment of the asserted purpose. Id. at 1145. If the Government satisfies both elements of the rational relationship test, then the burden shifts to the relator “to demonstrate that dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (internal quotations omitted).

         The Sequoia court found that the two-step rational relationship approach best “respected the Executive Branch's prosecutorial authority by requiring no greater justification of the dismissal motion than is mandated by the Constitution itself.” Id. at 1146. The Tenth Circuit adopted the Sequoia test on a similar rationale. See Ridenour v. Kaiser-Hill Co., LLC, 397 F.3d 925, 935 (10th Cir. 2005) (concluding that Sequoia “recognizes the constitutional prerogative of the Government under the Take Care Clause, comports with legislative history, and protects the rights of relators to judicial review of a government motion to dismiss”).

         The Sequoia test is not intended to be rigorous-it does not require a “tight fitting relationship” between the purpose and accomplishment of the identified purpose. Sequoia Orange Co. v. Sunland Packing House Co., 912 F.Supp. 1325, 1341 (E.D. Cal. 1995). Rather, the Government's burden is simply to set forth a rational reason supporting its decision to seek dismissal; once it does so, “it becomes the relator's burden to come forward with some evidence to rebut the Government's asserted reasons and demonstrate that the decision is fraudulent, arbitrary and capricious, or illegal.” Nasuti v. Savage Farms, Inc., No. 12-30121, 2014 WL 1327015, at *12 (D. Mass. Mar. 27, 2014).

         b. District of Columbia Circuit “Unfettered Discretion” Test [Swift]

         Following the Ninth Circuit's adoption of the rational relationship test, the District of Columbia Circuit considered the appropriate standard to assess government motions to dismiss under Section 3730(c)(2)(A) and concluded that Sequoia inappropriately impeded on the province of the executive. Swift v. United States, 318 F.3d 250, 251 (D.C. Cir. 2003). Rather, in the view of the Swift court, Section 3730(c)(2)(A) gives the “government an unfettered right to dismiss an action.” Id. (emphasis added). Swift provided two rationales for the highly discretionary standard it adopted. First, focusing closely on the statutory text, the court noted that the absence of a reference to the judiciary in Section 3730(c)(2)(A) “at least suggests the absence of judicial constraint.” Id. Second, according to Swift, the presumption of unreviewability that applies to initial government decisions not to prosecute counsels in favor of minimal judicial oversight of Section 3730(c)(2)(A) dismissals, because a government motion under this section essentially amounts to a decision not to prosecute. Id. Swift also noted that the purpose of Section 3730(c)(2)(A)'s guarantee of a hearing is “simply to give the relator a formal opportunity to convince the government not to end the case;” the section is not intended to invite judicial review of the government's decision. Id. at 253.

         c. Third Circuit and Eastern District of Pennsylvania Precedent

         The Third Circuit noted the circuit split on the standard applicable to Section 3730(c)(2)(A) in two recent opinions but expressly declined to take a position. See Bookwalter v. UPMC, 938 F.3d 397, 417 (3d Cir. 2019) (“[O]ur Court has not yet specified the standard of review for a [Section] 3730(c)(2)(A) dismissal”); Chang v. Children's Advocacy Ctr. of Del., 938 F.3d 384, 387 (3d Cir. 2019) (“We need not take a side in the [Ninth/Tenth v. District of Columbia] circuit split because [relator] fails even the more restrictive standard.”).

         The two district court judges in the Eastern District of Pennsylvania to squarely confront the question of which test (rational relationship or unfettered discretion) should apply have taken slightly different approaches.

         Judge Stengel declined to “predict which standard the Third Circuit would adopt” in Surdovel v. Digirad Imaging Solutions, No. 07-0458, 2013 WL 6178987 (E.D. Pa. Nov. 25, 2013), concluding instead that the government satisfied both standards. Id. at *3.

         Judge Savage took a different approach in SMSPF, LLC v. EMD Serono, Inc., 370 F.Supp.3d 483 (E.D. Pa. 2019), finding that “the reasoning of the Ninth and Tenth Circuits [adopting the rational relationship test] is more persuasive than that of the District of Columbia Circuit [because it] accords with statutory interpretation and fosters transparency” and therefore adopting the Sequoia test. Id. at 488. Serono emphasized separation of powers considerations, because “[r]equiring some justification, no matter how insubstantial, for a decision not to pursue a false claim, acts as a check against the Executive.” Id. at 488-89. The Serono court ultimately concluded that the rational relationship test espoused by Sequoia ...

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