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Chattanooga-Hamilton County Hospital Authority v. Xerox Corp.

United States District Court, E.D. Tennessee, Chattanooga

June 19, 2017




         This civil action is before the Court on two pending motions to dismiss: the motion to dismiss [Doc. 7] filed by defendant Xerox Business Services, LLC (“XBS”), f/k/a Affiliated Computer Services, Inc., which owned ACS Consultant Company, Inc., d/b/a ACS Healthcare Solutions (“ACS”); and the motion to dismiss [Doc. 9] filed by defendant Xerox Corporation (“Xerox”). The parties have filed briefs in support of and in opposition to the pending motions [Docs. 8, 10, 14, 18, 27, 28], which the Court has carefully reviewed.

         After considering the pending motions, defendant XBS's motion to dismiss [Doc. 7] will be GRANTED in part and DENIED in part and defendant Xerox's motion to dismiss [Doc. 9] will be GRANTED.

         I. Relevant Facts[1]

         This case arises from a contract for services between plaintiff Chattanooga-Hamilton County Hospital Authority, d/b/a Erlanger Medical Center and Erlanger Health System (“Erlanger”) and ACS in 2005 and 2006 [Doc. 1 at ¶10]. Subsequent to the events at issue, defendant Xerox acquired ACS [Id. at ¶ 4].

         Following the settlement of a prior civil suit under the False Claims Act (“FCA”), 31 U.S.C. § 3729, et seq., Erlanger contracted with ACS to improve its billing and other financial practices [Id. at ¶¶ 9-11]. In December 2005, Erlanger and ACS entered into a Service Agreement and then into a Master Service Agreement (“MSA”) on January 25, 2006 (collectively the “Agreement”) [Id. at ¶ 10]. Under this Agreement, ACS agreed to provide Erlanger with “consultants, managers, technical personnel, and other personnel to furnish healthcare information technology, strategic, financial and operations management consulting services, and computer program development services” who would work at Erlanger [Id. at ¶ 13]. During the term of this Agreement, ACS and its employees had the authority to assume almost complete control of specific areas of Erlanger's operations and ACS was authorized to appoint its own employees to leadership positions at Erlanger [Id. at ¶ 14]. Thus, ACS employees essentially controlled or exerted significant influence upon Erlanger's financial operations, its revenue cycle, its employment and staffing, and its clinical resource management programs [Id. at ¶ 15]. However, all of the ACS consultants working at Erlanger remained employees or subcontractors of ACS [Id. at ¶ 16].

         In order to perform the services provided for under the Agreement, ACS and its employees were given access to sensitive, confidential, and proprietary information, including patient and financial information [Id. at ¶ 19]. Accordingly, the Agreement required ACS to hold any proprietary information it received from Erlanger “in confidence;” to “exercise reasonable care to protect it;” and to take affirmative actions to guard against its disclosure and misappropriation [Id. at ¶ 20]. ACS agreed that its work would “be performed in a workmanlike and professional manner consistent with the level of care and skill ordinarily exercised by providing similar services under similar conditions” [Id. at ¶ 21]. ACS further agreed that it would indemnify and hold Erlanger harmless “from and against any third-party claims for loss, damage, expense (including attorneys' fees) liability … caused by the negligent acts or omissions of the indemnifying party, its employees, agents or subcontractors …” [Id. at ¶ 22].

         Erlanger and ACS entered into a Business Associate Addendum to the Agreement which required ACS “to return to [Erlanger] or destroy all PHI [“Protected Health Information”], in whatever form or medium” under ACS's control “as promptly as possible, but not later than 30 days after the effective date of the termination, cancellation, expiration, or other conclusion” of the agreement [Id. at ¶ 23]. The Addendum also imposed indemnification obligations upon ACS for “any claim, cause of action, liability, damage, cost or expense, including attorneys' fees and court or proceedings costs, ” arising out of or connection with any “breach of this Addendum by ACS or any subcontractor, agent, person or entity under ACS's control” [Id. at ¶ 24].

         ACS's work at Erlanger lasted from November 2005 through at least December 2006 [Id. at ¶ 25]. In December 2005, ACS hired Robert Whipple as a revenue cycle consultant for the Erlanger contract [Id. at ¶ 26]. In February 2006, Whipple was named Erlanger's Director of Utilization Review/Case Management and he remained in this position until he was removed in July 2006 [Id.]. Erlanger claims that Whipple and ACS pressured Erlanger to bill fewer observation claims and more inpatient claims in order to increase revenue [Id. at ¶ 28].[2] ACS did this by directing the rebilling of a larger number of observation claims from 2004-2005 as inpatient claims; altering patient status guidelines for Erlanger's utilization review staff; and changing the patient status in certain patient records from observation to inpatient, regardless of whether the change was supported by a physician order and in violation of Medicare billing requirements [Id. at ¶ 29].

         Erlanger alleges the following specific incidents:

• In December 2005, Whipple requested billing data for all observation services and short-stay inpatient admissions for May 2004 through October 2005 and he directed that 143 claims previously billed as “observation” claims should be rebilled as inpatient stays [Id. at ¶ 32].
• On December 21, 2005, Whipple met with Erlanger managers and stated that Erlanger should not be putting any Medicare patients in observation status and that “emergent” admissions and surgeries should always be billed as inpatient claims [Id. at ¶ 33].
• In January and February 2006, ACS instituted changes to the patient status guidelines to increase the amounts billed by Erlanger [Id. at ¶ 34].
• On February 1, 2006, ACS consultants directed Erlanger's Patient Financial Services (“PFS”) Department to rebill as inpatient claims the observation claims previously identified by ACS [Id. at ¶ 36].
• In mid-February 2006, ACS advised the Erlanger Board of Trustees that rebilling the 700-plus historical observation records as inpatient claims would produce $4.99 million in revenue for Erlanger and an additional $3.32 million moving forward [Id. at ¶ 38].
• Erlanger then requested that ACS not rebill any more observation claims until ACS had met with Erlanger's fiscal intermediary to discuss the propriety of ACS's billing directives [Id. at ¶ 39].
• Starting in early February 2006, Whipple reviewed the observation charts daily and personally changed numerous observation patient accounts to inpatient status without physician authorization [Id. at ¶ 40].
• In March 2006, Erlanger staff began flagging the records reviewed by Whipple in order to document the Health Information Management's disagreement with the ACS billing and patient status directives [Id. at ¶ 41].
• On May 1, 2006, an Erlanger employee called Erlanger's internal compliance hotline to complain about Whipple's billing recommendations. From May to July 2006, Erlanger's Chief Compliance Officer and staff met on multiple occasions to review accounts where Whipple had changed the patient status from observation to inpatient without a physician order [Id. at ¶ 43].
• In June 2006, Erlanger's Chief Compliance Officer informed employees to call the compliance hotline or notify Erlanger Leadership directly and immediately if they saw accounts where Whipple made status changes [Id. at ¶ 44].
• On July 12 and 16, 2006, the internal compliance hotline received complaints that Whipple had changed patient statuses without a physician order [Id. at ¶ 45].
• Whipple was removed from the Erlanger engagement in late July 2006, and he kept PHI and confidential documents belonging to Erlanger [Id. at ¶¶ 49, 51].

         On March 7, 2011, Whipple filed a qui tam complaint against Erlanger in the United States District Court for the Middle District of Tennessee [Id. at ¶ 52]. Whipple alleged that Erlanger violated the FCA by submitting fraudulent reimbursement claims to Medicare and Medicaid for medically unnecessary inpatient and observation services during the period he worked for ACS at Erlanger [Id.]. These allegations were based upon confidential documents, data, and other information that Whipple obtained from Erlanger [Id. at ¶ 53]. The United States and the states of Tennessee, Georgia, and North Carolina declined to intervene in the lawsuit, but Whipple pursued the claims on his own [Id. at ¶¶ 54-55]. The parties settled the lawsuit in July 2016 and the case was dismissed. As part of the settlement, the parties signed a settlement agreement and release [Id. at ¶ 56; Doc. 7, Ex. 2].

         Following a June 18, 2012 letter from Erlanger's counsel to ACS's counsel, the parties negotiated and executed a Tolling Agreement [Doc. 1, Ex. C] relative to disputes that had arisen between the parties, including alleged breaches of the service agreements [Doc. 1 at ¶¶ 57-60]. Therein, the parties agreed to toll the statutes of limitations, statutes of repose, and contractual periods of limitation and preserve any claims or defenses arising from “disputes relating to Mr. Whipple's conduct as part of the work performed for Erlanger by ACS under the Agreements, and actions taken with respect to Erlanger by Mr. Whipple” effective June 18, 2012 [Id. at ¶ 61, Ex. C]. Erlanger terminated the Tolling Agreement on November 14, 2016 [Id. at ¶ 63] and this action followed. Erlanger asserts claims for: (1) breach of contract; (2) breach of warranty; (3) breach of fiduciary duties; (4) negligent misrepresentation; (5) negligence; and (6) indemnification [Id. at ¶¶ 64- 111].

         II. Standard of Review

         Federal Rule of Civil Procedure 8(a)(2) sets out a liberal pleading standard, Smith v. City of Salem, 378 F.3d 566, 576 n.1 (6th Cir. 2004), requiring only “‘a short and plain statement of the claim showing that the pleader is entitled to relief, ' in order to ‘give the [opposing party] fair notice of what the . . . claim is and the grounds upon which it rests, '” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Detailed factual allegations are not required, but a party's “obligation to provide the ‘grounds' of his ‘entitle[ment] to relief' requires more than labels and conclusions.” Twombly, 550 U.S. at 555. “[A] formulaic recitation of the elements of a cause of action will not do, ” nor will “an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         In deciding a Rule 12(b)(6) motion to dismiss, a court must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, draw all reasonable inferences in favor of the plaintiff, and determine whether the complaint contains “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570; Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007) (citation omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. “Determining whether a complaint states a plausible claim for relief will [ultimately] . . . be a context-specific task that requires th[is Court] to draw on its judicial experience and common sense.” Id. at 679.

         III. Analysis

         A. Xerox's Motion to Dismiss [Doc. 9]

         Xerox is the parent corporation of XBS. Xerox has moved to dismiss the claims against it because Erlanger fails to allege any facts by which Xerox can be liable for the conduct alleged in the complaint. Indeed, the only allegations in the complaint against Xerox are as follows:

• Xerox is a New York corporation with a principal place of business in Norwalk, Connecticut and Xerox has done business within Hamilton County, ...

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