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United States ex rel. Prather v. Brookdale Senior Living Communities, Inc.

United States Court of Appeals, Sixth Circuit

June 11, 2018

United States of America ex rel. Marjorie Prather, Relator-Appellant,
v.
Brookdale Senior Living Communities, Inc. et al., Defendants-Appellees. Episode RAP F2F encounter signed Certification signed Final bill

          Argued: April 25, 2018

          Appeal from the United States District Court for the Middle District of Tennessee at Nashville. No. 3:12-cv-00764-Aleta Arthur Trauger, District Judge.

         ARGUED:

          Patrick Barrett, BARRETT LAW OFFICE, PLLC, Nashville, Tennessee, for Appellant. Brian D. Roark, BASS, BERRY & SIMS PLC, Nashville, Tennessee, for Appellees.

          Megan Barbero, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Amicus Curiae.

         ON BRIEF:

          Patrick Barrett, BARRETT LAW OFFICE, PLLC, Nashville, Tennessee, Michael Hamilton, PROVOST UMPHREY LAW FIRM, LLP, Nashville, Tennessee, for Appellant.

          Brian D. Roark, J. Taylor Chenery, Angela L. Bergman, BASS, BERRY & SIMS PLC, Nashville, Tennessee, for Appellees.

          Megan Barbero, Charles W. Scarborough, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Amicus Curiae.

          Before: MOORE, McKEAGUE, and DONALD, Circuit Judges.

          OPINION

          KAREN NELSON MOORE, Circuit Judge.

         Brookdale Senior Living Communities employed Marjorie Prather to review Medicare claims prior to their submission for payment. Many of these claims were missing the required certifications from physicians attesting to the need for the medical services that the defendants had provided. These certifications need to "be obtained at the time the plan of care is established or as soon thereafter as possible." 42 C.F.R. § 424.22(a)(2). But the defendants were allegedly obtaining certifications months after patients' plans of care were established.

         In July 2012, Prather filed a complaint pleading violations of the False Claims Act under an implied false certification theory. The district court dismissed her complaint, holding that Prather did not allege fraud with particularity or that the claims were false. This panel reversed the district court in part, holding that Prather had pleaded two of her claims with the required particularity and that the claims submitted were false. United States ex rel. Prather v. Brookdale Senior Living Cmties., Inc. (Prather I), 838 F.3d 750, 775 (6th Cir. 2016). In doing so, we interpreted the phrase "as soon thereafter as possible" in 42 C.F.R. § 424.22(a)(2) to mean that a delay in certification is "acceptable only if the length of the delay is justified by the reasons the home-health agency provides for it" and held that the reason alleged for the defendants' delay was not justifiable. Id. at 765.

         On remand, the district court granted Prather leave to file her Third Amended Complaint ("complaint") in light of the Supreme Court's clarification of the materiality element of a False Claims Act claim in Universal Health Services., Inc. v. United States ex rel. Escobar, U.S., 136 S.Ct. 1989 (2016). The defendants moved to dismiss again on the grounds that Prather did not plead sufficiently the materiality and scienter elements of her two alleged False Claims Act violations. The district court granted that motion, and Prather now appeals. For the reasons set forth below, we REVERSE the district court's dismissal of Prather's complaint and REMAND for proceedings consistent with this opinion.

          I. BACKGROUND

         A. Legal Background

         The False Claims Act, 31 U.S.C. § 3729 et seq., imposes civil liability that is "essentially punitive in nature" on those who defraud the U.S. government. Escobar, 136 S.Ct. at 1996 (quoting Vt. Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 784 (2000)). Here, Prather is asserting a theory of liability under the False Claims Act known as "implied false certification." Under this theory, "liability can attach when the defendant submits a claim for payment that makes specific representations about the goods or services provided, but knowingly fails to disclose the defendant's non-compliance with a statutory, regulatory, or contractual requirement." Id. at 1995. This misrepresentation through omission "renders the claim 'false or fraudulent' under § 3729(a)(1)(A)." Id. "A misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act." Id. at 1996.

         The claims and alleged misrepresentations at issue in this case arise in the context of Medicare and home-health services. Medicare Parts A and B provide coverage for certain home-health services. Prather I, 838 F.3d at 755 (citing 42 U.S.C. §§ 1395c and 1395k(a)(2)(A)). These services include: "skilled nursing services, home health aide services, physical therapy, speech-language pathology services, occupational therapy services, and medical social services." Id. (internal quotation marks and brackets denoting alterations omitted). "'Medicare Part A or Part B pays for home health services only if a physician certifies and recertifies' the patient's eligibility for and entitlement to those services." Id. (quoting 42 C.F.R. § 424.22).

         These certifications are projections about the patient's medical need and plan of care, and Medicare payments for the care provided are made on a prospective system of 60-day periods, known as an "episode of care." Id. at 756. Payments for each episode are made in two parts. The initial payment-the "request for anticipated payment" or "RAP"-is a percentage of the total expected reimbursement. Id. (citing 42 C.F.R. § 484.205(b)). The second payment-the "residual final payment"-is disbursed at the end of the episode. Id. (citing 42 C.F.R. § 484.205(b)).

         "The certification of need for home health services must be obtained at the time the plan of care is established or as soon thereafter as possible and must be signed and dated by the physician who establishes the plan." 42 C.F.R. § 424.22(a)(2). This regulation "permits a home-health agency to complete a physician certification of need after the plan of care is established, but . . . such a delay [is] acceptable only if the length of the delay is justified by the reasons the home-health agency provides for it." Prather I, 838 F.3d at 765.[1] If the required certification was not obtained in compliance with the timing requirement in 42 C.F.R. § 424.22(a)(2), the RAP and final payment claims are "impliedly false." Id. at 766-67.

         B. Factual Background

         Prather, the relator in this case, "was employed by Brookdale Senior Living, Inc. as a Utilization Review Nurse from September of 2011 until November 23, 2012."[2] R. 98 (Third. Am. Compl. ¶ 10) (Page ID #1462). Defendant Brookdale Senior Living, Inc., along with defendants Brookdale Senior Living Communities, Inc., Brookdale Living Communities, Inc., Innovative Senior Care Home Health of Nashville, LLC, and ARC Therapy Services, LLC, "are interconnected corporate siblings who operate senior communities, assisted living facilities, and home health care providers." Id. ¶ 3 (Page ID #1460).

         Prather alleges that it was the defendants' policy to "enroll[] as many of their assisted living facility residents as possible in home health care services that were billed to Medicare, " id., even when these treatments "were not always medically necessary or did not need to be performed by nurses who billed to Medicare." Prather I, 383 F.3d at 765; R. 98 (Third. Am. Compl. ¶¶ 70, 105, 110) (Page ID #1477, 1486, 1488). This "aggressive solicitation of their senior community and assisted living facility residents ultimately generated thousands of Medicare claims that were 'held' because they did not meet basic Medicare requirements . . . ." R. 98 (Third Am. Compl. ¶ 3) (Page ID #1460). "In September of 2011, there was a large backlog of about 7, 000 unbilled Medicare claims worth approximately $35 million." Id. ¶ 77 (Page ID #1478). To facilitate the processing of these claims, the defendants initiated the "Held Claims Project, " and Prather was hired to work on this specific assignment. Id. ¶ 77-80 (Page ID #1478-49).

Prather's job responsibilities included:
(1) pre-billing chart reviews in order to ensure compliance with the requirements and established policies of Defendants, as well as state, federal, and insurance guidelines; (2) working directly with the Regional Directors, Directors of Professional Services, and clinical associates to resolve documentation, coverage, and compliance issues; (3) acting as resource person to the agencies for coverage and compliance issues, (4) reviewing visits utilization for appropriateness pursuant to care guidelines and patient condition; and (5) keeping Directors of Professional Services apprised of problem areas requiring intervention.

Id. ¶ 80 (Page ID #1479).

         The Held Claims Project team "used a 'billing release checklist' to identify items that needed to be completed before [a] claim could be released for final billing to Medicare." Id. ¶ 82 (Page ID #1480). The checklist and corresponding documents for each claim were then given to the billing office. Id. Once the billing office had all the documentation required, it submitted the bill to Medicare. Id.

         One of the required documents frequently missing was the physician certification. Initially, Prather and the other project members "sent attestation forms to doctors for them to sign to correct the problem of missing signatures, " but they "only received a few signed and completed forms back from the doctors." Id. ¶ 86 (Page ID #1481). Beginning in May 2012, to facilitate the process of gathering the required certifications, "Defendants paid physicians to review outstanding held claims and sign orders for previously provided care." Id. ¶ 98 (Page ID #1483). Additionally, team members visited physicians in order to obtain certifications. Id. ¶ 104 (Page ID #1818-19). Prather also alleges that the defendants repeatedly "billed RAPs without having physician certifications, and then re-billed them immediately after the RAPs were canceled in order to keep the funds received through the RAPs, while still lacking the required physician certifications." Id. ¶ 99 (Page ID #1484).

         Prather alleges that she, and the other employees in the Held Claims Project, "raised concerns" about "compliance problems" with supervisors. Id. ¶ 91-92 (Page ID #24). But the defendants told the utilization review nurses to ignore problems they found and only cursorily to review the documentation. Id. ¶ 23, 91, 94-95 (Page ID #1481-83). In response to Prather's repeated comments to her supervisors that she was discovering compliance issues, she was told that the defendants could "just argue in our favor if we get audited." Id. ¶ 114 (Page ID #1489).

         To support her allegations that the defendants failed to comply with the timing requirement in 42 C.F.R. § 424.22(a)(2), Prather included five examples in her complaint and incorporated by reference two exhibits containing spreadsheets listing information about hundreds of other untimely certifications. In the examples in her complaint, Prather describes physician certifications obtained from a few months to nearly a year after an episode of care began. Id. ¶ 104-13 (Page ID #1485-89). In her attached Exhibit A, Prather identifies 489 claims submitted to Medicare for which she alleges "Defendants did not obtain the required physician certification of need until after the episode was complete and/or the patient was discharged." Id. ¶ 115-17 (Page ID #1489-90); R. 98-1 (Third Am. Compl. Ex. A) (Page ID #1497-1520). Similarly, in Exhibit B, Prather identifies 771 claims that were allegedly submitted to Medicare with physician certifications of the required face-to-face encounter that were not obtained "until after the patient had been discharged and/or the episode was complete." R. 98 (Third Am. Compl. ¶ 118-20) (Page ID #1491); R. 98-2 (Third Am. Compl. Ex. B) (Page ID #1521-54).

         C. Procedural History

         Prather filed her complaint in this lawsuit under seal in July 2012 asserting multiple False Claim Act violations and state-law claims. R. 1 (Sealed Compl. at 28-45) (Page ID #28-45). In April 2014, the United States declined to intervene, and Prather's complaint was unsealed and served on the defendants. R. 23 (Notice of Election to Decline Intervention) (Page ID #103-04); R. 24 (Apr. 10, 2014 Dist. Ct. Order) (Page ID #107-08). Before the defendants had responded to the initial complaint, Prather filed her First Amended Complaint. R. 52 (First Am. Compl.) (Page ID #178-211). The defendants subsequently moved to dismiss for failure to comply with Federal Rule of Civil Procedure 9(b), R. 56 (First Mot. to Dismiss at 1) (Page ID #217), and the district court granted the motion without prejudice, R. 71 (Mar. 31, 2015 Dist. Ct. Op.) (Page ID #889-922).

         In June 2015, Prather filed her Second Amended Complaint. R. 73 (Second Am. Compl.) (Page ID #924-57). She alleged three claims: (1) the presentation of false claims to the United States government in violation of 31 U.S.C. § 3729(a)(1)(A); (2) the making or use of material false records or statements in the submission of claims to the government in violation of 31 U.S.C. § 3729(a)(1)(B); and (3) the wrongful retention of overpayments in violation of 31 U.S.C. § 3729(a)(1)(G). Id. at 29-32 (Page ID #952-55). The defendants again moved to dismiss for failure to comply with Federal Rule of Civil Procedure 9(b). R. 78 (Second Mot. to Dismiss at 1) (Page ID #1028). The district court granted the motion with respect to all three counts. R. 89 (Nov. 5, 2015 Dist. Ct. Op.) (Page ID #1358-1402).

         Prather appealed, and this panel reversed the district court's "dismissal of Prather's claims regarding the submission of false or fraudulent claims for payment and the fraudulent retention of payments, " but affirmed the "dismissal of Prather's claim regarding the use of false records." Prather I, 838 F.3d at 775. The briefs in Prather I were filed prior to the Supreme Court's decision in Escobar, so we did not address any potential impact that decision may have had on Prather's complaint. Id. at 761 n.2. On remand to the district court:

the defendants stated their intent to file a motion to dismiss the Second Amended Complaint for failure to meet the standards set forth in Escobar. Because the Second Amended Complaint was filed before Escobar was issued, the court afforded the relator an opportunity to amend her complaint again, specifically to attempt to satisfy the pleading obligations identified in that case.

United States ex rel. Prather v. Brookdale Senior Living Cmties., Inc., 265 F.Supp.3d 782, 787 (M.D. Tenn. 2017).

         Prather filed her Third Amended Complaint in March 2017. R. 98 (Third. Am. Compl.) (Page ID #1459-96). She asserted two claims: (1) the presentation of false claims to the United States government in violation of 31 U.S.C. § 3729(a)(1)(A); and (2) the wrongful retention of overpayments in violation of 31 U.S.C. § 3729(a)(1)(G). Id. ¶ 121-31 (Page ID #1492-94). The defendants moved again to dismiss the complaint. R. 102 (Third Mot. to Dismiss) (Page ID #1571-73). The defendants argued that Prather had failed to plead adequately the required elements of materiality and scienter under Escobar. Id. at 1 (Page ID #1571). The district court granted the defendants' motion to dismiss with prejudice, holding that Prather had not sufficiently pleaded materiality. Prather, 265 F.Supp.3d at 801; R. 113 (June 22, 2017 Dist. Ct. Order) (Page ID #2142); R. 114 (Dist. Ct. J.) (Page ID #2143). It did not reach the issue of scienter. Prather, 265 F.Supp.3d at 801.

         Prather's timely appeal from the district court's judgment is now before the same panel that heard her original appeal in Prather I.

         II. STANDARD OF REVIEW

         Federal Rule of Civil Procedure 9(b)'s requirement that fraud be pleaded with particularity applies to complaints alleging violations of the False Claims Act, because "defendants accused of defrauding the federal government have the same protections as defendants sued for fraud in other contexts." Prather I, 838 F.3d at 760 (quoting Chesbrough v. VPA, P.C., 655 F.3d 461, 466 (6th Cir. 2011)). "To satisfy Rule 9(b), a complaint of fraud, 'at a minimum, must allege the time, place, and content of the alleged misrepresentation on which [the plaintiff] relied; the fraudulent scheme; the fraudulent intent of the defendants; and the injury resulting from the fraud.'" United States ex rel. Marlar v. BWXT Y-12, L.L.C., 525 F.3d 439, 444 (6th Cir. 2008) (quoting United States ex rel. Bledsoe v. Cmty. Health Sys., Inc. (Bledsoe I), 342 F.3d 634, 643 (6th Cir. 2003)). If the complaint "alleges 'a complex and far-reaching fraudulent scheme, ' then that scheme must be pleaded with particularity and the complaint must also 'provide[] examples of specific' fraudulent conduct that are 'representative samples' of the scheme." Id. at 444-45 (alteration in original) (quoting United States ex rel. Bledsoe v. Cmty. Health Sys. (Bledsoe II), 501 F.3d 493, 510 (6th Cir. 2007)).

         "This Court reviews de novo a district court's dismissal of a complaint for failure to state a claim, including dismissal for failure to plead with particularity under [Rule] 9(b).'" United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 914 (6th Cir. 2017) (alteration in original) (quoting United States ex rel. Eberhard v. Physicians Choice Lab. Servs., LLC, 642 Fed.Appx. 547, 550 (6th Cir. 2016)), cert. denied, No. 17-1399, 2018 WL 1697046 (U.S. May 29, 2018). We "must construe the complaint in the light most favorable to the plaintiff, accept all factual allegations as true, and determine whether the complaint contains 'enough facts to state a claim to relief that is plausible on its face.'" Bledsoe II, 501 F.3d at 502 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

         III. ANALYSIS

         To plead a claim under the False Claims Act, the plaintiff must sufficiently allege that: (1) the defendant made a false statement or created a false record; (2) with scienter; (3) that was "material to the Government's decision to make the payment sought in the defendant's claim"; and (4) that the defendant submitted to the U.S. government causing it to pay the claim. United States ex rel. Sheldon v. Kettering Health Network, 816 F.3d 399, 408 (6th Cir. 2016) (quoting United States ex rel. SNAPP, Inc. v. Ford Motor Co., 618 F.3d 505, 509 (6th Cir. 2010)); see also United States ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 902 (9th Cir. 2017), petition for cert. filed, 86 U.S.L.W. 3361 (U.S. Dec. 26, 2017) (No. 17-936). In Prather I, we resolved in Prather's favor the issue of whether Prather had sufficiently pleaded facts supporting the first element. 838 F.3d at 762. The parties are now contesting whether Prather sufficiently pleaded the second and third elements: scienter and materiality. Appellant Br. at 12; Appellees Br. at 14-15. These two elements are integral to both of Prather's alleged claims and therefore Count One and Count Two of Prather's complaint rise or fall together. Prather, 265 F.Supp.3d at 801. Because the district court addressed only materiality and not scienter, we will discuss the two elements in that order.

         A. Materiality

         "[A] misrepresentation about compliance with a statutory, regulatory, or contractual requirement must be material to the Government's payment decision in order to be actionable under the False Claims Act." Escobar, 136 S.Ct. at 2002. The Act defines "material" as "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." 31 U.S.C. § 3729(b)(4). In Escobar, the Supreme Court clarified this materiality requirement and emphasized that the "standard is demanding." 136 S.Ct. at 2003.

         "[M]ateriality 'look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.'" Escobar, 136 S.Ct. at 2002 (second alteration in original) (quoting 26 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 69:12 (4th ed. 2003)). Something is material if a reasonable person "would attach importance to [it] in determining his choice of action in the transaction" or "if the defendant knew or had reason to know that the recipient of the representation attaches importance to the specific matter 'in determining his choice of action, ' even though a reasonable person would not." Id. at 2002-03 (alteration in original) (quoting Restatement (Second) of Torts § 538 (Am. Law Inst. 1977)).

         The analysis of materiality is "holistic." United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 109 (1st Cir. 2016). Relevant factors include: (1) "the Government's decision to expressly identify a provision as a condition of payment"; (2) whether "the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement" or if, with actual knowledge of the non-compliance, it consistently pays such claims and there is no indication that its practice will change; and (3) whether the "noncompliance is minor or insubstantial" or if it goes "to the very essence of the bargain." Escobar, 136 S.Ct. at 2003 & n.5. None of these considerations is dispositive alone, nor is the list exclusive. Id. at 2001-04.

         1. Express Condition of Payment

         "A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment." Escobar, 136 S.Ct. at 2003. But such a designation is a relevant factor in determining materiality. Id.

         The parties vigorously dispute whether the timing requirement in 42 C.F.R. § 424.22(a)(2) is an express condition of payment for RAPs and residual final payments.[3]Appellant Br. at 25-27; Appellees Br. at 28-35; Appellant Reply Br. at 4-6. The district court concluded that the timing requirement was an express condition of payment for both, Prather, 265 F.Supp.3d at 796, and we agree.

         Medicare Parts A and B condition payment for services on a physician's certification regarding the necessity of such services. 42 U.S.C. §§ 1395f(a)(2) & 1395n(a)(2); 42 C.F.R. § 424.10. Thus, "[i]n order for home health services to qualify for payment under the Medicare program, " 42 C.F.R. § 409.41 mandates that "[t]he physician certification and recertification requirements for home health services described in [42 C.F.R.] § 424.22" be met. 42 C.F.R. § 409.41(b). The timing requirement at issue in this case is located in 42 C.F.R. § 424.22.

         Prather argues that this analysis answers the question. Section 409.41(b) expressly conditions payment on meeting the certification requirements in § 424.22. Section 424.22(a)(2) contains the timing requirement for the certification Prather alleges the defendants violated. Thus, Prather argues, § 424.22(a)(2) must be an express condition of payment. Appellant Br. at 26.

         Not so fast argue the defendants. Section 409.41(b) directs the reader to the requirements "described in § 424.22." So the reader must then look to the language in § 424.22 itself. Appellees Br. at 30. Section 424.22 states: "Medicare Part A or Part B pays for home health services only if a physician certifies and recertifies the content specified in paragraphs (a)(1) and (b)(2) of this section, as appropriate." The defendants argue that this language limits the broader language of 42 C.F.R. § 409.41 by making only the requirements in 42 C.F.R. § 424.22(a)(1) and (b)(2) express conditions of payment. Appellees Br. at 29.

         The defendants are correct that § 409.41(b) incorporates the requirements in § 424.22, and thus it is necessary to examine the latter section to understand the scope of the former. For example, if § 424.22 contained a provision that stated "certifications may be submitted via U.S. mail" then § 409.41(b) could not be read as to make it an express condition of payment that the certification must be submitted via U.S. mail merely by reference to § 424.22 as a whole. But the defendants' reading of the introductory clause in § 424.22 is overly crabbed.

         The prefatory language states that payment requires the physician to certify (or recertify) the contents specified in § 424.22(a)(1) and (b)(2). Section 424.22(a), entitled "[c]ertification, " then explains in further detail what a certification requires. Thus, § 424.22(a) gives meaning to the word "certifies" in the introductory clause. The required certification is not a certification unless it complies with all provisions of § 424.22(a), both (a)(1) and (a)(2). And § 424.22(a)(2) states that the certification "must be obtained at the time the plan of care is established or as soon thereafter as possible and must be signed and dated by the physician who establishes the plan."[4]Cf. Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 1000-01 (9th Cir. 2010) (holding that 42. C.F.R. § 424.22(d), which limits which physicians may certify or recertify the need for home-health services, is an express condition of payment), cert. denied, 562 U.S. 1102 (2010).

         Consequently, we agree with the district court that the timing requirement in 42 C.F.R. § 424.22(a)(2) is an express condition of payment. Thus, this factor weighs in favor of the conclusion that a misrepresentation with respect ...


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