United States v. UPMC ( 2019 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 18-1693
_______________
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
_______________
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
_______________
Argued January 10, 2019
Before: AMBRO, BIBAS, and FUENTES, Circuit Judges.
(Filed: September 17, 2019)
_______________
Patrick K. Cavanaugh
Stephen J. Del Sole
Del Sole Cavanaugh Stroyd LLC
Three PPG Place
Suite 600
Pittsburgh, PA 15222
Gregory M. Simpson [ARGUED]
Simpson Law Firm
110 Habersham Drive
Suite 108
Fayetteville, GA 30214
Andrew M. Stone
Stone Law Firm
1806 Frick Building
437 Grant Street
Pittsburgh, PA 15219
Counsel for Appellants
Kirti Datla
Jonathan L. Diesenshaus
Jessica L. Ellsworth [ARGUED]
Mitchell J. Lazris
Sarah C. Marberg
Hogan Lovells US
555 Thirteenth Street, N.W.
Columbia Square
Washington, DC 20004
Counsel for Appellees
2
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
3
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
4
_______________
OPINION OF THE COURT
_______________
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 hospi-
tals pay their doctors based on the number or value of their re-
ferrals, 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 cer-
tain 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.
5
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 dis-
missed 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’ com-
plaint alleges enough facts to make out their claim. The sur-
geons’ 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 ac-
count. 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 litiga-
tion. 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 plead-
ings 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 re-
verse.
6
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 sec-
ond 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 sys-
tem 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 Pitts-
burgh 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 sur-
geons who worked for the three subsidiaries here all had simi-
lar employment contracts. Each surgeon had a base salary and
an annual Work-Unit quota. Work Units (or wRVUs) measure
7
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 sal-
ary. 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 sal-
aries and revenues. This compensation structure gave the sur-
geons an incentive to maximize their Work Units. And the in-
centive 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 dou-
bled 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 rela-
tors, “[w]ith the full knowledge and endorsement of” the Med-
ical Center. App. 184 ¶ 190.
8
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 provid-
ers bill Medicare for more than just the surgeons’ own Work
Units. Whenever a surgeon did a procedure at one of the hos-
pitals, the Medical Center also got to bill “for the attendant hos-
pital and ancillary services.” App. 166 ¶ 104. This part of the
bill could be four to ten times larger than the cost of the sur-
geon’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 neurosurgi-
cal 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 ser-
vices. The government settled those claims for about $2.5 mil-
lion. It declined to intervene as to the claims for hospital ser-
vices, but it let the relators maintain that part of the action in
its stead.
9
After the government intervened, the District Court dis-
missed the first amended complaint without prejudice for fail-
ure to state a claim. The relators then filed their current com-
plaint, 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 state-
ments, and
(3) one count of knowingly making false records or state-
ments 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 possi-
ble. 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
10
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 consti-
tuting fraud.” Fed. R. Civ. P. 9(b).
III. THE STARK ACT AND THE FALSE CLAIMS ACT
A. The Stark Act
The Stark Act protects the public fisc from Medicare and
Medicaid fraud. The Act and its regulations broadly bar Medi-
care claims for many services referred by doctors who have a
financial interest in the healthcare provider. But the statute cre-
ates dozens of exceptions and authorizes the Department of
Health and Human Services to make even more exceptions for
financial relationships that “do[ ] not pose a risk of program or
patient abuse.” 42 U.S.C. § 1395nn(b)(4).
1. Forbidden conduct. The Stark Act opens with a broad
ban. It forbids submitting Medicare claims for “designated
health services” provided under a “referral” made by a doctor
with whom the entity has a “financial relationship.” Id.
§ 1395nn(a)(1). Understanding this ban requires exploring
11
these three quoted terms, each of which has statutory and reg-
ulatory definitions.
The Stark Act lists several categories of designated health
services, including inpatient hospital services. Id.
§ 1395nn(h)(6)(K). And inpatient hospital services include bed
and board, interns’ and residents’ services, nursing, drugs, sup-
plies, transportation, and overhead. 42 C.F.R. §§ 409.10(a),
411.351.
A referral is a doctor’s request for a designated health ser-
vice. 42 U.S.C. § 1395nn(h)(5)(A); 42 C.F.R. § 411.351. That
definition is broad, but it has an important exception: services
that a doctor performs personally do not count. 42 C.F.R.
§ 411.351. That makes sense; ordinarily, one cannot refer
something to oneself. And the exception’s boundaries also fol-
low: it does not cover services by a doctor’s associates or em-
ployees, or services incidental to the doctor’s own services. Id.;
Medicare Program; Physicians’ Referrals to Health Care En-
tities with Which They Have Financial Relationships (Phase
II); Interim Final Rule, 69 Fed. Reg. 16054, 16063 (Mar. 26,
2004).
Finally, financial relationships come in two forms:
(1) ownership or investment interests and (2) compensation ar-
rangements. 42 U.S.C. § 1395nn(a)(2). This case turns on the
latter. The statute defines compensation arrangement to mean
“any arrangement involving any remuneration between” a doc-
tor and a healthcare provider. Id. § 1395nn(h)(1)(A). And re-
muneration “includes any remuneration, directly or indirectly,
in cash or in kind.” Id. § 1395nn(h)(1)(B).
12
2. Exceptions. On its face, the Stark Act’s ban sweeps in
lots of common situations. To separate the fraudulent wheat
from the innocuous chaff, Congress and the Department of
Health and Human Services have created many exceptions.
Here, the Medical Center argues that exceptions for four types
of compensation arrangements could apply here: bona fide em-
ployment; personal services; fair-market-value compensation;
and indirect compensation. See id. § 1395nn(e)(2), (e)(3); 42
C.F.R. § 411.357(l), (p).
All four exceptions have two elements in common. First,
the doctor’s compensation must not “take[ ] into account (di-
rectly or indirectly) the volume or value of” the doctor’s refer-
rals. 42 U.S.C. § 1395nn(e)(2)(B)(ii); accord id.
§ 1395nn(e)(3)(A)(v); 42 C.F.R. § 411.357(l)(3), (p)(1)(i). Sec-
ond, the doctor’s compensation must not exceed fair market
value. 42 U.S.C. § 1395nn(e)(2)(B)(i), (e)(3)(A)(v); 42 C.F.R.
§ 411.357(l)(3), (p)(1)(i).
In litigation, these exceptions are affirmative defenses. So
once a plaintiff proves a prima facie violation of the Stark Act,
the burden shifts to the defendant to prove that an exception
applies. United States ex rel. Kosenske v. Carlisle HMA, Inc.,
554 F.3d 88, 95 (3d Cir. 2009).
3. No built-in cause of action. The Stark Act forbids the
government to pay claims that violate the Act. 42 U.S.C.
§ 1395nn(g)(1). It demands restitution from those who receive
payments on illegal claims. Id. § 1395nn(g)(2). And it creates
civil penalties for submitting improper claims or taking part in
schemes to violate the Act. Id. § 1395nn(g)(3), (4). But it gives
13
no one a right to sue. United States ex rel. Drakeford v.
Tuomey, 792 F.3d 364, 374 n.4 (4th Cir. 2015).
So the Stark Act never appears in court alone. Instead, it
always come in through another statute that creates a cause of
action—typically, the False Claims Act.
B. The False Claims Act
Under the False Claims Act, any person who “knowingly
presents, or causes to be presented, a false or fraudulent claim
for payment or approval” is civilly liable to the United States.
31 U.S.C. § 3729(a)(1)(A). A Medicare claim that violates the
Stark Act is a false claim under the False Claims Act.
Kosenske, 554 F.3d at 94. The False Claims Act also makes
liable anyone who “knowingly makes, uses, or causes to be
made or used, a false record or statement material to” a false or
fraudulent claim. 31 U.S.C. § 3729(a)(1)(B), (G).
IV. THE RELATORS PLEAD STARK ACT VIOLATIONS
A prima facie Stark Act violation has three elements: (1) a
referral for designated health services, (2) a compensation ar-
rangement (or an ownership or investment interest), and (3) a
Medicare claim for the referred services. See United States ex
rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 241 (3d Cir. 2004).
This combination of factors suggests potential abuse of Medi-
care. When they are all present, we let plaintiffs go to discov-
ery.
Here, no one denies that the defendants made Medicare
claims for designated health services. The issue is whether the
14
complaint sufficiently alleges referrals and a compensation ar-
rangement. We hold that it does. The alleged Medicare abuse
is plausible and deserves more scrutiny.
A. The surgeons referred designated health services to
the hospitals
The relators allege that “[e]very time [the neurosurgeons]
performed a surgery or other procedure at the UPMC Hospi-
tals, [they] made a referral for the associated hospital claims.”
App. 193 ¶ 234. They are right that these claims are referrals.
As mentioned, the law defines referrals broadly. A referral
is a doctor’s request for any designated health service that is
covered by Medicare and provided by someone else. 42 C.F.R.
§ 411.351. Designated health services include bed and board,
some hospital overhead, nursing services, and much more. 42
C.F.R. § 409.10(a). And the relators plead that as the surgeons
performed more procedures, those procedures required (and
the hospital provided and “increased billings for[)] the at-
tendant hospital and ancillary services including . . . hospital
and nursing charges.” App. 166 ¶ 104 (emphasis added). So
the plaintiffs plead that the surgeons referred designated health
services to the hospitals.
Treating these services as referrals makes sense. The Stark
Act’s first step is to flag all potentially abusive arrangements.
And doctors who generate profits for a hospital may be
tempted to abuse their power, raising hospital bills as well as
their own pay. These financial arrangements thus deserve a
closer look. And they will get a closer look only if we call these
15
arrangements what they are: doctors referring services to hos-
pitals.
The Department of Health and Human Services agrees. In
Phase I of its Stark Act rulemaking, it considered this point. It
determined that “any hospital service, technical component, or
facility fee billed by [a] hospital in connection with [a doctor’s]
personally performed service” counts as a referral. Medicare
and Medicaid Programs; Physicians’ Referrals to Health Care
Entities with Which They Have Financial Relationships, 66
Fed. Reg. 856, 941 (Jan. 4, 2001). This is true even “in the case
of an inpatient surgery” where the doctor performs the surgery.
Id.Then, in Phase II of its rulemaking, the agency revisited the
question and considered narrower definitions. For instance,
many commenters suggested excluding “services that are
performed ‘incident to’ a physician’s personally performed
services or that are performed by a physician’s employee” from
the definition of a referral. 69 Fed. Reg. at 16063.
But the agency reasonably rejected these suggestions. A
narrower view, it reasoned, would all but swallow at least one
statutory exception. Id. And it explained that the availability of
that and other exceptions did enough to protect innocent con-
duct. Id. “[T]his interpretation is consistent with the statute as
a whole,” which begins by casting a broad net to scrutinize all
potential abuse. Id.
16
B. The relators’ complaint alleges an indirect compen-
sation arrangement
A referral is ripe for abuse only when the doctor who made
it has a financial relationship with the provider. Only then can
a doctor profit from his own referral. The financial relationship
here is a compensation arrangement.
Compensation arrangements can be either direct or indirect.
42 C.F.R. § 411.354(c). The hospitals did not pay the surgeons
directly. So if there is any compensation arrangement here, it
is indirect. That requires three elements: First, there must be
“an unbroken chain . . . of persons or entities that have financial
relationships” connecting the referring doctor with the provider
of the referred services. Id. § 411.354(c)(2)(i). Second, the re-
ferring doctor must get “aggregate compensation . . . that varies
with, or takes into account, the volume or value of referrals.”
Id. § 411.354(c)(2)(ii). And third, the service provider must
know, recklessly disregard, or deliberately ignore that the doc-
tor’s compensation “varies with, or takes into account, the vol-
ume or value of referrals.” Id. § 411.354(c)(2)(iii). (The parties
do not challenge any of the regulations at issue, so we likewise
assume that they are valid.) The complaint plausibly pleads
enough facts to satisfy each element.
1. An unbroken chain of entities with financial relation-
ships connects the surgeons with the hospitals. An unbroken
chain of financial relationships links the surgeons to the hospi-
tals. First, the Medical Center owns each hospital. Second, the
Medical Center also owns three entities: Pittsburgh Physicians,
Community Medicine, and Tri-State. Third, each of these three
entities employs and pays at least one of the surgeons. That
17
adds up to an unbroken chain of financial relationships. Neither
party disputes this.
2. The surgeons’ compensation varies with, or takes into
account, the volume and value of their referrals. Next, the re-
lators allege that the surgeons’ aggregate compensation varied
with, and took into account, their referrals. Under the Stark Act
and its regulations, compensation varies with referrals if the
two are correlated. And compensation takes into account refer-
rals if there is a causal relationship between the two. The struc-
ture of the surgeons’ contracts is enough to plead correlation.
And the surgeons’ suspiciously high compensation suggests
causation.
a. The relators must show either correlation or causation
between compensation and referrals. To start, we have to tease
out the difference between varies with and takes into account.
Section 411.354(c)(2)(ii) uses both phrases. But in other
places, like the exceptions, the Stark Act and its regulations use
only takes into account, not varies with. 42 U.S.C.
§ 1395nn(e)(2)(B)(ii), (e)(3)(A)(v); 42 C.F.R. § 411.357(l)(3),
(p)(1)(i). So varies with must mean something different from
takes into account.
Here is the most natural reading of both phrases: Takes into
account means actual causation. The doctor’s pay must be
based on or designed to reflect the volume or value of his re-
ferrals. But varies with means correlation. If compensation
tends to rise and fall as the volume or value of referrals rises
and falls, then the two vary with each other. This reading gives
each phrase independent meaning. And it makes the scope of
18
indirect compensation arrangements broader than the scope of
the exceptions.
This makes sense. Correlation does not guarantee causa-
tion, but it is evidence of causation. So the agency reasonably
decided to include as indirect compensation arrangements
those where pay varies with referrals. 69 Fed. Reg. at 16059.
That way, such arrangements get a closer look. Then, the de-
fendant gets a chance to show that the correlation is mere co-
incidence, not causation. If it does, then the compensation ar-
rangement can fit within a Stark Act exception. Id.
Our concurring colleague adopts a less natural reading. In-
stead of treating varies with as a broader phrase meaning cor-
relation, he reads takes into account as broader. Conc. Op. 4–
6. And he limits this broader phrase to causal relationships,
whether explicit or “implicit (that is, unstated).” Id. So his read-
ing of the causation requirement makes varies with (express
causation) a subset of takes into account (express or implied
causation). But the Stark Act’s text and structure are to the con-
trary.
Textually, the concurrence is right that, read in isolation,
varies with sometimes implies causation. Varies with can mean
correlation, however, and often does. Mathematicians some-
times use A varies with B causally, to mean that A is a function
of B. But statisticians often say that A varies with B if A corre-
lates with B. Thus, a correlation coefficient expresses the co-
variance between two variables. Timothy C. Urdan, Statistics
in Plain English 79–80 (2d ed., Psychology Press 2005); see
also Paul McFedries, Excel Data Analysis 202 (4th ed. 2013)
(“[A] correlation does not prove one thing causes another. The
19
most you can say is that one number varies with the other.”)
(emphasis added).
Courts likewise use varies with as a synonym for correla-
tion. Our Court has explained that “a correlation coefficient . . .
measures ‘how consistently’ the dependent variable varies in
correspondence with the independent variable.” Jenkins v. Red
Clay Consol. Sch. Dist. Bd. of Educ., 4 F.3d 1103, 1120 n.10
(3d Cir. 1993) (emphasis added). Other courts do too. E.g.,
NAACP v. City of Niagara Falls, 65 F.3d 1002, 1005 n.2 (2d
Cir. 1995) (“A ‘correlation coefficient’ is generated, demon-
strating how consistently voter support for a candidate or group
of candidates varies with the racial composition of the election
districts.”) (emphasis added) (quoting district court)); Citizens
for a Better Gretna v. Gretna, 636 F. Supp. 1113, 1126 n.32
(E.D. La. 1986) (same). So we can plausibly read varies with
to mean correlation, not just causation.
And that is the point. Here, varies with is about correlation,
not causation. As our concurring colleague notes, we do not
think the Stark Act requires relators to plead a “perfect positive
correlation” between doctors’ pay and referrals. Conc. Op. 7.
The beauty of the phrase varies with is that it carries little tech-
nical baggage yet “make[s] clear that there is no need to estab-
lish causation.” Loan Originator Compensation Requirements
Under the Truth in Lending Act (Regulation Z), Supplemen-
tary Information, 78 Fed. Reg. 11280, 11325–26 (Feb. 15,
2013) (explaining that the final rule uses varies with as a non-
technical substitute for correlates with).
More importantly, as he admits, our concurring colleague’s
approach makes varies with into surplusage, robbing it of any
20
useful role in the regulatory scheme. Conc. Op. 8. In 42 C.F.R.
§ 411.354(c)(2)(ii), for example, varies with would be redun-
dant of every takes into account. It would do no work. By con-
trast, our reading casts varies with as the star of
§ 411.354(c)(2)(ii). Takes into account gets its turn to shine in
the Stark Act exceptions, where varies with does not appear.
Id. §§ 411.355, 357. On this reading, the scope of indirect com-
pensation arrangements is broader than the scope of the excep-
tions. Each phrase does real work and serves an independent
purpose.
Faced with two readings, one of which gives each phrase in
a disjunctive list an operative meaning and another that makes
a phrase surplus, we should follow the “elementary canon of
construction” against surplusage. Colautti v. Franklin, 439
U.S. 379, 392 (1979); United States v. Kouevi, 698 F.3d 126,
133–34 (3d Cir. 2012) (collecting cases).
Structurally, our approach also reinforces the Stark Act’s
design. It casts a wide net of initial suspicion, followed by nar-
rower safe harbors. A correlation between pay and referrals
suggests that hospitals are rewarding doctors for referrals. And
healthcare providers get to use the Stark Act’s exceptions to
show that there is no problematic causal relationship. Only if
they cannot should those cases go to discovery.
Our concurring colleague’s approach would upend that
structure by denying relators the discovery they need to prove
their cases. In Tuomey, for example, hospital insiders linked
pay with referrals only during discovery—not in the complaint.
Compare First Amended Complaint, United States ex rel.
Drakeford v. Tuomey, 976 F. Supp. 2d 776 (D.S.C. 2013) (No.
21
3:05-2858-MBS), ECF No. 151, with J.A. Combined Vols. I–
XIII at 504–14, Tuomey, 792 F.3d 364 (No. 13-2219), ECF No.
39 (testimony of William (Paul) Johnson) (Tuomey’s CFO ad-
mitting that he feared losing money if doctors treated patients
offsite, so he analyzed the value of doctors’ noncompete agree-
ments that might recapture that revenue by requiring them to
do their procedures at Tuomey’s hospitals); id. at 1809–22 (tes-
timony of Kimberly Saccone) (same, by senior consultant); id.
at 335, 4594 (statement by Tuomey’s lawyer Tim Hewson to
CEO, several vice presidents, and key doctors at a recorded
meeting on Jan. 19, 2004) (“Because of the Stark and Anti-
kickback laws, you can’t explicitly say, ‘Well, it’s because
we’re getting all the referrals for these patients,’ and of course
that’s what we’re doing.”).
And Tuomey was a close case at the motion-to-dismiss
stage. Tuomey itself had received conflicting legal advice
about whether its contracts violated the Stark Act. Compare
Tuomey, 792 F.3d at 371–72 (advice from lawyer Kevin
McAnaney), with First Am. Compl. 25 ¶¶ 97–98 (advice from
law firm Hall & Render). The truth emerged only through the
cleansing light of discovery, once the relators got to depose
hospital executives and transcribe audio recordings of execu-
tive meetings. But our concurring colleague’s approach would
shut that door, dismissing such cases before discovery. That
would make it all but impossible for the relator in the next
Tuomey to prevail.
In short, at the pleading stage, a plaintiff must plead facts
that make either correlation or causation plausible. Here, the
relators do both.
22
b. The structure of the surgeons’ contracts plausibly al-
leges correlation between their pay and referrals. The relators
plead that two aspects of the surgeons’ pay varied with their
referrals: base salaries and bonuses. If the surgeons met their
quota of Work Units, they protected their base salaries. And if
they exceeded that quota, they earned a bonus for each addi-
tional Work Unit.
So the surgeons’ pay was facially based only on the services
they personally performed. But every time they “performed a
surgery or other procedure at the UPMC Hospitals, [they]
made a referral for the associated hospital claims,” like nursing
services or hospital overhead. App. 193 ¶ 234. And the defend-
ants got to bill Medicare for those referred services, which
could be worth many times more than the surgeon’s own ser-
vices.
As a result, the surgeons’ salaries rose and fell with their
referrals. The more procedures they did at the hospitals, the
more referrals they made, and the more they would earn by
maintaining their base salaries and earning higher bonuses.
And just as their salaries flowed, they also ebbed: the fewer
procedures they did, the fewer referrals they made, and the less
they got paid. Thus, their aggregate compensation varied with
their referrals’ volume and value.
The Fourth Circuit agrees. In Tuomey, as here, the doctors’
base salaries and bonuses rose and fell each year “based solely
on” their “personally performed professional services.” 792
F.3d at 379 (internal quotation marks omitted). Our concurring
colleague reads the Fourth Circuit’s opinion as limited to com-
23
pensation agreements that expressly give doctors a cut of ex-
penses like technical or facility fees, beyond the work doctors
do personally. Conc. Op. 9–11. But that reading overlooks
Tuomey’s facts.
The Tuomey court did not say that the doctors there took a
straight percentage cut of referrals. It says only that as doctors
did more procedures, the number of Tuomey’s referrals went
up—and so did the doctors’ compensation. See 792 F.3d at
379.
And the briefing in Tuomey clarifies any possible ambigu-
ity about which collections affected pay by falling within the
scope of a doctor’s “personally performed professional ser-
vices.” Id. (internal quotation marks omitted). The hospital
there insisted that “[n]o component of the physicians’ pay de-
pended on the amount of Tuomey’s charges or collections for
facility fees.” Appellant’s Final Br. 44, Tuomey, 792 F.3d 364(No. 13-2219), ECF No. 50. In fact, the hospital had rejected
“suggested modifications” to its contracts that would have
made “technical fees . . . a component of the physicians’ com-
pensation.” Id. Contrary to our concurring colleague, the
Tuomey record shows that the doctors’ pay was “based on their
professional collections for services that they personally per-
form[ed], not on any billings or collections of the Hospital for
its services.” Mem. in Supp. of Def.’s Mot. to Dismiss 5,
Tuomey, 976 F. Supp. 2d 776, ECF No. 64-1 (emphasis added).
The same is true here.
But as the Fourth Circuit observed, these personally per-
formed services almost always came with referrals for ancil-
24
lary hospital services. 792 F.3d at 379. And the healthcare pro-
vider got to bill Medicare for those services. Id. The more pro-
cedures a doctor did at the hospital, the more referrals he made,
and the more he could make in both base salary and bonuses.
Id. Thus, the Fourth Circuit “th[ought] it plain that a reasonable
jury could find that the physicians’ compensation varied with
the volume or value of actual referrals.” Id. at 379–80 (empha-
sis added).
We agree with the Fourth Circuit’s logic. It applies equally
here. So the relators have pleaded that the surgeons’ pay varied
with their referrals.
Our concurring colleague fears that our rationale casts sus-
picion on any compensation agreement based on a doctor’s
“own labor.” Conc. Op. 11. Not so. The Stark Act kicks in only
when a doctor’s pay varies with Medicare or Medicaid referrals
tied to that doctor’s personal labor. If a doctor’s pay does not
vary with the volume or value of Medicare or Medicaid refer-
rals, the Stark Act plays no role.
But here, the relators have pleaded that the doctors’ pay
correlated with the value of their Medicare referrals. That cor-
relation is enough to plead the second element of an indirect
compensation arrangement. The relators need not also plead
causation. But they do anyway.
c. The surgeons’ suspiciously high compensation suggests
causation. Compensation for personal services above the fair
market value of those services can suggest that the compensa-
tion is really for referrals. This is just common sense.
Healthcare providers would not want to lose money by paying
25
doctors more than they bring in. They would do so only if they
expected to make up the difference another way. And that way
could be through the doctors’ referrals.
This may not be obvious on the face of the statute and reg-
ulations. The Stark Act often treats fair market value as a con-
cept distinct from taking into account the volume or value of
referrals. For example, these two concepts are separate ele-
ments of many Stark Act exceptions. E.g., 42 U.S.C.
§ 1395nn(e)(2) (bona fide employment), (e)(3) (personal ser-
vice); 42 C.F.R. § 411.357(l) (fair-market-value compensa-
tion), (p) (indirect compensation). And the definition of an in-
direct compensation arrangement includes taking referrals into
account, but not fair market value. 42 C.F.R.
§ 411.354(c)(2)(ii).
But the Act’s different treatment of these concepts does not
sever them. To start, just because a statute has two elements
does not mean that one can never be evidence of the other.
Theft requires taking another’s property with intent. Those are
two elements, but the fact of taking property can be circum-
stantial evidence of intent.
So too here. Perhaps not all payments above fair market
value are evidence of taking into account the doctor’s referrals.
But common sense says that marked overpayments are a red
flag. Anyone would wonder why the hospital would pay so
much if it was not taking into account the doctor’s referrals for
other services. And we do no violence to the statutory text by
seeking an answer to that question.
26
The agency confronted this question directly. It remarked
that even “fixed aggregate compensation can form the basis for
a prohibited . . . indirect compensation arrangement” if it “is in-
flated to reflect the volume or value of a physician’s referrals.”
69 Fed. Reg. at 16059 (emphasis added). The same is true of
“unit-of-service-based compensation arrangements,” like the
one here. Id. Excessive compensation is thus a sign that a sur-
geon’s pay in fact takes referrals into account.
So aggregate compensation that exceeds fair market value
is smoke. It suggests that the compensation takes referrals into
account. And the relators here plead five facts that, viewed to-
gether, make plausible claims that the surgeons’ pay exceeded
their fair market value. First, some surgeons’ pay exceeded
their collections. Second, many surgeons’ pay exceeded the
90th percentile of neurosurgeons nationwide. Third, many gen-
erated Work Units far above industry norms. Fourth, the sur-
geons’ bonus per Work Unit exceeded what the defendants col-
lected on most of those Work Units. And finally, the govern-
ment alleged in its settlement agreement that the Medical Cen-
ter had fraudulently inflated the surgeons’ Work Units. That
much smoke makes fire plausible.
i. Pay exceeding collections. Paying a worker more than he
brings in is suspicious. And the complaint alleges that at least
three surgeons (Drs. Bejjani, Spiro, and El-Kadi) were paid
more than the Medical Center collected for their services. The
complaint also alleges that the Medical Center credits surgeons
with 100 percent of the Work Units that they generate, even if
it cannot collect on all of them. So at least three surgeons
(maybe more) were paid more than they bring in.
27
ii. Pay exceeding the 90th percentile. The relators allege
that “[c]ompensation exceeding the 90th percentile is widely
viewed in the industry as a ‘red flag’ indicating that it is in
excess of fair market value.” App. 191 ¶ 223. The defendants
do not deny this.
Several surgeons were paid more than the 90th percentile.
For example, the relators point to the compensation of Drs.
Abla, Spiro, Kassam, and Bejjani between 2008 and 2011.
Apart from Dr. Spiro in 2008, each of these surgeons was paid
more than even the highest estimate of the 90th percentile for
all U.S. neurosurgeons in all four years. And depending on
which estimate of the 90th percentile you use, they were some-
times paid two or three times more than the 90th percentile. Dr.
Bejjani’s 2011 bonus alone exceeded the 90th percentile of to-
tal compensation in some surveys.
iii. Extreme Work Units. The relators also allege facts from
which we can reasonably infer that the surgeons generated far
more Work Units than normal. Many neurosurgeons “were
routinely generating [Work Units] exceeding by an enormous
margin the 90th percentile as reflected in widely-accepted mar-
ket surveys.” App. 171 ¶ 126. Even if we look only at the high-
est industry estimates, all but one of the surgeons reported
Work Units above the 90th percentile in 2006 and 2007. In
2008 and 2009, eight of the twelve named surgeons exceeded
the highest estimate of the 90th percentile. A few even seemed
“super human,” racking up two to three times the 90th percen-
tile. App. 169 ¶ 117.
28
In short, most of the surgeons generated Work Units at or
above the 90th percentile. Some of their numbers were unbe-
lievably high. And because their pay depends in large part on
their Work Units, it is fair to infer that most of their pay was
also at or above the 90th percentile.
iv. Bonuses exceeding the Medicare reimbursement rate.
Once a surgeon had enough Work Units to earn bonus pay, the
bonus per Work Unit was more than Medicare would pay for
each one. The surgeons’ bonus per Work Unit was $45. But the
Medicare reimbursement rate was only about $35. So once sur-
geons became eligible for bonuses, the defendants took an im-
mediate loss on every Work Unit submitted to Medicare.
On its own, this would not show that the surgeons were
overpaid. Medicare and Medicaid are well known as bottom-
billers. They pay less than private insurers. Though the defend-
ants lost some money on Medicare Work Units, perhaps they
made it back with Work Units billed to other insurers.
But the relators also allege that “the majority of all claims
submitted by the [defendants] . . . were submitted to federal
health insurance programs such as Medicare and Medicaid.”
App. 193 ¶ 233. We cannot assume that private payments suf-
fice to make up the difference. Doing so would disregard our
job at this stage: to draw reasonable inferences in favor of the
plaintiffs.
In short, the defendants took an immediate financial hit on
Work Units for a majority of their claims. This is yet another
sign that the surgeons’ pay took referrals into account.
29
The defendants disagree. They argue that the surgeons earn
high salaries because of bona fide bargaining with their em-
ployers. Their salaries supposedly represent the market’s de-
mand for their surgical skill and experience.
This argument fails for two reasons. First, the complaint
says nothing about the surgeons’ skill and experience or the
Pittsburgh market for surgeons. On this motion to dismiss, we
cannot go beyond the well-pleaded facts in the complaint.
Second, a bare claim of bona fide bargaining is not enough.
The Stark Act recognizes that related parties often negotiate
agreements “to disguise the payment of non-fair-market-value
compensation.” Kosenske, 554 F.3d at 97. We trust that bona
fide bargaining leads to fair market value only when neither
party is “in a position to generate business for the other.” Id.;
42 C.F.R. § 411.351 (defining “fair market value” and “general
market value”). But that is not true here. The surgeons and the
Medical Center can generate business for each other. So we
cannot assume that any bargaining was bona fide or that the
resulting pay was at fair market value.
v. The possibility of fraud. Finally, the surgeons’ high pay
may have been based on fudging the numbers. Not only were
their individual Work Units “significantly out of line with in-
dustry benchmarks,” but the Neurosurgery Department as a
whole realized astounding “annual growth rates of work
[Units] . . . of 20.3%, 57.1% and 20.0%” in 2007, 2008, and
2009. App. 171 ¶¶ 127–28. Two of the surgeons more than dou-
bled their output in just a few years. The relators allege that the
defendants got this growth by “artificially inflat[ing] the num-
ber of [Work Units] in a number of ways.” App. 171 ¶ 130.
30
Alleging this fraud, the relators’ first complaint included
claims “relating to physician services submitted by” the de-
fendants along with the “hospital claims” currently before us.
App. 189 ¶ 217 (emphases in original) The government chose
to intervene as to the former claims, settling them with the de-
fendants for almost $2.5 million.
The relators’ current complaint quotes that settlement
agreement. In it, the government accused the surgeons of many
fraudulent practices: They claimed to have acted as assistants
when they did not. They claimed to have done more extensive
surgeries than they did. And they chose the wrong codes for
surgeries. So “claims submitted for these physician services re-
sulted in more reimbursement than would have been paid” oth-
erwise. App. 188–89 ¶ 216.
We are careful not to overstate the point. This settlement is
not an admission of guilt. It proves no wrongdoing. But at the
12(b)(6) stage, we are looking only for plausible claims, not
proof of wrongs. And the government’s choice to intervene af-
ter years of investigation and its allegations in the settlement
are cause for suspicion.
The question is not whether a doctor was able to use an oth-
erwise-valid compensation scheme as a vehicle for fraudulent
billing. Not every fraudulent Medicare bill made at a hospital
will give rise to a Stark Act violation. Here, however, where
the compensation scheme produced results bordering on the
absurd, relators plausibly assert that the system may have been
designed with that outcome in mind.
31
The relators allege five sets of facts that suggest that the
surgeons’ pay exceeded fair market value: pay exceeding col-
lections, pay above the 90th percentile, extreme Work Units,
bonuses above the Medicare reimbursement rate, and the set-
tlement. That is plenty of smoke. We need not decide whether
any of these allegations alone would satisfy the relators’ plead-
ing burden. Together, they plausibly suggest that the surgeons’
pay took their referrals into account.
* * * * *
So the relators have met their burden twice over. They al-
lege that the surgeons’ pay correlated with their referrals. That
alone is enough to meet their burden. They also plausibly al-
lege causation. Thus, the relators have pleaded more than
enough facts to suggest an indirect compensation arrangement.
3. The hospitals knew that the surgeons’ compensation
varied with, or took into account, referrals. The final element
of an indirect compensation arrangement is scienter. To show
scienter, the relators’ pleadings must allege that the hospitals
that provided the referred services either (1) knew, (2) deliber-
ately ignored, or (3) recklessly disregarded that the surgeons
got “aggregate compensation that varie[d] with, or t[ook] into
account, the volume or value of referrals.” 42 C.F.R.
§ 411.354(c)(2)(iii). They allege this too.
To begin, the Medical Center controls all the hospitals and
the surgeons’ direct employers. It owns each hospital. And it
owns Pittsburgh Physicians, Community Medicine, and Tri-
State. So the Medical Center “has unfettered authority with
32
respect to most members of the [medical system] and signifi-
cant authority (including with respect to financial and tax mat-
ters) with respect to the remaining members.” App. 146–47
¶ 19 (quoting a Medical Center tax filing).
Further, many officers and board members of these entities
overlapped. For example, one person simultaneously served as
an executive vice president of the Medical Center as well as
the president and a board member of Pittsburgh Physicians.
And he signed surgeons’ pay agreements for Pittsburgh Physi-
cians. The relators identify nine others who served on the board
of both the Medical Center and another entity in the medical
system. Authority was so centralized that a single person
signed a settlement agreement on behalf of all the defendants
that were part of the medical system. And with common con-
trol comes common knowledge.
The common knowledge included both the surgeons’ pay
and their referrals. The Medical Center took part in forming,
approving, and implementing the surgeons’ pay packages. So
it knew their structure. The Medical Center also had a central
coding and billing department that handled billing for its sub-
sidiaries. So it knew about the surgeons’ referrals.
With both sets of data in front of it, we can plausibly infer
that the Medical Center knew the surgeons’ compensation var-
ied with or took into account their referrals. And as the Medical
Center knew that, so did the hospitals. They had all the data
right in front of them. They knew that the surgeons’ pay and
Work Units were out of line with industry survey data. Even if
they did not actually know that the surgeons’ pay was corre-
lated with their referrals, they at least deliberately ignored or
33
recklessly disregarded that fact. Thus, the complaint alleges
that both the Medical Center and hospitals had scienter.
* * * * *
This means that the relators have successfully pleaded the
third and final element of a Stark Act violation: scienter. But
they must plead one more thing to survive a motion to dismiss.
We must now consider whether the relators have pleaded a
plausible prima facie case under the False Claims Act.
V. THE RELATORS PLEAD FALSE CLAIMS ACT VIOLA-
TIONS
The relators plead their Stark Act claims as violations of the
False Claims Act. So their pleadings must satisfy all the ele-
ments of the False Claims Act. They do. And they satisfy Rule
9(b)’s heightened pleading standard. Last, we hold that the
Stark Act’s exceptions are not additional elements of a prima
facie case. But even if they were, the relators have plausibly
pleaded that no exception applies here.
A. The pleadings satisfy all three elements of the False
Claims Act
To make out a prima facie case, the relators must plead
three elements: “ ‘(1) the defendant presented or caused to be
presented to an agent of the United States a claim for payment;
(2) the claim was false or fraudulent; and (3) the defendant
knew the claim was false or fraudulent.’ ” Schmidt, 386 F.3d at
242 (quoting Hutchins v. Wilentz, Goldman & Spitzer, 253
F.3d 176, 182 (3d Cir. 2001)). They have alleged enough facts
to plead all three elements.
34
First, by submitting claims to Medicare and other federal
health programs, the defendants presented claims for payment
to the government.
Second, the relators allege that these claims were false. A
Medicare claim that violates the Stark Act is a false claim.
Kosenske, 554 F.3d at 94. And we have already explained at
length why the Medicare claims here plausibly violated the
Stark Act.
Third, the relators’ allegations plead scienter. Just like the
Stark Act, the False Claims Act requires that the defendants
know, deliberately ignore, or recklessly disregard the falsity of
their claim. 31 U.S.C. § 3729(b)(1)(A). But it does not require
a specific intent to defraud. Id. § 3729(b)(1)(B).
The claims are false because they allegedly violated the
Stark Act. The question is whether the defendants at least reck-
lessly disregarded that possibility. The defendants had a cen-
tralized billing department and were familiar with the Stark Act
itself, so they knew that they submitted Medicare claims for
referred designated health services. That leaves only whether
the defendants knew that the hospitals and surgeons had an in-
direct compensation agreement.
The complaint alleges that the defendants at least recklessly
disregarded that possibility. They knew their own corporate
structure. We have already explained how they knew or reck-
lessly disregarded that the surgeons’ pay varied with their re-
ferrals. And we have also explained how they knew or reck-
lessly disregarded that their surgeons’ pay exceeded fair mar-
ket value and thus plausibly took referrals into account. So the
35
relators have pleaded a prima facie claim under the False
Claims Act.
B. The pleadings satisfy Rule 9(b)
The relators’ complaint also satisfies Rule 9(b)’s particu-
larity requirement. This requires a plaintiff to allege “ ‘all of the
essential factual background that would accompany the first
paragraph of any newspaper story—that is, the who, what,
when, where, and how of the events at issue.’ ” Majestic Blue
Fisheries, 812 F.3d at 307 (quoting In re Rockefeller Ctr.
Props., Inc. Secs. Litig., 311 F.3d 198, 217 (3d Cir. 2002)). The
complaint gives us all these necessary details:
• Who? The defendants: the Medical Center and Pitts-
burgh Physicians.
• What? The defendants submitted or caused to be
submitted false Medicare claims.
• When? From 2006 until now.
• Where? The Medicare claims were submitted from
the Medical Center’s centralized billing facility,
while the referred services were provided at the
Medical Center’s twenty hospitals.
• How? When the Medical Center submitted a claim,
it certified compliance with the Stark Act. The com-
plaint makes all the allegations discussed above. We
will not repeat them. But they detail exactly how
these claims violated the Stark Act.
36
Rule 9(b) does not require the relators to plead anything
more, such as the date, time, place, or content of every single
allegedly false Medicare claim. The falsity here comes not
from a particular misrepresentation, but from a set of circum-
stances that, if true, makes a whole set of claims at least prima
facie false. It is enough to allege those circumstances with par-
ticularity. Doing so “inject[s] precision or some measure of
substantiation into [the] fraud allegation” and “place[s] the de-
fendant on notice of the precise misconduct with which [it is]
charged.” Alpizar-Fallas v. Favero, 908 F.3d 910, 919 (3d Cir.
2018) (quoting Frederico v. Home Depot, 507 F.3d 188, 200
(3d Cir. 2007)) (last alteration in original; internal quotation
marks omitted). And the relators have done so.
C. Pleading Stark Act exceptions under the False
Claims Act
One final issue is how the Stark Act interacts with the False
Claims Act. The defendants argue that the False Claims Act’s
elements of falsity and knowledge turn the Stark Act’s excep-
tions into prima facie elements of the False Claims Act. On
their reading, the relators would have to plead that no exception
applies here.
We reject that argument. The defendants retain the burden
of pleading Stark Act exceptions even under the False Claims
Act. And even if the relators bore that burden, they have met it
here.
1. The burden of pleading Stark Act exceptions stays with
the defendant under the False Claims Act. The defendants ar-
gue that the False Claims Act’s knowledge and falsity elements
37
turn the Start Act’s exceptions into prima facie elements. Their
logic is simple and cogent: The False Claims Act penalizes
only false claims. 31 U.S.C. § 3729(a)(1). False claims include
claims submitted in violation of the Stark Act. See Kosenske,
554 F.3d at 94. But if an exception to the Stark Act applies,
then the claim is not false. And if the defendant thinks that an
exception applies, then the defendant does not know that the
claim is false. So, according to the defendants, to plead a False
Claims Act claim based on Stark Act violations, a relator must
plead that no Stark Act exception applies and that the defend-
ant knows that none applies. Otherwise, the relator pleads nei-
ther falsity nor knowledge.
Though this argument has force, we reject it. Our precedent
compels this result. Like this case, Kosenske was a False
Claims Act case based on Stark Act violations. Id. It placed the
burden of proving a Stark Act exception on the defendant. Id.
at 95; accord Tuomey, 792 F.3d at 374. And we see no reason
to split up the burdens of pleading and persuasion. It is thus the
defendants’ burden to plead a Stark Act exception, not the re-
lators’ burden to plead that none exists.
2. Even if the relators bore this pleading burden, they have
met it. In any event, the relators here plausibly plead that no
Stark Act exception applies. The parties identify four that
could apply here: exceptions for bona fide employment, per-
sonal services, fair-market-value pay, and indirect compensa-
tion. All four exceptions require that the surgeons’ compensa-
tion not exceed fair market value and not take into account the
volume or value of referrals.
38
We have already explained how the relators plausibly plead
that the surgeons were paid more than fair market value. And
that itself suggests that their pay may take into account their
referrals’ volume or value. So the relators plausibly plead that
no Stark Act exception applies.
D. Practical concerns
Our concurring colleague raises legitimate concerns about
opening the floodgates of litigation. Top hospitals that offer
doctors performance bonuses, he argues, could be sued and
forced to suffer through discovery or to settle.
Although understandable, this fear is overstated. Qui tam
actions face hurdles even before they reach a motion to dis-
miss. The government can dismiss them over the relator’s ob-
jection. 31 U.S.C. § 3730(c)(2)(A). Federal courts are not the
first line of defense against abusive suits; the Justice Depart-
ment is. Indeed, it recently took a more aggressive approach to
dismissing qui tam actions, urging its lawyers to consider dis-
missal every time the government decides not to intervene. Mi-
chael D. Granston, U.S. Dep’t of Justice, Memorandum: Fac-
tors for Evaluating Dismissal Pursuant to 31 U.S.C.
3730(c)(2)(A), at 1 (2018).
While our Court has not yet specified the standard of review
for a § 3730(c)(2)(A) dismissal, our sister circuits defer a great
deal to the Justice Department. Swift v. United States, 318 F.3d
250, 252 (D.C. Cir. 2003) (recognizing the government’s “un-
fettered right” to dismiss qui tam actions); United States ex rel.
Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d
1139, 1145 (9th Cir. 1998) (adopting a “rational relation” test
39
for reviewing dismissals). That deference gives the govern-
ment plenty of room to make good on its stated intention to
scrutinize and dismiss more qui tam actions than in the past. So
there is little reason to fear that a flood of frivolous cases will
reach discovery.
VI. CONCLUSION
Evaluating a motion to dismiss is “a context-specific task
that requires the reviewing court to draw on its judicial experi-
ence and common sense.” Iqbal, 556 U.S. at 679. Our experi-
ence and common sense tell us that the relators state a plausible
claim that the Medical Center and Pittsburgh Physicians have
violated the Stark Act and the False Claims Act.
The facts they plead, if true, satisfy every element of those
statutes: A chain of financial relationships linked the surgeons
to the hospitals. The surgeons referred many designated health
services to the hospitals, generating ancillary hospital services
and facility fees. Their pay necessarily varied with the volume
of those referrals. The hospitals made Medicare claims for
those referrals. And the defendants allegedly knew all this.
With all this smoke, a fire is plausible. So this case deserves
to go to discovery. Once the discovery is in, it may turn out that
there is no fire. We do not prejudge the merits. But this is ex-
actly the kind of situation on which the Stark and False Claims
Acts seek to shed light. We will thus reverse the District
Court’s dismissal and remand for further proceedings.
40
AMBRO, Circuit Judge, concurring in the judgment
The Stark Act prescribes strong medicine for a very
specific evil. The core concern is that if doctors have financial
interests in other medical service providers, they will have a
monetary incentive to refer patients to those providers, even if
that is not in the patient’s best interest. For example, if a doctor
owns a stake in an entity that does blood tests and other lab
work, she or he might send patients to that entity for tests even
though it is not as good as its competitors, or might recommend
tests that the patient does not truly need. The key is that the
doctor has a financial interest in the services that someone else
performs.
That is very different from this case. The physicians
operating at UPMC’s neurosurgery department are, according
to the terms of their contracts, paid for the work they personally
perform. True, this encourages the surgeons to perform more
procedures, creating a similar potential for misaligned interests
as the arrangements proscribed by the Stark Act. And true, the
relators have alleged significant fraud by the hospital, inflating
the work these surgeons performed and billing the Government
for things that never happened. The majority places great
emphasis on the general atmospherics of fraud around UPMC,
and certainly if these allegations are true, then the hospital has
much it must answer for.
But the Stark Act is not concerned with general fraud
and misrepresentation. Those claims were addressed by
UPMC’s settlement with the Government. Nor, as I read the
statute and its accompanying regulations, are they concerned
with the entirely standard compensation structure between
UPMC and these surgeons. The majority makes much of the
notion that where there is smoke, there might also be fire, and
I am sympathetic to that approach. In this case, however, I
1
worry we are sending signals to hospitals throughout the Third
Circuit, and the nation, that their routine business practices are
somehow shady or suspicious and could leave them vulnerable
to significant litigation, with all the trouble and expense that
brings. Accordingly, I do not join in all the majority opinion’s
reasoning.
I do, however, agree with many of my colleagues’
conclusions—enough that I am able to concur in allowing the
case to proceed at this time. The Court is correct that there are
referrals when one of the surgeons employed by UPMC’s
subsidiary UPP performs a procedure at a UPMC hospital.
Although the physician’s own part in the surgery is not a
referred service, everything else that goes into the operation is,
from the operating room itself to the equipment to the other
hospital employees—nurses, anesthesiologists, medical
technicians, and so on—involved. This is the “technical
component of the surgical service.” See Medicare and
Medicaid Programs; Physicians’ Referrals to Health Care
Entities With Which They Have Financial Relationships
(Phase I), 66 Fed. Reg. 856, 941 (Jan. 4, 2001). Because these
are referred services for which the hospital billed Medicare,
two of the three elements of a Stark Act violation are present.
See Maj. Op. at 12–13 (stating the elements of a Stark Act
claim as “(1) a referral for designated health services, (2) a
compensation arrangement (or an ownership or investment
interest), and (3) a Medicare claim for the referred services.”).
The only question is whether there was a “compensation
arrangement” within the meaning of the statute and
regulations.
I also agree with the majority that the burden of pleading
Stark Act exceptions falls on the defendants. We held in
United States ex rel. Kosenske v. Carlisle HMA, Inc., 554 F.3d
88 (3d Cir. 2009), that these exceptions function as affirmative
defenses. In theory things may be different in the context of a
2
False Claims Act suit, where the relators bear the burden of
proving intent and therefore must plead that the defendants
knew the claims they submitted were false. If they fail to do
so, it would likely be appropriate to dismiss on that basis. But
the majority persuasively explains why that is not what we
have at this time: because the language of the exceptions tracks
the relevant definition of a compensation arrangement, it is
virtually impossible that the exceptions could apply if the
defendants are covered by the Stark Act in the first place.
Moreover, in order to invoke any of the exceptions, the
defendants would have to show compensation that did not
exceed fair market value, and the majority aptly explains why,
at least at the motion-to-dismiss stage, the complaint plausibly
alleges that the defendants knew the compensation here did
exceed that standard.
And I agree with the Court that the relators have
adequately pleaded a causal relationship between the
physicians’ referrals to UPMC and their compensation. This
is a close question for me, because many of the factors the
majority points to as suspicious and indicating causation would
likely be present in many cases where nothing untoward has
occurred. For example, aggregate compensation above the
90th percentile will be found, after all, in 10% of all cases by
definition. The relators make much of the fact that the bonus
for each “work relative value unit” (“wRVU”) exceeds the
Medicare reimbursement rate, but statistics cited in the
complaint itself suggest that the $45/wRVU rate is actually
below the national average compensation per wRVU. See
Appellee’s Br. at 49. (Dividing the listed median total
compensation figures by the median wRVU totals from 2009
suggests a rate between $50 and $70 per wRVU. This is not
mathematically precise, because these are median rather than
average figures, but it is clear enough that $45 per wRVU is
not aberrantly high. The difference is presumably made up
through non-Medicare patients being charged at significantly
3
higher rates.) Thus, for me, that the physicians accrued large
wRVU totals does not especially suggest that their rate of
compensation was excessive.
Another problem I have is the possibility that UPMC
may have defrauded the Government by inflating the
physicians’ wRVU totals does not suggest that the surgeons
were compensated for the value of their referrals, but that they
were compensated for nothing, as the hospital (if these
allegations are true) simply stole money from the Government
and distributed some of those ill-gotten gains to the surgeons.
That may well have been illegal, but it is not the kind of
illegality covered by the Stark Act. Instead, these fraud claims
were covered by the Government’s $2.5 million settlement
with UPMC (which, for an organization that so dominates the
market, is a modest figure), and are no longer before us.
I am therefore concerned if any one of these factors,
standing alone, would be enough to raise a plausible inference
of a Stark Act violation. But as the majority rightly notes, we
are not dealing with only one of these indicators but with all of
them together. In this context, I agree that there is enough
“smoke,” as the Court puts it, at this early stage. Very possibly
there is no Stark Act problem here (whatever other problems
there may have been with the UPMC neurosurgery
department). But the collection of suspicious circumstances
argues that the case should proceed to discovery so that we can
find out one way or the other. I therefore concur in reversing
the District Court and denying the motion to dismiss.
I write separately, however, because I cannot agree with
the majority that the relators met their burden simply by
pleading that the neurosurgeons’ compensation correlated
with the volume or value of their referrals. To show a
compensation arrangement as defined by the Stark Act, relators
must establish a number of elements, and, as the majority
4
correctly states, only one of those elements is in doubt here:
Did the surgeons receive “aggregate compensation . . . that
varies with, or takes into account, the volume or value of
referrals” from the surgeons to UPMC (emphasis added)? My
colleagues understand the phrase “takes into account” to mean
an express cause-and-effect relationship between referrals and
compensation, while “varies with,” on its understanding,
applies to any situation in which the physicians’ compensation
correlates with the volume or value of their referrals. This
means any situation where, if one tends to be higher, the other
tends to be higher as well.
I disagree, as I do not think that this language includes
cases of mere correlation standing alone. To begin with, I have
some doubt that the drafters of this regulation actually intended
for there to be much difference between “varies with” and
“takes into account.” But assuming that a difference does exist,
I would most naturally read “varies with” to mean that
compensation is expressly based, at least in part, on the volume
or value of referrals. “Takes into account,” then, is a broader
term that can include implicit (that is, unstated) causal
relationships as well as explicit ones, but still requires more
than mere correlation.
These relationships are somewhat difficult to
understand in the abstract (set theory is notoriously
counterintuitive), so here is an example of how the concepts
might play out. If one physician’s contract provided for a
certain base salary (say, $250,000) and then a bonus equal to a
percentage of the hospital’s revenues from any referred
services, that would be compensation that “varies with”
referrals. On the other hand, if another surgeon’s contract only
provides for a flat annual salary (say, $450,000), but there is
evidence that the hospital chose the higher number because of
the value it derived from the surgeon’s referrals, that would be
compensation that “takes into account” referrals, even though
5
it does not expressly “vary with” them. Of course, if
compensation explicitly “varies with” referrals, then it will also
“take [them] into account,” as on my reading the former is a
subset of the latter.
As I read the regulations, however, neither term
includes cases of correlation standing by itself without any
alleged causal relationship.1 This is consistent with common
usage. If a baseball player’s contract provided him a bonus for
every base hit during the course of a season, we would not say
that his compensation “varied with” his total number of runs
batted in, even though hits and RBIs are closely correlated.
The only dictionary I have found offering a definition of
“varies with” is “to become different based on or according to
some determining factor,” or “to change according to
something.” Vary with, Idioms by The Free Dictionary,
https://idioms.thefreedictionary.com/vary+with (last accessed
August 15, 2019). Thus, in order for compensation to “vary
with” a certain factor, that factor must be an express input to
the compensation formula. Thus, where a surgeon gets a flat
$250,000 annually but with an added referral bonus for the
hospital’s facility fee, the referral fees are an express input into
the higher-than-$250,000 total compensation.
The majority acknowledges this usage of “vary with,”
yet goes on to suggest that statisticians (as distinct from
mathematicians, apparently) also use it to mean simple
correlation. And, to be fair, it does cite a handful of examples
of the phrase being used this way. Several of the authorities it
cites for this proposition, however, do not actually use the
phrase. Our Court’s decision in Jenkins v. Red Clay Consol.
Sch. Dist. Bd. of Educ., 4 F.3d 1103, 1120 n.10 (3d Cir. 1993),
1
The majority evidently agrees that “takes into account”
suggests a causal relationship. I therefore focus on the
interpretation of “varies with,” which is where we disagree.
6
instead used “varies in correspondence with.” This is a
meaningful distinction because “in correspondence with”
contemplates simply that two things tend to move together
(i.e., are correlated), not that one of them changes directly as a
function of the other. And the book on general statistics cited,
as opposed to the one on data analysis in Microsoft Excel,
offers only an explanation of the basic concepts of correlation;
the phrase “vary with” or “varies with” does not appear either
at the cited pages or elsewhere in the work. See Timothy C.
Urdan, Statistics in Plain English 79–80 (3d ed., Psychology
Press 2010).
That exposition of correlation does, however, expose a
further problem with the majority’s reading: correlation is not
an absolute matter. Rather, it ranges from a perfect positive
correlation of +1.00 to a perfect negative correlation of -1.00.
Id. at 80. At what point along this range would the majority
say that compensation “varies with” the volume or value of
referrals? A correlation coefficient above 0.50? Above 0.75?
The majority notes this ambiguity but does not resolve it,
instead claiming that this lack of “technical baggage,” Maj. Op.
at 18, is a point in its favor.2
2
Indeed it is not clear from the majority’s reading that a
negative correlation would not suffice to show compensation
that “varies with” referrals under the Stark Act regulations.
The Federal Register commentary on a rule pertaining to the
Truth in Lending Act that did use “vary with” essentially as a
synonym for correlation made clear that the relationship could
be positive or negative, so long as it is “consistent.” See Loan
Originator Compensation Requirements Under the Truth in
Lending Act (Regulation Z), Supplementary Information, 78
Fed. Reg. 11280, 11326 (Feb. 15, 2013). Is the same true here?
I would assume not, but the majority does not say.
7
Of course, there is nothing before us to suggest exactly
what the correlation coefficient is here. Instead we have only
the general sense that two things will tend to happen at the
same time. As UPMC points out, that is only a rough tendency.
Two neurosurgeons might perform surgeries at UPMC on the
same day each involving 10 wRVUs from the surgeons, but
one surgery involves $100 of referrals to the hospital for
facility services while the other involves $1,000. Under the
contract in this case, those two surgeons would be paid the
same amount for their two procedures (effectively $450, or $45
per wRVU, assuming they have enough wRVUs to get their
productivity bonus for the year). How, then, can we say that
compensation “varies with, or takes into account,” the volume
or value of referrals when two procedures with the same
wRVUs, but wildly different amounts of referrals, will result
in the same compensation?
The majority charges that my reading of the statute
creates surplusage because I see “varies with” as a subset of
“takes into account.” There would thus be no meaningful
difference between the full phrase “varies with, or takes into
account,” which appears three times in 42 C.F.R. § 411.354,
and “takes into account” standing on its own, which appears
three more times in § 411.354 and throughout § 411.357
(which defines the exceptions to the definition of
compensation arrangements from § 411.354). That is correct;
as noted, I suspect the difference in wording does not signify
any change in meaning. Rather I would take “varies with” as
an archetypal example of what it means to “take [something]
into account.” The latter expression can then occur on its own
as a convenient shorthand for the full phrase.3
3
Contrary to the majority’s suggestion, this does not deny or
rob “vary with” of “any useful role in the regulatory scheme.”
Making explicit what would otherwise be implicit, or offering
8
This usage is made clear by § 411.354(d), which uses
“takes into account” on its own. That subsection defines
“[s]pecial rules on compensation” applicable to the definitions
in § 411.354(c)(2), where the full phrase “varies with, or takes
into account,” is used. It states that “[u]nit-based
compensation . . . is deemed not to take into account ‘the
volume or value of referrals’ if the compensation is fair market
value for services or items actually provided and does not vary
during the course of the compensation arrangement in any
manner that takes into account referrals.” Id. § 411.354(d)(2).
So whereas § 411.354(c)(2) speaks of compensation that
“varies with, or takes into account,” referrals, the special rule
in § 411.354(d) states that compensation shall not be
considered to “take into account” referrals if certain conditions
are met. This implies that the drafters of these regulations did
not intend any change in meaning based on whether they
included the words “varies with” in a given instance of this
phrase.
The majority invokes United States ex rel. Drakeford v.
Tuomey, 792 F.3d 364 (4th Cir. 2015), which held—after a jury
trial where Tuomey Healthcare System was found to have
violated the Stark Act—that a “reasonable jury could have
found that Tuomey’s contracts in fact compensated the[ir]
physicians in a manner that varied with the volume or value of
referrals.” The Tuomey physicians’ compensation depended
on the hospital’s “collections” for “the physicians’ personally
specific examples of general provisions, is a useful textual
function even if the text would be fairly read to mean the same
thing without the phrase in question. See generally Akhil Reed
Amar, Constitutional Redundancies and Clarifying Clauses,
33 Val. U. L. Rev. 1, 7 (1998) (noting that the United States
Constitution itself “contains a good many provisions that are
best read as declaratory and clarifying.”).
9
performed services.” The majority’s extraordinarily thorough
analysis of the record in Tuomey suggests convincingly that, in
fact, this meant only the portion of the hospital’s collections
that pertained directly to each physician’s own labor. That
would be analogous to the metric used here, wRVUs. Thus the
majority sees Tuomey as supporting its position: the Fourth
Circuit found that a similar contract structure could be
understood as violating the Stark Act.
But the rub is this. The Fourth Circuit’s opinion
reflects, I believe, a different factual understanding: that
“collections for the physicians’ personally performed services”
included all collections by the hospital relating to the service,
not just to the physician’s role in the service. Thus the Court
states at one point that “there are referrals here, consisting of
the facility component of the physicians’ personally performed
services, and the resulting facility fee billed by Tuomey
[Healthcare] based upon that component.” Id. at 379
(emphasis added) (internal citations and quotation marks
omitted). Elsewhere the Court took pains to distinguish
regulatory language approving “productivity bonus[es] based
on the fair market value of the work personally performed by
a physician” because it “says nothing about the propriety of
varying a physician’s base salary based on the volume or value
of referrals.” Id. at 380 n.10. Again, the only theory the
majority offers for why compensation here or in Tuomey varies
with referrals is that compensation based on the work
personally performed by a physician inherently varies with
referrals, because each procedure a doctor performs will
generate some referrals. But the Fourth Circuit was clear in its
view that there was more than that present in Tuomey—
compensation based not only on the collections from the
surgeon’s own labor but also the facility fees collected by the
hospital. Even if that misread the facts of the case, it means
that the Fourth Circuit did not actually adopt the majority’s
preferred rule of law.
10
Of course, Tuomey is a Fourth Circuit case and therefore
not binding precedent. And although I believe my
interpretation of the regulations is more apt solely as a
linguistic matter, I also have a concern about the consequences
of our decision on myriad innocent contractual arrangements.
At its conclusion the majority opinion offers this summation of
the case against UPMC:
A chain of financial relationships linked the
surgeons to the hospitals. The surgeons referred
many designated health services to the hospitals,
generating ancillary hospital services and facility
fees. Their pay necessarily varied with the
volume of those referrals. The hospitals made
Medicare claims for those referrals. And the
defendants allegedly knew all this.
Maj. Op. at 40 (emphasis added). For the most part this simply
describes an arrangement where doctors are employed by
hospitals to perform services at those hospitals, which is hardly
suspicious. The only ingredient that transforms this innocuous
set-up into a potential Stark Act violation is that the surgeons’
pay “necessarily” varied with the volume of referrals. But the
majority makes clear that any compensation based on a
physician’s own labor, in its view, “necessarily” varies with
referrals.
Today’s decision suggests, therefore, that any hospital
that pays its affiliated physicians according to some metric of
the work they personally perform at the hospital falls under
suspicion of violating the Stark Act, and it can only restore its
good name by pleading one of the statutory exceptions—
presumably at the summary judgment stage at the earliest, i.e.,
after discovery has already taken place. If this is so, I cannot
see why most of the top hospitals in the country, many of
whom likely employ similar compensation schemes to
11
UPMC’s, would not be vulnerable to a Stark Act lawsuit that
could survive a motion to dismiss and proceed to discovery.
Nor is it easy to say what those hospitals should do to avoid the
prospect of litigation. If compensation that merely correlates
with referrals, including correlation based solely on a
physician’s own work, is enough to place a hospital under
suspicion of violating the Stark Act, then the only way to evade
suspicion altogether, short of abandoning the widespread
practice of hospitals employing their own doctors (whether
directly or, as here, through a subsidiary), would be to pay
those doctors a flat annual salary—and a modest one at that.4
4
The majority suggests that my concern about “opening the
floodgates of litigation” is “overstated” because the
Government can dismiss frivolous qui tam actions over the
relators’ objections. Thus “[f]ederal courts are not the first line
of defense against abusive suits; the Justice Department is.”
Maj. Op. at 39; see also 31 U.S.C. § 3730(c)(2)(A). That may
be so, but it does not excuse us from playing our role and
ensuring at the motion-to-dismiss stage that complaints are
legally sufficient. “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.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007))
(internal citations and quotation marks omitted). In other
words, a complaint must plead facts that are not only consistent
with the defendant’s liability but in some measure suggest it,
as opposed to any innocent explanation. See id. at 680(explaining that, in Twombly, the allegations were “consistent
with an unlawful agreement” but “not only compatible with,
but indeed . . . more likely explained by, lawful . . . behavior.”)
Here, however, the majority would allow the relators’ suit to
12
I do not believe that the Stark Act was written
essentially to ban compensation based on wRVUs or other
measures of a physician’s own productivity, or that its
implementing regulations have this effect. To the contrary, the
statute and regulations repeatedly express their approval of
these compensation schemes. See, e.g., 42 U.S.C.
§ 1395nn(e)(2) (indented text) (“Subparagraph (B)(ii) shall not
prohibit the payment of remuneration in the form of a
productivity bonus based on services performed personally by
the physician.”); 42 C.F.R. § 411.352(i)(3)(i) (expressly listing
wRVU as an acceptable basis for a productivity bonus for
group practice doctors); Medicare and Medicaid Programs;
Physicians’ Referrals to Health Care Entities With Which They
Have Financial Relationships (Phase II), 69 Fed. Reg. 16054,
16067 (Mar. 26, 2004) (“[A]ll physicians, whether employees,
independent contractors, or academic medical center
physicians, can be paid productivity bonuses based on work
they personally perform.”).
Thus, although I concur with the judgment of the
majority that the relators here have done enough to survive a
motion to dismiss, I cannot agree that correlation alone is
enough to show that compensation “varies with, or takes into
account, the volume or value of referrals” as required by
§ 411.354(c)(2)(ii). Instead I would hold that this language
requires some showing of an actual causal relationship to
establish an indirect compensation arrangement under the
Stark Act.
proceed based on nothing more than allegations of entirely
innocuous conduct: a hospital paying its affiliated physicians
based on the labor they personally perform at the hospital.
13