Vaughn v. Harris County Hospital Dist ( 2023 )

Case: 22-20659 Document: 00517002115 Page: 1 Date Filed: 12/14/2023
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
____________ FILED
December 14, 2023
No. 22-20659 Lyle W. Cayce
____________ Clerk
United States of America, ex rel, Kent Vaughn,
Plaintiff—Appellant,
versus
Harris County Hospital District, doing business as Harris
Health System; Harris County Clinical Services,
Incorporated; Memorial Hermann Health System;
Christus Health; Christus Health Gulf Coast; HCA
Healthcare; HCA Gulf Coast Division Incorporated;
St. Joseph Medical Center; Houston Methodist; Texas
Children’s Hospital; St. Luke’s Episcopal Health
System; Affiliated Medical Services; Baylor College of
Medicine; UT Physicians,
Defendants—Appellees.
______________________________
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:17-CV-2749
______________________________
Before Graves, Higginson, and Ho, Circuit Judges.
James E. Graves Jr., Circuit Judge:*
_____________________
*
This opinion is not designated for publication. See 5th Cir. R. 47.5.
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Appellant Kent Vaughn brought a False Claims Act suit against Harris
County, and other hospital and medical Defendants, alleging fraud against
the government. Because the District Court found that Vaughn’s second
amended complaint was substantially the same as publicly disclosed allega-
tions, it dismissed the suit. We AFFIRM.
Background
This appeal stems from Appellant Kent Vaughn’s False Claims Act
(“FCA”) suit against the Appellees concerning Medicaid fraud. The
Medicaid program is a cost-sharing program between the federal government
and state/local governments, where the federal government pays at least 50%
of the cost of each state’s Medicaid program. 42 U.S.C. § 1396d(b). States
may offer additional supplemental Medicaid payments up to a federally
established “Upper Payment Limit” (“UPL”), which is meant to get the
reimbursement rates closer to the actual cost of providing care. Thus, the
funding for the Medicaid program includes Medicaid reimbursements and
supplemental payments. Some states, such as Texas, get funding from local
governments to help with the state’s portion of Medicaid payments
(“intergovernmental transfers”). In 1991, in order to stop state and local
governments from shifting their contribution responsibilities to the private
sector, Congress amended the Medicaid statute to exclude “non-bona fide
provider-related donations” (“NBFD Statute”) from federal matching.
42 U.S.C. § 1396b(w)(1).
Here, Vaughn alleges that in 2008, the Appellees “engineered a
scheme” to violate the NBFD Statute by collecting payments deemed to be
“donations,” from private hospitals and submitting that payment as being
entitled to Medicaid reimbursement in order to receive federal matching
funds from the Government. This scheme, referred to as the Collaborative
Program (the “Collaborative”), involved private hospitals paying as
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“donations,” inflated medical staffing costs and expenses provided by
medical schools at and for Harris County Hospital District (“HCHD”)
hospitals. HCHD then used these “donations” as cost savings and increased
the amount of funds to the State of Texas through intergovernmental
transfers, to fund the state/local government share of the Medicaid program.
The federal government would then accordingly match the amounts Texas
received from HCHD, and the increased funds were made available for UPL
payments to the private hospitals involved in the Collaborative. Vaughn
alleges that all of the non-federal parties involved in the Collaborative
benefitted because “the private-hospital Defendants knew they would
receive back in Medicaid payments substantially more than they ‘donated’
to cover HCHD’s medical-staffing costs . . . the medical-school Defendants
increased the amount they charged HCHD so that they received exorbitant
payments . . . for their medical-staffing services [and] . . . HCHD’s hospitals
saved the cost of medical staffing services, appeased the [medical school
Defendants’ demands for higher pay], and were able to make increased
intergovernmental transfers.” Vaughn alleges that this scheme was in
violation of the NBFD Statute because the state and local governments did
not cost-share with the federal government as the Medicaid program
required, but shifted the financial burden to private hospitals who later
recouped their contributions from increased federal funding.
As a part of this scheme Vaughn alleges that the “federal
contributions have been diverted away from supporting indigent and
uninsured care” and instead have been “used to pay physician/provider
salaries and medical-school faculty/staff expenses.” He states he learned of
the Collaborative’s scheme when he was working for HCHD in 2010 as its
“Associate Administrator of Provider Practices and Contracting.” During
his employment, Vaughn attempted to make changes at HCHD to comply
with the NBFD statute. However, after Vaughn was unable to achieve any
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meaningful changes or oversight, in August 2014 he wrote a letter to the chair
of HCHD’s Compliance Committee and HCHD’s CCO informing them that
the medical-school Defendants had been charging for physician and medical-
director services in excess of fair market value and that FCA violations had
occurred and were continuing to occur. Afterwards, HCHD launched an
investigation into Vaughn, and transferred him and his staff to the finance
department. Vaughn was ultimately terminated by HCHD.
Procedural History
Appellant Kent Vaughn filed suit in August 2017 alleging that public
hospitals, including HCHD, in concert with private hospitals in Harris
County and other medical school Defendants, violated the False Claims Act
by claiming and receiving excessive Medicaid funding. In April 2020,
Defendants moved to dismiss Vaughn’s Second Amended Complaint. The
magistrate judge recommended dismissing the claims because of the public
disclosure bar and denying Vaughn’s request to file a third amended
complaint. The district court adopted the magistrate judge’s order in full.
Vaughn appealed.
Standard of Review
The court conducts de novo review of a district court’s order to dismiss
under Federal Rule of Civil Procedure 12(b)(6). Walker v. Beaumont Indep.
Sch. Dist., 938 F.3d 724, 734 (5th Cir. 2019). “To survive a Rule 12(b)(6)
motion to dismiss, the complaint ‘does not need detailed factual allegations,’
but it must provide the plaintiff’s grounds for entitlement to relief—
including factual allegations that, when assumed to be true, ‘raise a right to
relief above the speculative level.’” Taylor v. City of Shreveport, 798 F.3d 276,
279 (5th Cir. 2015) (citation omitted). “We may affirm a district court’s
order dismissing a claim under Rule 12(b)(6) ‘on any basis supported by the
record.’” Id. (citation omitted).
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Discussion
I. False Claims Act
The False Claims Act permits individuals who meet certain criteria to
pursue damages on behalf of the government for false claims submitted to the
government. 31 U.S.C. § 3730(b). Under this provision, the Government
may elect to intervene with the action or decline to take over the action.
Id. § (b)(4). If the Government elects not to proceed, the person who
initiated the action may conduct the action. Id. § (c)(3). Whether or not the
Government elects to proceed with the action, the individual who brought
the action may receive a percentage of the proceeds from the action.
Id. § (d)(1)—(2). The Act provides that:
(4)(A) [t]he court shall dismiss an action or claim
under this section, unless opposed by the
Government, if substantially the same
allegations or transactions as alleged in the action
or claim were publicly disclosed—
(i) in a Federal criminal, civil, or administrative
hearing in which the Government or its agent is
a party;
(ii) in a congressional, Government
Accountability Office, or other Federal report,
hearing, audit, or investigation; or
(iii) from the news media,
31 U.S.C. § 3730(e)(4)(A). This section, deemed the “public disclosure
bar,” seeks to “strike a balance between encouraging private persons to root
out fraud and stifling parasitic lawsuits” based on publicly available
information. Graham Cnty. Soil & Water Conservation Dist. v. United States
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ex rel. Wilson, 559 U.S. 280, 295 (2010). The public disclosure bar applies
“whenever qui tam relators bring a suit based on publicly available
information.” United States ex rel. Colquitt v. Abbott Lab’ys, 858 F.3d 365, 373
(5th Cir. 2017) (quoting United States ex rel. Jamison v. McKesson Corp., 649
F.3d 322, 327 (5th Cir. 2011)). The Act provides an exception to the public
disclosure bar for individuals who are the “original source of the
information.” 31 U.S.C. § 3730(e)(4)(A). “Together, the public disclosure
bar and its original source exception calibrate the incentives for individuals
to bring qui tam suits under the False Claims Act.” Colquitt, 858 F.3d at 373.
“The purpose of the [] bar is both to promote private citizen involvement in
fraud exposure while also ‘preventing parasitic suits by opportunistic late-
comers who add nothing to the exposure of fraud.’” United States ex rel.
Solomon v. Lockheed Martin Corp., 878 F.3d 139, 143 (5th Cir. 2017) (quoting
United States ex rel. Reagan v. E. Tex. Med. Ctr. Reg’l Healthcare Sys., 384 F.3d
168, 174 (5th Cir. 2004)).
The court applies “a three-part test to determine whether this bar
applies. It asks ‘1) whether there has been a ‘public disclosure’ of allegations
or transactions, 2) whether the qui tam action is ‘based upon’ such publicly
disclosed allegations, and 3) if so, whether the relator is the ‘original source’
of the information.’” Colquitt, 858 F.3d at 373 (quoting Fed. Recovery Servs.,
Inc. v. United States, 72 F.3d 447, 450 (5th Cir. 1995)). Under the test the
court compares “the allegations contained in [the] original complaint with
public disclosures available at the time the complaint was filed. If the
complaint could have been synthesized from the disclosures, then we
determine if the complainant was the original source of the disclosures.”
Solomon, 878 F.3d at 143 (internal citations omitted). The parties do not
dispute whether there has been a public disclosure, only whether Vaughn’s
complaint is based on those publicly disclosed allegations. So we begin our
inquiry at step two.
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A. Public Disclosure Bar
Vaughn argues that the public disclosure bar does not apply because
the publicly available information did not (1) identify these specific
Defendants; (2) address above-market payments and “other frauds”; or (3)
show Defendants acted knowingly. The district court properly determined
that Vaughn’s complaint was barred by the public disclosure bar because his
complaint was substantially the same as allegations publicly disclosed.
A Plaintiff’s FCA complaint is “based upon public disclosures if ‘one
could have produced the substance of the complaint merely by synthesizing
the public disclosures’ description of the joint venture scheme[.]’” Solomon,
878 F.3d at 144. Thus, if the public disclosure was “sufficient to set the
government on the trail of the fraud” then there will be “sufficient indicia of
an FCA violation to bar a subsequently filed FCA complaint.” Id. The Fifth
Circuit has adopted a test embraced by other circuits to determine if a public
disclosure is “sufficient to set the government on the trail of fraud.”
Under this approach, ‘the combination of X and
Y must be revealed, from which the readers or
listeners may infer Z.’ Z is an inference of fraud
under the FCA, while X and Y are two required
elements for the inference: ‘a misrepresented
state of facts and a true state of facts.’ ‘The
presence of one or the other in the public
domain, but not both, cannot be expected to set
government investigators on the trail of fraud.
Id. (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d
645, 654—55 (D.C. Cir. 1994)). Notably, “[w]hen the elements of a
fraudulent transaction are present in public disclosures, those public
disclosures need not allege fraud in explicit language.” Id. at 145. The
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information publicly available prior to Vaughn’s FCA complaint was
sufficient to set the government on the trail of fraud. A disclosure by the news
media in 2007 provided that “Federal officials are questioning the financial
arrangements that allowed the private hospitals to claim the supplemental
funds for the first time . . . . [and whether these arrangements represented]
an impermissible quid pro quo between a private hospital and public entity.”
Robert Garrett & Sherry Jacobson, Texas Hospitals Face End of Funding Plan
Federal Officials Halt Payments Medicaid Officials Halt Payments that Ease
Indigent-care Burden, Dallas Morning News (Oct. 6, 2007).
Furthermore, contrary to Vaughn’s assertion, the same source identified that
“private hospitals in 25 communities throughout the state, including Dallas,
Houston, San Antonio, Austin[,] and El Paso, were able to generate $264
million in local matching funds . . . to get the federal dollars.” Id. Another
source, in 2008, identified the scheme that Vaughn claims in his complaint:
[t]hese public-private agreements work like this:
a taxing entity sets aside money – in some cases,
8 percent of its tax levy, normally used for the
indigent program – to be used as a match for
additional Medicaid funds. With that match, the
hospitals qualify to receive a higher
reimbursement rate for treating Medicaid
patients – roughly equivalent to what they
receive for treating Medicare patients. That’s
known as receiving the Medicaid ‘upper
payment limit.’ In return, the hospitals, often
through a nonprofit organization, take over
paying bills for the county’s indigent residents.
Melissa Mcever, Indigent Program Drawing Scrutiny: Area Officials:
Partnership Helping Needy, Valley Morning Star (July 14, 2008).
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Another media story in 2015 shows that the federal government was already
on the trail of fraud: “federal officials questioned whether Texas hospital
districts violate federal law by using money from private hospitals to gain
federal matching funds for Medicaid and other needy patients.” Mary Ann
Roser, State’s Medicaid Overhaul Draws Federal Scrutiny, Austin
American-Statesman (Mar. 29, 2015). These examples are sufficient
to show that the federal government was aware of the fraudulent scheme.
Contrary to Vaughn’s assertion, the way in which the Defendants
perpetrated the fraud (above market payments and non-indigent care) need
not be alleged. See Solomon, 878 F.3d at 145 (“[t]he public disclosures need
not expressly allege fraud. The question is whether the relator could have
synthesized an inference of fraud from the public disclosures.”).
Accordingly, these public disclosures, and many others not described in
detail here, allege facts that make a potentially fraudulent scheme readily
identifiable. See id. at 146. Thus, the public disclosure bar applies, and
Vaughn’s complaint may only proceed if he qualifies as an original source.
B. Original Source
An “original source means an individual who either (i) prior to a
public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the
Government the information on which allegations or transactions in a claim
are based, or (ii) who has knowledge that is independent of and materially
adds to the publicly disclosed allegations or transactions, and who has
voluntarily provided the information to the Government before filing an
action under this section.” 31 U.S.C. § 3730(e)(4)(B). Vaughn’s claims were
not brought prior to the public disclosures and so only provision (ii) is
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relevant here.1 While the Fifth Circuit has not opined on when an original
source qualifies as having “materially added” to a public disclosure,
decisions from other circuits prove instructive. In United States ex rel.
Winkelman v. CVS Caremark Corp., 827 F.3d 201, 211 (1st Cir. 2016), the
court observed that “an addition is material if it is ‘[o]f such a nature that
knowledge of the item would affect a person’s decision-making,’ or if it is
‘significant,’ or if it is ‘essential.’” Id. (citing Black’s Law Dictionary, 1124
(10th ed. 2014)). “Our task is to ascertain whether the relators’ allegedly new
information is sufficiently significant or essential so as to fall into the narrow
category of information that materially adds to what has already been
revealed through public disclosures. As the level of detail in public
disclosures increases, the universe of potentially material additions shrinks.”
Id. Similar to the public disclosure argument, Vaughn alleges that he qualifies
as an original source because he (1) identified the specific Defendants; (2)
alleged facts to establish Defendants’ scienter; and (3) alleged non-public
facts showing a more expansive fraudulent scheme. None of the purportedly
non-public information alleged by Vaughn “materially adds” to the publicly
disclosed allegations. The district court was thus correct in finding that
Vaughn does not qualify as an original source.
First, the publicly available information identified Houston and Harris
County as having been involved in these collaborative programs. Vaughn
could not have materially added information on the identities of the specific
Defendants when it was already known at least as early as 2004.
Second, Vaughn’s assertion that his allegations of scienter materially
add to the public disclosures lacks force. Vaughn alleges that the state and
_____________________
1
Whether Vaughn voluntarily provided this information to the Government is not
disputed.
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local governments did not cost-share with the federal government as the
Medicaid program required, but shifted the financial burden to private
hospitals who later recouped their contributions from increased federal
funding. It defies logic to assume that Defendants were unaware that this
arrangement was a potential violation of the law, when information and
allegations about collaborative schemes such as and including this one were
reported by the news media since at least 2004—2017. The court in
Winkelman has likewise applied this logic:
the allegations gleaned from [the relator’s]
experience add nothing significant about CVS’s
knowledge: every indication from the public
disclosures was that CVS was fully aware that it
was refusing to provide its [Health Savings Pass]
prices to the Connecticut Medicaid program
prior to the legislative change—and, indeed,
adopted this firm position in spite of known
doubts about whether this conduct was legal.
Winkelman, 827 F.3d at 213. Accordingly, adding details as to the
Defendants’ scienter cannot be said to be a material addition.
Vaughn’s argument that he alleges a more expansive fraudulent
scheme due to Defendants’ use of above market payments and non-indigent
care likewise fails. The crux of the public disclosures unearths the possible
fraud in enumerating a quid pro quo, or program where private hospitals
provide services, money, and/or care in order to receive greater government
funding. Vaughn’s specific theory on the Collaborative’s use of above market
payments adds nothing significant to the public disclosures. Another source
had publicly disclosed that “the controversy stems from a complex payment
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system that served as a workaround for the non-public hospitals to put up
their own matching funds . . . which the federal government initially intended
to come from a local government source.” Matt Goodman, Breaking Down
Why CMS Wants $27 Million Back from Dallas Area Hospitals, D CEO
Healthcare (Sept. 8, 2016). Here, “above market payments and non-
indigent care” qualify as the complex payment system that serves as a
workaround for local government sources to avoid cost-sharing with the
government. In a case such as this one, it is not unexpected for a fraudulent
scheme to involve some sort of payment manipulation. Vaughn’s “addition”
therefore cannot be material. Importantly, “offering specific examples of []
conduct does not provide any significant new information where the
underlying conduct already has been publicly disclosed.” Winkelman, 827
F.3d at 212. Accordingly, Vaughn has not made any material additions to the
public disclosure, and he thus fails to qualify as an original source. We move
to Vaughn’s final argument on appeal, that the district court erred in denying
him leave to file a third amended complaint.
II. Leave to Amend
The district court denied Vaughn’s Motion for Leave to Amend
holding that it would be futile, burdensome, and cause undue delay. Denial
of leave to amend is reviewed for abuse of discretion. United States ex rel.
Spicer v. Westbrook, 751 F.3d 354, 367 (5th Cir. 2014). The district court did
not abuse its discretion in denying the motion. “The district court properly
exercises its discretion under Rule 15(a)(2) when it denies leave to amend for
a substantial reason, such as undue delay, repeated failures to cure
deficiencies, undue prejudice, or futility.” Id. (citation omitted). Vaughn’s
purported amendment would add additional facts about scienter, above-
market payments and non-indigent coverage. But those facts do not
materially add to what has already been publicly disclosed. Any such
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amendments are futile. The district court therefore could have denied the
motion on that ground alone; however, the district court also found that
Vaughn had essentially rewritten his complaint and based it on a new legal
theory after four years of litigation. So undue delay is another reason in
support of denial of the motion.
Conclusion
For all of the foregoing reasons, the judgment of the district court is
AFFIRMED.
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