U.S. et Tenn. ex rel. Armes v. Jan Garman ( 2017 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 17a0681n.06
No. 16-6212
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
UNITED STATES OF AMERICA and STATE OF ) Dec 08, 2017
TENNESSEE ex rel. JASON ARMES, ) DEBORAH S. HUNT, Clerk
)
Relator-Appellant, )
) ON APPEAL FROM THE
v. ) UNITED STATES DISTRICT
) COURT FOR THE EASTERN
JAN GARMAN, et al., ) DISTRICT OF TENNESSEE
)
Defendants-Appellees. )
)
BEFORE: BOGGS, BATCHELDER, and BUSH, Circuit Judges.
BATCHELDER, Circuit Judge. Relator Jason Armes brought this qui tam action on
behalf of the United States and the State of Tennessee against two Tennessee hospitals owned by
Select Medical Corporation, and several hospital employees and executives (“the Select Medical
defendants”). Armes alleged that the Select Medical defendants violated the False Claims Act
and the Tennessee Medicaid False Claims Act by submitting false claims for payment to
Medicare and Tenncare, Tennessee’s Medicaid program. The district court dismissed Armes’s
claims with prejudice. We AFFIRM, albeit on grounds different from those on which the
district court relied.
I.
Select Specialty Hospital - Knoxville and Select Specialty Hospital - North Knoxville are
part of a network of Long Term Acute Care (“LTAC”) facilities owned by Select Medical
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U.S. ex rel. Armes v. Garman
Corporation. The individual defendants are employees and executives at these LTAC facilities.
These LTAC facilities treat patients who have multiple acute or chronic conditions that require
extended medical and rehabilitative treatments. Relator Jason Armes worked at Select Specialty
Hospital - Knoxville as a respiratory therapist from 2005 until 2012, when the hospital
terminated his employment.
Armes brought this qui tam action against the Select Medical defendants in the Eastern
District of Tennessee in March 2014. Armes alleged that from “at least 2005” until 2014, the
Select Medical defendants “[a]s a matter of corporate policy” engaged in several fraudulent
schemes designed to exploit Medicare’s reimbursement policies and maximize hospital profits
without regard for patient health and safety. First, Medicare reimburses LTAC facilities at a
higher rate than that for other hospitals. Armes alleged that the Select Medical defendants
manipulated patient admissions and discharges to achieve and maintain LTAC status—and thus
the higher reimbursement rate—for Select Medical hospitals. Second, Medicare reimburses
LTAC facilities a predetermined amount per patient based on the average length of stay and the
average cost to treat patients with the same diagnosis, but reimburses LTAC facilities a lower
amount if the patient is discharged early. Armes alleged that the Select Medical defendants
ensured that patients stayed just long enough to earn the higher reimbursement amounts but
discharged patients immediately thereafter to maximize profits. Third, Armes alleged that the
Select Medical defendants billed Medicare and Tenncare both for medically unnecessary
services and for medical services that the Select Medical defendants did not actually provide to
patients. Fourth, Armes alleged that the Select Medical defendants violated federal and state law
by providing bonuses to “liaisons” who ensured that patients remained on ventilators long
enough to trigger significantly higher Medicare reimbursement amounts.
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Armes alleged that each of these fraudulent schemes culminated in the Select Medical
defendants filing false claims for reimbursement from both Medicare and Tenncare, in violation
of the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–3733, and the Tennessee Medicaid False
Claims Act, Tenn. Code Ann. §§ 71-5-181 to 185.
The Select Medical defendants moved to dismiss Armes’s complaint. Days before the
district court heard argument on the motion to dismiss, Armes filed a motion to amend his
complaint. The district court denied this motion on the grounds of both undue delay and futility
and dismissed Armes’s FCA claims with prejudice. The district court dismissed all but one of
Armes’s FCA claims based on the FCA’s first-to-file bar, because of a then-pending qui tam
action in the Southern District of Indiana alleging Medicare reimbursement fraud against Select
Medical Corporation. The district court dismissed the remaining FCA claim under Federal Rule
of Civil Procedure 9(b). The district court refused to exercise supplemental jurisdiction over
Armes’s state-law claims and dismissed them without prejudice.
Armes filed a timely notice of appeal. Shortly before Armes filed his merits brief, the
Indiana district court dismissed portions of the Indiana qui tam action against Select Medical.
See U.S. ex rel. Conroy v. Select Med. Corp., 211 F. Supp. 3d 1132 (S.D. Ind. 2016). Armes
then filed a motion asking this court to vacate the district court’s dismissal of his action and to
remand without addressing the merits of the appeal. A motions panel of this court denied the
motion but instructed Armes to seek from the district court an indicative ruling on whether that
court might grant a Federal Rule of Civil Procedure 60(b) motion for relief from judgment based
on the ruling in the Indiana case.
Armes filed a motion in the district court requesting that indicative ruling. Days before
we heard oral argument in this case, the district court issued its indicative ruling. The district
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court concluded that the Indiana district court’s partial dismissal of the Indiana qui tam action
did not provide a basis for Rule 60(b) relief in this action because the Indiana qui tam action was
still pending both when Armes brought his action and when the district court dismissed this
action. The district court also rejected Armes’s argument that the Supreme Court’s decision in
Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015),
required the district court to dismiss Armes’s FCA claims without prejudice. Because those of
Armes’s FCA claims that the district court had initially dismissed under the first-to-file bar
would also be barred by the FCA’s public-disclosure bar, the district court concluded that
dismissal with prejudice was appropriate.
II.
On appeal, Armes argues that the district court erroneously dismissed his claims as barred
by the FCA’s first-to-file bar. Or, Armes argues, even if the district court did not err by
dismissing his claims under the FCA’s first-to-file bar, it erred by dismissing his claims with
prejudice. In support of that argument, Armes again cites Carter, 135 S. Ct. at 1978, which held
that district courts should dismiss claims under the FCA’s first-to-file bar without prejudice.
Armes also challenges the district court’s denial of his motion to amend his complaint and its
refusal to exercise supplemental jurisdiction over his state law claims.
A.
We review de novo a district court’s dismissal of an FCA case under either Federal Rule
of Civil Procedure 12(b)(6) or 12(b)(1).1 U.S. ex rel. Sheldon v. Kettering Health Network,
816 F.3d 399, 407 (6th Cir. 2016); U.S. ex rel. McKenzie v. BellSouth Telecomm., Inc., 123 F.3d
1
The district court described both the Rule 12(b)(1) and Rule 12(b)(6) standards. Following Sixth Circuit precedent,
the district court treated the first-to-file bar as jurisdictional and appears to have dismissed all but one of Armes’s
FCA claims under Rule 12(b)(1). The district court dismissed Armes’s remaining FCA claim under Rule 9(b) and
Rule 12(b)(6).
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935, 938 (6th Cir. 1997). “This court may affirm on any grounds supported by the record, even
those not relied on by the district court.” U.S. ex rel. Harper v. Muskingum Watershed
Conservancy Dist., 842 F.3d 430, 435 (6th Cir. 2016).
The FCA bars actions where “substantially the same allegations or transactions” were
previously “publicly disclosed” in certain judicial or administrative proceedings, government
reports, government audits or investigations, or news media reporting unless the action is
brought by “an original source of the information.” 31 U.S.C. § 3730(e)(4)(A). The purpose of
this public-disclosure bar is to “discourage opportunistic plaintiffs from bringing parasitic
lawsuits” that “merely feed off a previous disclosure of fraud.” U.S. ex rel. Poteet v. Medtronic,
Inc., 552 F.3d 503, 507 (6th Cir. 2009) (quoting Walburn v. Lockheed Martin Corp., 431 F.3d
966, 970 (6th Cir. 2005)). The public-disclosure bar “provides a broad sweep” and is “wide-
reaching.” Schindler Elevator Corp. v. U.S. ex rel. Kirk, 563 U.S. 401, 408 (2011) (internal
alteration, quotation marks, and citation omitted).
Congress amended the FCA’s public-disclosure bar in 2010 as part of the Patient
Protection and Affordable Care Act. See U.S. ex rel. Advocates for Basic Legal Equal., Inc. v.
U.S. Bank, N.A., 816 F.3d 428, 430 (6th Cir. 2016) (“ABLE”). The amendment was not
retroactive. Id. Because Armes alleges Medicare reimbursement fraud that occurred both before
and after the amendment date, we address the amendment where it affects our analysis.
Our public-disclosure bar analysis proceeds in three steps. First, we look to see whether
there has been a public disclosure of fraud. Poteet, 552 F.3d at 511. There has been a public
disclosure when “enough information exists in the public domain to expose the fraudulent
transaction” and to “put the government on notice of the likelihood of related fraudulent
activity.” U.S. ex rel. Antoon v. Cleveland Clinic Found., 788 F.3d 605, 615–16 (6th Cir. 2015)
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(internal quotation marks and citations omitted). Court filings in cases where the government or
its agent is a party constitute a public disclosure. Id.; 31 U.S.C. § 3730(e)(4)(A)(i).
Second, we look to see whether the qui tam complaint is “based upon”2 the disclosed
fraud. Poteet, 552 F.3d at 513. A later qui tam complaint is based upon a publicly disclosed
fraud when a “substantial identity” exists between the publicly disclosed allegations or
transactions and the qui tam complaint. Id. at 514 (quotation marks and citation omitted). There
need not be a complete identity “even as to time, place, and manner” between the publicly
disclosed allegations or transactions and the later qui tam complaint in order to trigger the
public-disclosure bar. Id. (quoting U.S. ex rel. Boothe v. Sun Healthcare Grp., Inc., 496 F.3d
1169, 1174 (10th Cir. 2007)). “Any action based even partly upon public disclosures” is barred.
Id. (internal quotation marks and citation omitted).
Third, we look to see if the relator is an “original source.” Id. at 515. To be an original
source under the pre-amendment version of the FCA’s public-disclosure bar, a relator needed
both to have “direct and independent knowledge of the information on which the allegations are
based” and to have disclosed that information to the government before any public disclosure
occurred. Id. The current version of the public-disclosure bar includes a second category of
original sources, in which “the claimant must have knowledge that ‘materially adds to’ the public
disclosure.” ABLE, 816 F.3d at 431 (quoting 31 U.S.C. § 3730(e)(4)(B)). In ABLE, we
interpreted this to include only information that “‘would affect a person’s decision-making,’ is
‘significant,’ or is ‘essential.’” Id. (quoting Black’s Law Dictionary 1124 (10th ed. 2014)). Qui
tam complaints that “merely ‘add[] details’ to what is already known in outline” do not
2
In the 2010 amendment, Congress changed the language of the public-disclosure bar from “based upon the public
disclosure of allegations or transactions” to “if substantially the same allegations or transactions . . . were publicly
disclosed.” Because this court had already interpreted the “based upon” language to mean a “substantial identity,”
Poteet, 552 F.3d at 514, the 2010 amendment does not affect our public-disclosure analysis at this second step.
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materially add to the publicly disclosed fraud. Id. at 432 (quoting U.S. ex rel. Bogina v. Medline
Indus., Inc., 809 F.3d 365, 370 (7th Cir. 2016)). See also U.S. ex rel. Winkelman v. CVS
Caremark Corp., 827 F.3d 201, 213 (1st Cir. 2016) (“[A] relator who merely adds detail or color
to previously disclosed elements of an alleged scheme is not materially adding to the public
disclosure.”); U.S. ex rel. Osheroff v. Humana Inc., 776 F.3d 805, 815–16 (11th Cir. 2015)
(additional “background information and details” that made the fraud “somewhat more plain”
were not material additions).
We hold that all of Armes’s FCA claims were barred by the FCA’s public-disclosure bar.
First, before Armes filed his qui tam action, the Indiana qui tam action had publicly disclosed
allegations of Medicare reimbursement fraud by Select Medical Corporation. The Indiana qui
tam action alleged “a corporate-wide policy” of manipulating patient stays to maximize
Medicare payments. Conroy, 211 F. Supp. 3d at 1139. The information in the Indiana complaint
was more than enough to expose the alleged fraud and put the government on notice of the
likelihood of related fraudulent activity, especially because the United States government was
involved in and filed briefing in the Indiana qui tam action. See id. at 1141.
Second, Armes’s qui tam action was “based upon” the same Medicare reimbursement
fraud that was publicly disclosed in the Indiana qui tam action. Both complaints alleged
company-wide schemes to manipulate patient stays in order to maximize Medicare
reimbursements. Both complaints alleged that Select Medical fraudulently billed Medicare for
services that either were not rendered or were not medically necessary. There is therefore a
substantial identity between the Medicare-reimbursement fraud alleged in the Indiana qui tam
action and the Medicare-reimbursement fraud Armes alleged. Although Armes alleged “slightly
different” “particular details,” including the use of bonuses to ensure that patients stayed on
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ventilators long enough to trigger higher Medicare reimbursements, the “primary focus” of the
two complaints is the same. See Poteet, 552 F.3d at 514–15. Armes’s qui tam complaint is
therefore “based upon” the alleged fraud publicly disclosed by the Indiana qui tam action.
Third, Armes was not an original source of the information in his qui tam complaint. The
Indiana qui tam complaint was unsealed in January 2013, but Armes did not disclose his
knowledge to the government until March 2014. Therefore, even if Armes had direct and
independent knowledge of the Medicare-reimbursement fraud, he was not an original source
under the pre-amendment public-disclosure bar because his disclosure of that knowledge to the
government did not occur before the Indiana public disclosure. Nor was Armes an original
source under the current version of the public-disclosure bar because his allegations did not
materially add to the publicly disclosed Medicare reimbursement fraud. The Indiana qui tam
complaint alleged “the knowing manipulation of Length of Stay for patients at Select Long Term
Acute Care Hospitals to maximize reimbursement . . . , unnecessary medical procedures and
upcoding.” Specifically, the Indiana qui tam complaint alleged that Select Medical LTAC
facilities held patients longer than medically necessary so as to obtain higher Medicare
reimbursements, forced patients to leave Select Medical LTAC facilities prematurely once the
Medicare predetermined payment was earned, admitted patients who did not require LTAC care,
billed Medicare for medically unnecessary procedures, targeted patients whose length-of-stay
was expected to be long to maintain LTAC-facility status for Select Medical hospitals, and
“rewarded physicians willing to manage patients with the primary goal of maximizing . . .
reimbursement.” Although it is true, as Armes emphasizes, that “only Jason Armes” has alleged
some additional details, none of those details is significant or essential to the alleged Medicare
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reimbursement fraud that was already publicly disclosed in the Indiana qui tam action. Armes is
therefore not an original source under either version of the FCA’s public-disclosure bar.
The FCA’s public-disclosure bar supports affirming the district court’s dismissal of all of
Armes’s FCA claims with prejudice. We affirm on that ground.3
B.
We normally review a district court’s order denying a motion to amend for abuse of
discretion. Sheldon, 816 F.3d at 407. However, where a district court denies a motion to amend
because the complaint as amended could not withstand a motion to dismiss, we review that order
de novo. Id. The district court denied Armes leave to amend his complaint on the grounds of
both undue delay and futility.
District courts must generally give plaintiffs “at least one chance to amend the
complaint” before dismissing it with prejudice. U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc.,
342 F.3d 634, 644 (6th Cir. 2003) (internal quotation marks and citation omitted). Where a
plaintiff engages in undue delay or where an amendment would be futile, denial may be
appropriate. Id. When a district court denies a motion to amend based on undue delay, we look
to see whether the plaintiff had sufficient notice that his complaint was deficient, and if so,
whether the plaintiff had an adequate opportunity to cure the deficiencies. Id.
Here, the Select Medical defendants filed a motion to dismiss in November 2015, relying
on the first-to-file bar, the public-disclosure bar, and Rule 9(b), putting Armes on notice that his
complaint might require amendment. Armes sought and received an extension of time to
respond, and responded in January 2016. Although Armes said that he “would have preferred to
3
The pre-amendment public-disclosure bar was jurisdictional, Rockwell Intern. Corp. v. United States, 549 U.S. 457,
467–68 (2007), so we affirm the district court’s dismissal of Armes’s FCA claims based on conduct alleged to have
occurred prior to the amendment date under Rule 12(b)(1). The current version of the public-disclosure bar is not
jurisdictional, ABLE, 816 F.3d at 433, so we affirm the district court’s dismissal of Armes’s FCA claims based on
post-amendment conduct under Rule 12(b)(6).
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have been able to file an amended complaint” at that time, he claimed that evolving case law and
the holidays had gotten in his way. He then waited until April 2016, nearly five months after the
motion to dismiss and three days before oral argument on that motion, to file a motion to amend
his complaint. Even then, Armes did not allege any new schemes that were not barred by the
FCA’s first-to-file or public-disclosure bars in his proposed amended complaint. The district
court did not abuse its discretion by denying Armes’s motion to amend his complaint based on
undue delay.
C.
We review for an abuse of discretion a district court’s refusal to exercise supplemental
jurisdiction. Habich v. City of Dearborn, 331 F.3d 524, 535 (6th Cir. 2003). “[G]enerally, if the
federal claims are dismissed before trial the state claims should be dismissed as well.” Hankins
v. The Gap, Inc., 84 F.3d 797, 803 (6th Cir. 1996) (internal quotation marks and citations
omitted). The district court did not abuse its discretion by refusing to exercise supplemental
jurisdiction over Armes’s state-law claims after dismissing his federal claims.
III.
For the foregoing reasons, we AFFIRM the judgment of the district court. We DENY
the Select Medical defendants’ October 9, 2017, motion to take judicial notice.
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