United States v. Bourseau ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, 
Plaintiff-Appellee,
v.
ROBERT I. BOURSEAU; RIB MEDICAL
MANAGEMENT SERVICES, INC., a No. 06-56741
California corporation,  D.C. No.
Defendants-Appellants, CV-03-00907-RTB
and
RUDRA SABARATNAM; NAVATKUDA,
INC., a California corporation,
Defendants.

UNITED STATES OF AMERICA, 
Plaintiff-Appellee,
v.
ROBERT I. BOURSEAU; RIB MEDICAL No. 06-56743
MANAGEMENT SERVICES, INC., a
California corporation,  D.C. No.
CV-03-00907-RTB
Defendants,
OPINION
and
RUDRA SABARATNAM; NAVATKUDA,
INC., a California corporation,
Defendants-Appellants.

Appeal from the United States District Court
for the Southern District of California
Roger T. Benitez, District Judge, Presiding
8645
8646 UNITED STATES v. BOURSEAU
Argued and Submitted
April 9, 2008—Pasadena, California
Filed July 14, 2008
Before: Robert R. Beezer, Cynthia Holcomb Hall, and
Barry G. Silverman, Circuit Judges.
Opinion by Judge Beezer
UNITED STATES v. BOURSEAU 8649
COUNSEL
Patric Hooper, Los Angeles, California, for appellants Robert
I. Bourseau and RIB Medicial Management Services, Inc.
Patric Hooper and Howard S. Levine, Los Angeles, Califor-
nia, for appellants Rudra Sabaratnam and Navatkuda, Inc.
Peter D. Keisler, Assistant Attorney General, Karen Hewitt,
Acting United States Attorney, and Douglas Letter and Robert
J. McAuliffe, Assistant United States Attorneys, Washington,
D.C., for the appellee.
OPINION
BEEZER, Circuit Judge:
Robert I. Bourseau (“Bourseau”), RIB Medical Manage-
ment Services, Inc. (“RIB”), Dr. Rudra Sabaratnam
8650 UNITED STATES v. BOURSEAU
(“Sabaratnam”) and Navatkuda, Inc. (“Navatkuda”) (collec-
tively, “Appellants”), appeal the district court’s judgment
holding them jointly and severally liable to the United States
(“government”) for violations of the False Claims Act
(“FCA”), 31 U.S.C. §§ 3729-3733. We affirm.
I
The parties agree that the underlying facts are not in dis-
pute. The government brought this case on behalf of the
United States Department of Health and Human Services,
Centers for Medicare and Medicaid Services (“Medicare”)
against two psychiatric hospital operators, Bourseau and
Sabaratnam, and their single-employee corporations, RIB and
Navatkuda, for fraud in the context of the Medicare reim-
bursement process.
A. The Medicare Reimbursement Process
Medicare reimburses hospitals, including psychiatric hospi-
tals, for the reasonable costs of services that the hospitals pro-
vide to Medicare beneficiaries. 42 U.S.C. §§ 1395d(c), 1395k,
1395x(v)(1)(A); 42 C.F.R. § 410.27. Medicare reimburses
such providers only for the portion of costs that relate to Med-
icare patients. 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R.
§ 413.50. Medicare contracts with private insurance compa-
nies, known as fiscal intermediaries, to facilitate the reim-
bursement process. 42 U.S.C. § 1395h; 42 C.F.R. § 413.64.
Intermediaries pay providers an interim amount periodically
throughout the year that is based on estimated treatment costs
for Medicare patients. 42 U.S.C. § 1395g(e); 42 C.F.R.
§§ 413.60, 413.64. At the end of the year, providers submit a
final accounting of their actual costs for the year to their inter-
mediaries in a document called a cost report. 42 C.F.R.
§ 413.20.
In order to reimburse providers for their Medicare expenses
as quickly as possible, intermediaries make an initial retroac-
UNITED STATES v. BOURSEAU 8651
tive adjustment to the interim payments as soon as they
receive the providers’ cost reports. 42 C.F.R. § 413.64(f)(2);
Provider Reimbursement Manual (“PRM”), Pt. 1 § 2408.2. In
making the initial retroactive adjustment, intermediaries
accept costs as they are reported on a cost report, except for
obvious errors and inconsistencies. 42 C.F.R. § 413.64(f)(2);
PRM, Pt. 1 § 2408.2. The cost reports are later subject to an
audit. 42 C.F.R. § 413.64(f)(2); PRM, Pt. 1 § 2408.2. After
intermediaries audit a cost report, intermediaries determine
the providers’ and Medicare’s final liability to one another. 42
C.F.R. § 413.64(f)(2); PRM, Pt. 1 § 2408.2. In other words,
an intermediary will use a cost report to determine whether a
provider, or Medicare, is owed money based on the difference
between the interim payments already paid to the provider
and the actual amount that the intermediary determines was
actually due to the provider. 42 C.F.R. §§ 405.1803,
413.9(b)(1), 413.60, 413.64(f). Recoupment of any overpay-
ments made to a provider is made notwithstanding any
request for a hearing to review an intermediary’s determina-
tion. 42 C.F.R. § 405.1803(c).
If an intermediary has a valid basis for believing that pro-
ceedings have been or will be instituted in state or federal
court to determine the solvency of a provider, the intermedi-
ary will adjust any interim payments “notwithstanding any
other regulation or program instruction regarding the timing
or manner of such adjustments, to a level necessary to insure
that no overpayment to the provider is made.” 42 C.F.R.
§ 413.64(i).
B. Appellants’ Cost Reports for 1997, 1998 and 1999
Between 1994 and 2000, Bayview Hospital and Mental
Health Systems (“Bayview”) was a psychiatric hospital that
participated in the Medicare program. Bayview was owned
and operated by a California limited partnership, known as
California Psychiatric Management Services (“CPMS”). The
only general partners in CPMS were RIB and Navatkuda.
8652 UNITED STATES v. BOURSEAU
Bourseau controlled RIB and served as its president and sole
employee. Sabaratnam controlled Navatkuda and served as its
president and sole full-time employee. Bourseau and Sabarat-
nam, through RIB and Navatkuda, ran CPMS and Bayview.
Bourseau focused on operations management while Sabarat-
nam focused on medical management.
In 1996, CPMS filed for Chapter 11 bankruptcy. In 1998,
the United States Bankruptcy Court for the Central District of
California approved a reorganization plan for CPMS which,
among other things, gave National Century Financial Enter-
prises, Inc. (“NCFE”) a 49.9% limited partnership interested
in CPMS. This made NCFE and CPMS “related parties” as
that term is defined in the Medicare regulations.
Between 1997 and 1999, CPMS retained Paul Fayollat
(“Fayollat”) and Loretta Masi (“Masi”) of Pacific Hospital
Management to prepare and submit Bayview’s 1997, 1998
and 1999 cost reports to its intermediary, Mutual of Omaha
Insurance Company (“Mutual of Omaha”).
In preparing the 1997 cost report, Bourseau and Sabarat-
nam met with Fayollat, Masi and CPMS’ Director of Finance,
Seth Morriss (“Morriss”). Fayollat advised Bourseau that
Medicare would not reimburse Bayview for interest and bank-
ruptcy legal fees unrelated to Bayview’s Medicare patient ser-
vices, and that it would be improper to include such amounts
in the cost report. Notwithstanding Fayollat’s advice, Bour-
seau directed Fayollat to include in the 1997 report (1) the
total amount of interest charged by NCFE for earlier loans
and (2) all of CPMS’ bankruptcy legal fees. Only a portion of
the interest and bankruptcy legal fees related to the operation
of Bayview. CPMS never paid the interest to NCFE.
In preparing the 1998 cost report, Bourseau and Sabarat-
nam again met with Fayollat, Masi and Morriss. Fayollat
advised Bourseau that Medicare would not reimburse Bay-
view for interest and bankruptcy legal fees unrelated to Bay-
UNITED STATES v. BOURSEAU 8653
view’s Medicare patient services, and that it would be
improper to include such amounts in the cost report. Notwith-
standing Fayollat’s advice, Bourseau directed Fayollat to
include in the 1998 cost report (1) the total amount of interest
charged by NCFE, (2) all of CPMS’ bankruptcy legal fees, (3)
a rental expense for a lease that never existed, (4) 16,965
additional square feet of space for a partial hospitalization
program, although little of the additional space was actually
used for Medicare patient care or operation support and (5)
management fees for NCFE. Only a portion of the interest and
bankruptcy legal fees related to the operation of Bayview.
CPMS never paid the interest to NCFE.
In preparing the 1999 cost report, Bourseau again ignored
Fayollat’s advice and directed that Fayollat include in the
1999 cost report (1) all of CPMS’ bankruptcy legal fees, (2)
16,965 additional square feet of space for the partial hospital-
ization program, although little of the additional space was
actually used for patient care, (3) management fees for NCFE
and (4) “program costs,” representing additional interest pay-
able to NCFE. CPMS never paid the interest to NCFE.
Mutual of Omaha never made adjustments to Bayview’s
cost reports, never audited the cost reports and never collected
overpayments or paid underpayments. Between July of 1997
and October 2000, Bayview’s Medicare reimbursement rates
did not change. And in 2000, CPMS filed for bankruptcy
again.
The government filed suit against Appellants in the United
States District Court for the Southern District of California,
alleging (1) violations of the FCA, (2) unjust enrichment and
(3) common law fraud. After a six day bench trial, the district
court held Appellants jointly and severally liable to the gov-
ernment for the FCA claims only. The district court found that
Appellants’ 1997, 1998 and 1999 cost reports constituted
false claims under the FCA, actionable as both affirmative
false claims and reverse false claims. The district court found
8654 UNITED STATES v. BOURSEAU
that by including false costs in its cost reports, Bayview had
decreased the amount it owed Medicare by $5,219,195. The
district court awarded the government $15,657,585 in treble
damages and $31,000 in civil penalties.
Appellants timely and separately appealed. We consoli-
dated their appeals.
II
The district court had jurisdiction to enter its judgment
despite CPMS’ bankruptcy proceedings in 2000. See 11
U.S.C. § 362(b)(4); 28 U.S.C. § 1345; 31 U.S.C. § 3732(a);
Universal Life Church v. United States, 128 F.3d 1294, 1298
(9th Cir. 1997). We have jurisdiction over this appeal under
28 U.S.C. § 1291.
We review de novo mixed questions of law and fact, Mat-
thews v. Chevron Corp., 362 F.3d 1172, 1180 (9th Cir. 2004),
and a district court’s interpretation of the FCA, U.S. ex rel.
Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d
1139, 1143 (9th Cir. 1998). We review for clear error a dis-
trict court’s underlying factual findings, a standard which is
“significantly deferential, requiring a ‘definite and firm con-
viction that a mistake has been committed’ before reversal is
warranted.” Matthews, 362 F.3d at 1180 (internal quotation
omitted).
III
Appellants argue that their 1997, 1998 and 1999 cost
reports do not violate the reverse false claims provision of the
FCA.1 We disagree.
1
Appellants also argue that their cost reports are not actionable as affir-
mative false claims because the cost reports are not “claims” for payment.
This argument has been squarely rejected. See United States v. Neifert-
White, 390 U.S. 228, 233 (1968); United States v. Jackson, 845 F.2d 880,
UNITED STATES v. BOURSEAU 8655
[1] Title 31 U.S.C. § 3729(a)(7), the reverse false claims
provision of the FCA, punishes anyone who “knowingly
makes, uses, or causes to be made or used, a false record or
statement to conceal, avoid, or decrease an obligation to pay
or transmit money or property to the Government.” The gov-
ernment must prove five elements in order to establish liabil-
ity under § 3729(a)(7). In this case, the government has met
its burden.
A. False Record or Statement
Appellants do not contest that the cost reports are records
or statements submitted to a government agent, but argue that
none of the claimed costs is false.
The FCA does not define false. Rather, courts decide
whether a claim is false or fraudulent by determining whether
a defendant’s representations are accurate in light of applica-
ble law. U.S. ex rel. Oliver v. Parsons Co., 195 F.3d 457, 463
(9th Cir. 1999). Applicable law is subject to judicial interpreta-
tion.2 Id. Courts have interpreted the FCA to cover claims for
services not rendered, see United States v. Kitsap Physicians
Serv., 314 F.3d 995, 1002 (9th Cir. 2002), and Medicare cost
reports containing nonallowed or inflated costs, see, e.g.,
882-83 & n.6 (9th Cir. 1988); S. Rep. No. 99-345, at 18-19 (1986), as
reprinted in 1986 U.S.C.C.A.N. 5266, 5283-84. Nevertheless, we need not
analyze Appellants’ liability under the affirmative false claims provisions
of the FCA because we hold that the government has established liability
under the reverse false claims provision.
2
Appellants argue that their statements were not false under a reason-
able interpretation of the applicable regulations. Some courts hold that the
government must prove that a claim is false under any reasonable interpre-
tation of applicable law to succeed under the FCA. See, e.g., United States
v. Alder, 623 F.2d 1287, 1289 (8th Cir. 1980). We reject this approach.
See Parsons, 195 F.3d at 463 (holding that the reasonableness of an inter-
pretation may be relevant to the knowledge requirement but not the falsity
requirement).
8656 UNITED STATES v. BOURSEAU
United States v. Halper, 490 U.S. 435, 437 (1989), overruled
on other grounds by Hudson v. United States, 522 U.S. 93(1997) (discussing damages resulting from inflated costs);
U.S. ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Group,
Inc., 400 F.3d 428, 451 (6th Cir. 2005) (unpaid costs); Shaw
v. AAA Eng’g & Drafting, Inc., 213 F.3d 519, 530 (10th Cir.
2000) (nonallowed costs).
Each of the claimed costs identified by the government is
false as that term is used in the FCA context, for the reasons
set forth below.
1. Interest
[2] The claims for interest were false for several reasons.
First, the district court found, and Appellants do not dispute,
that CPMS never paid any interest to NCFE. Under the Medi-
care regulations, interest must be paid within one year after it
is included in a cost report unless “the provider furnishes to
the intermediary sufficient written justification (based upon
documented evidence) for nonpayment of the liability” and
the intermediary grants an extension for good cause. 42
C.F.R. § 413.100(c). In this case, Mutual of Omaha knew that
CPMS was in bankruptcy before March 1998 and after June
2000,3 but CPMS never provided written justification based
upon documented evidence for why it could not pay the inter-
est to NCFE within one year, nor asked Mutual of Omaha for
an extension for good cause. Nonpayment of the interest
under these circumstances renders the claimed interest nonal-
lowable and false.
[3] Second, the district court found that the 1997 and 1998
cost reports inflated the amount of interest related to Medicare
patients. This finding is not clearly erroneous. Bourseau
3
This knowledge would still not excuse including the interest on the
1999 and much of the 1998 reports, because CPMS was not in bankruptcy
at those times.
UNITED STATES v. BOURSEAU 8657
admitted that much of the claimed interest did not relate to
Medicare patient care at Bayview. Medicare only reimburses
providers for expenses related to the care of Medicare benefi-
ciaries. 42 U.S.C. § 1395f(b); 42 C.F.R. § 413.9. In the event
that an intermediary deems a cost nonallowable but the pro-
vider disagrees, the provider may still include the cost in a
cost report if “[t]he provider clearly indicates [the] item(s) is
being included in the cost report only to establish the basis for
an appeal and each disputed item and amount is specifically
identified.” PRM, Pt. 1 § 2905.2. “When [a provider files] a
cost report under protest, the disputed item and amount for
each issue must be specifically identified in footnotes to the
settlement worksheet and the fact that the cost report is filed
under protest must be disclosed.” PRM, Pt. 2 § 115.1. “In
addition, [a provider] must submit, with the cost report, copies
of the working papers used to develop the estimated adjust-
ments in order for the intermediary to evaluate the reasonable-
ness of the methodology for purposes of establishing whether
the cost report is acceptable.” PRM, Pt. 2 § 115.2.
In a cover letter accompanying its 1997 cost report, CPMS
put Mutual of Omaha on notice that it intended to include
interest as a disputed item in the cost report, and that it would
include supporting workpapers and documentation. The cost
report contains an entry for the interest, but does not clearly
indicate that the interest is a disputed item. Appellants do not
provide supporting workpapers and there are no footnotes or
other explanatory materials.
Similarly, in a cover letter accompanying its 1998 cost
report, CPMS put Mutual of Omaha on notice that it intended
to include interest as a disputed item in the cost report and
that it would include supporting workpapers and documenta-
tion. The letter does not indicate where to find the item in the
cost report, and there are no footnotes or other explanatory
materials. The interest claimed in the 1997 and 1998 reports
was inflated and did not comply with regulations governing
disputed items, rendering the claimed interest false.
8658 UNITED STATES v. BOURSEAU
[4] Third, the district court found that CPMS and NCFE
were related parties. This finding is not clearly erroneous
because NCFE had a 49.9% limited partnership interest in
CPMS. See 42 C.F.R. §§ 413.17(a), (b). Interest is not reim-
bursable if paid to a lender that is related to the provider
through control or ownership, with limited exceptions that do
not apply here. See 42 C.F.R. §§ 413.153(b)(3)(ii), (c).
CPMS’ inclusion of the nonallowable interest renders the
claimed interest false.
[5] Finally, the district court found that the interest claimed
in 1997, 1998 and 1999 cost reports was not supported by
adequate documentation. This finding is not clearly erroneous
because Appellants cannot cite any documentation to support
the interest expenses. Medicare requires that providers include
adequate cost data to support their claims for reimbursement.
42 C.F.R. §§ 413.20(a), (d), 413.24(a). CPMS’ failure to ade-
quately document the interest in these circumstances renders
the claimed interest false.
2. Bankruptcy Legal Fees
[6] The claims for bankruptcy legal fees were false. The
district court found, and CPMS does not dispute, that the
amount of bankruptcy legal fees claimed exceeded the amount
of fees related to Bayview and/or Medicare patient care at
Bayview. “Legal fees and related costs incurred by a provider
are allowable if related to the provider’s furnishing of patient
care, e.g., legal fees incurred in appeals to the Provider Reim-
bursement Review Board. . . .” PRM, Pt. 1 § 2183. Appel-
lants’ inclusion of legal fees unrelated to patient care or
Bayview renders the claimed bankruptcy legal fees false.
Bourseau’s argument that the fees were properly included
as disputed items fails because the cost report cover letters do
not indicate where to find the fees in the cost reports and
Appellants do not provide supporting workpapers, footnotes
UNITED STATES v. BOURSEAU 8659
or other explanatory materials. See 42 C.F.R. §§ 413.20(a),
(d), 413.24(a); PRM, Pt. 2 § 115.2.
3. Additional Space
[7] The claims for additional space were false. The addi-
tional space was used for staff meetings and storage, rather
than patient care. Medicare allows reimbursement for areas
used for staff meetings and storage, but it is allowable only in
the “administrative and general” area of a cost report, not the
“partial hospitalization program” area. Tr. 498:13-18; 793:4-
794:23; 943:5-944:12. CPMS included the additional space in
the wrong area of the cost report, which inflated the amount
of CPMS’ actual allowable costs. Under these circumstances,
the claimed additional space was false.
4. Management Fees
[8] The claims for management fees paid to NCFE were
false. The district court found that NCFE provided no man-
agement services to CPMS. This finding is not clearly errone-
ous. The only evidence that NCFE provided management
services was Bourseau’s trial testimony that NCFE sent a rep-
resentative to Bayview once per quarter to work with the
accounting firm. At a pretrial deposition, Bourseau could not
describe NCFE’s management services in any detail, even
though NCFE received payments of $20,000 per month for
management services. Medicare reimburses management fees
only to the extent they are incurred for the efficient delivery
of needed health services to Medicare beneficiaries. 42 U.S.C.
§ 1395x(v)(1)(A); 42 C.F.R. § 413.9(a). Under these circum-
stances, the claimed management fees were false.
5. Rental Expense
[9] Finally, the claimed rental expense was false. Appel-
lants admit that the rental expense never existed.
8660 UNITED STATES v. BOURSEAU
B. Knowledge of Falsity
Bourseau argues that he did not knowingly include false
statements in the cost reports because he relied on good faith
interpretations of the Medicare regulations in submitting the
cost reports. Sabaratnam argues that he did not knowingly
include false statements in the cost reports because financial
operations were not his responsibility.
[10] The FCA defines “knowing” and “knowingly” to mean
that, with respect to information, a person: “(1) has actual
knowledge of the information; (2) acts in deliberate ignorance
of the truth or falsity of the information; or (3) acts in reckless
disregard of the truth or falsity of the information.” 31 U.S.C.
§ 3729(b). “[N]o proof of specific intent to defraud is
required.” Id. “ ‘The requisite intent is the knowing presenta-
tion of what is known to be false,’ as opposed to innocent
mistake or mere negligence. ‘Bad math is no fraud,’ proof of
mistakes ‘is not evidence that one is a cheat,’ and ‘the com-
mon failings of engineers and other scientists are not culpable
under the Act.’ ” Hagood v. Sonoma County Water Agency,
81 F.3d 1465, 1478 (9th Cir. 1996) (quoting U.S. ex rel.
Anderson v. N. Telecomm., Inc., 52 F.3d 810, 815 (9th Cir.
1995)).
1. Bourseau and RIB
Bourseau acted with knowledge that each disputed item in
the cost report was false.
[11] Bourseau acted with actual knowledge that the claimed
interest was false. He admitted that it had never been paid, yet
did not provide written justification or request an excuse for
nonpayment, see 42 C.F.R. § 413.100(c), did not disclose it as
a disputed item with any detail near that required, see PRM,
Pt. 1 § 2905.2; PRM, Pt. 2 § 115, and did not retain adequate
supporting documentation, see 42 C.F.R. §§ 413.20(a), (d),
413.24(a).
UNITED STATES v. BOURSEAU 8661
[12] Bourseau acted with at least reckless disregard of the
truth or falsity of the claimed bankruptcy legal fees. He
admitted that much of the bankruptcy legal fees did not relate
to Medicare patient care, even though it is clear that reimburs-
able fees must relate to patient care. PRM, Pt. § 2183. He also
failed to disclose the fees as a disputed item with any detail
near that required. PRM, Pt. 1 § 2905.2; PRM, Pt. 2 § 115.
[13] Bourseau acted with at least reckless disregard of the
truth or falsity of the additional space. Medicare allows reim-
bursement for meeting and storage space,4 but CPMS
included it in the wrong area of the report, resulting in a
higher reimbursement to CPMS.
Bourseau acted with actual knowledge that the manage-
ment fees were false. The district court properly found that
NCFE never rendered management fees, which Bousreau
would have known based upon his position within CPMS.
[14] Finally, Bourseau acted with at least reckless disregard
of the truth or falsity of the rental expense. Bourseau admitted
that the rental expense never existed, but claims that its inclu-
sion in the cost report was a mistake. Affirmatively including
a non-existent rental expense of $396,209 on a cost report to
seek reimbursement from the government is at least reckless
disregard of the truth or falsity of the rental expense, if not
actual knowledge of the falsity of the rental expense.
[15] Considering the regulations described above and the
degree to which Bourseau’s actions deviated from them,
Bourseau did not rely on good faith interpretations of the reg-
ulations in including the disputed costs in the cost reports. Cf.
Parsons, 195 F.3d at 463 (recognizing that a good faith but
mistaken interpretation of applicable regulations may negate
the knowledge requirement).
4
There is evidence to suggest that this space had actually been closed
for years. Tr. 613:2-13.
8662 UNITED STATES v. BOURSEAU
2. Sabaratnam and Navatkuda
[16] The district court found that Sabaratnam agreed with
Bourseau’s decision to submit the cost reports. This finding
is not clearly erroneous. Although Sabaratnam did not prepare
or sign the cost reports, he was generally familiar with cost
reports, having signed one in the past, and he had attended
two meetings held for the purpose of discussing the cost
reports at issue. In addition, when asked whether Sabaratnam
agreed with Bourseau’s 1998 cost reporting decisions, Bour-
seau responded, “I would say so, but it just wasn’t his area of
responsibility, it was mine.” Tr. 1000:14-21. Sabaratnam
acted with at least reckless disregard to the truth or falsity of
each claim when he agreed to submit the cost reports.
[17] Notwithstanding his agreement with Bourseau,
Sabaratnam also acted in deliberate ignorance of the truth of
the cost reports. In defining knowingly, Congress attempted
“to reach what has become known as the ‘ostrich’ type situa-
tion where an individual has ‘buried his head in the sand’ and
failed to make simple inquiries which would alert him that
false claims are being submitted.” S. Rep. No. 99-345, at 21
(1986), as reprinted in 1986 U.S.C.C.A.N. 5266, 5286. Con-
gress adopted “the concept that individuals and contractors
receiving public funds have some duty to make a limited
inquiry so as to be reasonably certain they are entitled to the
money they seek.” Id. at 20; see also id. at 7 (discussing the
importance of individual responsibility because the govern-
ment has limited resources to police fraud). “While the Com-
mittee intends that at least some inquiry be made, the inquiry
need only be ‘reasonable and prudent under the circum-
stances.’ ” Id. at 21.
[18] Sabaratnam, as president of Navatkuda and a general
partner of CPMS, depended upon the cost reports for reim-
bursement just as much as Bourseau and RIB. He undertook
no inquiry into the cost reports, let alone a reasonable and
UNITED STATES v. BOURSEAU 8663
prudent one. His behavior falls within the category of deliber-
ate ignorance.
[19] Sabaratnam and Navatkuda, along with Bourseau and
RIB, acted with the scienter required under the FCA.
C. Makes, Uses or Causes to be Made or Used a False
Statement
Sabaratnam argues that he did not make, use or cause to be
made or used the cost reports at issue.5
[20] Sabaratnam frames his argument solely in terms of
“presentment,” arguing that he did not “present or cause to be
presented” false claims to the intermediary. Presentment is an
element in a cause of action under § 3729(a)(1), which pun-
ishes someone who “knowingly presents, or causes to be
presented, to an officer or employee of the United States Gov-
ernment or a member of the Armed Forces of the United
States a false or fraudulent claim for payment or approval.”
31 U.S.C. § 3729(a)(1) (emphasis added). Presentment is not
an element in a cause of action under § 3729(a)(7), which is
the cause of action at issue here. Cf. Allison Engine Co., Inc.
v. U.S. ex rel. Sanders, No. 07-214, slip op. at 6 (U.S. June
9, 2008) (holding that there is no presentment requirement in
§ 3729(a)(2), which uses the same “makes, uses, or causes to
be made or used” language found in § 3729(a)(7)).
[21] Unlike § 3729(a)(1), § 3729(a)(7) focuses on a defen-
dant who “knowingly makes, uses, or causes to be made or
used, a false record or statement to conceal, avoid, or decrease
an obligation to pay or transmit money or property to the
Government.” 31 U.S.C. § 3729(a)(7) (emphasis added). The
plain language of this statute requires that a defendant make
or use a false record or statement in order to conceal, avoid
5
Bourseau does not dispute that he made, used and signed the cost
reports at issue.
8664 UNITED STATES v. BOURSEAU
or decrease an obligation to pay the government. Cf. Allison
Engine Co., Inc., No. 07-214, slip op. at 5 (holding that
§ 3729(a)(2) requires the government to prove that the defen-
dant made a false statement to get a false claim paid or
approved). Sabaratnam, in his capacity as president of Navat-
kuda and general partner of CPMS, used and agreed to use the
false cost reports in order to decrease CPMS/Bayview’s obli-
gation to pay money to Medicare.
D. Purpose to Conceal, Avoid or Decrease an
Obligation to Pay Money to the Government
Appellants argue that they had no specific, independent,
preexisting obligation to pay Medicare. Appellants argue that
their interim payment rates were based upon the cost report
from 1996, such that any repayment obligation arose because
of the 1996 cost report. Appellants further argue that they had
no duty to pay a “specific and definite sum” because the cost
reports were never audited.
[22] The FCA does not define “obligation,” and we have
not set forth a framework for determining whether an obliga-
tion exists under the FCA. The Sixth and Eighth Circuits use
the following analysis in determining whether an obligation
exists:
To recover under the False Claims Act, . . . the
United States must demonstrate that it was owed a
specific, legal obligation at the time that the alleged
false record or statement was made, used, or caused
to be made or used. The obligation cannot be merely
a potential liability: instead, in order to be subject to
the penalties of the False Claims Act, a defendant
must have had a present duty to pay money or prop-
erty that was created by a statute, regulation, con-
tract, judgment, or acknowledgment of indebtedness.
The duty, in other words, must have been an obliga-
tion in the nature of those that gave rise to actions of
UNITED STATES v. BOURSEAU 8665
debt at common law for money or things owed. . . .
The deliberate use of the certain, indicative, past
tense suggests that Congress intended the reverse
false claims provision to apply only to existing legal
duties to pay or deliver property.
Am. Textile Mfrs. Inst., Inc. v. The Ltd., Inc., 190 F.3d 729,
735 (6th Cir. 1999) (quoting United States v. Q Int’l Courier,
Inc., 131 F.3d 770, 773 (8th Cir. 1997)).
This definition is consistent with the language and intent of
the FCA, see S. Rep. No. 99-345, at 9 (“A false claim for
reimbursement under the Medicare, Medicaid or similar pro-
gram is actionable under the act . . . .” ), as well as holdings
of the Fifth, Tenth and Eleventh Circuits. See U.S. ex rel.
Bahrani v. Conagra, Inc., 465 F.3d 1189, 1195-96 (10th Cir.
2006), cert. denied, 128 S. Ct. 388 (2007) (holding that an
obligation must be existing and arise from an independent
legal duty); U.S. ex rel. Bain v. Ga. Gulf Corp., 386 F.3d 648,
657 (5th Cir. 2004) (defining what an obligation is not);
United States v. Pemco Aeroplex, Inc., 195 F.3d 1234, 1237
(11th Cir. 1999) (recognizing an obligation exists pursuant to
contract). We adopt it.
[23] Under this framework, Appellants had a legal obliga-
tion to pay the government money at the time they submitted
the cost reports. Between 1994 and 2000, CPMS was a Medi-
care provider, subject to a Medicare Provider Agreement
requiring compliance with all Medicare regulations. See 42
U.S.C. § 1395cc; 42 C.F.R. §§ 411.406, 413.24(f), 489.11.
Medicare regulations allowed CPMS to receive interim pay-
ments throughout the year from the Medicare Trust Fund, but
required that CPMS repay any overpayments at the end of
each reporting period. 42 C.F.R. § 413.20(d)(1); see also 42
U.S.C. § 1395g(a); 42 C.F.R. §§ 413.60, 413.64, 405.377,
405.378, 405.1803. Medicare was also required to pay CPMS
any underpayments at the end of each reporting period. 42
8666 UNITED STATES v. BOURSEAU
C.F.R. § 413.20(d)(1); see also 42 U.S.C. § 1395g(a); 42
C.F.R. §§ 413.60, 413.64, 405.377, 405.378, 405.1803.
Because cost reports are not final until after an audit, the
specific amount of the repayment obligation, for either CPMS
or Medicare, may not have been known at the time the report
was filed, see, e.g., 42 C.F.R. § 413.64(f), but both sides were
under a continuing, specific obligation to repay each other.
See S. Rep. No. 99-345, at 18-19 (“A false claim for reim-
bursement under [ ] Medicare . . . is actionable under the
act.”). Similarly, CPMS’ bankruptcy may have frozen both
the rate for interim payments and Medicare’s ability to collect
overpayments, but it did not eliminate CPMS’ obligation to
reimburse Medicare for overpayments. This obligation was
not potential, like fines and penalties which have not been
levied or assessed, but rather existing and specific because
CPMS had been accepting Medicare funds. See Ga. Gulf Co.,
386 F.3d at 657-58.
[24] By including nonexistent, nonallowed and inflated
costs in their cost reports, Appellants concealed and decreased
amounts that they were obligated to repay to Medicare. This
obligation was fixed, even if the specific amount of the repay-
ment obligation was not.
E. Materiality
Appellants argue that their cost report entries were not
material because they had no impact on any payment decision
made by the intermediary.
[25] The text of the FCA does not include a materiality
requirement, but legislative history indicates that § 3729(a)(7)
was enacted to provide that “an individual who makes a mate-
rial misrepresentation to avoid paying money owed the Gov-
ernment should be equally liable under the Act as if he had
submitted a false claim” S. Rep. No. 99-345, at 15 (emphasis
added). We have incorporated a materiality element into the
UNITED STATES v. BOURSEAU 8667
FCA, at least within the context of false certification and
promissory fraud cases. See U.S. ex rel. Hendow v. Univ. of
Phoenix, 461 F.3d 1166, 1174 (9th Cir. 2006), cert. denied,
127 S. Ct. 2099 (2007). Recently, the Sixth Circuit analyzed
this issue and, using the framework set forth in United States
v. Wells, 519 U.S. 482, 490-92 (1997), concluded that the
FCA includes a materiality element. Medshares Mgmt.
Group, Inc., 400 F.3d at 440-44. We find the reasoning of the
Sixth Circuit persuasive, and hold that the FCA includes a
materiality requirement. This holding is consistent with the
law in the First, Fourth, Fifth, Sixth and Eighth Circuits. Med-
shares Mgmt. Group, 400 F.3d at 442; United States v. South-
land Mgmt. Corp., 326 F.3d 669, 679 (5th Cir. 2003); U.S. ex
rel. Costner v. United States, 317 F.3d 883, 886-87 (8th Cir.
2003); U.S. ex rel. Berge v. Bd. of Trs. of the Univ. of Ala.,
104 F.3d 1453, 1459 (4th Cir. 1997); United States. v. Data
Translation, Inc., 984 F.2d 1256, 1267 (1st Cir. 1992). But
see U.S. ex rel. Cantekin v. Univ. of Pittsburgh, 192 F.3d 402,
415 (3d Cir. 1999) (casting doubt on whether materiality is an
element under the FCA, but declining to resolve the issue).
[26] The Supreme Court has stated that “[i]n general, a
false statement is material if it has ‘a natural tendency to
influence, or [is] capable of influencing, the decision of the
decisionmaking body to which it was addressed.’ ” Neder v.
United States, 527 U.S. 1, 16 (1999). Yet, circuit courts are
split on how to measure materiality in the context of the FCA.
See Medshares Mgmt. Group, Inc., 400 F.3d at 445. The
Fourth and Sixth Circuits have adopted a “natural tendency
test” for materiality, which focuses on the potential effect of
the false statement when it is made rather than on the false
statement’s actual effect after it is discovered. Id. The Eighth
Circuit has adopted a more restrictive “outcome materiality
test,” which requires a showing that the defendant’s actions
(1) had “the purpose and effect of causing the United States
to pay out money it is not obligated to pay,” or (2) “intention-
ally deprive[d] the United States of money it is lawfully due.”
Id. (citing Costner v. URS Consultants, 153 F.3d 667, 677
8668 UNITED STATES v. BOURSEAU
(8th Cir. 1998)). We agree with the Fourth and Sixth Circuits
that the natural tendency test is the appropriate measure for
materiality because it is more consistent with the plain mean-
ing of the FCA. Id. Applying the natural tendency test to this
case, we hold that Appellants’ cost report entries were mate-
rial because they had the potential effect, or natural tendency,
to decrease the amount CPMS owed Medicare in overpay-
ments, despite the fact that cost reports were never audited.
[27] Appellants’ submission of the 1997, 1998 and 1999
cost reports satisfy all five elements necessary to establish lia-
bility under § 3729(a)(7).
IV
Appellants argue that the district court erred in awarding
treble damages in this case. We disagree.
A. The Government Sustained Damages
Appellants argue that even if they are liable under
§ 3729(a)(7), the government did not sustain damages in this
case because the government never relied upon the cost
reports to pay CPMS.
Because of CPMS’ 1996 bankruptcy, it is accurate to state
that Medicare did not increase its rates beyond those set in the
1996 cost report. But Medicare was never prohibited from
decreasing its rates, thereby minimizing any potential over-
payments. If an intermediary has a valid basis for believing
that proceedings have been or will be instituted in state or fed-
eral court to determine the solvency of a provider, the inter-
mediary will adjust any interim payments “notwithstanding
any other regulation or program instruction regarding the tim-
ing or manner of such adjustments, to a level necessary to
insure that no overpayment to the provider is made.” 42
C.F.R. § 413.64(i) (emphasis added). Although the Provider
Reimbursement Manual may indicate that intermediaries will
UNITED STATES v. BOURSEAU 8669
not make adjustments once they learn that a provider is poten-
tially insolvent, by its very terms, section 413.64(i) applies
regardless of the Provider Reimbursement Manual with
respect to this issue. Compare 42 C.F.R. § 413.64(i), with
PRM, Pt. 1 § 2408.2 (stating that intermediaries should not
make a tentative or initial retroactive adjustment to interim
payments when they know that a provider is insolvent, but
rather that intermediaries should make necessary adjustments
when the cost report is “settled.”). Similarly, although the reg-
ulations provide that intermediaries generally do not deter-
mine final liability until after an audit is made, see 42 C.F.R.
§ 413.64(f)(2); PRM, Pt. 1 § 2408.2, section 413.64(i) clearly
indicates that this general rule is preempted once an interme-
diary learns that a provider is potentially insolvent.
[28] Appellants’ inclusion of nonallowable, inflated and
fictitious costs in the 1997, 1998 and 1999 cost reports
impeded the intermediary’s ability to determine whether
maintaining the 1996 rates would result in overpayments, and
therefore impeded the intermediary’s ability to determine
whether it should have decreased interim payments. This
damaged the Medicare Trust Fund by causing Medicare to
continue making interim payments at the 1996 rates instead of
lower rates.
The Sixth Circuit considered and rejected an argument sim-
ilar to that made by Appellants. In Medshares Management
Group, Inc., the Sixth Circuit held that the government’s fail-
ure to issue a notice of provider reimbursement (“NPR”) does
not preclude the government from establishing that it has sus-
tained actual damages. 400 F.3d at 455. Instead, an NPR,
which is a written document issued by the intermediary to the
provider reflecting the amount of reimbursement due to the
provider, is merely an administrative mechanism used to
make adjustments for overpayments or underpayments. Id. at
456. Whether and when the intermediary issues an NPR does
not change whether the government sustained damages to the
8670 UNITED STATES v. BOURSEAU
treasury and to the integrity of the Medicare program as a
result of fraud. See id. at 456-57.
CPMS owes Medicare money as a result of overpayments
that Medicare made to CPMS based on the 1997, 1998 and
1999 cost reports. It now appears as though Medicare will not
recover the full amount that it has already made in overpay-
ments because CPMS has filed for bankruptcy again. None-
theless, Medicare should be allowed to attempt to recover its
losses in CPMS’ bankruptcy. To hold otherwise would allow
CPMS to escape repaying what it has already received in
overpayments.
Damages for a reverse false claim consist of the difference
between what the defendant should have paid the government
and what the defendant actually paid the government. 1 John
T. Boese, Civil False Claims and Qui Tam Actions 3-5 (3d ed.
Supp. 2008). Once a defendant is found liable under any pro-
vision of § 3729(a), that defendant “is liable to the United
States Government for . . . 3 times the amount of damages
which the Government sustains because of the act.” 31 U.S.C.
§ 3729(a). If the defendant cooperates with the government,
then the defendant is liable to the government for “not less
than 2 times the amount of damages which the Government
sustains because of the act.” Id.[29] In this case, the government’s expert, Charles Potter
(“Potter”), used a program to determine that Medicare over-
paid CPMS by $5,219,195 between 1997 and 1999 because of
the false claimed costs. CPMS never reimbursed the govern-
ment, so if Potter’s calculation is correct, the difference
between what CPMS should have repaid the government and
what it did repay the government is $5,219,195. There is no
evidence that Appellants cooperated with the government, so
the district court properly awarded treble damages under the
statute in the amount of $15,657,585.
UNITED STATES v. BOURSEAU 8671
B. The District Court’s Calculation of Damages Was
Supported by the Evidence
Appellants argue that even if they are liable and the govern-
ment has sustained damages, the district court’s calculation of
damages, based upon Potter’s “what if” program, was incor-
rect because the intermediary never made any adjustments to
the cost reports.
As discussed above, none of the disputed costs was allow-
able, so the intermediary would have disallowed all of the dis-
puted costs in determining CPMS’ repayment obligation.
Potter’s “what if” program simulated this process because he
removed all disputed costs from the cost reports, which
resulted in a figure of $5,219,195 representing overpayments
made to CPMS. Even if CPMS believed that some of the costs
should have been allowed, CPMS would still have had to
repay Medicare $5,219,195 at the time it filed the cost reports,
because challenges to an intermediary’s determination of lia-
bility do not postpone a provider’s obligation to repay the
government the amount an intermediary initially determines
to be due. See 42 C.F.R. § 405.1803(c). Thus, Potter’s calcu-
lation and the district court’s ultimate damages award was
supported by the admissible evidence.
C. The Treble Damages Award Does Not Violate the
Constitution
Finally, Appellants argue that even if they are liable, the
government sustained damages and the district court’s calcu-
lation of damages was correct, an award of treble damages in
this case is unconstitutional.
An award of treble damages and civil penalties under the
FCA is, at least in part, punitive and subject to the Eighth
Amendment’s Excessive Fines Clause. United States v.
Mackby, 339 F.3d 1013, 1016 (9th Cir. 2003). An award of
treble damages under the FCA violates the Excessive Fines
8672 UNITED STATES v. BOURSEAU
Clause if it is grossly disproportional to the gravity of a defen-
dant’s offense. Id. There is no rigid set of factors in deciding
whether an award is grossly disproportional to the gravity of
a defendant’s offense, but we consider the following factors
relevant: (1) the severity of the offense and its relation to
other criminal activity; (2) the maximum penalty faced; (3)
the harm caused and (4) whether the defendant falls within the
class of persons targeted by the applicable law. Id. at 1016-17.
In this case, the second factor favors Appellants because
the district court imposed treble damages and the maximum
amount of allowable civil penalties. Yet we have found no
law requiring a district court to award less than treble dam-
ages and the maximum amount of allowable civil penalties in
an FCA case in order to satisfy the Excessive Fines Clause.
The FCA, itself, instructs the district court to treble damages
and provides the district court with limited discretion in calcu-
lating civil penalties. See 31 U.S.C. § 3729(a).
“Congress provided for treble damages and an automatic
civil monetary penalty per false claim,” which “shows that
Congress believed that making a false claim to the govern-
ment is a serious offense.” Mackby, 339 F.3d at 1017. The
government sustained harm to its treasury and to the integrity
of the Medicare program itself. Medshares Mgmt. Group,
Inc., 400 F.3d at 456. And Appellants fall squarely among the
class of people targeted by the FCA. See Mackby, 339 F.3d
at 1017. Considering these factors, we cannot conclude that
the district court’s judgment is grossly disproportional to the
gravity of Appellants’ offenses.
V
[30] Appellants are liable under the reverse false claims
provision of the FCA for the submission of false statements
in their 1997, 1998 and 1999 cost reports. The government
sustained actual damages and is entitled to a treble damages
UNITED STATES v. BOURSEAU 8673
award of $15,657,585 and a civil penalties award of $31,000.
AFFIRMED.