United States of America v. Dynamic Medical Systems, LLC. ( 2023 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 ----oo0oo---- 11 12 UNITED STATES OF AMERICA AND THE No. 1:17-cv-01757 WBS SAB STATE OF CALIFORNIA ex rel. 13 THOMAS TURNER, 14 Plaintiffs, MEMORANDUM AND ORDER RE: DEFENDANTS’ MOTION TO DISMISS 15 v. 16 DYNAMIC MEDICAL SYSTEMS, LLC; JOERNS HEALTHCARE LLC; COVENANT 17 CARE CALIFORNIA LLC; MARINER HEALTH CARE MANAGEMENT COMPANY; 18 PLUM HEALTHCARE GROUP LLC; and CAMBRIDGE HEALTHCARE SERVICES, 19 Defendants. 20 21 ----oo0oo---- 22 Relator Thomas Turner brings this qui tam action 23 against Covenant Care California, LLC (“Covenant”), Mariner 24 Health Care Management Company (“Mariner”), Plum Healthcare Group 25 LLC (“Plum”), and Cambridge Healthcare Services (“Cambridge”), 26 who manage skilled nursing facilities (collectively the “SNFs”); 27 and Dynamic Medical Systems LLC and Joerns Healthcare LLC, who 28 1 lease mattresses and bed frames to companies that manage skilled 2 nursing facilities (collectively “Dynamic”1). (See generally 3 Second Am. Compl. (Docket No. 141) (“SAC”).) Relator asserts 4 various claims under the federal and California False Claims Acts 5 (“FCA” and “CFCA,” respectively). The court now considers 6 defendants’ motions to dismiss relator’s Second Amended 7 Complaint.2 (Mots. (Docket Nos. 142, 144-46).) 8 I. Procedural Background 9 Due to the long history of this case and its recent 10 assignment to the undersigned, the court briefly recites the 11 procedural background in relevant part. Relator filed his First 12 Amended Complaint (“FAC”) in March 2018. (Docket No. 7.) The 13 FAC asserted four violations of the FCA (presenting false claims; 14 making or using false records or statements; retaining proceeds 15 not entitled to keep; and conspiracy) (Claims 1-4, respectively), 16 and four violations of the CFCA (presenting false claims; making 17 or using false records or statements; (in the alternative) 18 inadvertently submitting false claims; and conspiracy) (Claims 5- 19 8, respectively). (See generally FAC.) 20 Defendants then filed parallel motions to dismiss the 21 FAC. (Docket Nos. 59, 60, 64, 67.) In January 2022, an order by 22 Judge Drozd dismissed Claims 1, 2, 4, 5, 6, and 8 of the FAC, 23 24 1 Joerns, like Dynamic, is in the business of leasing mattresses to skilled nursing facilities. Joerns acquired 25 Dynamic in 2015. (SAC ¶ 10-11.) For the purpose of this motion, they will be treated in common. 26 27 2 Relator incorrectly labels his Second Amended Complaint “First Amended Complaint.” 28 1 which are based on false certification, Anti-Kickback Statute, 2 and conspiracy theories, with leave to amend for failure to plead 3 with particularity a false or fraudulent claim under Federal Rule 4 of Civil Procedure 9(b) (“Rule 9(b)”). (Order (Docket No. 135).) 5 The order also dismissed Claims 3 and 7 without further leave to 6 amend on the ground that they are based on an untenable reverse 7 false claim theory. (Id.) 8 Relator then filed his Second Amended Complaint, which 9 re-pleads the six claims based on false certification, Anti- 10 Kickback Statute, and conspiracy theories that were previously 11 dismissed with leave to amend. (SAC Claims 1-5, 7.) The SAC 12 also re-pleads the CFCA inadvertent submissions claim (i.e., 13 Claim 7, which is now re-numbered Claim 6 in the SAC). 14 Defendants then filed their second set of motions to 15 dismiss. (Mots.) Thereafter, the case was transferred to the 16 undersigned. (Docket No. 174.) 17 II. Discussion3 18 The court previously dismissed the FAC because relator 19 failed to plead with particularity a false statement or 20 fraudulent course of conduct -- specifically, who made a false 21 claim or certification, when, and how. (Order.) Dismissal of 22 the FAC was pursuant to the “reliable indicia” pleading standard 23 that the Ninth Circuit adopted in Ebeid ex rel. United States v. 24 Lungwitz, 616 F.3d 993, 998-99 (2010) (Rule 9(b) satisfied with 25 “particular details of a scheme to submit false claims paired 26 3 Except where further discussion is merited, the court 27 does not revisit the applicable legal standards already set forth in the previous Order. 28 1 with reliable indicia that lead to a strong inference that claims 2 were actually submitted”). The court now examines, under this 3 standard, only whether relator’s new allegations cure this defect 4 by pleading the who, when, and how of a false claim with the 5 particularity required by Rule 9(b).4 6 A. Who Submitted a False Claim (Claims 1, 2, 4, 5) 7 The SAC pleads several new names of various officers 8 and employees associated with defendants, along with their job 9 descriptions. (See, e.g., SAC ¶¶ 59-72.) It further alleges 10 that various of these now-identified individuals, among other 11 things, “spearheaded the discriminatory billing practices,” 12 “implemented [the fraudulent program],” “carried out the scheme,” 13 were “instructed to search-out all SOC and Medi-Cal business in 14 order to increase profits,” were “one of the drivers of 15 differential billing,” or were “tasked with invoicing as many SOC 16 patients as possible to increase profits.” (Id.) However, these 17 new allegations still fail to allege the “who” with requisite 18 particularity. 19 In the FAC, relator alleged that Robert Husband and 20 Laura Bailey, employees at Dynamic, corresponded about engaging 21 in a fraudulent scheme to get “rid of competition” and push “the 22 share of cost program.” (Order at 35.) This failed to allege 23 that Husband and Bailey “were engaging in discriminatory billing 24 4 Dynamic also requests that the court take judicial 25 notice of seven state and federal administrative documents in support of their motion to dismiss the SAC. (Docket No. 143.) 26 The court need not rely on these documents in order to address 27 the issues presented in defendants’ motions to dismiss. Accordingly, the court will deny Dynamic’s request to take 28 judicial notice of the documents. (Docket No. 143.) 1 on any comparable ‘service or article’ in violation of Medi-Cal’s 2 low-price rules, nor d[id] any of relator’s allegations show that 3 Husband and Bailey falsely certified or caused to be certified a 4 claim for payment to the government.” (Id. at 36). 5 The new allegations against the newly identified 6 individuals are deficient for the same reasons. While the 7 allegations implicate these individuals in the supposed 8 underlying fraudulent scheme, they too fail to address the 9 relevant question pursuant to an FCA claim: Who made false 10 statements or omissions? See United States ex rel. Cafasso v. 11 Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1055 (9th Cir. 2011) 12 (FCA attaches liability only “to the claim for payment,” not the 13 “underlying fraudulent activity”). The closest thing to an 14 answer that relator offers is an allegation that “[b]ills were 15 submitted by Dynamic [] by various personnel in their billing 16 departments,” SAC ¶ 42, but this still fails to “at a minimum 17 identify [who] by title and/or job responsibility” submitted 18 false claims or certifications. See United States ex rel. 19 Modglin v. DJO Glob. Inc., 114 F. Supp. 3d 993, 1016 (C.D. Cal. 20 2015), aff’d 678 F. App’x 594 (9th Cir. 2017). Accordingly, the 21 court will dismiss Claims 1, 2, 4, and 5 on this basis. 22 B. When a False Claim was Submitted (Claims 1, 2, 4, 5) 23 The SAC’s new allegations on when a false claim was 24 submitted still establish only general stretches of time, despite 25 the court’s prior admonition that Rule 9(b) requires more. 26 (Order at 38-39.) See, e.g., SAC ¶ 57 (quid pro quo in contract 27 provisions “[u]ntil at least 2018”); id. ¶ 59 (“Dynamic has 28 carried out this scheme since at least 2006”); id. ¶ 60 (data 1 showing that “in 2011 Dynamic/Invacare was clearly continuing to 2 charge different rates for SOC patients . . . .”). Cf. Ryan v. 3 Microsoft Corp., 147 F. Supp. 3d 868, 888 (N.D. Cal. 2015) 4 (allegations that fraudulent conduct occurred “in 2011 and 2012” 5 and “in approximately 2008” were insufficient under Rule 9(b)). 6 Relator attempts to cure this defect by alleging that 7 false claims and certifications were submitted “every month” 8 during the relevant time periods, thereby “taint[ing] every 9 single one of their claims to Medicare and Medi-Cal.” (SAC ¶ 5.) 10 However, this still is not enough to allege “when” with 11 sufficient precision. For one, the supposed timeframe of the 12 “business relationship” between the SNFs and Dynamic, during 13 which false claims and certifications were allegedly submitted 14 every month, remains unspecified. (Id.) 15 But even assuming a precise stretch of time for the 16 alleged scheme, averments of “each” or “every” alleged 17 occurrence, without more, fail to provide defendants sufficient 18 notice about specific alleged misconduct to investigate and 19 against which to prepare a defense. See Godecke v. Kinetic 20 Concepts, Inc., 937 F.3d 1201, 1208 (9th Cir. 2019) (fraud needs 21 to be pled with particularity to allow defendant to defend 22 against charge). In Knudsen v. Sprint Commc'ns Co., the relator 23 similarly alleged a fraudulent scheme where the defendants 24 submitted false claims every month during a 105-month contractual 25 period. No. C13-04476 CRB, 2016 WL 4548924, at *9 (N.D. Cal. 26 Sept. 1, 2016). The Knudsen court found that the basis of that 27 allegation, which was an audit that the relator conducted on 3 28 months’ worth of services postdating the contractual period at 1 issue, failed to provide any specific details about any of the 2 105 allegedly false claims. Id. Here, relator fails to plead 3 any particular basis at all for his allegation that the entire 4 set of claims, submitted monthly over a course of years, was 5 fraudulent. Relator is not required to present a representative 6 example of a false claim, but he still must allege “particular 7 details of a fraudulent scheme to submit false claims” that 8 credit allegations of routinized fraud. Ebeid ex rel. U.S. v. 9 Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) (emphasis added). 10 As another attempted remedy, relator attaches provider 11 agreements between Dynamic and various skilled nursing 12 facilities. (SAC Exs. A-C.) While these contracts contain 13 specific execution dates, they fail to further identify when the 14 allegedly fraudulent rates and terms contained within the 15 contracts were actually charged, or when such charges were 16 allegedly submitted to the government as a false claim or 17 certification. See Eferton DMCC v. Asia-Glob. Renewable Energy 18 Corp., No. CV 15-9295-R, 2016 WL 5886900, at *1 (C.D. Cal. Apr. 19 22, 2016) (“Mere general allegations of a multi-month period of 20 various contracts and agreements does not suffice for Rule 21 9(b).”). Accordingly, the court will dismiss Claims 1, 2, 4, and 22 5 on this basis. 23 C. How a False Claim was Submitted (Claims 1, 2, 4, 5) 24 1. Dynamic 25 The SAC also fails to sufficiently establish how 26 Dynamic submitted false claims and certifications to the 27 government. Dynamic uses Form CMS-1500 to bill Medi-Cal directly 28 for “qualifying wound” or “direct bill” patients. (SAC ¶ 41.) 1 This form requires Dynamic to certify that the submission 2 complies with all applicable federal and state laws, including 3 (1) Medi-Cal’s low-price rules, and (2) the Anti-Kickback 4 Statute. (Id. ¶ 41.) The SAC alleges that all of Dynamic’s CMS- 5 1500 submissions violate both. (Id. ¶ 42.) 6 (a) Violation of Medi-Cal Low-Price Rules 7 Medi-Cal’s low-price rules prohibit a provider from 8 submitting a reimbursement request for a service that costs more 9 than the “usual fee” charged to the “general public” for that 10 service. (Id. ¶ 77.) Construing the SAC in the light most 11 favorable to relator, Dynamic charges Medi-Cal the “usual fee,” 12 which is $18.76 per day per patient, for specialty mattresses. 13 (Id. ¶ 41; see also Order at 33 n.41.) At the same time, Dynamic 14 allegedly charges skilled nursing facilities “a massively 15 discounted price of between $3 and $6 per day” for “facility” 16 patients whose entire cost of care is covered by the state. (Id. 17 ¶ 43.) These discounts for the facility segment allegedly render 18 every submission of Form CMS-1500 false because the discounted 19 price falls far below the “usual fee” of $18.76. (Id. ¶ 78.) 20 However, relator fails to further allege any reliable 21 indicia supporting the inference that the “massively discounted” 22 fees charged to the facility segment are the right comparator for 23 the “usual fees” charged to Medi-Cal. Put another way, the SAC 24 fails to answer three questions: (1) For what product or service 25 does Dynamic charge Medi-Cal $18.76 per day? (2) For what product 26 or service does Dynamic charge the skilled nursing facilities $3 27 28 1 to $6 per day? and (3) Are these products or services the same?5 2 See United States v. Chang, No. CV-13-3772-DMG-MRWx, 2017 WL 3 10544289, at *14-15 (C.D. Cal. July 25, 2017) (failure to specify 4 whether “usual fee” charged to “general public” prevented 5 doctor’s office from charging uninsured population less pursuant 6 to Medi-Cal low-price rules); Physicians and Surgeons Labs., Inc. 7 v. Dep’t of Health Servs., 6 Cal. App. 4th 968, 990 (2d Dist. 8 1992) (finding laboratory’s negotiated contract with discounted 9 fees were not part of the “usual” fees charged to the “general 10 public” and rejecting idea that “any time [a service provider] 11 charged a lower fee, it would be required to charge Medi-Cal that 12 same lower fee”); People v. Duz-Mor Diagnostic Lab., Inc., 68 13 Cal. App. 4th 654, 665-66 (2d Dist. 1998) (clinical laboratory 14 provider discounts to private-pay patients, negotiated by 15 physicians and HMOs, were not “charge to the general public” and 16 thus did not violate low-price rules). 17 Relator’s own allegations suggest that he requires the 18 assistance of discovery to provide them: “[Dynamic is] in 19 possession of detailed billing and reimbursement records that 20 will easily identify each and every claim they submitted to Medi- 21 Cal for ‘qualifying wound’ patients, including the identity of 22 the patient, the date of service, the date the bill was 23 submitted, the amount of the charge, and the amount reimbursed.” 24 SAC ¶ 42. But this puts the cart before the horse. The FCA and 25 26 5 The provider contracts that relator attaches to the SAC further muddies this issue. Each contract contains a price list, 27 which sets forth a grid of different prices based on the specific type and feature set of mattress and duration of the rental 28 period. (SAC Exs. A-C.) 1 Rule 9(b) “encourage insiders to disclose information necessary 2 to prevent fraud on the government.” Ebeid, 616 F.3d at 999. 3 They further require relators to “come to court with a claim in 4 hand or with sufficiently detailed circumstantial evidence to 5 establish that the defendant actually submitted a false claim.” 6 United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314 7 F.3d 995, 1002 (9th Cir. 2002). 8 Because relator fails to bring this information to 9 court at the pleading stage, he fails to sufficiently allege a 10 violation of Medi-Cal’s low-price rules. 11 (b) Violation of Anti-Kickback Statute 12 Relator also alleges a direct link between the 13 purported differential pricing scheme between Dynamic and SNFs, 14 on the one hand, and SNFs’ referral of qualifying wound patients 15 to Dynamic, on the other hand. In support, the SAC alleges that 16 “the quid pro quo is reflected and memorialized in the 17 contractual agreements between [SNFs] and [Dynamic].” (SAC ¶ 18 53.) Relator points in particular to certain preferred vendor or 19 exclusivity contract terms within that require SNFs to source all 20 or most of their supplies from Dynamic. (Id. ¶¶ 53-56.) These 21 contract terms allegedly form the kickback to Dynamic in exchange 22 for Dynamic’s participation in SNFs’ discriminatory billing 23 scheme. (Id.) 24 However, the contract terms do not suggest a quid pro 25 quo even viewed in a light most favorable to relator. First, the 26 one “exclusivity” agreement that relator identifies (id. Ex. A 27 (Dynamic-Plum contract)) acknowledges the skilled nursing 28 facilities’ right to choose alternative providers as provided by 1 law. (Id. ¶ 54.) Second, simply offering lower prices or 2 bulk/loyalty discounts in exchange for volume of business is not 3 enough to support an Anti-Kickback Statute violation.6 See 4 United States ex rel. Dan Abrams Co. v. Medtronic, Inc., No. LA 5 CV15-01212 JAK ASX, 2018 WL 5266863, at *8 (C.D. Cal. June 7, 6 2018) (dismissing Anti-Kickback Statute claims after finding 7 allegations that defendants provided rebates to hospitals that 8 purchased certain devices and that defendants knowingly caused 9 claims to be submitted as a result were conclusory and “failed to 10 allege a clear link between any alleged inducements and the false 11 claims, any specific inducement, which products physicians were 12 allegedly induced to purchase, or when and where any device was 13 used as a result of a kick-back”). The SAC fails to allege any 14 reliable indicia of a fraudulent scheme that Dynamic’s alleged 15 participation in a discriminatory billing scheme was 16 consideration for or inducement of these agreements. 17 Without more, the SAC fails to allege how defendants’ 18 agreements amounted to an illegal kickback scheme that, in turn, 19 caused Dynamic’s Form CMS-1500 submissions to become false 20 certifications. Accordingly, the court will dismiss Claims 1, 2, 21 4, and 5 against Dynamic on this basis. 22 2. Skilled Nursing Facilities 23 SNFs bill Medicare Part A and Medi-Cal using Forms CMS- 24 1450 and 1500. (SAC ¶¶ 29-30.) Relator alleges that SNFs submit 25 a consolidated bill, meaning that other entities also treating 26 27 6 Lowered prices may generally help support alleged violations of Medi-Cal’s low-price rules, but not in this case as 28 discussed above. See supra. 1 patients bill their services to SNFs. SNFs then include those 2 charges along with their own charges in a unified bill that they 3 then submit to the government. (Id.) 4 The SAC alleges no additional details on what goes on 5 the forms, how that information is organized on the forms so that 6 any mistakes or fraud relating to specialty mattress prices can 7 be detected, or what further conditions and certifications that 8 the forms require. It also fails to allege that any information 9 that SNFs transmitted to the government was in fact fraudulent, 10 either intrinsically (i.e., submitting false dollar amounts) or 11 by failing to comply with certain requirements as provided by the 12 forms. As a result, the SAC fails to allege, either directly or 13 circumstantially, how any Form CMS-1450 or 1500 submitted by SNFs 14 was a false claim, either by falsely certifying to the government 15 that specialty mattresses were being charged for in a manner 16 consistent with all applicable laws and regulations, or by 17 directly submitting false information. Accordingly, the court 18 will dismiss Claims 1, 2, 4, and 5 against SNFs on this basis. 19 D. Conspiracy (Claims 3, 7) 20 Allegations about the contracts between Dynamic and the 21 SNFs form the core of relator’s renewed attempt to plead 22 conspiracy. (Id. ¶¶ 52-57, 104, 122.) However, combined with 23 the failure to plead a false claim as outlined above, nothing 24 about these contracts plausibly demonstrate any “meeting of the 25 minds in an unlawful arrangement” required to establish a civil 26 conspiracy. Gilbrook v. City of Westminster, 177 F.3d 839, 856 27 (9th Cir. 1999). The contracts in fact tend to do the opposite. 28 Accordingly, the court will dismiss Claims 3 and 7. 1 E. Motion to Strike (Claim 6) 2 Defendants move to strike Claim 6 on the ground that 3 the court’s previous order dismissed an identically-worded claim 4 with prejudice. (Mots.) Relator argues that this was in error 5 because the order mistakenly characterized Claim 6 as advancing a 6 reverse false claim theory, a theory that the order found to be 7 untenable even with amendment. (Docket Nos. 151-54.) 8 Whether or not the court grants this request is 9 irrelevant, as the SAC pleads Claim 6 with the same lack of 10 particularity that afflicts all its other claims. Claim 6 11 invokes Cal. Gov. Code § 12651(a)(8), which provides that “a 12 beneficiary of a claim who subsequently discovers the falsity of 13 the claim, and fails to disclose the false claim to the state or 14 the political subdivision within a reasonable time after 15 discovery of the false claim[,] is liable under the California 16 FCA.” United States v. Safran Grp., S.A., No. 15-cv-746-LHK, 17 2017 WL 235197, at *5 (N.D. Cal. Jan. 19, 2017) (internal 18 quotation omitted). “[W]ith the exception of scienter and the 19 timing of a defendant's discovery of the false claim,” which are 20 not at issue here, “the elements of a claim under § 12651 (a)(8) 21 are identical to the other federal and California FCA 22 provisions.” United States v. Sutter Health, No. 14-CV-04100- 23 KAW, 2021 WL 9182522, at *22 (N.D. Cal. Mar. 17, 2021). 24 The analysis disposing of relator’s other claims 25 applies with equal force to Claim 6. Relator fails to allege 26 with the required particularity who discovered the falsity of any 27 claim or statement, how he discovered and then subsequently 28 failed to disclose it, and when. Claim 6 is therefore 1 insufficient for the same reasons. Accordingly, the court will 2 deny the motion to strike and dismiss Claim 6. 3 F. Leave to Amend 4 Leave to amend a pleading is generally freely granted 5 and is within the discretion of the court. See Fed. R. Civ. P. 6 15(a); Foman v. Davis, 371 U.S. 178, 182 (1962); DCD Programs, 7 Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). However, 8 this “liberality does not apply when amendment would be futile.” 9 Ebner v. Fresh, Inc., 838 F.3d 958, 968 (9th Cir. 2016). 10 The SAC is relator’s third attempt to sufficiently 11 plead claims under the FCA and CFCA. Relator has failed to 12 remedy any of the FAC’s defects identified in the court’s 13 previous order. For example, relator has been afforded countless 14 opportunities to answer the basic question of whether the 15 government and skilled nursing facilities were charged different 16 prices for the same product. Relator’s repeated inability to 17 answer that question with any specific examples, either in his 18 pleadings or at oral argument, is telling. In addition, 19 relator’s suggestion that billing and reimbursement records in 20 Dynamic’s possession would salvage his claims, SAC ¶ 42, and his 21 attachment of assorted provider agreements but no other documents 22 which might indicate the submission of any false claim, compel 23 the conclusion that a fourth attempt would be futile. The court 24 will therefore dismiss relator’s SAC in its entirety without 25 leave to amend. 26 IT IS THEREFORE ORDERED that the Second Amended 27 Complaint (Docket No. 141) be, and hereby is, DISMISSED WITH 28 ee enn en en nnn nn nn enn nn nn nn EE OS OSE ED 1 PREJUDICE.? . « 2 Dated: October 17, 2023 ob tle Ah fh bee WILLIAM B. SHUBB 3 UNITED STATES DISTRICT JUDGE 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 |. 7 Dynamic’s request for judicial notice (Docket No. 143) is 28 | DENIED as moot. 15