St Lukes Health Network Inc v. Lancaster General Hospital

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 19-3340
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ST. LUKE’S HEALTH NETWORK, INC., DBA St. Luke’s
University Health Network; SAINT LUKE’S HOSPITAL OF
BETHLEHEM, PENNSYLVANIA, DBA St. Luke’s
University Hospital, Bethlehem Campus; ST. LUKE’S
QUAKERTOWN HOSPITAL; CARBON-SCHUYLKILL
COMMUNITY HOSPITAL, DBA St. Luke’s Miners
Memorial Hospital; BLUE MOUNTAIN
HOSPITAL, individually and on behalf of all others similarly
situated, DBA St. Luke’s Hospital, Palmerton Campus,
Appellants
v.
LANCASTER GENERAL HOSPITAL; LANCASTER
GENERAL HEALTH; UNIVERSITY OF
PENNSYLVANIA HEALTH SYSTEM; UNIVERSITY
OF PENNSYLVANIA TRUSTEES; JOHN DOE 1;
JOHN DOE 2
______________
Appeal from the United States District Court
for the Eastern District of Pennsylvania
(Civ. Action No. 5-18-cv-02157)
District Judge: Honorable Jeffrey L. Schmehl
______________
Argued March 31, 2020
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Before: GREENAWAY, JR., PORTER, and MATEY, Circuit
Judges.
(Opinion filed: July 22, 2020)
Brian W. Barnes [ARGUED]
David H. Thompson
Cooper & Kirk
1523 New Hampshire Avenue, N.W.
Washington, DC 20036
Douglas J. McGill
Webber McGill
760 Route 10
Suite 104
Whippany, NJ 07981
Counsel for Appellants
Kevin W. Fay [ARGUED]
Peter J. Hoffman
Jeffrey P. Lewis
Eckert Seamans Cherin & Mellott
50 South 16th Street
Two Liberty Place, 22nd Floor
Philadelphia, PA 19102
Counsel for Appellees
2
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OPINION
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GREENAWAY, JR., Circuit Judge.
This case involves a state-run program to reimburse
Pennsylvania hospitals for treating indigent patients.
Plaintiffs-Appellants are a group of hospitals and their related
health care networks that seek civil remedies from Defendants-
Appellees, another hospital and hospital system, for violations
of the Racketeer Influenced & Corrupt Organizations Act
(“RICO”), 18 U.S.C. § 1964(c)–(d). Plaintiffs allege that
Defendants submitted fraudulent claims for reimbursement, in
violation of the wire fraud statute, 18 U.S.C. § 1343, and
received an unduly inflated proportion of the available funding.
As a result, Plaintiffs claim they were reimbursed an artificially
smaller share of funds. The District Court dismissed Plaintiffs’
claims for lack of RICO standing, an additional requirement to
Article III standing. It found that Plaintiffs failed to plead
sufficient facts to demonstrate that their injury was caused by
Defendants’ alleged fraud.
Because we find Plaintiffs’ theory of liability
adequately alleges proximate causation, we will reverse the
District Court and remand for further proceedings consistent
with this opinion.
3
I. BACKGROUND
A. Tobacco Settlement Act and Extraordinary
Expense Program
In 1998, Pennsylvania and forty-five other states
entered into a master settlement agreement with certain
cigarette manufacturers. As part of the settlement, the cigarette
manufacturers disbursed funding to the states to cover tobacco-
related health care costs. To allocate the funds to hospitals
providing care to indigent patients, the Pennsylvania General
Assembly enacted the Tobacco Settlement Act in 2001 (the
“Act”). P.L. 755, No. 77 (codified at 35 Pa. Stat. § 5701.101
et seq. (2001)).
This case concerns the Hospital Extraordinary Expense
Program (“EE Program”) established under the Act. The EE
Program reimburses participating hospitals for “extraordinary
expenses” incurred for treating uninsured patients.1 The
amount each participating hospital receives is the lesser of “(1)
the extraordinary expense claim[] or (2) the prorated amount
of each hospital’s percentage of extraordinary expense costs as
compared to all eligible hospitals’ extraordinary expense costs,
as applied to the total funds available in the Hospital
Extraordinary Expense Program for the fiscal year.” 35 Pa.
Stat. § 5701.1105(d) (2001). The latter recognizes that funds
available through this program may not cover all extraordinary
expenses that would be eligible for reimbursement in a fiscal
1
As defined by the statute, “extraordinary expenses” are
“the cost of hospital inpatient services provided to an uninsured
patient which exceeds twice the hospital’s average cost per stay
for all patients.” 35 Pa. Stat. § 5701.1102 (2001).
4
year. So, in fiscal years when the program does not have
enough money to cover all of the extraordinary expenses of
each participating hospital, the funds are distributed
proportionally based on each hospital’s share of reported
extraordinary expenses.
The Act charges the Department of Human Services
(formerly the Department of Public Welfare) (“DHS”) with
administering the EE Program. § 5701.1105(b). This includes
the responsibility to determine the eligibility of each hospital
for payment under the EE Program based on certain
requirements under the Act. § 5701.1105(b)(4). A
participating hospital must submit eligibility information and
unpaid claims through the Pennsylvania Health Care Cost
Containment Council’s (“PHC4”) website portal on a quarterly
basis. DHS then calculates and makes EE Program payments
to qualifying hospitals on an annual basis.2 § 5701.1105(b)(5).
B. Factual Background
The Pennsylvania Auditor General has audited the EE
Program for each Fiscal Year since the Program’s nascence.
According to the Auditor General’s Reports for Fiscal Years
2008-2012, some participating hospitals received
disbursements for unqualified claims. For the years in which
2
Although the Act requires DHS to pay the hospitals by
October 1 of each fiscal year, the claims submitted were for
services rendered a year or a year-and-a-half prior. Therefore,
the references throughout this Opinion to a particular “fiscal
year” are based on the year in which disbursements are made
to participating hospitals rather than the year in which medical
services were rendered.
5
the total amount of extraordinary expenses claimed by
participating hospitals under the EE Program exceeded the
total funds available in the EE Program, the Auditor General
recommended, inter alia, that DHS claw back funds from the
overpaid hospitals and redistribute the money to hospitals that
had been underpaid.
DHS followed the Auditor General’s recommendations
for the fiscal years prior to Fiscal Year 2010. But DHS later
found methodological discrepancies between DHS’s and the
Auditor General’s eligibility determinations.3 As a result,
DHS decided to discontinue the claw-back process for Fiscal
Years 2010-2012 and declined to reallocate EE Program funds
for those years.4
3
As justification for its decision to discontinue the
claw-back procedure pursuant to the Auditor General’s
recommendations, DHS stated that “[n]either [the Tobacco
Settlement Act nor the DHS’s approved State Plan] requires
[DHS] to recalculate and redistribute payments as updated
information becomes available from hospitals after [DHS] has
made its determination. . . . [S]uch a requirement would result
in constant revision and recalculation of payment amounts for
indefinite periods of time, which is a result seemingly
inconsistent with the General Assembly’s intent.” App. 119.
4
The Auditor General issued reports of a particular
fiscal year several years after that fiscal year’s disbursement.
For example, the report of Fiscal Year 2010 was not released
until 2014.
6
C. Procedural Background
Plaintiffs-Appellants are a group of hospitals and their
related health care networks suing on behalf of all hospitals
participating in the EE Program that the Auditor General
deemed underpaid during Fiscal Years 2010-2012
(collectively, “Plaintiffs”). Plaintiffs commenced this action
against Lancaster General Hospital (“Lancaster”), one of the
allegedly overpaid hospitals, and its related hospital system
and staff (collectively, “Defendants”). Plaintiffs claim
Defendants conspired to defraud the Tobacco Settlement Act’s
EE Program in violation of RICO, 18 U.S.C. §§ 1961–1964.
Plaintiffs seek civil remedies under 18 U.S.C. § 1964(c) (“civil
RICO”). They also bring state-law claims for unjust
enrichment and breaches of a constructive trust.
Specifically, Plaintiffs allege that John Doe 1 and John
Doe 2, employees of Lancaster, “knew that [Lancaster’s]
claims were grossly inflated but nevertheless continued to
submit them even after being called out by the Auditor
General.” App. 37. They claim John Doe 1 instructed John
Doe 2 to submit fraudulent claims through the PHC4 portal for
Fiscal Years 2008-2012. Plaintiffs contend that these actions
amount to separate acts of wire fraud under 18 U.S.C. § 1343,
a RICO predicate, and together the acts formed a pattern of
racketeering activity under 18 U.S.C. § 1962(c). According to
Plaintiffs, these actions resulted in “massively inflated
extraordinary expense claims,” which unjustly enriched
Lancaster by $9 million during Fiscal Years 2010-2012.5 App.
5
Prior to DHS’s discontinuance of the claw-back
procedure, Lancaster repaid excess funds received in Fiscal
Years 2008-2009 as directed by DHS.
7
47. Since participating hospitals submitted claims that totaled
more than was available in EE Program funding for Fiscal
Years 2010-2012, Plaintiffs claim they were collectively
undercompensated by $9 million during those years.
Defendants moved to dismiss under Federal Rule of
Civil Procedure 12(b)(6), contending, inter alia, that the
alleged RICO violation did not proximately cause Plaintiffs’
injury.6 The District Court agreed, granting Defendants’
motion and dismissing for lack of civil RICO standing. Having
dismissed the civil RICO claim, the District Court declined to
exercise supplemental jurisdiction over the state-law claims.
This appeal followed.
II. JURISDICTION AND STANDARD OF REVIEW
The District Court had subject matter jurisdiction over
the RICO claims under 28 U.S.C. § 1964(c) and 28 U.S.C.
§ 1331, and supplemental jurisdiction over the state-law claims
under 28 U.S.C. § 1367. This Court has jurisdiction under 28
U.S.C. § 1291.
We exercise plenary review over a district court’s grant
of a motion to dismiss, pursuant to Federal Rule of Civil
Procedure 12(b)(6), for failure to state a claim. Grier v. Klem,
591 F.3d 672, 676 (3d Cir. 2010). “[I]n deciding a motion to
dismiss, all well-pleaded allegations of the complaint must be
6
Defendants also moved to dismiss under Federal Rule
of Civil Procedure 12(b)(1). As we explain below, the District
Court dismissed the civil RICO claim under Rule 12(b)(6).
Accordingly, we apply the Rule 12(b)(6) standard in reviewing
the District Court’s Order.
8
taken as true and interpreted in the light most favorable to the
plaintiffs, and all inferences must be drawn in favor of them.”
McTernan v. City of York, 577 F.3d 521, 526 (3d Cir. 2009).
To withstand a Rule 12(b)(6) “motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to state
a claim to relief that is plausible on its face.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (internal quotation marks omitted).
We also review de novo a legal determination regarding
standing to pursue a civil action under § 1964(c) of RICO.
Maio v. Aetna, Inc., 221 F.3d 472, 482 (3d Cir. 2000).
III. DISCUSSION
We begin with an explication of RICO standing
requirements. In light of these principles, we conclude that
Plaintiffs’ Complaint adequately claims that their injury was
proximately caused by Defendants’ allegedly fraudulent
conduct. Since the District Court dismissed the civil RICO
claim on standing grounds alone, we will remand to the District
Court for further proceedings consistent with this opinion.
A. Civil RICO Standing
Title 18 of the United States Code § 1964(c) provides
that “any person injured in his business or property by reason
of a violation of section 1962 of this chapter may sue therefor
in any appropriate United States district court and shall recover
threefold the damages he sustains and the cost of the suit,
including a reasonable attorney’s fee.” As distinct from Article
III standing, a plaintiff bringing a civil RICO claim must
additionally state an injury to business or property and “that a
RICO predicate offense ‘not only was a ‘but for’ cause of
injury, but was the proximate cause as well.’” Hemi Grp., LLC
9
v. City of New York, 559 U.S. 1, 9 (2010) (citing Holmes v. Sec.
Inv’r Protection Corp., 503 U.S. 258, 268 (1992)); see also In
re Schering Plough Corp. Intron/Temodar Consumer Class
Action, 678 F.3d 235, 246 (3d Cir. 2012) (“In addition to
meeting the constitutional standing requirements, ‘plaintiffs
seeking recovery under RICO must satisfy additional standing
criterion set forth in section 1964(c) of the statute.’” (quoting
Maio, 221 F.3d at 482)).
Similar to the antitrust context, proximate causation is
employed in civil RICO as a limiting principle intended to
stymie a flood of litigation, reserving recovery for those who
have been directly affected by a defendant’s wrongdoing. See
Holmes, 503 U.S. at 268 (“[W]e use ‘proximate cause’ to label
generically the judicial tools used to limit a person’s
responsibility for the consequences of that person’s own
acts.”). But unlike its more generic definition at common law,
“[o]ur precedents make clear that in the RICO context, the
focus [of proximate causation] is on the directness of the
relationship between the conduct and the harm” rather than
“the concept of foreseeability.” Hemi Grp., 559 U.S. at 12
(2010).
The Supreme Court has also articulated three judicially
practicable reasons for requiring directness of injury. First,
“indirect injuries make it difficult ‘to ascertain the amount of a
plaintiff’s damages attributable to the violation, as distinct
from other, independent factors.’” In re Avandia Mktg., 804
F.3d 633, 642 (3d Cir. 2015) (quoting Holmes, 503 U.S. at
269). Second, and relatedly, indirect injuries risk double
recovery so the “courts would have to adopt complicated rules
apportioning damages to guard against this risk.” Id. Third,
directly injured victims can be counted on and are best
positioned to “vindicate the law as private attorneys general,”
10
so there is no need to extend civil RICO’s private right of
action to those whose injuries are more remote. Holmes, 503
U.S. at 269–70.
To demonstrate “some direct relation between the injury
asserted and the injurious conduct alleged,” the manipulation
alleged must not be “purely contingent” on another event or
action. Id. at 269, 271. Even though a plaintiff is not required
to claim first-party reliance on a defendant’s purported
misrepresentation, Bridge v. Phoenix Bond & Indem. Co., 553
U.S. 639, 657–58 (2008), the cause of an injury that is “entirely
distinct from the alleged RICO violation” may be too
attenuated to meet the proximate causation requirement, Anza
v. Ideal Steel Supply Corp., 547 U.S. 451, 458 (2006).
Relatedly, a more direct victim of the purported violation or
independent, intervening factors may also break the chain of
causation. See Hemi Grp., 559 U.S. at 15; Anza, 547 U.S. at
458.
B. Plaintiffs Meet the Proximate Causation
Requirement for Civil RICO Standing
Applying these principles to the present case, we
conclude that Plaintiffs have adequately stated that
Defendants’ alleged misrepresentation proximately caused
their injury.
At the outset, it is important to specify the purported
conduct constituting a RICO predicate and the resulting injury.
The Complaint shows that Plaintiffs’ theory of liability extends
to Defendants’ submission of allegedly fraudulent claims
between Fiscal Years 2008-2012. Plaintiffs therefore claim
collective injury in the form of a decreased proportion of EE
Program funds during each of those years.
11
Defendants contend, and the District Court similarly
mischaracterizes, Plaintiffs’ injury as being based on DHS’s
discontinuance of the claw-back procedure after the Auditor
General’s Report of Fiscal Year 2010 was released in 2014.
But this confuses Plaintiffs’ allegations of injury with
Plaintiffs’ requested relief. Although true that the existence of
the claw-back procedure and the reapportionment of funds for
Fiscal Years 2008-2009 undermines claims for relief during
that period, the allegations pertinent to the question of
proximate cause are those of the purported injury. According
to the Complaint, the injury traces back to submissions for
Fiscal Year 2008. Indeed, Plaintiffs’ injury appears to be based
not on DHS’s discretionary conduct to terminate the claw-back
program for Fiscal Years 2010 and beyond, but on Defendants’
allegedly fraudulent submissions for Fiscal Years 2008-2012.
Viewed in this light, it is clear that Plaintiffs’ allegations
mirror those in Bridge v. Phoenix Bond & Indemnity Company,
in which the Supreme Court concluded the plaintiffs had met
the proximate causation requirement to proceed under civil
RICO. 553 U.S. at 648, 661. Bridge involved prospective
buyers of tax liens sold by the Cook County, Illinois
Treasurer’s Office at public auction. Id. at 642. Because the
structure of the bidding system permitted multiple prospective
buyers to submit the winning amount, the County decided to
“allocate parcels ‘on a rotational basis’ in order to ensure that
liens [were] apportioned fairly among [the bid winners].” Id.
at 643. To prevent a bidder from sending agents to bid the
winning amount on their behalf, thereby obtaining a
disproportionate share of liens, the County adopted the
“Single, Simultaneous Bidder Rule,” which required each
entity to submit bids only in its own name. Id.
12
The plaintiffs in Bridge, a group of bidders, claimed that
they were injured when the defendants, other bidding entities,
committed mail fraud, a RICO predicate, by “arrang[ing] for
related firms to bid on [the defendants’] behalf and direct[ing]
them to file false attestations that they complied with the
Single, Simultaneous Bidder Rule.” Id. at 644. By collusively
submitting winning bids, the defendants were able to
collectively acquire a greater number of liens than would have
been granted to a single bidder acting alone. The Bridge
plaintiffs complained that the defendants’ fraudulent
submissions regarding compliance with the Single,
Simultaneous Bidder Rule and their collusion deprived the
plaintiffs of their fair share of liens and related financial
benefits. Id.
The Supreme Court sided with the plaintiffs, concluding
that they had adequately alleged a “direct relationship between
the defendant’s wrongful conduct and the plaintiff’s injury to
satisfy the proximate-cause principles” even though the
plaintiffs had not relied first-hand on the defendants’ alleged
mail fraud. Id. at 657–58.
Plaintiffs’ theory of liability and alleged injury in the
present case are nearly identical to that of the Bridge plaintiffs.
Because the EE Program has a fixed pool of assets,
Defendants’ alleged manipulation to increase their share of the
limited funding necessarily resulted in Plaintiffs receiving a
decreased proportion of those assets. So, we must similarly
conclude that Plaintiffs have adequately demonstrated
proximate causation for purposes of civil RICO standing.
Moreover, Plaintiffs’ theory of proximate cause
satisfies the Supreme Court’s three policy considerations for
directness of injury. See Holmes, 503 U.S. at 269–70. First,
13
despite the District Court’s conclusion that DHS was “the
‘better situated plaintiff’ that can ‘generally be counted on to
vindicate the law as private attorneys general,’” St. Luke’s
Health Network, Inc. v. Lancaster Gen. Hosp., No. 18-2157,
2019 WL 4393112, at *8 (E.D. Pa. Sept. 13, 2019) (quoting
Anza, 547 U.S. at 460), DHS would not have been injured as a
result of Defendants’ misrepresentations.7 Because DHS
would not suffer harm at the hands of Defendants’ alleged
misrepresentations, it would have little incentive to investigate
and vindicate any harms arising from any purported
wrongdoing.8
Second, and relatedly, there is no concern of a double
recovery by a better-situated plaintiff because no entity
suffered any similar injury.9 Moreover, Plaintiffs’ purported
7
Defendants’ counsel conceded at oral argument that,
assuming Defendants submitted inflated claims, DHS would
suffer no harm.
8
To the extent that Defendants’ concern regarding
DHS’s potential loss of federal matching grants is raised in
their briefing for the purpose of showing DHS’s injury, this
argument is a non-starter. Not only does DHS suffer no present
injury, but any such harm would be the direct result of having
to redistribute funds. Defendants’ misrepresentations would
actually be too remote a source of injury. See Anza, 547 U.S.
at 458 (noting that where an injury is distinct from the alleged
RICO violation, the relationship may be indirect).
9
The District Court’s reasoning that DHS could have
but did not assess penalties for Defendants’ alleged fraud,
pursuant to 35 Pa. Stat. § 5701.1108 (2001), is immaterial. The
wording of the statutory authority does not preclude other
14
damages are tangible and concrete, as opposed to the uncertain
and ill-defined market-based injuries courts have typically
rejected as supporting a direct relationship to the RICO
violation. See, e.g., Anza, 547 U.S. at 460 (“A RICO plaintiff
cannot circumvent the proximate-cause requirement simply by
claiming that the defendant’s aim was to increase market share
at a competitor’s expense.”).
Third, since Plaintiffs request that Defendants remove
the fraudulent claim amounts, recalculate the overall pool of
claims submitted for Fiscal Years 2010-2012, and reapportion
the EE Program funding among the participating hospitals,
determining Plaintiffs’ damages should not be unduly
burdensome. See In re Avandia Mktg., 804 F.3d at 642
(quoting Holmes, 503 U.S. at 269) (discussing how damages
are often difficult to ascertain when the harms are indirect
because other, independent factors may have contributed to the
injury). At least on its face, damages appear to be no more
difficult to quantify here than in other cases that this Court has
permitted to go forward. See, e.g., id. at 644 (finding no
prohibitive difficulty in determining the overcharge amount for
medications with misrepresented risks).
Defendants are more hesitant about the math. As
indication of the confusion that lies ahead, they list the onerous
parties from seeking vindication of their rights. See Phoenix
Bond & Indem. Co. v. Bridge, 477 F.3d 928, 932 (7th Cir.
2007) (“If a government’s ability to penalize fraud knocked out
private [RICO] litigation, then § 1964 would no longer apply
when the predicate act is fraud, for governments always have
some ability to detect and penalize frauds.”), aff’d, 553 U.S.
639 (2008).
15
methodological differences between DHS’s and the Attorney
General’s calculations and worry that the calculations will be
prohibitively involved. They urge us to stop, as the District
Court did, before we are “required to adopt complicated rules
apportioning damages among Plaintiffs removed at different
levels of injury from the alleged violative acts.” St. Luke’s
Health Network, 2019 WL 4393112, at *9. But this puts the
cart before the horse. Whether methodological differences
between the Auditor General’s and DHS’s analyses of claim
submissions will even affect damages calculations is a question
of fact to be resolved at a later stage of litigation. See In re
Avandia Mktg., 804 F.3d at 644 (noting that “the issue of [how
to calculate the precise] damages, rather than demonstrating a
lack of proximate causation, raises an issue of proof . . . .”
which is “a question for another day”); see also Anza, 547 U.S.
at 466–67 (Thomas, J., dissenting) (“We did not adopt the
converse proposition that any injuries that are difficult to
ascertain must be classified as indirect for purposes of
determining proximate causation.”).
Given that Plaintiffs have adequately alleged proximate
causation, and because we find no “independent factors that
account[ed] for [the plaintiffs’] injury . . . and no more
immediate victim [was] better situated to sue,” we will reverse
the District Court. Bridge, 553 U.S. at 658.
C. Defendants’ Alternative Arguments
The bulk of Defendants’ briefing and oral presentation
is devoted to three additional arguments, which Defendants
had also raised in their motion to dismiss before the District
Court: (1) Plaintiffs’ allegations of a RICO predicate are
implausibly based on inferences from the Auditor General’s
reports; (2) Plaintiffs’ claims of fraud are not plausible because
16
the discrepancies between DHS’s and the Auditor General’s
disbursement recommendations are entirely attributable to
methodological differences; and (3) Plaintiffs lack any basis
for asserting a cognizable or plausible injury because the EE
Program funds are non-entitled funds. Since the District
Court’s decision to dismiss the civil RICO claim was based
solely on the issue of proximate causation, we will limit our
decision to reverse to that ground. We leave consideration of
alternative arguments to the District Court upon remand.
IV. CONCLUSION
Accordingly, we reverse the District Court and remand
for further proceedings consistent with this opinion.
17