USA, ex rel. v. UPMC

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 18-1693
_______________
UNITED STATES OF AMERICA, ex rel.
J. WILLIAM BOOKWALTER, III, M.D.;
ROBERT J. SCLABASSI, M.D.; ANNA MITINA
v.
UPMC; UNIVERSITY OF PITTSBURGH PHYSICIANS,
d/b/a UPP DEPARTMENT OF NEUROSURGERY
J. WILLIAM BOOKWALTER, III, M.D.;
ROBERT J. SCLABASSI, M.D.; ANNA MITINA,
Appellants
_______________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 2:12-cv-00145)
District Judge: Honorable Cathy Bissoon
_______________
Argued: January 10, 2019
Before: AMBRO, BIBAS, and FUENTES, Circuit Judges
(Filed: December 20, 2019)
_______________
Patrick K. Cavanaugh
Stephen J. Del Sole
Del Sole Cavanaugh Stroyd LLC
Three PPG Place
Suite 600
Pittsburgh, PA 15222
Gregory M. Simpson [ARGUED]
Simpson Law Firm
110 Habersham Drive
Suite 108
Fayetteville, GA 30214
Andrew M. Stone
Stone Law Firm
1806 Frick Building
437 Grant Street
Pittsburgh, PA 15219
Counsel for Appellants
Kirti Datla
Jonathan L. Diesenshaus
Jessica L. Ellsworth [ARGUED]
Mitchell J. Lazris
Sarah C. Marberg
Hogan Lovells US
555 Thirteenth Street, N.W.
Columbia Square
Washington, DC 20004
Counsel for Appellees
2
TABLE OF CONTENTS
I. Background .......................................................................... 7
A. Factual Background ........................................................ 7
1. The University of Pittsburgh medical system ............. 7
2. The neurosurgeons’ compensation structure .............. 7
3. The neurosurgeons’ alleged fraud and its effects
on salaries and revenues ............................................. 8
B. Procedural History .......................................................... 9
II. Standards of Review and Pleading ................................... 10
III. The Stark Act and the False Claims Act ......................... 11
A. The Stark Act ................................................................ 11
1. Forbidden conduct..................................................... 11
2. Exceptions ................................................................. 12
3. No built-in cause of action ........................................ 13
B. The False Claims Act.................................................... 14
IV. The Relators Plead Stark Act Violations ........................ 14
A. The surgeons referred designated health
services to the hospitals ............................................... 15
B. The relators’ complaint alleges an indirect
compensation arrangement .......................................... 16
1. An unbroken chain of entities with financial
relationships connects the surgeons with
the hospitals. ............................................................. 17
2. The surgeons’ compensation took into account
the volume and value of their referrals ..................... 17
3. The hospitals knew that the surgeons’
compensation took their referrals into account ......... 25
3
V. The Relators Plead False Claims Act Violations ............. 26
A. The pleadings satisfy all three elements of the
False Claims Act .......................................................... 27
B. The pleadings satisfy Rule 9(b) .................................... 28
C. Pleading Stark Act exceptions under the
False Claims Act .......................................................... 30
1. The burden of pleading Stark Act exceptions stays
with the defendant under the False Claims Act ........ 31
2. Even if the relators bore this pleading burden,
they have met it ......................................................... 32
VI. Conclusion....................................................................... 32
4
_______________
OPINION OF THE COURT
_______________
BIBAS, Circuit Judge.
Healthcare spending is a huge chunk of the federal budget.
Medicare and Medicaid cost roughly a trillion dollars per year.
And with trillions of dollars comes the temptation for fraud.
Fraud is a particular danger because doctors and hospitals
can make lots of money for one another. When doctors refer
patients to hospitals for services, the hospitals make money.
There is nothing inherently wrong with that. But when hospi-
tals pay their doctors based on the number or value of their re-
ferrals, the doctors have incentives to refer more. The potential
for abuse is obvious and requires scrutiny.
The Stark Act and the False Claims Act work together to
ensure this scrutiny and safeguard taxpayer funds against
abuse. The Stark Act forbids hospitals to bill Medicare for cer-
tain services when the hospital has a financial relationship with
the doctor who asked for those services, unless an exception
applies. And the False Claims Act gives the government and
relators a cause of action with which to sue those who violate
the Stark Act.
5
Here, the relators allege that the defendants have for years
been billing Medicare for services referred by their neurosur-
geons in violation of the Stark Act. The District Court found
that the relators had failed to state a plausible claim and dis-
missed their suit.
This appeal revolves around two questions: First, do the re-
lators offer enough facts to plausibly allege that the surgeons’
pay varies with, or takes into account, their referrals? Second,
who bears the burden of pleading Stark Act exceptions under
the False Claims Act?
The answer to the first question is yes. The relators’ com-
plaint alleges enough facts to make out their claim. The relators
make a plausible case that the surgeons’ pay is so high that it
must take their referrals into account. All these facts are smoke;
and where there is smoke, there might be fire.
The answer to the second question is the defendants. The
Stark Act’s exceptions work like affirmative defenses in litiga-
tion. The burden of pleading these affirmative defenses lies
with the defendant. This is true even under the False Claims
Act. And even if that burden lay with the relators, their plead-
ings meet that burden here.
We hold that the complaint states plausible violations of
both the Stark Act and the False Claims Act. So we will re-
verse.
6
I. BACKGROUND
A. Factual Background
1. The University of Pittsburgh medical system. On this
motion to dismiss, we take as true the facts alleged in the sec-
ond amended complaint: The University of Pittsburgh Medical
Center is a multi-billion-dollar nonprofit healthcare enterprise.
The Medical Center is the parent organization of a whole sys-
tem of healthcare subsidiaries, including twenty hospitals. The
Medical Center is the sole member (owner) of each hospital.
More than 2,700 doctors, including dozens of neurosur-
geons, work at these hospitals. The doctors are employed not
by the hospitals, but by other Medical Center subsidiaries.
Three of these subsidiaries matter here: University of Pitts-
burgh Physicians; UPMC Community Medicine, Inc.; and Tri-
State Neurological Associates-UPMC, Inc.
These three subsidiaries employed many of the neurosur-
geons who worked at the Medical Center’s hospitals during the
years at issue, from 2006 on. Pittsburgh Physicians’ Neurosur-
gery Department employed most of the surgeons at issue. Tri-
State employed two, and Community Medicine employed one.
The Medical Center owns all three subsidiaries. In short, the
Medical Center owns both the hospitals and the companies that
employ the surgeons who work in the hospitals.
2. The neurosurgeons’ compensation structure. The sur-
geons who worked for the three subsidiaries here all had simi-
lar employment contracts. Each surgeon had a base salary and
an annual Work-Unit quota. Work Units (or wRVUs) measure
the value of a doctor’s personal services. Every medical service
7
is worth a certain number of Work Units. The longer and more
complex the service, the more Work Units it is worth. Work
Units are one component of Relative Value Units (RVUs).
RVUs are the basic units that Medicare uses to measure how
much a medical procedure is worth.
The surgeons were rewarded or punished based on how
many Work Units they generated. If a surgeon failed to meet
his yearly quota, his employer could lower his future base sal-
ary. But if he exceeded his quota, he earned a $45 bonus for
every extra Work Unit.
3. The neurosurgeons’ alleged fraud and its effects on sal-
aries and revenues. This compensation structure gave the sur-
geons an incentive to maximize their Work Units. And the in-
centive seems to have worked. The surgeons reported doing
more, and more complex, procedures. So the number of Work
Units billed by the Neurosurgery Department more than dou-
bled between 2006 and 2009.
Much of this increase allegedly stemmed from fraud. The
relators accuse the surgeons of artificially boosting their Work
Units: The surgeons said they acted as assistants on surgeries
when they did not. They said they acted as teaching physicians
when they did not. They billed for parts of surgeries that never
happened. They did surgeries that were medically unnecessary
or needlessly complex. And they did these things, say the rela-
tors, “[w]ith the full knowledge and endorsement of” the Med-
ical Center. App. 184 ¶ 190.
Fraud can be profitable. And here it allegedly was. With
these practices, the surgeons racked up lots of Work Units and
8
made lots of money. Most reported total Work Units that put
them in the top 10% of neurosurgeons nationwide. And some
received total pay that put them among the best-paid 10% of
neurosurgeons in the country.
The surgeons’ efforts proved profitable for the Medical
Center too. The Medical Center made money off the surgeons’
work on some of the referrals. And to boot, healthcare provid-
ers bill Medicare for more than just the surgeons’ own Work
Units. Whenever a surgeon did a procedure at one of the hos-
pitals, the Medical Center also got to bill “for the attendant hos-
pital and ancillary services.” App. 166 ¶ 104. This part of the
bill could be four to ten times larger than the cost of the sur-
geon’s own services. So when the surgeons billed more, the
Medical Center made more. “Indeed, in 2009,” the Neurosur-
gery Department “was the single highest grossing neurosurgi-
cal department in the United States, with Medicare charges
alone of $58.6 million.” App. 163–64 ¶ 91.
B. Procedural History
The relators first filed suit in 2012. They alleged that the
Medical Center, Pittsburgh Physicians, and a bevy of neurosur-
geons had submitted false claims for physician services and for
hospital services to Medicare and Medicaid. Four years later,
the United States intervened as to the claims for physician ser-
vices. The government settled those claims for about $2.5 mil-
lion. It declined to intervene as to the claims for hospital ser-
vices, but it let the relators maintain that part of the action in
its stead.
9
After the government intervened, the District Court dis-
missed the first amended complaint without prejudice for fail-
ure to state a claim. The relators then filed their current com-
plaint, asserting three causes of action against the Medical
Center and Pittsburgh Physicians under the False Claims Act:
(1) one count of submitting false claims,
(2) one count of knowingly making false records or state-
ments, and
(3) one count of knowingly making false records or state-
ments material to an obligation to pay money to the
United States.
The District Court again dismissed for failure to state a claim,
this time with prejudice. The relators now appeal.
II. STANDARDS OF REVIEW AND PLEADING
We review a district court’s dismissal for failure to state a
claim de novo. Vorchheimer v. Philadelphian Owners Ass’n,
903 F.3d 100, 105 (3d Cir. 2018). Our job is to gauge whether
the complaint states a plausible claim to relief. Ashcroft v. Iq-
bal, 556 U.S. 662, 678 (2009). Plausible does not mean possi-
ble. If the allegations are “merely consistent with” misconduct,
then they state no claim. Bell Atl. Corp. v. Twombly, 550 U.S.
544, 557 (2007). There must be something in the complaint to
suggest that the defendant’s alleged conduct is illegal. Id. at
557.
But plausible does not mean probable either. Our job is not
to dismiss claims that we think will fail in the end. See id. at
10
556. Instead, we ask only if we have “enough fact[s] to raise a
reasonable expectation that discovery will reveal evidence of”
each element. Id.
This is the baseline pleading standard for all civil actions.
Fed. R. Civ. P. 8; Iqbal, 556 U.S. at 684. But the relators allege
claims for fraud. So they must also meet Rule 9(b)’s
heightened pleading requirement. United States ex rel. Moore
& Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294,
306–07 (3d Cir. 2016). That rule says that a party alleging
fraud “must state with particularity the circumstances consti-
tuting fraud.” Fed. R. Civ. P. 9(b).
III. THE STARK ACT AND THE FALSE CLAIMS ACT
A. The Stark Act
The Stark Act and its regulations broadly bar Medicare
claims for many services referred by doctors who have a finan-
cial interest in the healthcare provider. But the statute creates
dozens of exceptions and authorizes the Department of Health
and Human Services to make even more exceptions for finan-
cial relationships that “do[ ] not pose a risk of program or pa-
tient abuse.” 42 U.S.C. § 1395nn(b)(4).
1. Forbidden conduct. The Stark Act opens with a broad
ban. It forbids submitting Medicare claims for “designated
health services” provided under a “referral” made by a doctor
with whom the entity has a “financial relationship.” Id.
§ 1395nn(a)(1). Understanding this ban requires exploring
these three quoted terms, each of which has statutory and reg-
ulatory definitions.
11
The Stark Act lists several categories of designated health
services, including inpatient hospital services. Id.
§ 1395nn(h)(6)(K). And inpatient hospital services include bed
and board, interns’ and residents’ services, nursing, drugs, sup-
plies, transportation, and overhead. 42 C.F.R. §§ 409.10(a),
411.351.
A referral is a doctor’s request for a designated health ser-
vice. 42 U.S.C. § 1395nn(h)(5)(A); 42 C.F.R. § 411.351. That
definition is broad, but it has an important exception: services
that a doctor performs personally do not count. 42 C.F.R.
§ 411.351. That makes sense; ordinarily, one cannot refer
something to oneself. And the exception’s boundaries also fol-
low: it does not cover services by a doctor’s associates or em-
ployees, or services incidental to the doctor’s own services. Id.;
Medicare Program; Physicians’ Referrals to Health Care En-
tities with Which They Have Financial Relationships (Phase
II); Interim Final Rule, 69 Fed. Reg. 16054, 16063 (Mar. 26,
2004).
Finally, financial relationships come in two forms:
(1) ownership or investment interests and (2) compensation ar-
rangements. 42 U.S.C. § 1395nn(a)(2). This case turns on the
latter. The statute defines compensation arrangement to mean
“any arrangement involving any remuneration between” a doc-
tor and a healthcare provider. Id. § 1395nn(h)(1)(A). And re-
muneration “includes any remuneration, directly or indirectly,
in cash or in kind.” Id. § 1395nn(h)(1)(B).
2. Exceptions. On its face, the Stark Act’s ban sweeps in
lots of common situations. To separate the wheat from the in-
nocuous chaff, Congress and the Department of Health and
12
Human Services have created many exceptions. Here, the
Medical Center argues that exceptions for four types of com-
pensation arrangements could apply here: bona fide employ-
ment; personal services; fair-market-value compensation; and
indirect compensation. See id. § 1395nn(e)(2), (e)(3); 42 C.F.R.
§ 411.357(l), (p).
All four exceptions have two elements in common. First,
the doctor’s compensation must not “take[ ] into account (di-
rectly or indirectly) the volume or value of” the doctor’s
referrals. 42 U.S.C. § 1395nn(e)(2)(B)(ii); accord id.
§ 1395nn(e)(3)(A)(v); 42 C.F.R. § 411.357(l)(3), (p)(1)(i). Sec-
ond, the doctor’s compensation must not exceed fair market
value. 42 U.S.C. § 1395nn(e)(2)(B)(i), (e)(3)(A)(v); 42 C.F.R.
§ 411.357(l)(3), (p)(1)(i).
In litigation, these exceptions are affirmative defenses. So
once a plaintiff proves a prima facie violation of the Stark Act,
the burden shifts to the defendant to prove that an exception
applies. United States ex rel. Kosenske v. Carlisle HMA, Inc.,
554 F.3d 88, 95 (3d Cir. 2009).
3. No built-in cause of action. The Stark Act forbids the
government to pay claims that violate the Act. 42 U.S.C.
§ 1395nn(g)(1). It demands restitution from those who receive
payments on illegal claims. Id. § 1395nn(g)(2). And it creates
civil penalties for submitting improper claims or taking part in
schemes to violate the Act. Id. § 1395nn(g)(3), (4). But it gives
no one a right to sue. United States ex rel. Drakeford v.
Tuomey, 792 F.3d 364, 374 n.4 (4th Cir. 2015).
13
So the Stark Act never appears in court alone. Instead, it
always come in through another statute that creates a cause of
action—typically, the False Claims Act.
B. The False Claims Act
Under the False Claims Act, any person who “knowingly
presents, or causes to be presented, a false or fraudulent claim
for payment or approval” is civilly liable to the United States.
31 U.S.C. § 3729(a)(1)(A). A Medicare claim that violates the
Stark Act is a false claim under the False Claims Act.
Kosenske, 554 F.3d at 94. The False Claims Act also makes
liable anyone who “knowingly makes, uses, or causes to be
made or used, a false record or statement material to” a false or
fraudulent claim. 31 U.S.C. § 3729(a)(1)(B), (G).
IV. THE RELATORS PLEAD STARK ACT VIOLATIONS
A prima facie Stark Act violation has three elements: (1) a
referral for designated health services, (2) a compensation ar-
rangement (or an ownership or investment interest), and (3) a
Medicare claim for the referred services. See United States ex
rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 241 (3d Cir. 2004).
This combination of factors suggests potential abuse of Medi-
care. When they are all present, we let plaintiffs go to discov-
ery.
Here, no one denies that the defendants made Medicare
claims for designated health services. The issue is whether the
complaint sufficiently alleges referrals and a compensation ar-
rangement. We hold that it does. The alleged Medicare abuse
is plausible and deserves more scrutiny.
14
A. The surgeons referred designated health services to
the hospitals
The relators allege that “[e]very time [the neurosurgeons]
performed a surgery or other procedure at the UPMC Hospi-
tals, [they] made a referral for the associated hospital claims.”
App. 193 ¶ 234. They are right that these claims are referrals.
As mentioned, the law defines referrals broadly. A referral
is a doctor’s request for any designated health service that is
covered by Medicare and provided by someone else. 42 C.F.R.
§ 411.351. Designated health services include bed and board,
some hospital overhead, nursing services, and much more. 42
C.F.R. § 409.10(a). And the relators plead that as the surgeons
performed more procedures, those procedures required (and
the hospital provided and “increased billings for[)] the at-
tendant hospital and ancillary services including . . . hospital
and nursing charges.” App. 166 ¶ 104 (emphasis added). So
the plaintiffs plead that the surgeons referred designated health
services to the hospitals.
Treating these services as referrals makes sense. The Stark
Act’s first step is to flag all potentially abusive arrangements.
And doctors who generate profits for a hospital may be
tempted to abuse their power, raising hospital bills as well as
their own pay. These financial arrangements thus deserve a
closer look. And they will get a closer look only if we call these
arrangements what they are: doctors referring services to hos-
pitals.
The Department of Health and Human Services agrees. In
Phase I of its Stark Act rulemaking, it considered this point. It
15
determined that “any hospital service, technical component, or
facility fee billed by [a] hospital in connection with [a doctor’s]
personally performed service” counts as a referral. Medicare
and Medicaid Programs; Physicians’ Referrals to Health Care
Entities with Which They Have Financial Relationships, 66
Fed. Reg. 856, 941 (Jan. 4, 2001). This is true even “in the case
of an inpatient surgery” where the doctor performs the surgery.
Id.
Then, in Phase II of its rulemaking, the agency revisited the
question and considered narrower definitions. For instance,
many commenters suggested excluding “services that are
performed ‘incident to’ a physician’s personally performed
services or that are performed by a physician’s employee” from
the definition of a referral. 69 Fed. Reg. at 16063.
But the agency reasonably rejected these suggestions. A
narrower view, it reasoned, would all but swallow at least one
statutory exception. Id. And it explained that the availability of
that and other exceptions did enough to protect innocent con-
duct. Id. “[T]his interpretation is consistent with the statute as
a whole,” which begins by casting a broad net to scrutinize all
potential abuse. Id.
B. The relators’ complaint alleges an indirect compen-
sation arrangement
A referral is ripe for abuse only when the doctor who made
it has a financial relationship with the provider. Only then can
a doctor profit from his own referral. The financial relationship
here is a compensation arrangement.
16
Compensation arrangements can be either direct or indirect.
42 C.F.R. § 411.354(c). The hospitals did not pay the surgeons
directly. So if there is any compensation arrangement here, it
is indirect. That requires three elements: First, there must be
“an unbroken chain . . . of persons or entities that have financial
relationships” connecting the referring doctor with the provider
of the referred services. Id. § 411.354(c)(2)(i). Second, the re-
ferring doctor must get “aggregate compensation . . . that varies
with, or takes into account, the volume or value of referrals.”
Id. § 411.354(c)(2)(ii). And third, the service provider must
know, recklessly disregard, or deliberately ignore that the doc-
tor’s compensation “varies with, or takes into account, the vol-
ume or value of referrals.” Id. § 411.354(c)(2)(iii). (The parties
do not challenge any of the regulations at issue, so we likewise
assume that they are valid.) The complaint plausibly pleads
enough facts to satisfy each element.
1. An unbroken chain of entities with financial relation-
ships connects the surgeons with the hospitals. An unbroken
chain of financial relationships links the surgeons to the hospi-
tals. First, the Medical Center owns each hospital. Second, the
Medical Center also owns three entities: Pittsburgh Physicians,
Community Medicine, and Tri-State. Third, each of these three
entities employs and pays at least one of the surgeons. That
adds up to an unbroken chain of financial relationships. Neither
party disputes this.
2. The surgeons’ suspiciously high compensation suggests
that it took into account the volume and value of their referrals.
Next, the relators allege that the surgeons’ aggregate compen-
sation varied with, and took into account, their referrals.
17
The parties disagree about what it means for compensation
to vary with referrals. Appellants argue that varies with re-
quires only correlation. And compensation correlates with re-
ferrals here, they argue, because surgeons racked up more
Work Units and earned more money by generating more refer-
rals. So the surgeons’ aggregate compensation allegedly varied
with their referrals. Appellees, by contrast, deny that a correla-
tion suffices. Rather, they insist that the law requires some
form of causation.
We need not resolve the meaning of varies with here. Re-
gardless, the complaint plausibly alleges that the surgeons’
compensation takes into account the volume or value of their
referrals. Under the Stark Act and its regulations, compensa-
tion takes into account referrals if there is a causal relationship
between the two. And here, the surgeons’ suspiciously high
compensation suggests causation.
Compensation for personal services above the fair market
value of those services can suggest that the compensation is
really for referrals. This is just common sense. Healthcare pro-
viders would not want to lose money by paying doctors more
than they bring in. They would do so only if they expected to
make up the difference another way. And that way could be
through the doctors’ referrals.
This may not be obvious on the face of the statute and reg-
ulations. The Stark Act often treats fair market value as a con-
cept distinct from taking into account the volume or value of
referrals. For example, these two concepts are separate ele-
ments of many Stark Act exceptions. E.g., 42 U.S.C.
18
§ 1395nn(e)(2) (bona fide employment), (e)(3) (personal ser-
vice); 42 C.F.R. § 411.357(l) (fair-market-value compensa-
tion), (p) (indirect compensation). And the definition of an in-
direct compensation arrangement includes taking referrals into
account, but not fair market value. 42 C.F.R.
§ 411.354(c)(2)(ii).
But the Act’s different treatment of these concepts does not
sever them. To start, just because a statute has two elements
does not mean that one can never be evidence of the other.
Theft requires taking another’s property with intent. Those are
two elements, but the fact of taking property can be circum-
stantial evidence of intent.
So too here. Perhaps not all payments above fair market
value are evidence of taking into account the doctor’s referrals.
But common sense says that marked overpayments are a red
flag. Anyone would wonder why the hospital would pay so
much if it was not taking into account the doctor’s referrals for
other services. And we do no violence to the statutory text by
seeking an answer to that question.
The agency confronted this question directly. It remarked
that even “fixed aggregate compensation can form the basis for
a prohibited . . . indirect compensation arrangement” if it “is in-
flated to reflect the volume or value of a physician’s referrals.”
69 Fed. Reg. at 16059 (emphasis added). The same is true of
“unit-of-service-based compensation arrangements,” like the
one here. Id. Excessive compensation is thus a sign that a sur-
geon’s pay in fact takes referrals into account.
19
So aggregate compensation that far exceeds fair market
value is smoke. It suggests that the compensation takes refer-
rals into account. And the relators here plead five facts that,
viewed together, make plausible claims that the surgeons’ pay
far exceeded their fair market value. First, some surgeons’ pay
exceeded their collections. Second, many surgeons’ pay ex-
ceeded the 90th percentile of neurosurgeons nationwide. Third,
many generated Work Units far above industry norms. Fourth,
the surgeons’ bonus per Work Unit exceeded what the defend-
ants collected on most of those Work Units. And finally, the
government alleged in its settlement agreement that the Medi-
cal Center had fraudulently inflated the surgeons’ Work Units.
That much smoke makes fire plausible.
a. Pay exceeding collections. Paying a worker more than
he brings in is suspicious. And the complaint alleges that at
least three surgeons (Drs. Bejjani, Spiro, and El-Kadi) were
paid more than the Medical Center collected for their services.
The complaint also alleges that the Medical Center credits sur-
geons with 100 percent of the Work Units that they generate,
even if it cannot collect on all of them. So at least three sur-
geons (maybe more) were paid more than they bring in.
b. Pay exceeding the 90th percentile. The relators allege
that “[c]ompensation exceeding the 90th percentile is widely
viewed in the industry as a ‘red flag’ indicating that it is in
excess of fair market value.” App. 191 ¶ 223. The defendants
do not deny this.
Several surgeons were paid more than the 90th percentile.
For example, the relators point to the compensation of Drs.
Abla, Spiro, Kassam, and Bejjani between 2008 and 2011.
20
Apart from Dr. Spiro in 2008, each of these surgeons was paid
more than even the highest estimate of the 90th percentile for
all U.S. neurosurgeons in all four years. And depending on
which estimate of the 90th percentile you use, they were some-
times paid two or three times more than the 90th percentile. Dr.
Bejjani’s 2011 bonus alone exceeded the 90th percentile of to-
tal compensation in some surveys.
c. Extreme Work Units. The relators also allege facts from
which we can reasonably infer that the surgeons generated far
more Work Units than normal. Many neurosurgeons “were
routinely generating [Work Units] exceeding by an enormous
margin the 90th percentile as reflected in widely-accepted mar-
ket surveys.” App. 171 ¶ 126. Even if we look only at the high-
est industry estimates, all but one of the surgeons reported
Work Units above the 90th percentile in 2006 and 2007. In
2008 and 2009, eight of the twelve named surgeons exceeded
the highest estimate of the 90th percentile. A few even seemed
“super human,” racking up two to three times the 90th percen-
tile. App. 169 ¶ 117.
In short, most of the surgeons generated Work Units at or
above the 90th percentile. Some of their numbers were unbe-
lievably high. And because their pay depends in large part on
their Work Units, it is fair to infer that most of their pay was
also at or above the 90th percentile.
d. Bonuses exceeding the Medicare reimbursement rate.
Once a surgeon had enough Work Units to earn bonus pay, the
bonus per Work Unit was more than Medicare would pay for
each one. The surgeons’ bonus per Work Unit was $45. But the
21
Medicare reimbursement rate was only about $35. So once sur-
geons became eligible for bonuses, the defendants took an im-
mediate loss on every Work Unit submitted to Medicare.
On its own, this would not show that the surgeons were
overpaid. Medicare and Medicaid are well known as bottom-
billers. They pay less than private insurers. Though the defend-
ants lost some money on Medicare Work Units, perhaps they
made it back with Work Units billed to other insurers.
But the relators also allege that “the majority of all claims
submitted by the [defendants] . . . were submitted to federal
health insurance programs such as Medicare and Medicaid.”
App. 193 ¶ 233. We cannot assume that private payments suf-
fice to make up the difference. Doing so would disregard our
job at this stage: to draw reasonable inferences in favor of the
plaintiffs.
In short, the defendants took an immediate financial hit on
Work Units for a majority of their claims. This is yet another
sign that the surgeons’ pay took referrals into account.
The defendants disagree. They argue that the surgeons earn
high salaries because of bona fide bargaining with their em-
ployers. Their salaries supposedly represent the market’s de-
mand for their surgical skill and experience.
This argument fails for two reasons. First, the complaint
says nothing about the surgeons’ skill and experience or the
Pittsburgh market for surgeons. On this motion to dismiss, we
cannot go beyond the well-pleaded facts in the complaint.
22
Second, a bare claim of bona fide bargaining is not enough.
The Stark Act recognizes that related parties often negotiate
agreements “to disguise the payment of non-fair-market-value
compensation.” Kosenske, 554 F.3d at 97. We trust that bona
fide bargaining leads to fair market value only when neither
party is “in a position to generate business for the other.” Id.;
42 C.F.R. § 411.351 (defining “fair market value” and “general
market value”). But that is not true here. The surgeons and the
Medical Center can generate business for each other. So we
cannot assume that any bargaining was bona fide or that the
resulting pay was at fair market value.
e. The possibility of fraud. Finally, the surgeons’ high pay
may have been based on fudging the numbers. Not only were
their individual Work Units “significantly out of line with in-
dustry benchmarks,” but the Neurosurgery Department as a
whole realized astounding “annual growth rates of work
[Units] . . . of 20.3%, 57.1% and 20.0%” in 2007, 2008, and
2009. App. 171 ¶¶ 127–28. Two of the surgeons more than dou-
bled their output in just a few years. The relators allege that the
defendants got this growth by “artificially inflat[ing] the num-
ber of [Work Units] in a number of ways.” App. 171 ¶ 130.
Alleging this fraud, the relators’ first complaint included
claims “relating to physician services submitted by” the de-
fendants along with the “hospital claims” currently before us.
App. 189 ¶ 217 (emphases in original) The government chose
to intervene as to the former claims, settling them with the de-
fendants for almost $2.5 million.
The relators’ current complaint quotes that settlement
agreement. In it, the government accused the surgeons of many
23
fraudulent practices: They claimed to have acted as assistants
when they did not. They claimed to have done more extensive
surgeries than they did. And they chose the wrong codes for
surgeries. So “claims submitted for these physician services re-
sulted in more reimbursement than would have been paid” oth-
erwise. App. 188–89 ¶ 216.
We are careful not to overstate the point. This settlement is
not an admission of guilt. It proves no wrongdoing. But at the
12(b)(6) stage, we are looking only for plausible claims, not
proof of wrongs. And the government’s choice to intervene af-
ter years of investigation and its allegations in the settlement
are cause for suspicion.
The question is not whether a doctor was able to use an
otherwise-valid compensation scheme as a vehicle for fraudu-
lent billing. Not every fraudulent Medicare bill made at a hos-
pital will give rise to a Stark Act violation. Here, however,
where the compensation scheme produced results bordering on
the absurd, relators plausibly assert that the system may have
been designed with that outcome in mind.
The relators allege five sets of facts that suggest that the
surgeons’ pay far exceeded fair market value: pay exceeding
collections, pay above the 90th percentile, extreme Work
Units, bonuses above the Medicare reimbursement rate, and
the settlement. That is plenty of smoke. We need not decide
whether any of these allegations alone would satisfy the rela-
tors’ pleading burden. Together, they plausibly suggest that the
surgeons’ pay took their referrals into account. Thus, the rela-
tors have pleaded more than enough facts to suggest an indirect
compensation arrangement.
24
3. The hospitals knew that the surgeons’ compensation
took their referrals into account. The final element of an
indirect compensation arrangement is scienter. To show
scienter, the relators’ pleadings must allege that the hospitals
that provided the referred services either (1) knew, (2) deliber-
ately ignored, or (3) recklessly disregarded that the surgeons
got “aggregate compensation that varie[d] with, or t[ook] into
account, the volume or value of referrals.” 42 C.F.R.
§ 411.354(c)(2)(iii). They allege this too.
To begin, the Medical Center controls all the hospitals and
the surgeons’ direct employers. It owns each hospital. And it
owns Pittsburgh Physicians, Community Medicine, and Tri-
State. So the Medical Center “has unfettered authority with
respect to most members of the [medical system] and signifi-
cant authority (including with respect to financial and tax mat-
ters) with respect to the remaining members.” App. 146–47
¶ 19 (quoting a Medical Center tax filing).
Further, many officers and board members of these entities
overlapped. For example, one person simultaneously served as
an executive vice president of the Medical Center as well as
the president and a board member of Pittsburgh Physicians.
And he signed surgeons’ pay agreements for Pittsburgh Physi-
cians. The relators identify nine others who served on the board
of both the Medical Center and another entity in the medical
system. Authority was so centralized that a single person
signed a settlement agreement on behalf of all the defendants
that were part of the medical system. And with common con-
trol comes common knowledge.
25
The common knowledge included both the surgeons’ pay
and their referrals. The Medical Center took part in forming,
approving, and implementing the surgeons’ pay packages. So
it knew their structure. The Medical Center also had a central
coding and billing department that handled billing for its sub-
sidiaries. So it knew about the surgeons’ referrals.
With both sets of data in front of it, we can plausibly infer
that the Medical Center knew the surgeons’ compensation took
their referrals into account. And as the Medical Center knew
that, so did the hospitals. They had all the data right in front of
them. They knew that the surgeons’ pay and Work Units were
out of line with industry survey data. Even if they did not
actually know that the surgeons’ pay and work levels were sus-
piciously high, they at least deliberately ignored or recklessly
disregarded that fact. Thus, the complaint alleges that both the
Medical Center and hospitals had scienter.
* * * * *
This means that the relators have successfully pleaded the
third and final element of a Stark Act violation: scienter. But
they must plead one more thing to survive a motion to dismiss.
We must now consider whether the relators have pleaded a
plausible prima facie case under the False Claims Act.
V. THE RELATORS PLEAD FALSE CLAIMS ACT
VIOLATIONS
The relators plead their Stark Act claims as violations of the
False Claims Act. So their pleadings must satisfy all the ele-
ments of the False Claims Act. They do. And they satisfy Rule
9(b)’s heightened pleading standard. Last, we hold that the
26
Stark Act’s exceptions are not additional elements of a prima
facie case. But even if they were, the relators have plausibly
pleaded that no exception applies here.
A. The pleadings satisfy all three elements of the False
Claims Act
To make out a prima facie case, the relators must plead
three elements: “ ‘(1) the defendant presented or caused to be
presented to an agent of the United States a claim for payment;
(2) the claim was false or fraudulent; and (3) the defendant
knew the claim was false or fraudulent.’ ” Schmidt, 386 F.3d at
242 (quoting Hutchins v. Wilentz, Goldman & Spitzer, 253
F.3d 176, 182 (3d Cir. 2001)). They have alleged enough facts
to plead all three elements.
First, by submitting claims to Medicare and other federal
health programs, the defendants presented claims for payment
to the government.
Second, the relators allege that these claims were false. A
Medicare claim that violates the Stark Act is a false claim.
Kosenske, 554 F.3d at 94. And we have already explained at
length why the Medicare claims here plausibly violated the
Stark Act.
Third, the relators’ allegations plead scienter. Just like the
Stark Act, the False Claims Act requires that the defendants
know, deliberately ignore, or recklessly disregard the falsity of
their claim. 31 U.S.C. § 3729(b)(1)(A). But it does not require
a specific intent to defraud. Id. § 3729(b)(1)(B).
27
The claims are false because they allegedly violated the
Stark Act. The question is whether the defendants at least reck-
lessly disregarded that possibility. The defendants had a cen-
tralized billing department and were familiar with the Stark Act
itself, so they knew that they submitted Medicare claims for
referred designated health services. That leaves only whether
the defendants knew that the hospitals and surgeons had an in-
direct compensation agreement.
The complaint alleges that the defendants at least recklessly
disregarded that possibility. They knew their own corporate
structure. We have already explained how they knew or reck-
lessly disregarded that the surgeons’ pay varied with their re-
ferrals. And we have also explained how they knew or reck-
lessly disregarded that their surgeons’ pay far exceeded fair
market value and thus plausibly took referrals into account. So
the relators have pleaded a prima facie claim under the False
Claims Act.
B. The pleadings satisfy Rule 9(b)
The relators’ complaint also satisfies Rule 9(b)’s particu-
larity requirement. To do so, the allegations must go well be-
yond Rule 8’s threshold of plausibility. A mere plausible infer-
ence of illegality is not enough. Instead, “a relator must ‘estab-
lish a “strong inference” that the false claims were submitted.’ ”
United States ex rel. Silver v. Omnicare, Inc., 903 F.3d 78, 92
(3d Cir. 2018) (quoting Foglia v. Renal Ventures Mgmt., 754
F.3d 153, 158 (3d Cir. 2014)).
28
Rule 9(b)’s particularity requirement requires a plaintiff to
allege “ ‘all of the essential factual background that would ac-
company the first paragraph of any newspaper story—that is,
the who, what, when, where, and how of the events at issue.’ ”
Majestic Blue Fisheries, 812 F.3d at 307 (quoting In re Rock-
efeller Ctr. Props., Inc. Secs. Litig., 311 F.3d 198, 217 (3d Cir.
2002)). The complaint gives us all these necessary details:
• Who? The defendants: the Medical Center and Pitts-
burgh Physicians.
• What? The defendants submitted or caused to be
submitted false Medicare claims.
• When? From 2006 until now.
• Where? The Medicare claims were submitted from
the Medical Center’s centralized billing facility,
while the referred services were provided at the
Medical Center’s twenty hospitals.
• How? When the Medical Center submitted a claim,
it certified compliance with the Stark Act. The com-
plaint makes all the allegations discussed above. We
will not repeat them. But they detail exactly how
these claims violated the Stark Act.
Rule 9(b) does not require the relators to plead anything
more, such as the date, time, place, or content of every single
allegedly false Medicare claim. The falsity here comes not
from a particular misrepresentation, but from a set of circum-
stances that, if true, makes a whole set of claims at least prima
29
facie false. It is enough to allege those circumstances with par-
ticularity. Doing so “inject[s] precision or some measure of
substantiation into [the] fraud allegation” and “place[s] the de-
fendant on notice of the precise misconduct with which [it is]
charged.” Alpizar-Fallas v. Favero, 908 F.3d 910, 919 (3d Cir.
2018) (quoting Frederico v. Home Depot, 507 F.3d 188, 200
(3d Cir. 2007)) (last alteration in original; internal quotation
marks omitted).
And the relators have done so. The second amended com-
plaint runs 57 pages (plus exhibits) and comprises 257 num-
bered paragraphs. Dozens of these paragraphs go into great de-
tail about specific physicians’ Work Units and pay levels. The
complaint compares those figures at length with industry
benchmarks, medians, and 90th percentiles. It alleges specific
ways that surgeons padded their bills, by for instance falsely
reporting unperformed work assisting other surgeons or phys-
ically supervising residents and interns. The complaint also
quotes the government’s settlement agreement, alleging spe-
cific ways that surgeons had been padding their bills. The sum
total of these allegations tells a detailed story about how the
defendants designed a system to reward surgeons for creating
and submitting false claims. See Omnicare, 903 F.3d at 91–92
(quoting Foglia, 754 F.3d at 158). And that is particular
enough to satisfy Rule 9(b).
C. Pleading Stark Act exceptions under the False
Claims Act
One final issue is how the Stark Act interacts with the False
Claims Act. The defendants argue that the False Claims Act’s
30
elements of falsity and knowledge turn the Stark Act’s excep-
tions into prima facie elements of the False Claims Act. On
their reading, the relators would have to plead that no exception
applies here.
We reject that argument. The defendants retain the burden
of pleading Stark Act exceptions even under the False Claims
Act. And even if the relators bore that burden, they have met it
here.
1. The burden of pleading Stark Act exceptions stays with
the defendant under the False Claims Act. The defendants ar-
gue that the False Claims Act’s knowledge and falsity elements
turn the Start Act’s exceptions into prima facie elements. Their
logic is simple and cogent: The False Claims Act penalizes
only false claims. 31 U.S.C. § 3729(a)(1). False claims include
claims submitted in violation of the Stark Act. See Kosenske,
554 F.3d at 94. But if an exception to the Stark Act applies,
then the claim is not false. And if the defendant thinks that an
exception applies, then the defendant does not know that the
claim is false. So, according to the defendants, to plead a False
Claims Act claim based on Stark Act violations, a relator must
plead that no Stark Act exception applies and that the defend-
ant knows that none applies. Otherwise, the relator pleads nei-
ther falsity nor knowledge.
Though this argument has force, we reject it. Our precedent
compels this result. Like this case, Kosenske was a False
Claims Act case based on Stark Act violations. Id. It placed the
burden of proving a Stark Act exception on the defendant. Id.
at 95; accord Tuomey, 792 F.3d at 374. And we see no reason
to split up the burdens of pleading and persuasion. It is thus the
31
defendants’ burden to plead a Stark Act exception, not the re-
lators’ burden to plead that none exists.
2. Even if the relators bore this pleading burden, they have
met it. In any event, the relators here plausibly plead that no
Stark Act exception applies. The parties identify four that
could apply here: exceptions for bona fide employment, per-
sonal services, fair-market-value pay, and indirect compensa-
tion. All four exceptions require that the surgeons’ compensa-
tion not exceed fair market value and not take into account the
volume or value of referrals.
We have already explained how the relators plausibly plead
that the surgeons were paid more than fair market value. And
that itself suggests that their pay may take into account their
referrals’ volume or value. So the relators plausibly plead that
no Stark Act exception applies.
VI. CONCLUSION
Evaluating a motion to dismiss is “a context-specific task
that requires the reviewing court to draw on its judicial experi-
ence and common sense.” Iqbal, 556 U.S. at 679. Our experi-
ence and common sense tell us that the relators state a plausible
claim that the Medical Center and Pittsburgh Physicians have
violated the Stark Act and the False Claims Act.
The facts they plead, if true, satisfy every element of those
statutes: A chain of financial relationships linked the hospitals
to the surgeons. The surgeons referred many designated health
services to the hospitals, generating ancillary hospital services
and facility fees. It is plausible that their pay takes into account
the volume of those referrals. The hospitals made Medicare
32
claims for those referrals. And the defendants allegedly knew
all this.
With all this smoke, a fire is plausible. So this case deserves
to go to discovery. Once the discovery is in, it may turn out that
there is no fire. We do not prejudge the merits. But this is ex-
actly the kind of situation on which the Stark and False Claims
Acts seek to shed light. We will thus reverse the District
Court’s dismissal and remand for further proceedings.
33