United States ex rel. Williams v. Renal Care Grp., Inc.

• Decision Date: 05 October 2012
• Docket Number: No. 11–5779.,11–5779.
• Parties: UNITED STATES of America, ex rel. Julie WILLIAMS, Plaintiffs–Appellees, John Martinez, M.D., Plaintiff, v. RENAL CARE GROUP, INC.; Renal Care Group Supply Company; Fresenius Medical Care Holdings, Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

696 F.3d 518

UNITED STATES of America, ex rel. Julie WILLIAMS, Plaintiffs–Appellees,

John Martinez, M.D., Plaintiff,

v.RENAL CARE GROUP, INC.; Renal Care Group Supply Company; Fresenius Medical Care Holdings, Inc., Defendants–Appellants.

No. 11–5779.

United States Court of Appeals,Sixth Circuit.

Argued: July 25, 2012.

Decided and Filed: Oct. 5, 2012.

ARGUED:James F. Bennett, Dowd Bennett, LLP, St. Louis, Missouri, for Appellants. Michael P. Abate, United States Department of Justice, Washington, D.C., for Appellees. ON BRIEF:James F. Bennett, Megan S. Heinsz, Dowd Bennett, LLP, St. Louis, Missouri, Michael L. Dagley, Matthew M. Curley, Bass Berry & Sims, Nashville, Tennessee, for Appellants. Michael P. Abate, Michael S. Raab, United States Department of Justice, Washington, D.C., for Appellees.

Before: COLE and COOK, Circuit Judges; ROSEN, Chief District Judge. ^*

COLE, J., delivered the opinion of the court in which, COOK, J., and ROSEN, C. D.J., joined. ROSEN, C. D.J. (pp. 533–35), delivered a separate concurring opinion.

OPINION

COLE, Circuit Judge.

Renal Care Group, Inc., a dialysis provider, created a wholly-owned subsidiary to take advantage of loopholes in the Medicareregulatory scheme that would permit it to increase profits. The United States, by and through its relators, brought suit against Renal Care Group, its subsidiary, and its successor, alleging that such actions constituted a number of False Claims Act violations. The district court granted summary judgment in favor of the United States as to the main claim, Count One—the only claim upon which damages were sought—and then proceeded to enter summary judgment as to the ancillary claims as well, though without explanation. For the reasons set forth below, we REVERSE the district court's judgments as to Counts One and Two, and GRANT summary judgment on those counts in favor of the defendants. Further, we REVERSE the district court's judgments as to all remaining counts and REMAND for proceedings consistent with this opinion, but DENY the defendants' motion for reassignment of this case to another district judge.

I. BACKGROUND

A. Factual Background

Renal Care Group, Inc. (RCG) was, for all times relevant to the instant case, the parent company of Renal Care Group Supply Company (RCGSC). Fresenius Medical Care Holdings, Inc., (Fresenius) is the successor-in-interest to both RCG and RCGSC. RCG provided dialysis to patients with end-stage renal disease (ESRD) at more than 260 RCG dialysis facilities, in addition to providing dialysis supplies and services to home dialysis patients. RCGSC, meanwhile, supplied only dialysis equipment to home dialysis patients. Both entities submitted claims for payment for these services to Medicare.

1. End-stage renal disease and Medicare

ESRD occurs when the kidneys are no longer able to function at a level needed for daily life because they are unable to remove waste and excess water from the body. Persons suffering from ESRD must undergo some form of kidney disease treatment, which may include either hemodialysis or peritoneal dialysis. Patients undergoing hemodialysis use a machine that removes blood from the body, runs it through a filter, and then returns the blood to the body. In peritoneal dialysis, a dialysis solution travels through a catheter into a patient's abdomen and draws wastes, chemicals, and extra water from blood vessels in the peritoneal membrane. The solution is then removed, and the process repeated. There are two types of peritoneal dialysis: continuous ambulatory peritoneal dialysis (CAPD), which requires no machine, and continuous cycler-assisted peritoneal dialysis (CCPD), in which a machine called a “cycler” fills and empties the abdomen while the patient sleeps.

In 1972, Congress expanded Medicare to provide insurance coverage for patients suffering from ESRD, regardless of their age. Pub. L. No. 92–603, § 2991, 86 Stat. 1329, 1463–64 (1972). In 1978, citing a need to lower costs, Congress amended the program to permit Medicare to reimburse dialysis facilities for the cost of home dialysis equipment. Pub. L. No. 95–292, § 2, 92 Stat. 307, 308 (1978). Initially, all services, including home dialysis, were reimbursed at a uniform composite weighted payment. Pub. L. No. 97–35, § 2145(a), 95 Stat. 357, 799–800 (1981). This reimbursement rate is known as “Method I” reimbursement.

The uniform Method I reimbursement rate did not apply to independent companies that provided only equipment and supplies (but not services) directly to home dialysis patients. Those companies were reimbursed under a “Method II” protocol, whereby payment is made on a “fee-for-service basis, which is the reasonable charge method used for [Medicare] Part B services.” 57 Fed. Reg. 54,179 (Nov. 17, 1992). Method II reimbursements eventually became more expensive than Method I reimbursements. SeeH.R. Conf. Rep. No. 101–386, reprinted in 1989 U.S.C.C.A.N. 3018, 3429. Congress eventually capped Method II payments at the Method I rate, except for payments for supplies for CCPD treatments, which were capped at 130% of the Method I rate. 42 U.S.C. § 1395rr(b)(7).

Congress further restricted Method II reimbursements with 42 U.S.C. § 1395rr(b)(4)(B), which permits such reimbursements only “to a supplier of home dialysis supplies and equipment furnished to a patient whose self-care home dialysis is not under the direct supervision of an approved provider of services or renal dialysis facility....” (emphasis added). This was clarified in 1994, when Congress required that Method II payments may only go to an entity that is not “a provider of services [or] a renal dialysis facility....” 42 U.S.C. § 1395rr(b)(1); see also42 C.F.R. § 400.202 (defining a supplier as “a physician or other practitioner, or an entity other than a provider, that furnishes health care services under Medicare”). Such an entity must obtain a supplier number before it can bill Medicare for supplies and equipment, 42 U.S.C. § 1395m(j)(1)(A), and may only be reimbursed if it is “not a Medicare approved dialysis facility,” 42 C.F.R. § 414.330(a)(2)(i). In 2010, the Secretary for Health and Human Services eliminated Method II reimbursements altogether. 75 Fed. Reg. 49,030, 49,058 (Aug. 12, 2010).

2. Conversion of RCG patients to RCGSC patients

RCGSC had its basis in a 1997 e-mail written by Russell Dimmitt, RCG's director of material management, which compared Method I and Method II reimbursements. The e-mail made clear that Method II reimbursements were substantially higher, and would result in less overhead. A subsequent memorandum to RCG associates directed them to “convert CCPD Medicare patients to method 2.” The memorandum also instructed associates to place new CCPD patients on Method II, even those who might initially be CAPD patients (which had an equivalent reimbursement rate for Method I CAPD patients), because the companies would “plan to convert them later.”

RCGSC was formed in 1998 as a wholly-owned subsidiary of RCG, and RCG employees, officers, and directors all held key roles in RCGSC's corporate structure. Gary Brukardt, RCG's chief executive officer, was also RCGSC's president. The companies shared office space, payroll, insurance benefits, contracts, and human resource services. Money deposited into RCGSC's account was swept into RCG's corporate account nightly, RCG's accounts payable department paid RCGSC's supply vendors, and RCGSC's director could not spend RCGSC's funds. All RCGSC employees were managed or directed by RCG employees. From 1999 to 2005, RCG and RCGSC received close to eighty-four million dollars in Medicare Method II reimbursements, comprising approximately seventy-seven percent of all Medicare reimbursements the two entities received.

On October 26, 1998, David Jones, RCG's chief operating officer for RCG's south central region, expressed his hesitation to convert Method I patients into Method II patients in an e-mail to Dimmitt. Jones wrote that such a plan “is not in the best interests of our patients.... I do not think it is legal to force our patients into a Method II arrangement simply to increase profits of our Company. I do not wish to go to jail....” Jones left the company in 1999.

3. RCG's attempts for clarification

Around the time that Jones told Dimmitt that he believed RCG's plan was illegal, RCG itself began inquiring into the plan's legality. On October 28, 1998, Dawn Alexander, outside counsel for RCG, prepared a memo on “Method I v. Method II Issues.” Alexander noted that a joint entity between a dialysis facility, like RCG, and another party could not be eligible for Method II reimbursements. She reserved judgment, however, on whether a wholly-owned subsidiary, like RCGSC, could do so, but noted that the Office of Inspector General (OIG) had issued a fraud alert concerning the use of shell corporations to maximize Medicare reimbursements. The OIG cautioned that hallmarks of such shell corporations could be that the parent corporation owned the capital equipment, and that the parent corporation was responsible for all day-to-day operations of the shell.

Alexander also sought clarification from Gene Richter, a federal official with the Health Care Financing Administration (HCFA), on the legality of establishing an entity like RCGSC (though never mentioning either RCG or RCGSC). In a letter to Richter, Alexander referred to a previous conversation with Richter in which Alexander asked whether “a dialysis facility's wholly-owned subsidiary supply company could act as a Method II supplier,” and noted that Richter's interpretation was that “as long as the wholly owned supply company has its own provider number and is established as a separate entity, it may act as a supplier for Method II patients [legally].” Richter's justification for this interpretation, Alexander memorialized, was “that there is now a payment cap on Method II payments that did not exist in the past.” Alexander closed the letter by...