Boca Raton Community Hosp. v. Tenet Health Care

Decision Date04 September 2009
Docket NumberNo. 07-14352.,07-14352.
Citation582 F.3d 1227
PartiesBOCA RATON COMMUNITY HOSPITAL, INC., a Florida not-for-profit corporation d.b.a. Boca Raton Community Hospital, Inc., Plaintiff-Appellant, Office of the Attorney General, Department of Legal Affairs, Plaintiff, v. TENET HEALTH CARE CORPORATION, a Nevada corporation, Defendant-Appellee.
CourtU.S. Court of Appeals — Eleventh Circuit

Bruce Rogow, Cynthia E. Gunther, Bruce S. Rogow, P.A., Fort Lauderdale, FL, for Plaintiff-Appellant.

Peter Prieto, Holland & Knight, LLP, Miami, FL, Susan Elisabeth Engel, Karen M. Walker, Kirkland & Ellis, LLP, Washington DC, Jay Philip Lefkowitz, Kirkland & Ellis, LLP, New York City, for Defendant-Appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before DUBINA, Chief Judge, CARNES, Circuit Judge, and RESTANI,* Judge.

CARNES, Circuit Judge:

More than a hundred years ago the mother of modern nursing, Florence Nightingale, observed: "It may be a strange principle to enunciate as the very first requirement in a Hospital that it should do the sick no harm. It is quite necessary, nevertheless, to lay down such a principle ...."1 When Nightingale wrote those words hospitals were not the sanitary sanctuaries they have become, and the harm she meant to shield her patients from was new or worsening illness. Since then the health care situation has become more complicated. Some hospitals are part of profit-driven, multi-billion dollar corporations, and the harm they can do has taken on additional forms. One such corporation is Tenet Health Care, and this case is about the economic harm it did by manipulating part of the Medicare program.


Boca Raton Community Hospital, Inc. is the largest hospital in southern Palm Beach County, Florida. Tenet Health Care Corporation is the second-largest for-profit hospital chain in the country, with more than seventy-five acute care facilities in thirteen states including Florida. Both Boca and Tenet participate in Medicare, a government health insurance system for the aged and disabled that is administered by the Center for Medicare and Medicaid Services (the Center).

Medicare reimburses participating hospitals for treatments given to qualified patients during acute care inpatient hospital stays. Instead of paying whatever the treatment actually costs, however, Medicare pays the hospital a fixed amount based on the patient's diagnosis. Medicare recognized that some treatments would cost significantly more than the standard fixed rate, so it created an "outlier program" to supplement the fixed-rate payment in those cases. Under the outlier program, a hospital receives additional reimbursements when the cost it incurs to treat a patient is greater than the standard fixed-rate payment by a specified amount called the fixed loss threshold. The loss threshold acts like an insurance deductible because the hospital is responsible for that portion of the treatment's excessive cost and then Medicare disburses an outlier payment for the amount exceeding the loss threshold.

The Center sets the loss threshold annually using a method that estimates the level that will keep total outlier payments between five and six percent of total inpatient Medicare reimbursements. The Center can consider a variety of factors when setting the loss threshold, including policy concerns, public comment, and expectations about inflation and the rate of change for hospital spending and charges. Because the Center does not disclose which of those factors it uses or how it uses them in any given year, we do not know the exact formula that produces the loss threshold. Boca describes the loss-threshold-setting process as an "iterative" one in which the Center begins with a "best guess" about what loss threshold will meet its target percentage.2 According to Boca, after estimating the next year's number of outlier claims based on historical data, the Center then uses trial and error until its best guess actually predicts total outlier payments equal to the target.

The outlier program is designed to reimburse hospitals for extraordinary costs, but during the years involved in this appeal the Center calculated outlier payments using a hospital's charges. To approximate a hospital's costs, the Center multiplied the hospital's charges by its "audited" cost-to-charge ratio, a hospital-specific number the Center reaches by reviewing a hospital's most recent settled cost reports.3 Because it takes between two and five years to audit cost reports, the audited ratios the Center used to calculate outlier payments were outdated and did not necessarily reflect a hospital's actual current charges or costs. Although a more current, "unaudited" ratio could be determined using a hospital's more recent (though tentative) cost reports, the Center used the time-lagged, audited ratios. So an increase in billed charges without a corresponding increase in costs made costs appear to have gone up even when they had not. As a result, hospitals with constant costs could receive more outlier payments simply by increasing charges.

At the end of each fiscal year, the Center calculated a national average of all hospitals' audited ratios. Using the national average the Center then created a National Threshold ratio range with its high and low points three standard deviations above and below the average. The Center assumed any audited ratios that fell outside this range were "unreasonable, in that [they] [we]re probably due to faulty data reporting or entry, and should not be used to identify and pay for cost outliers." To correct this perceived faulty data when calculating outlier payments, the Center substituted a statewide average ratio for any audited ratio that fell outside the range. If a hospital's audited ratio fell below the low National Threshold and the average ratio was substituted, that hospital would receive higher outlier payments than it would have if its own audited ratio had been used.

In August 2003 the Center changed the outlier payment system in three ways: (1) it allowed outlier payments to be calculated using unaudited ratios to approximate actual costs more accurately by recognizing recent charge increases; (2) it stopped substituting average ratios for ratios below the low National Threshold so that hospitals received outlier payments based on their "actual" ratios no matter how low those ratios fell; and (3) it made outlier payments subject to recapture on a case-by-case basis to ensure that the finalized outlier payments reflected an accurate assessment of the actual costs hospitals incurred. These changes were prospective only.

Boca believed that in the period before the 2003 changes, Tenet had been gaming the outlier program to get more reimbursements than its extraordinary-cost cases justified. Boca filed a class action complaint to that effect in March 2005 and amended it to include a revised class definition in June 2006. In the amended complaint, Boca alleged that Tenet increased its outlier reimbursements by dramatically raising its charges without reference to any actual cost increases, making average-cost cases look like outlier cases. Boca asserted that Tenet maximized its outlier receipts by taking advantage of both the Center's use of outdated audited ratios that did not reflect price increases and the Center's substitution of average ratios for audited ratios below the low National Threshold. Boca claimed that because Tenet's charge increases were unrelated to real cost increases, the excessive outlier payments it received from those inflated charges were unlawful and constituted a RICO violation under 18 U.S.C. § 1962(c), (d). As RICO predicate acts, Boca alleged that Tenet transported or received the "stolen or converted" outlier funds in violation of the National Stolen Property Act, 18 U.S.C. §§ 2314, 2315.

Boca originally sought to represent a class of "all acute-care hospitals in the United States" that would have been eligible for outlier reimbursements between 2000 and 2004, or would have received higher reimbursements, but for Tenet's conduct. Boca later narrowed its class definition to include only acute-care hospitals that received at least one outlier payment between 2000 and 2004, had an unaudited ratio above the low National Threshold, and were not owned by Tenet or a Florida governmental entity. Boca also added a component to its liability theory by re-defining Tenet's wrongful conduct, which it called "turbocharging," as the "breaking [of] any rational or reasonable relationship between charges and costs by driving hospital [audited ratios] below the low National Threshold." So for both class certification and liability, Boca used the low National Threshold to divide potential-class-member victim hospitals (those with audited ratios above the low National Threshold) from non-class-member culpable hospitals (those with audited ratios below the low National Threshold).

In describing its injury Boca claimed that Tenet's turbocharging, and the excessive outlier payments Tenet received as a result of it, forced the Center to increase the loss threshold to keep total outlier payments at the target percentage. That increase of the loss threshold caused Boca to receive less outlier money for its legitimate extraordinary-cost cases than it would have but for Tenet's turbocharging. To prove its injury and resultant money damages, Boca offered an expert opinion. The opinion purported to show that Tenet's overcharging had caused the loss threshold to increase, that Boca would have received additional outlier payments but for Tenet's overcharging, and the amount of those additional outlier payments. Boca's experts created a "Tenet-adjusted" loss threshold—the loss threshold that the Center would have set if it had not had to pay out Tenet's unlawful outlier claims. They arrived at that loss threshold number by replacing the audited ratios the Center used to...

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