Boca Raton Community Hosp. v. Tenet Healthcare

• Decision Date: 02 August 2007
• Docket Number: No. 05-80183-CIV-SEITZ/MCALILEY.,05-80183-CIV-SEITZ/MCALILEY.
• Citation: 502 F.Supp.2d 1237
• Parties: BOCA RATON COMMUNITY HOSPITAL, INC., et al., Plaintiffs, v. TENET HEALTHCARE CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of Florida

502 F.Supp.2d 1237

BOCA RATON COMMUNITY HOSPITAL, INC., et al., Plaintiffs, v. TENET HEALTHCARE CORPORATION, Defendant.

No. 05-80183-CIV-SEITZ/MCALILEY.

United States District Court, S.D. Florida.

August 2, 2007.

Ann C. Turetsky, Hal M. Hirsch, John F. Triggs, Kenneth A. Lapatine, Richard A. Edlin, Greenberg Traurig, New York, NY, Arthur R. Miller, Harvard University, Cambridge, MA, David A. Coulson, Hilarie Bass, Greenberg Traurig, Miami, FL, David K. Isom, Greenberg Traurig, Denver, CO, Robert P. Charrow, William B. Eck, Greenberg Traurig, Washington, DC, for Plaintiffs.

Brett Alan Barfield, Martha R. Mora, Peter Prieto, Sanford Lewis Bohrer, Scott Daniel Ponce, Holland & Knight, Mark Alan Lavine, Wendy A. Jacobus, United States Attorney's Office, Miami, FL, Bridget K. O'Connor, Jay P. Lefkowitz, Jennifer G. Levy, Karen Natalie Walker, Patrick M. Bryan, Rebecca A. Koch, Susan E. Engel, Kirkland & Ellis, Daniel Spiro, David T. Cohen, Michael Granston, United States Department of Justice, Washington, DC, for Defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND MOTION TO EXCLUDE PLAINTIFF'S EXPERT OPINION ON DAMAGES

SEITZ, District Judge.

This RICO case comes before the Court on Tenet Healthcare Corporation's ("Tenet") Motion for Summary Judgment [DE-326] and Motion to Exclude the Testimony of Plaintiff's Expert Joan DaVanzo and all Testimony Based on the So-Called "Lewin Model" [DE-301]. Having considered Tenet's motions, the responses and replies thereto, the amicus curiae brief of the United States and the record, the Court grants Tenet's motions for two reasons. First, Boca cannot establish proximate causation under RICO since Tenet's con duct did not directly cause Boca's alleged injury. Second, Boca's damages model does not fit its theory of liability and must be excluded; therefore Boca cannot prove damages.¹

I. Introduction

Plaintiff Boca Raton Community Hospital ("Boca") asserts that Tenet, a national healthcare corporation, in combination with 76 of its affiliated hospitals, implemented a scheme, commonly referred to as "turbocharging," to collect unlawful reimbursements from Medicare. According to Boca, Tenet made its Medicare cases appear to be extraordinarily costly, and therefore eligible for additional Medicare reimbursements known as "outliers," merely lay grossly overcharging for them rather than actually incurring high costs. The scheme succeeded because Medicare did not reimburse for these extraordinarily costly outlier cases by evaluating a hospital's actual costs, but rather by using a hospital's billed charges multiplied by the hospital's "cost-to-charge ratio," in what Medicare assumed would generate a reasonable approximation of the hospital's actual costs.

Because Tenet obtained so many excessive reimbursements, Boca claims that Medicare was forced ultimately to diminish the amount of outlier reimbursements available to Boca" and other hospitals.² Boca's two-count Amended Complaint [DE-253] alleges that through its overcharging conduct Tenet engaged in a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c) and a conspiracy to do so in violation of 18 U.S.C. § 1962(d), both predicated on Tenet's receipt and/or transport of stolen or converted funds from Medicare in violation of the National Stolen Property Act ("NSPA"), 18 U.S.C. §§ 2314-15.³

Tenet's summary judgment motion attacks' Boca's ability to meet its burden to prove RICO proximate causation, as well as its burden to establish the existence of a RICO enterprise or conspiracy. Tenet also moves for judgment based on Boca's inability to prove the impact of Tenet's overcharging on Medicare, and damages to Boca therefrom, because Boca's expert's methodology for calculating such impact does not "fit" Boca's liability theory. Thus, this order addresses Tenet's pending Daubert motion to the extent necessary to resolve the motion for summary judgment. Tenet also challenges the assertion that it violated the outlier program and that such transgression amounts to a violation of the NSPA. Finally, Tenet moves for summary judgment on its affirmative defenses of unclean hands and "advice of counsel."

Although Boca's RICO claims are insufficient as a matter of law to prevail against Tenet in this case, it bears emphasizing that Tenet escapes Boca's grasp not because its conduct is blameless, but only because Boca is not the proper entity, and RICO not the proper legal vehicle, to redress the harm Boca targets. The evidence in this case paints a clear picture of unmitigated corporate greed. Tenet's shameless appetite for profit at the expense of a taxpayer supported medical system designed to benefit the less fortunate in society is unconscionable. Fortunately, the government finally caught on to the perversion of the outlier program and amended the Medicare regulations to eliminate some of the potential for abuse. The United States also sued Tenet to recover for the same overcharging scheme Boca identifies.⁴ Thus, the narrow question before this Court is not whether Tenet is liable to the government for the alleged theft, or to the individuals forced to pay outrageously high medical bills as a result of the overcharging,⁵ but rather whether Boca, as Tenet's competitor, can recover its own damages from Tenet for the alleged theft from Medicare.

II. Background⁶

Medicare is a system of health insurance for the nation's 40 million aged and disabled administered by the United States Department of Health and Human Services, through the Center for Medicare and Medicaid Services ("CMS"). See United States v. R & F Properties of Lake Co., Inc., 433 F.3d 1349, 1351 (11th Cir. 2005). The relevant provisions of Medicare set forth a system of payments for the operating costs of acute care hospital inpatient stays. Under this system, a hospital is reimbursed at a fixed rate for its services regardless of the hospital's costs, thereby creating an incentive to keep costs in check. See Fischer v. United States, 529 U.S. 667, 685, 120 S.Ct. 1780, 146 L.Ed.2d 707 (2000). The fixed reimbursement rate is based on the patient's diagnosis, or diagnosis-related group ("DRG"). In a nutshell, Medicare pays each hospital a predetermined average cost reimbursement for a particular DRG (a "DRG payment"), adjusted for various factors like the geographic location of the hospital, local cost of living, wage rates and the like.

The outlier program, the program at issue in this case, was designed to supplement the basic fixed reimbursement scheme described above. Whereas the basic DRG payment system sets reimbursements for each DRG based on the average cost to treat that diagnosis, the outlier program recognizes that some cases will inevitably fall well above the average in terms of costs. Under the outlier program, a hospital may receive additional outlier payments when the costs it incurs to treat a patient exceed the standardized DRG payment by a fixed amount. See 42 U.S.C. § 1395ww(d)(5); 42 C.F.R §§ 412.80, 412.84; County of Los Angeles v. Shalala, 192 F.3d 1005, 1009 (D.C.Cir. 1999). Specifically, the statute authorizes additional payments "in any case where charges, adjusted to cost, ... exceed the sum of the applicable DRG prospective payment rate plus [other fixed adjustments] plus a fixed dollar amount determined by the Secretary." 42 U.S.C. § 1395ww(d)(5)(A)(ii). In other words, when the standard DRG payment does not cover the hospital's costs, then the hospital must absorb them unless they are so extraordinary that they exceed the Fixed Loss Threshold or "FLT." If they exceed the FLT, which acts like an insurance deductible, then the case is considered a "cost outlier" and the hospital is eligible to receive a large percentage of those costs that fall above the FLT as outlier reimbursements.

A. The Fixed Loss Threshold

The FLT is a dollar amount threshold that distinguishes an exceptionally costly outlier case from an average-cost DRG case. If a hospital incurs costs above the FLT, then that hospital can recover a significant percentage of the additional costs as an outlier reimbursement. The CMS establishes the FLT annually by rule making according to a methodology which estimates what FLT level will keep total outlier payments within the statutory limits. CMS is constrained by statute to make outlier reimbursements at no less than 5% and no more than 6% of the total aggregate DRG payments for any given year. See 42 U.S.C. 1395ww(d)(5)(A)(iv). For the years at issue in this case, CMS set the total outlier payment target at 5.1%. See 68 Fed.Reg. at 34501. Nevertheless, despite the statutory mandate not to pay out more than 6%, and even with the regulatory target of 5.1%, CMS paid out between 6.1% and 7.6% for the years at issue. See 68 Fed.Reg. 34496; see also id. at 10423.

According to Boca, CMS calculated the FLT for any given year using an "iterative process." See DE-258, Ex. A (DaVanzo Report) at 15. As Boca's counsel has explained, CMS began with an educated guess about what FLT level would meet the target total outlier payment of 5.1%. CMS then used that "best-guess" FLT to estimate total outlier payments by calculating the predicted number of claims for the upcoming year based on historical data. If the estimated total payments exceeded 5.1%, then CMS would adjust the FLT upward to reduce the predicted overall payments. CMS proceeded in this trial and error fashion, until it found the proper estimated FLT level that would result in predicted total outlier payments of 5.1%. Despite its best efforts at predicting the appropriate FLT for each year, CMS consistently missed the 5.1% and 6.0% targets and therefore had to increase the FLT each year. The FLT increased from $14,600 in 2000 to $33,560 in 2003. See 68 Fed.Reg. 34496. Thus, despite an ever increasing FLT, CMS was consistently paying out more outlier reimbursements than it expected, and more than the Medicare statute allowed.

B. The Cost-to-Charge...