State of Fla., Office of Atty. v. Tenet Healthcare, 05-20591-CIV.

• Court: United States District Courts. 11th Circuit. United States District Courts. 11th Circuit. Southern District of Florida
• Writing for the Court: Seitz
• Citation: 420 F.Supp.2d 1288
• Parties: STATE OF FLORIDA, OFFICE OF THE ATTORNEY GENERAL, DEPARTMENT OF LEGAL AFFAIRS, et al., Plaintiffs, v. TENET HEALTHCARE CORPORATION, Defendant. BOCA RATON COMMUNITY HOSPITAL, INC., d/b/a Boca Raton Community Hospital, on behalf of itself and on behalf of a class of all others similarly situated, Plaintiff, v. Tenet Healthcare Corporation, Defendant.
• Docket Number: No. 05-20591-CIV.,No. 05-80183-CIV.,05-20591-CIV.,05-80183-CIV.
• Decision Date: 29 August 2005

420 F.Supp.2d 1288 STATE OF FLORIDA, OFFICE OF THE ATTORNEY GENERAL, DEPARTMENT OF LEGAL AFFAIRS, et al., Plaintiffs,
v.
TENET HEALTHCARE CORPORATION, Defendant.
BOCA RATON COMMUNITY HOSPITAL, INC., d/b/a Boca Raton Community Hospital, on behalf of itself and on behalf of a class of all others similarly situated, Plaintiff,
v.
Tenet Healthcare Corporation, Defendant. No. 05-20591-CIV. No. 05-80183-CIV. United States District Court, S.D. Florida. August 29, 2005.

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Lori S. Rowe, Office of Attorney General, Tallahassee, FL, Christopher M. Kise, Paul Courtney Huck, Jr., Office of the Attorney General, Fort Lauderdale, FL, David A. Coulson, Greenberg Traurig, Miami, FL, David A.P. Brower, Melvyn I. Weiss, Milberg Weiss Bershad Schulman, Ann C. Turetsky, Greenberg Traurig, New York City, Hal M. Hirsch, Richard A. Edlin, Arthur R. Miller, Harvard University, Cambridge, MA, Maya Susan Saxena, Milberg Weiss Bershad Schulman, Boca Raton, FL, Robert P. Charrow, Greenberg Traurig, Washington, DC, Hilarie Bass, for Plaintiffs.

Patrick M. Bryan, Kirkland & Ellis, Washington, DC, Jennifer G. Levy, Susan E. Engel, Nicole B. Pitman, John C. O'Quinn, Karen Natalie Walker, Jay P. Lefkowitz, Brett Alan Barfield, Holland & Knight, Miami, FL, Scott Daniel Ponce, Sanford Lewis Bohrer, Peter Prieto, for Defendant.

ORDER ON DEFENDANT TENET HEALTHCARE CORPORATION'S MOTIONS TO DISMISS

SEITZ, District Judge.

THIS MATTER is before the Court upon Defendant Tenet Healthcare Corporation's Motions to Dismiss filed in Case No. 05-20591-CIV-SEITZ [DE-29] and Case No. 05-80183-CIV-SEITZ [DE-30]. The Plaintiffs in these two cases—Boca Raton Community Hospital ("Boca"), thirteen public hospitals in Florida ("the Hospital Plaintiffs"),¹ and the Florida Attorney General ("Florida AG")-allege that Tenet purposefully inflated the amount that it charged for hospital services in order to increase Medicare reimbursements that its hospitals received. Specifically, the Plaintiffs² contend that Tenet engaged in "turbocharging" to obtain excessive outlier payments on cases that qualified for additional reimbursements under the Medicare program pursuant to a complex formula prescribed by the Secretary of the U.S. Department of Health and Human Services ("HHS").

Defendant Tenet moves to dismiss the Complaints on the grounds that: (1) Medicare

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preempts the Plaintiffs' state law claims and supercedes their federal RICO claims; (2) Plaintiffs failed to exhaust Medicare's administrative remedies; (3) Plaintiffs lack standing to assert their RICO claims because Tenet's alleged conduct did not proximately cause Plaintiffs' alleged injuries; (4) Plaintiffs have failed to allege facts which, if proven, would constitute a predicate act under RICO; (5) Plaintiffs have failed to adequately allege an enterprise or a conspiracy under RICO; (6) the Florida Deceptive and Unfair Trade Practices Act ("FDUTPA") claim must fail because Tenet's alleged conduct was authorized by then-applicable Medicare regulations and the Florida AG has failed to plead this claim with particularity; (7) substantive limits on the scope of state regulatory jurisdiction bar Boca's claim under California's Unfair Competition Law ("UCL"); and (8) the unjust enrichment count fails to state a claim because the Plaintiffs cannot demonstrate that anything was taken from them.

The Court has considered the Motions, the responses and replies thereto, the amicus brief of the United States of America, the applicable case law, and the oral argument of counsel at the June 20, 2005, hearing. Having considered the allegations of the Complaints—viewed in the light most favorable to the Plaintiffs—as well as the Medicare regulatory structure, the Court concludes that: (1) Plaintiffs' claims are not preempted under, or superseded by, Medicare; (2) Plaintiffs are not required to pursue the administrative remedies under the Medicare Act; (3) Plaintiffs properly allege RICO standing; (4) Plaintiffs have adequately alleged predicate acts, a RICO enterprise, and proximate cause; (5) Plaintiffs have alleged sufficient facts supporting a RICO conspiracy; (6) the FDUTPA and UCL claims are properly pled and are not subject to dismissal at this stage; and (7) the unjust enrichment claim must be dismissed with prejudice. Accordingly, Tenet's Motions to Dismiss are granted in part, denied in part.

I. FACTUAL BACKGROUND

This action involves the operation of the Medicare outlier trust fund or pool for inpatient hospital services. Medicare, established in Title XVIII of the Social Security Act ("SSA"), 42 U.S.C. § 1395, et seq., is the federal program that provides health care insurance to the nation's aged and disabled. Compl. of Boca Raton Community Hosp. ("Boca Compl.") ¶ 22; Am. Compl. of State of Fla., Office of Att'y Gen., et al. ("Pub.Hosp.Compl.") ¶ 1. Medicare is administered by the Centers for Medicare & Medicaid Services ("CMS"), a non-independent agency within HHS, and has over 40 million beneficiaries. Id.

Because this case addresses the operation of the Medicare outlier trust fund for inpatient hospital services, it is necessary to situate the allegations in the Complaints within the pertinent regulatory and statutory framework governing Medicare reimbursements.

A. Medicare Regulatory Background and the Outlier Pool

Medicare and its implementing regulations establish an Inpatient Prospective Payment System ("IPPS") under which hospitals are reimbursed for inpatient services provided to Medicare beneficiaries at prospectively fixed rates. Boca Compl. ¶¶ 36-37; Pub. Hosp. Compl. ¶¶ 26-27. Under IPPS, each patient's condition is classified into one of over 520 Diagnosis-Related Groups ("DRG"), to which CMS has assigned a numeric weight reflecting the amount of resources needed, on average, to treat a patient with the corresponding diagnosis. Id. Greatly simplified, a hospital's payment for treating a specific

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patient is determined by multiplying the numeric weight for that DRG by a standardized amount. Id. The standardized amount is based on the average resources used to treat cases in all DRGs, and is adjusted to take into account regional wage rates as well as other factors. Id. Hospitals submit their claims for reimbursement to "fiscal intermediaries," usually private insurance companies, to which the Secretary of HHS delegates the day-to-day administration of the Medicare program. See 42 U.S.C. § 1395h.

1. The Outlier System

Although IPPS assumes that fixed payments based on cases of average complexity will provide adequate compensation to efficiently run hospitals, Congress recognized that an extremely costly case could undermine any averaging. Boca Compl. ¶ 43; Pub. Hosp. Compl. ¶ 28. Therefore, in addition to fixed IPPS rates, the Medicare statute also requires that hospitals be reimbursed for atypical medical cases known as "outliers." Id. Outlier payments are designed to supplement standard IPPS payments "for extraordinarily high-cost cases."³ Id.; see 42 C.F.R. § 412.84. Under IPPS, a hospital may receive outlier payments when the cost it incurs to treat a patient exceeds the normal IPPS payment by a fixed deductible, the exact magnitude of which is established by a computer program on an annual basis (i.e., the "Outlier Threshold"). Boca Compl. ¶ 44; Pub. Hosp. Compl. ¶ 29. The higher the Outlier Threshold, the fewer the number of cases that qualify as outliers and, for those that qualify, the lower the outlier payments. Boca Compl. ¶ 44; Pub. Hosp. Compl. ¶ 30.

The statute empowers the Secretary to promulgate regulations establishing when outlier payments are appropriate. See 42 U.S.C. § 1395ww(d)(5)(A)(iii) ("The amount of such additional payment under clauses (i) and (ii) shall be determined by the Secretary and shall ... approximate the marginal cost of care beyond the cutoff point applicable under clause (i) or (ii)."). The statute also authorizes hospitals to submit claims for outlier payments that satisfy the criteria set forth in the Secretary's outlier regulations. See 42 U.S.C. § 1395ww(d)(5)(A)(ii). Exercising this statutory authority, the Secretary decided to tie the outlier payment system to hospital charges—not actual costs. Under the Secretary's formula, although a case qualifies as an outlier if its costs exceed a certain threshold, i.e., "a fixed dollar amount determined by the Secretary," for all cases before October 1, 2003, the hospital's costs were determined based on the hospital's billed charges, adjusted by the hospital's cost-to-charge ratio ("CCR"). 42 U.S.C. § 1395ww(d)(5)(A)(II); 42 C.F.R. § 412.84(h).

Congress constrained the Secretary's discretion in reimbursing outlier cases by setting a five to six percent target for the total amount of outlier payments made each fiscal year in the aggregate to all hospitals, as compared to total aggregate IPPS reimbursements to all hospitals. 42 U.S.C. § 1395ww(d)(5)(A)(iv). For the years at issue in this case, from 1999-2003, the Secretary established a target of 5.1%. See 68 Fed.Reg. at 34501. In 2003, the Secretary amended the rules regarding outlier reimbursements, and determined

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that outlier payments are subject to reconciliation on a case-by-case basis when the cost report relevant to each case is settled. See 42 C.F.R. § 412.84(i)(3); 68 Fed.Reg. at 34501. The amended rule thus implements a formula designed to "ensure that when final outlier payments are made, they ... reflect an accurate assessment of the actual costs the hospital incurred." Id. The amended rule did not, however, "make retroactive adjustments to outlier payments to ensure total payments [to all hospitals] are 5.1 percent of [all inpatient spending]," 68 Fed.Reg. at 34502, nor did it restrict a hospital's right to set its own charges or to submit outlier claims for cases that purportedly...