U.S. Ex Rel. Cleuza Colucci v. Beth Israel Med. Ctr.

• Decision Date: 31 March 2011
• Docket Number: No. 06 Civ. 5033(DC).,06 Civ. 5033(DC).
• Citation: 785 F.Supp.2d 303
• Parties: UNITED STATES of America ex rel. Cleuza COLUCCI, Plaintiff,v.BETH ISRAEL MEDICAL CENTER et al., Defendants.
• Court: U.S. District Court — Southern District of New York

785 F.Supp.2d 303

UNITED STATES of America ex rel. Cleuza COLUCCI, Plaintiff,

v.BETH ISRAEL MEDICAL CENTER et al., Defendants.

No. 06 Civ. 5033(DC).

United States District Court, S.D. New York.

March 31, 2011.

Law Office of Diane McFadin, by: Diane McFadin, Esq., New York, NY, Willa N. France, Esq., New York, NY, for Relator.Proskauer Rose LLP, by: Malcolm J. Harkins III, Esq., James F. Segroves, Esq., Washington DC, by: Edward S. Kornreich, Esq., Roger A. Cohen, Esq., New York, NY, for Defendants.

OPINION

CHIN, Circuit Judge.

Qui tam relator Cleuza Colucci (“Colucci”) brings this action on behalf of the United States against Beth Israel Medical Center (“BIMC”), Mort Hyman, Tom Hayes, and Robert Naldi under the False Claims Act (the “FCA”). Colucci seeks per-claim penalties and treble damages exceeding $1.5 billion, alleging that defendants submitted false claims to Medicare related to BIMC's Graduate Medical Education program. Specifically, Colucci alleges that BIMC, a teaching hospital, purchased two non-teaching hospitals to manipulate the factors on which Medicare payments are based, thereby fraudulently inflating BIMC's Medicare reimbursement payments. Defendants move to dismiss, pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, challenging the sufficiency of Colucci's claims. For the reasons that follow, defendants' motion is granted.

BACKGROUND

A. Prior Proceedings

The procedural history in this case is recounted in my prior opinion in United States ex rel. Colucci v. Beth Israel Med. Ctr., 603 F.Supp.2d 677 (S.D.N.Y.2009). Thus, I describe it here only briefly.

In June 2006, Thomas Colucci, a former independent consultant to BIMC, filed his original FCA complaint under seal as a relator on behalf of the United States. After the United States declined to intervene in September 2007, the complaint was unsealed.

In January 2008, shortly after Thomas Colucci served defendants with process in this action, he died. In July 2008, Thomas Colucci's widow, Colucci, filed a motion to substitute as relator pursuant to Rule 25(a), presenting an issue of first impression in the Second Circuit as to whether a qui tam FCA suit can survive the death of the relator. After reviewing the parties' papers and a statement of interest submitted by the United States, I granted Colucci's motion, id. at 684, and later denied defendants' motion to certify an interlocutory appeal, United States ex rel. Colucci v. Beth Israel Med. Ctr., No. 06 Civ. 5033(DC), 2009 WL 4809863, at *2 (S.D.N.Y. Dec. 15, 2009).

In March 2010, Colucci filed her First Amended Complaint (the “Complaint”), which defendants now move to dismiss.

B. The Medicare System ¹

Medicare provides health insurance for disabled persons and persons over 65. See 42 U.S.C. § 1395c; Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 168 (2d Cir.2006). The U.S. Department of Health and Human Services, Center for Medicare and Medicaid Services (“CMS”), administers the Medicare program. Id. To assist in administering Medicare, CMS contracts with “fiscal intermediaries,” who review and process reimbursement claims submitted by health care providers. Conn. Dep't of Soc. Servs. v. Leavitt, 428 F.3d 138, 142 (2d Cir.2005).

Medicare contains four distinct programs, but Colucci's claims relate only to the first two: Medicare Parts A and B. Medicare Part A provides insurance coverage for the costs of inpatient hospital care, related post-hospital care, home health services, and hospice care. Matthews v. Leavitt, 452 F.3d 145, 146 n. 1 (2d Cir.2006); see 42 U.S.C. §§ 1395c to 1395i–5 (Part A statutory provisions). Part B is a federally-subsidized, voluntary health insurance program; it provides supplemental coverage for medical services excluded from Part A. Matthews, 452 F.3d at 146 n. 1; see 42 U.S.C. §§ 1395j to 1395w–4 (Part B statutory provisions).

Prior to 1983, Medicare reimbursed hospitals for Part A services based upon their actual costs. Bellevue Hosp. Ctr., 443 F.3d at 168. This system changed dramatically in 1983, however, when Congress implemented the Inpatient Prospective Payment System (“IPPS”). See Social Security Amendments of 1983, Pub. L. No. 98–21, 97 Stat. 65 (1983). Under IPPS, hospitals are not reimbursed for their actual costs; instead, they are reimbursed under the Diagnostic Related Groups (“DRG”) system, under which Medicare pays hospitals an amount reflected in the Medicare DRG reimbursement schedules. See Bellevue Hosp. Ctr., 443 F.3d at 168; 42 U.S.C. § 1395ww(d). These schedules pair a Medicare patient's diagnosis with a DRG amount, which is intended to reflect the average cost that an efficiently run provider would incur to treat a patient with the corresponding diagnosis. See 42 U.S.C. § 1395ww(d)(2)(D). Thus, under the DRG system, if a hospital's costs exceed the DRG rate, the hospital must absorb the difference; conversely, if a hospital's costs are lower than the DRG rate, the hospital retains the difference. Huntington Hosp. v. Thompson, 319 F.3d 74, 77 (2d Cir.2003).

Significantly, costs associated with qualifying Graduate Medical Education (“GME”) and school of nursing programs are excepted from the DRG system. Instead of reimbursing hospitals for GME and school of nursing costs based on the DRG schedule, hospitals are generally reimbursed for these programs on a reasonable-cost basis. 42 U.S.C. § 1395ww(a)(4) (excepting “approved educational activities” from DRG system), § 1395x; see generally Cmty. Care Found. v. Thompson, 318 F.3d 219, 222–23 (D.C.Cir.2003).

Hospitals receive interim Medicare payments throughout the fiscal year based on their expected entitlement to Medicare reimbursement. 42 C.F.R. § 413.60. At the end of the fiscal year, each hospital must submit an Institutional Cost Report (“ICR”) and audited financial statements to its fiscal intermediary. 42 U.S.C. § 1395g; 42 C.F.R. §§ 413.20, .24. Based on the ICR, Medicare determines whether a hospital is entitled to additional reimbursement or whether the hospital was overpaid and must thus reimburse Medicare. 42 C.F.R. §§ 413.60, .64(f)(1). In other words, each hospital settles with Medicare at the end of the year, based on information contained in its ICR.

When submitting an ICR, the provider's administrator or Chief Financial Officer must make the following certification:

Misrepresentation or falsification of any information contained in this cost report may be punishable by criminal, civil and administrative action, fine and/or imprisonment under federal law. Furthermore, if services identified by this report were provided or procured through the payment directly or indirectly of a kickback or were otherwise illegal, criminal, civil and administrative action, fines, and/or imprisonment may result.

....

I hereby certify that I have read the above [certification] statement and that I have examined the accompanying electronically filed or manually submitted cost report and the Balance Sheet Statement of Revenue and Expenses prepared by _________ (Provider Name(s) and Number(s)) for the cost reporting period beginning ______ and ending ______ and that to the best of my knowledge and belief it is a true, correct, and complete statement prepared from the books and records of the provider in accordance with applicable instructions, except as noted. I further certify that I am familiar with the laws and regulations regarding the provision of health care services and that the services identified in this cost report were provided in compliance with such laws and regulations.

United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 237 n. 2 (3d Cir.2004) (quoting Health and Human Services Form HCFA–2552); see 42 C.F.R. § 413.24(f)(4)(iv).C. The Facts

The facts alleged in the Complaint are assumed to be true for purposes of this motion and may be summarized as follows:

1. The Parties

Colucci, Thomas Colucci's widow, brings this action for violations of the FCA for herself and the United States. (Compl. ¶ 5).

Thomas Colucci was a healthcare consultant who advised hospitals on, inter alia, how to maximize their Medicare and Medicaid reimbursements and receivables. ( Id. ¶ 6). From 1997 to 2002, he worked as a consultant for BIMC and its affiliated hospitals. ( Id.). Through this consulting work, he became familiar with their operations and reporting practices. ( Id.).

BIMC is a Manhattan hospital and a subsidiary of Continuum Health Partners, Inc. (“CHP”). ( Id. ¶¶ 8, 11). BIMC is a teaching hospital and also has a licensed school of nursing. ( Id. ¶ 8). In 1992, BIMC acquired Doctors Hospital, a non-teaching hospital on Manhattan's Upper East Side with approximately 220 patient beds. ( Id. ¶ 9). It sold Doctors Hospital in 2004. ( Id. ¶ 12). In 1995, BIMC acquired Kings Highway hospital, a non-teaching hospital with approximately 250 patient beds. ( Id. ¶ 10). BIMC still owns Kings Highway. ( Id. ¶ 112). Each hospital functioned under its own operating certificate, and the hospitals did not share staff or equipment. ( Id. ¶ 59).

Colucci also asserts claims against Mort Hyman, Tom Hayes, and Robert Naldi (the “individual defendants”). Hyman was the Chairman of the Board at BIMC until mid–2006. ( Id. ¶ 15). Hayes was Chief Financial Officer at BIMC and CHP until approximately 2000. ( Id. ¶ 16). Until 2001, Naldi was Vice President for Finance and Director of Budget for BIMC and Senior Vice President for Finance at CHP; through these positions, Naldi became fully familiar with BIMC's preparation of its financial statements and ICRs. ( Id. ¶ 18). The individual defendants were fully familiar with the Medicare and Medicaid statutes and regulations. ( Id. ¶¶ 15, 16, 18).

2. Alleged Fraudulent Conduct by Defendants

Colucci alleges that BIMC purchased Kings Highway and Doctors Hospital (the “satellite hospitals”), and subsequently submitted Medicare reimbursement claims under BIMC's consolidated provider number, to fraudulently inflate its Medicare...