U.S. ex rel. Pervez v. Beth Israel Med. Ctr.

• Decision Date: 13 September 2010
• Docket Number: No. 01 Civ. 2745(LAK),01 Civ. 2745(LAK)
• Citation: 736 F.Supp.2d 804
• Court: U.S. District Court — Southern District of New York
• Parties: UNITED STATES of America ex rel. Najmuddin PERVEZ, Plaintiff, v. BETH ISRAEL MEDICAL CENTER and Ernst & Young, LLP, Defendants.

736 F.Supp.2d 804

UNITED STATES of America ex rel. Najmuddin PERVEZ, Plaintiff,

v.BETH ISRAEL MEDICAL CENTER and Ernst & Young, LLP, Defendants.

No. 01 Civ. 2745(LAK).

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

Sept. 13, 2010.

Rebecca C. Martin, Assistant United States Attorney, Preet Bharara, United States Attorney, for Plaintiff-Intervenor, United States of America.

Philip R. Michael, Michael Law Group, P.C., for Plaintiff-Relator.

Richard A. Cirillo, Anne M. Cook, King & Spalding LLP, for Defendant, Ernst & Young, LLP.

MEMORANDUM OPINION

LEWIS A. KAPLAN, District Judge.

Relator Najmuddin Pervez, a former executive at Beth Israel Medical Center ("BIMC") from 1973 to 1991, brings this qui tam action on behalf of the United States of America, the State of New York, and himself against BIMC and Ernst & Young ("E & Y"), an accounting and consulting firm retained by BIMC to audit certain of its financial statements and Medicaid cost reports. The government intervened to assert and then settled the claims of the United States against BIMC. It declined to take over the claims against E & Y. Accordingly, Pervez pursues those claims.

Pervez asserts that E & Y violated various provisions of the federal and New York False Claims Acts (the "FCA" and the "NY FCA," respectively) ¹ by causing false claims and statements to be made and presented in connection with the preparation and submission of Medicaid cost reports (also known as Institutional Cost Reports, or "ICRs") for the Petrie campus ("Petrie"), of BIMC for the years 1991 through 2003. The matter is before the Court on E & Y's motion to dismiss the third amended complaint for failure to state a legally sufficient claim. For the reasons set forth below, the motion is granted.

Facts

Notwithstanding the parties' voluminous submissions, the allegations at base are relatively simple. Pervez claims that BIMC fraudulently reported certain financial information to the New York state Medicaid agency from 1991 to 2003 in order to receive reimbursements to which it was not entitled. He asserts that E & Y knowingly assisted BIMC in this alleged fraud by falsely certifying that E & Y had audited BIMC's fraudulent cost reports and by falsely representing in its accompanying opinion letters that it believed the information to be "free of material misstatements" and "fairly presented in all material respects." ²

Medicaid

Medicaid provides medical insurance for low income individuals and families. It is funded jointly by the federal and state governments and is supervised by the United States Department of Health and Human Services through the Centers for Medicare and Medicaid Services ("CMS"). It is administered, however, by the states. In New York City, the program is managed primarily by the New York State Department of Health ("DoH") and is subject to regulations and guidelines governing the process by which providers seek reimbursement for their Medicaid expenses. The federal government pays 50 percent of Medicaid costs, and the State and City share the remaining 50 percent.³

Each participating hospital is required to submit an ICR to DoH at the end of the fiscal year.⁴ Among other things, the hospital must allocate the hospital's expensesamong "cost centers." Under N.Y. Medicaid law, some costs-those related to administering the Medicaid program-are reimbursable and are properly allocated to reimbursable cost centers. Other costs deemed unrelated to Medicaid services-including capital costs incurred by a provider to support the space and operations of physicians' private practices-are not reimbursable and must be allocated to nonreimbursable cost centers.⁵

These cost reports are prepared by the provider, which must certify that the information contained therein is true, correct, and complete and prepared in accordance with applicable instructions.⁶ In addition, Section § 86-4.4 of the pertinent regulations ⁷ mandates that "[a]ll financial and statistical reports ... be certified by an independent licensed public accountant or an independent certified public accountant on forms prescribed and provided by the Department." ⁸ The reports, including the certifications, then are submitted to the DoH.

Pervez alleges in a conclusory fashion that DoH uses these ICRs to estimate current-year Medicaid entitlements, allowing hospitals to receive funds on an interim basis throughout the year.⁹ He later explains that, under N.Y. State Medicaid law, "capital costs" are reimbursed in accordance with their "actual" costs and that wrongly allocating capital costs to reimbursable cost centers in a cost report necessarily results in the state and federal government overreimbursing the provider. The State of New York as amicus curiae describes the process in similar terms, explaining that "a hospital's 'capital costs' ... are reimbursed on an annual basis using the actual costs reported in each year's ICR; if the information contained in an ICR is not accurate, a hospital will not receive the proper reimbursement for its capital costs.... DOH uses the ICR to calculate a hospital's capital cost reimbursement." ¹⁰ New York State then seeks reimbursement from the federal government of half of the actual cost of the reimbursement paid to the provider.

BIMC's Petrie Medicaid Cost Reports

BIMC is a not-for-profit corporation, owned by parent company Continuum Health Partners, that operates a teaching hospital and other health care facilities in New York City, including the Petrie campus, the Phillips Ambulatory Care Center, and, before it was sold, Beth Israel-North (formerly Doctors Hospital). ¹¹ Petrie hascontractual arrangements, known collectively as the "faculty practice plan" ("FPP"), with more than 500 physician-employees pursuant to which the physicians are required, inter alia, to engage in professional private practices at Petrie-supplied offices. Petrie does the billing for the participating physicians and benefits from the substantial resulting revenue.¹² As these private practices are not eligible for Medicaid reimbursement, however, the capital costs associated with those practices also are not reimbursable.

Pervez alleges that Petrie's ICRs for the years 1991 through 2003 fraudulently misrepresented information regarding capital costs associated with the FPP. ¹³ The factual details alleged to show the falsehoods contained in the Petrie ICRs- e.g., specifically which care facility and service costs were accounted for inaccurately and how those inaccuracies appeared in different portions of the cost reports and exhibits ¹⁴-are complicated. The gist, however, is not. Pervez claims that Petrie's ICRs failed to allocate a variety of non-reimbursable FPP capital costs to non-reimbursable cost centers in the Petrie ICRs and that they failed in 2002 and 2003 to allocate the correct amounts of non-reimbursable FPP capital costs to non-reimbursable cost centers in the reports.¹⁵ BIMC and E & Y allegedly became aware in 2002 of a government investigation regarding BIMC's Medicare and Medicaid reporting and, as a result, the 2002 and 2003 ICRs for the first time correctly assigned some but not all of the non-reimbursable FPP capital costs to non-reimbursable cost centers.¹⁶

Pervez alleges, without explaining precisely how this came to pass, ¹⁷ that submitting these false ICRs "caus[ed] Medicaid damages to the United States and the State of New York of approximately $60 million."

E & Y's Audits, Certifications, and Opinion Letters

Around 1982, BIMC retained E & Y to serve as its outside auditor with respect to the ICRs for its Petrie campus.¹⁸ E & Y audited, certified, and provided an opinion letter for each of Petrie's allegedly false ICRs from 1991 to 2003. Each letter stated, inter alia, that:

"We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluatingthe overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion." ¹⁹

Each letter stated also that "these [audited] financial statements are the responsibility of the facility's management. Our responsibility is to express an opinion on these financial statements based on our audit." ²⁰ Each letter then certified that, in light of its audit, E & Y believed that the financial information contained in the reports and the exhibits that were audited was "fairly presented in all material respects" and was "in conformity in all material respects" with the applicable DoH computer-form instructions. ²¹

Pervez claims that E & Y, contrary to the statements contained in these certifications and opinion letters, in fact did not perform the audits it claimed to have performed.²² Moreover, he asserts that E & Y knew that the Petrie cost reports and exhibits falsely allocated FPP capital costs to reimbursable cost centers and that BIMC falsified the Petrie cost reports and exhibits for the purpose of defrauding the state and federal Medicaid programs. ²³

Prior Proceedings

Pervez brought this qui tam action in 2001 against BIMC, alleging substantially the same theory of fraud now before the Court. E & Y subsequently was added as a co-defendant in an amended complaint.

On November 30, 2005, the government partially intervened in the case with respect to BIMC and settled the claims against that defendant,²⁴ leaving only the claims against E & Y. More than three years later, the government declined to intervene as to those claims.²⁵ Pervez now pursues the claims against E & Y.

The third amended complaint alleges multiple causes of action under the federaland New York False Claims...