United States v. Catholic Health Initiatives, CIVIL ACTION NO. 4:17–CV–1817

• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)
• Writing for the Court: HON. KEITH P. ELLISON, UNITED STATES DISTRICT JUDGE
• Citation: 312 F.Supp.3d 584
• Parties: UNITED STATES of America and State of Texas, ex rel. Shatish Patel, et al., Plaintiffs, v. CATHOLIC HEALTH INITIATIVES, et al., Defendants.
• Docket Number: CIVIL ACTION NO. 4:17–CV–1817
• Decision Date: 16 May 2018

312 F.Supp.3d 584

UNITED STATES of America and State of Texas, ex rel. Shatish Patel, et al., Plaintiffs,
v.
CATHOLIC HEALTH INITIATIVES, et al., Defendants.

CIVIL ACTION NO. 4:17–CV–1817

United States District Court, S.D. Texas, Houston Division.

Signed May 16, 2018

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Hiren P. Patel, Patel Ervin PLLC, Andrew A. Bobb, Office of the US Attorney, Houston, TX, Susan Jean Miller, Office of the Attorney General, Austin, TX, for Plaintiffs.

Andrew J. Ennis, Patrick John Brady, Polsinelli PC, Kansas City, MO, Asher Doren Funk, Polsinelli PC, Chicago, IL, Mark Stephen Armstrong, Polsinelli PC, Houston, TX, for Defendants.

MEMORANDUM & ORDER

HON. KEITH P. ELLISON, UNITED STATES DISTRICT JUDGE

This qui tam action under the False Claims Act, 31 U.S.C. § 3729 et seq. , alleges two unlawful schemes by St. Luke's Health System ("System") in connection with its hospital in Sugar Land, Texas. The System launched the hospital with partial physician ownership. In 2011, after several years of poor performance and an intervening change in the law, the System decided to buy out the physician–investors and change the hospital's ownership structure. Relators are three physicians who were among the earliest investors and resisted the System's attempt to buy them out. Defendants are various St. Luke's entities, St. Luke's executives from the relevant period, and Catholic Health Initiatives, which bought the St. Luke's Health System in 2013.

The first alleged scheme concerns the process by which the physician investors were bought out. St. Luke's used a statutory rescission process under the Texas Securities Act. Relators allege that it resulted in payments to the physician investors substantially above the market value of their stakes in the hospital. According to Relators, St. Luke's made these high payments with the intent of maintaining referral relationships with the physicians. This discrepancy in value is alleged to violate the Anti–Kickback Statute, the Stark Law, and by extension, the False Claims Act.

The second alleged scheme concerns St. Luke's representations to federal and state health care programs about the true ownership of the hospital. Before the investors were bought out, they were part of a limited liability partnership that existed for the purpose of owning the hospital. After the buyout, St. Luke's began representing to the government that the partnership was defunct and so a different entity owned the hospital. Relators allege that St. Luke's knew this to be false at the time they made these various representations. Relators rely on their own litigation against St. Luke's in Texas courts from 2011 to 2016, which established that Relators retained partnership interests and that the partnership remained the owner of the hospital. According to Relators, this rendered St. Luke's representations factually false, leading to violations of both the False Claims Act and the Texas Medicaid Fraud Prevention Act.

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Relators' complaint has an abundance of detail, but it does not add up to liability under the False Claims Act. Relators might well have had legitimate grievances; their litigation in state court against some of the Defendants suggests as much. But the False Claims Act "is not an all-purpose antifraud statute or a vehicle for punishing garden-variety breaches of contract or regulatory violations." Univ. Health Servs., Inc. v. U.S. ex rel. Escobar , ––– U.S. ––––, 136 S.Ct. 1989, 2003, 195 L.Ed.2d 348 (2016). More is needed to establish that false or fraudulent claims have been made on the government.

Accordingly, based on careful consideration of the parties' filings and the applicable law, the Court must dismiss with prejudice Relators' claims for violations of the False Claims Act. Dismissal of those claims leaves only claims under state law in the suit. The Court dismisses those claims without prejudice to refiling in state court.

I. BACKGROUND

Relators begin their story in the mid–2000's. St. Luke's was trying to catch up to competitors that had moved more quickly into markets in the suburbs of Houston like Sugar Land. (Doc. No. 1 at 7–8.) To stay competitive, St. Luke's needed to form good relationships with physicians in the area who would make referrals. Its approach was conferring ownership stakes in its new hospital. In 2006, the System formed a new partnership, the St. Luke's Sugar Land Partnership, L.L.P. ("Partnership"), a non-party. (Id. at 8.) Class A shares would comprise 49% of the Partnership, while Class B shares would comprise 51%. (Id. at 9.) Physician investors could buy Class A units for $40,000 per unit, while only the System or an affiliated entity would own the Class B shares. (Id. ) Later, Defendant St. Luke's Community Development Corporation–Sugar Land ("SLCDC–SL") came to be the owner of these Class B shares. (Id. at 11.) Despite the 49–51 split, the physician investors had an important role in the Partnership's governance, because the partnership agreement imposed supermajority thresholds for votes by the Partnership's governing board on important matters. (Id. at 23.) Relators Shatish Patel, Hemalatha Vijayan, and Wolley Oladut were among the first physician investors, with Patel and Vijayan buying four Class A units each and Oladut buying two. (Id. at 10.)

a. New Limits on Hospital Expansion Lead to Rescission

The hospital opened for business in October 2008, and it evidently was a Medicare provider from the outset. (Doc. No. 1 at 12.) The next year, Congress began consideration of the Affordable Care Act (ACA), and the ACA's passage in 2010 had major significance for the hospital. Based on long-standing apprehensions about the conflicts of interest inherent in physician-owned hospitals,¹ the ACA added a provision

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to the Stark Law, 42 U.S.C. § 1395nn(i)(1)(B), that limited the expansion of operating rooms, procedure rooms, and beds in physician-owned hospitals to the number they had as of March 2010. The effect of this provision, according to one commentator, was to "prohibit[ ] future physician investment and cap[ ] existing physician investment in hospitals." Craig A. Conway, Physician Ownership of Hospitals Significantly Impacted by Health Care Reform Legislation , UNIV. HOUSTON L. CTR., HEALTH L. PERSPECTIVES 2 (Apr. 2010). Another observed that the provision "rais[ed] questions about [physician-owned hospitals'] future status and viability." Cristie M. Cole, Physician–Owned Hospitals and Self–Referral , 15 AM. MED. ASSOC. J. ETHICS 150, 150 (2013).

Relators say that the ACA hampered the System's plans for expanding the hospital from a 100–bed to a 200–bed facility. (Doc. No. 1 at 12–13.) The System had been planning this expansion for some time, viewing it as a necessity for the hospital to become reliably profitable. (Id. at 13–14.) The System also had intended to open an additional operating room at the hospital, but the new law prevented that. Relators quote emails from System executives saying that the new law "is killing us." (Id. at 14.)

With the ACA's limits on physician-owned hospitals impeding business, System executives—like Defendants David Fine, David Koontz, and Stephen Pickett—began planning to move away from physician ownership. (Doc. No. 1 at 14–17.) The System worked with outside counsel from Baker Donelson and a health care consultant, HCAI, to devise a plan. By March 2011, the System had chosen to use the Texas Security Act's rescission process, which permits sellers of securities to rescind a sale at a statutorily determined price in exchange for the release of the buyer's legal claims against the seller. See TEX. REV. CIV. STAT. ART. 581–33. In April 2011, HCAI produced a report that appraised the Class A ownership units, originally sold for $40,000, at only $5,000. (Id. at 19–21.) In May, the Partnership took a $10 million loan from the System to fund rescission offers, and then it made the offers in June, giving the physician investors thirty days to decide. (Id. at 23.)

Relators devote a lengthy portion of their complaint to the argument that the System and Partnership faced no risk of lawsuits from their physician investors. (Doc. No. 1 at 18–29.) The inference is that the System used the Texas Securities Act's rescission process under false pretenses. Relators assert that "no formal or informal claims of any kind had been made by any of the physician investors in the Partnership." (Id. at 19.) Relators also assert that the statute of limitations for claims under the Texas Securities Act was, right at that time, foreclosing the possibility of litigation by most or all of the original physician investors. (Id. at 25–26.)

These rescission offers are the core of the first scheme that the Relators allege. As to the plausibility of Relators' allegations, it must be noted that Patel sued the Partnership in state court in April 2011, shortly before the rescission offers went out. The other Relators later joined the suit. Whether Relators can plausibly contend that the Partnership faced no litigation risk at the very time they were suing the Partnership is a question the Court takes up below.

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