United States v. Palin

• Decision Date: 30 October 2017
• Docket Number: Nos. 16-4522, 16-4540.,s. 16-4522, 16-4540.
• Citation: 874 F.3d 418
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Beth PALIN, Defendant–Appellant. United States of America, Plaintiff–Appellee, v. Joseph D. Webb, Defendant–Appellant.
• Court: U.S. Court of Appeals — Fourth Circuit

874 F.3d 418

UNITED STATES of America, Plaintiff–Appellee,

v.Beth PALIN, Defendant–Appellant.

United States of America, Plaintiff–Appellee,

v.Joseph D. Webb, Defendant–Appellant.

Nos. 16-4522, 16-4540.

United States Court of Appeals, Fourth Circuit.

Argued: September 13, 2017

Decided: October 30, 2017

ARGUED: Michael John Khouri, LAW OFFICES OF MICHAEL KHOURI, Laguna Hills, California; Nancy Combs Dickenson, OFFICE OF THE FEDERAL PUBLIC DEFENDER, Abingdon, Virginia, for Appellants. Janine Marie Myatt, OFFICE OF THE UNITED STATES ATTORNEY, Abingdon, Virginia, for Appellee. ON BRIEF: Larry W. Shelton, Federal Public Defender, OFFICE OF THE FEDERAL PUBLIC DEFENDER, Roanoke, Virginia, for Appellant Joseph D. Webb. Rick A. Mountcastle, Acting United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Roanoke, Virginia, for Appellee.

Before MOTZ, DUNCAN, and WYNN, Circuit Judges.

Affirmed by published opinion. Judge Motz wrote the opinion, in which Judge Duncan and Judge Wynn joined.

DIANA GRIBBON MOTZ, Circuit Judge:

After a bench trial, the district court found Beth Palin and Joseph Webb (wife and husband) guilty of health care fraud and conspiracy to engage in health care fraud, in violation of 18 U.S.C. §§ 1347 and 1349. Palin and Webb appeal, principally contending the district court failed to apply the correct standard of materiality and failed to find their misrepresentations were material. For the reasons that follow, we affirm.

I.

During a two-week trial, the district court considered numerous documents and the testimony of more than twenty witnesses. We briefly summarize that evidence.

Palin owned Mountain Empire Medical Care ("MEMC"), an addiction medicine clinic, and Bristol Laboratories ("the Lab"), which processed urine drug tests ordered by MEMC doctors, among others. Webb assisted Palin in the operation of both facilities.

The Lab performed two types of urine tests: the basic, inexpensive "quick-cup" test and a more sophisticated, more expensive "analyzer" test. Although referring doctors ordered their patients to undergo drug tests, the doctors did not specify the type of test. Palin and Webb made that decision, instituting procedures in which insured patients were treated differently than uninsured patients. In general, uninsured patients paid cash and received one test each week—the "quick-cup" test. Insured patients received both the "quick-cup" and the more expensive "analyzer" test. The Lab billed insurers (which included Medicare and private insurance companies) for the sophisticated test.

In a detailed written opinion, the district court found Palin and Webb "knowingly and willfully executed a scheme to defraud health care benefit programs" in violation of §§ 1347 and 1349. The court found that performing additional, weekly, expensive tests for insured patients was not medically necessary; that insurers have rules prohibiting providers from submitting claims for unnecessary tests; and that Palin and Webb knew the additional tests were unnecessary but hid that fact when billing the insurers. The court, however, did not expressly mention materiality.

Palin and Webb then moved for judgments of acquittal or, in the alternative, for a new trial, relying in part on Universal Health Services, Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016), which issued after the district court had found them guilty. They contended that Universal Health changed the materiality standard applicable to health care fraud under § 1347 and, under the new standard, their asserted misrepresentations were not material.

The district court issued a careful opinion and order denying the motions. In that opinion and order, the court acknowledged that its opinion finding Palin and Webb guilty did not discuss materiality as an element of health care fraud. But the court explained that the misrepresentations at issue in this case were material, even assuming the standard outlined in Universal Health applied.

This appeal followed.

II.

A.

On appeal, the Government agrees with the defendants that materiality constitutes an element of health care fraud and conspiracy to commit health care fraud. That concession is well-advised. Section 1347 provides that it is a crime to "knowingly and willfully execute[ ] ... a scheme or artifice ... to defraud any health care benefit program" or obtain money or property from a health care benefit program "by means of false or fraudulent pretenses, representations, or promises." This language mirrors that in the longstanding federal mail fraud ( 18 U.S.C. § 1341 ), wire fraud (§ 1343), and bank fraud (§ 1344) statutes, which similarly prohibit any "scheme or artifice to defraud" or obtaining money or property "by means of false or fraudulent pretenses, representations, or promises." In Neder v. United States , 527 U.S. 1, 21–25, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999), the Supreme Court held that the mail, wire, and bank fraud statutes incorporated the common-law definition of "fraud," which requires "a misrepresentation or concealment of material fact," meaning materiality is an implicit element of those statutes. Although Neder did not examine § 1347, the same analysis applies and compels the same result—materiality constitutes an element of health care fraud. See United States v. Perry , 757 F.3d 166, 175–76 (4th Cir. 2014).

Because materiality constitutes an element of their offenses, we must examine whether, as Palin and Webb contend, the district court erred by not expressly ruling on materiality when finding them guilty. The extent to which the court considered materiality at that stage is unclear. On one hand, as the court acknowledged in denying the post-trial motions, it "did not include any reference to a materiality element" in its opinion finding Palin and Webb guilty. On the other, the court never stated in that opinion that it had concluded materiality was not an element of health care fraud. Moreover, its findings suggest that it viewed the misrepresentations at issue here—that the sophisticated tests were medically necessary—as material to the decision by insurers to pay for claims submitted by the Lab. For example, the district court found that Palin and Webb performed medically unnecessary tests, hid this fact from insurers, and sought payment for those tests from insurers when applicable rules prohibited the submission of claims for medically unnecessary tests.

Assuming the district court did err in failing to consider materiality expressly when assessing guilt, harmless error review applies. See Neder , 527 U.S. at 15, 119 S.Ct. 1827 (a court reviews an omission of an element of an offense for harmless error). An error is harmless only if the reviewing court concludes beyond a reasonable doubt that the verdict would have been the same absent the error. See id. at 19, 119 S.Ct. 1827. In the context of a bench trial, that inquiry turns on whether "it is clear that a rational fact finder would have found [the defendant] guilty absent the error." See United States v. Poole , 640 F.3d 114, 120 (4th Cir. 2011). Moreover, in determining if an error is harmless, a reviewing court may consider the entire record, including the trial court's discussion of its error during post-trial proceedings. See id.

Even if the district court failed to consider materiality when finding Palin and Webb guilty, the error was harmless. The record contains no evidence "that could rationally lead to a contrary finding with respect to that omitted element." See United States v. Brown , 202 F.3d 691, 700–01 (4th Cir. 2000) (quoting Neder , 527 U.S. at 19, 119 S.Ct. 1827 ) (internal quotation marks omitted). Rather, the record conclusively establishes that insurers would not have paid for the second, more sophisticated tests had they known those tests were not medically necessary. No rational fact finder could conclude otherwise.

B.

Nor does Universal Health compel a different conclusion. Palin and Webb maintain that Universal Health established a new materiality standard that applies to all criminal fraud statutes, including § 1347. See Appellants' Br. 15–16 (claiming Universal Health "overruled the old standard for materiality"). We do not believe that is so, but even if it is, that purported new standard does not assist Palin and Webb here.

In Universal Health , the Court considered materiality under the False Claims Act ("FCA"). The Court generally noted that, "[u]nder any understanding of the concept, materiality ‘looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.’ " 136 S.Ct. at 2002 (bracket omitted) (quoting 26 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 69:12 (4th ed. 2003) ). It then discussed how materiality applies under a specific theory of FCA liability known as "implied false certification." See id. at 1195, 2003–04. In that context, the Court noted that, if the government pays a particular claim despite knowing certain requirements for payment were violated, "that is very strong evidence that those requirements are not material." Id. at 2003.

According to Palin and Webb, the Court's discussion of materiality in this specific FCA context applies here and bolsters their claims that any misrepresentations they made were not material. In short, they claim that because Palin and Webb billed insurers for the second, sophisticated tests, and because the insurers regularly paid those claims despite knowing the type of test (analyzer) and the frequency of testing (weekly), it follows that "no material misrepresentations existed." Appellants' Br. 18–19.

As an initial matter, Palin and Webb stretch Universal Health too far. We do not believe the Supreme Court intended to broadly "overrule" materiality standards that had previously applied in the context of criminal fraud. And we doubt the Court's examination of how materiality applies under "implied false certification" FCA cases transfers to all ...