US ex rel. McCoy v. Cal. Med. Review, Inc.

• Decision Date: 14 July 1989
• Docket Number: No. C 88-3659 MHP.,C 88-3659 MHP.
• Citation: 723 F. Supp. 1363
• Parties: UNITED STATES of America, ex rel. Guy D. McCOY, Jr., and Frank Hellum, Plaintiffs, v. CALIFORNIA MEDICAL REVIEW, INC.; Jo Ellen H. Ross, Larry Magna; Margaret Shea; and Alan Snodgrass, Defendants.
• Court: U.S. District Court — Northern District of California

723 F. Supp. 1363

UNITED STATES of America, ex rel. Guy D. McCOY, Jr., and Frank Hellum, Plaintiffs, v. CALIFORNIA MEDICAL REVIEW, INC.; Jo Ellen H. Ross, Larry Magna; Margaret Shea; and Alan Snodgrass, Defendants.

No. C 88-3659 MHP.

United States District Court, N.D. California.

July 14, 1989.

Thomas Steel, M. Jane Lawhon, San Francisco, Cal., for plaintiffs.

Stephen A. Shefler, Asst. U.S. Atty., Civ. Div., San Francisco, Cal., John Bolton, Michael F. Hertz, Ronald H. Clark, Richard G. Vartain, U.S. Dept. of Justice, Washington, D.C., for U.S.

Michael L. Lipman, Coughlan, Semmer & Lipman, San Diego, Cal., for Alan L. Snodgrass.

William E. Grauer, Gray, Cary, Ames & Frye, San Diego, Cal., for Margaret A. Shea.

S. Thomas Pollack, Wendy A. Wolf, Irell & Manella, Los Angeles, Cal., Gerald D. Stern, Brown & Bain, Palo Alto, Cal., for Jo Ellen H. Ross.

Barry J. London, Douglas R. Schwartz, Daniel King, Lillick & Charles, San Francisco, Cal., for California Medical Review.

William L. Osterhoudt, Susan B. Jordan, Jordan & Osterhoudt, San Francisco, Cal., for Larry Magna.

OPINION

PATEL, District Judge.

This action under the False Claims Act, 31 U.S.C. § 3729 et seq., was filed by relators Guy D. McCoy, Jr. and Frank Hellum on September 16, 1988. The matter is now before the court on motions by defendants California Medical Review, Inc., Jo Ellen H. Ross, Margaret Shea and Alan Snodgrass to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim and under Federal Rule 9(b) for failure to plead fraud with particularity. Defendants also move to strike the claim for interest under Federal Rule of Civil Procedure 12(f). Defendant Shea moves to strike portions of the complaint under Federal Rule 12(f). Plaintiff United States moves to amend its first amended complaint.

Having considered the memoranda and the arguments of the parties, the court GRANTS plaintiff's motion to amend the First Amended Complaint, DENIES defendants' motion to dismiss counts I and II under Federal Rules 12(b)(6) and 9(b) and DENIES defendant California Medical Review's motion to dismiss Counts III, IV and V of the First Amended Complaint. The court further DENIES as moot defendant Snodgrass' motion to strike the prayer for an award of interest, and DENIES defendant Shea's motion to strike portions of the complaint under Rule 12(f).

BACKGROUND

Relators McCoy and Hellum are former employees of defendant California Medical Review, Inc. ("CMR"). Acting as qui tam plaintiffs under the False Claims Act ("Act"), 31 U.S.C. § 3729 et seq., relators filed this action in September 1988, alleging fraudulent practices by CMR in violation of the Act. On January 3, 1989, pursuant to 31 U.S.C. § 3730(b)(4), the United States entered its appearance and took over the action. The United States filed its first amended complaint on March 22, 1989.

The United States, suing on behalf of the Health Care Financing Administration (HCFA) of the Department of Health and Human Services (HHS), seeks damages and civil penalties arising from false claims and reports allegedly submitted by California Medical Review, Inc. (CMR) to HCFA. Under 42 U.S.C. § 1320c et seq., HCFA is responsible for administering certain aspects of the Medicare program, in particular the Prospective Payment System (PPS). Under the PPS system, each state has one Peer Review Organization (PRO), which contracts with HHS to monitor and review hospital discharge payments under the Medicare program. The PROs review each discharge case under HCFA's regulations, denying any inappropriate discharge payments. See 42 C.F.R. §§ 466.83-466.104; 476.101-476.103. The crux of the United States' case is the allegation that CMR and its personnel, without performing this required review, fraudulently certified to HCFA that the review had been completed.

The United States alleges that at least from July 1, 1986 to September 30, 1986, the time of the fraud alleged in this action, CMR was under contract with HHS to serve as California's PRO. The United States alleges that the individual defendants were employed by CMR during the relevant period in the following capacities: Jo Ellen H. Ross was and is CMR's Chief Executive Officer (CEO); Larry Magna was CMR's Senior Vice President for Operations; Margaret Shea, formerly CMR's Assistant to the CEO, is now CMR's Community Outreach Specialist; Allen Lee Snodgrass, CMR's former Director of Review, is now CMR's Senior Vice President for Corporate Operations. The government alleges that the individual defendants were agents of CMR, acting within the scope of their employment for CMR's benefit.

The United States alleges that under CMR's 1984-1986 contract with HHS, which is not before the court, CMR was required to "review the medical discharge records of Medicare beneficiaries to determine the appropriateness of hospital costs and quality of care." Second Amended Complaint, para. 16. CMR's "Review Coordinators" performed this task and were responsible for referring questionable discharge records to a Physician's Advisor for further evaluation. Id.

The United States alleges that on or about July 28, 1986, a meeting attended by defendants Ross, Magna, Snodgrass and others was held at CMR's corporate headquarters. At that meeting a telephone conference call was planned for July 30, 1989. During the conference call, plaintiff alleges, CMR's District Directors "were instructed to apply procedures for certifying the review of hospital discharges without review by Review Coordinators ..." Second Amended Complaint, para. 28. Plaintiffs allege that defendants employed a procedure called "autocertification," which involved stamping the identification number of a CMR Review Coordinator or District Review Manager on a discharge, although neither that CMR employee nor any other had in fact reviewed the discharge. Id. at paras. 28, 31.

The United States alleges that, pursuant to this system for falsely certifying that contractually required review had actually taken place, defendants falsely claimed that 51,094 reviews were performed between August 1, 1986 and September 30, 1986. Second Amended Complaint, para. 31. Approximately 30,000 discharges were identified as reviewed by defendant Snodgrass alone. Id.

According to the United States, CMR's 1984-1986 agreement with HCFA was a fixed price contract which called for monthly payments of $1,125,000 from HCFA to CMR. Second Amended Complaint, para. 17. During the time of the alleged fraud, CMR received over $2,400,000 for its contractual services. Id. at para. 38. The United States alleges that because CMR did not perform the required reviews, HCFA lost approximately $4,314,600 in hospital payments that it should not have authorized or reimbursements it should have recouped. Id.

Article XIX of the contract allegedly provides that CMR would obtain each installment payment upon the HCFA project officer's certification that performance was satisfactory. Second Amended Complaint, para. 17. In making this determination, the government contends, the HCFA project officer relied upon, inter alia, invoices CMR submitted and documents known as HCFA-516 reports also submitted by CMR. Id. Those documents allegedly incorporated the false certification that 51,000 discharge forms had been reviewed.

Count I of the complaint alleges that pursuant to this review process, and "for purposes of obtaining or aiding to obtain payment or approval," the defendants presented to the United States four invoices containing false or fraudulent representations of CMR's contract performance. Second Amended Complaint, para. 40. Count II alleges that the defendants presented two false HCFA-516 reports, "knowing them to be false records and/or containing false or fraudulent statements, or acting with reckless disregard or deliberate ignorance thereof." Id. at para. 43. Counts III, IV and V of the First Amended Complaint, though based on the same facts, are brought solely against CMR and allege, respectively, breach of contract, payment under mistake of fact, and unjust enrichment. First Amended Complaint at paras. 32-33, 35-36, 39-40. In the Second Amended Complaint, Counts III, IV and V are renumbered as IV, V and VI respectively and a new Count III is added. The new count charges a conspiracy among all defendants to make or present the two false HCFA-516 reports and the four false invoices. Second Amended Complaint at para. 46.

All defendants except defendant Magna move to dismiss Counts I and II under Federal Rules of Civil Procedure 12(b)(6) and 9(b). Defendants contend that applying the 1986 False Claims Act amendments to their alleged conduct violates the due process clause of the Fifth Amendment and the ex post facto prohibition of Article I, sections 9 and 10 of the United States Constitution, and therefore move to dismiss under Rule 12(b)(6). Defendants further contend that the complaint fails to allege fraud with sufficient particularity as required by Rule 9(b). Defendant CMR moves to dismiss Counts III, IV and V of the First Amended Complaint on both 12(b)(6) and 9(b) grounds. Defendant Shea moves to strike portions of the complaint under Rule 12(f). The United States moves to amend its First Amended Complaint. The court will deal with each motion in turn.

DISCUSSION

A. Motion to Amend

Under Federal Rule of Civil Procedure 15(a), leave of the court to amend the complaint "shall be freely given when justice so requires." Defendants have filed no opposition to plaintiff's motion to amend its First Amended Complaint and the court therefore follows Rule 15's liberal amendment policy. Accordingly, the motion to file a Second Amended Complaint is granted.

B. Motion to Dismiss under Rule 12(b)(6)

1. Legal Standard

A motion to dismiss for failure to state a claim will be denied unless it appears that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46...