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United States v. Catholic Health Initiatives

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

May 16, 2018

UNITED STATES OF AMERICA and STATE OF TEXAS, ex rel. SHATISH PATEL, et al., Plaintiffs,
v.
CATHOLIC HEALTH INITIATIVES, et al., Defendants.

          MEMORANDUM & ORDER

          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.

         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, 136 S.Ct. 1989, 2003 (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 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.

         b. Relators' Conflict with St. Luke's Intensifies

          All but four of the physician investors accepted the System's rescission offers: Relators and Subodh Sonwalkar, their co-plaintiff in the state court litigation. (Doc. No. 1 at 29.) At this point, the four physicians were the last hold-outs blocking the System's plans. A complex dispute over the hospital's ownership then unfolded, playing out partly in Texas courts. The significance, in Relators' view, is that this dispute allegedly led the System to knowingly misrepresent SLCDC-SL, its subsidiary, as the hospital's owner to the government.

         Relators took the position that the rescission of all other Class A units left them and Sonwalkar in sole control of the Class A units' 49% voting interest in the Partnership that owned the hospital. (Doc. No. 1 at 29.) The System seems to have taken the view that the rescission process resulted in Relators and Sonwalkar possessing only a small stake in the Partnership-- under 5%--while its subsidiary, SLCDC-SL, controlled the rest. As the System saw it, the four physician investors were therefore incapable of blocking decisions by the Partnership's governing board.

         Faced with these four physician investors' resistance, the System initiated a capital call, demanding they produce nearly a quarter of a million (in the case of Oladut and Sonwalkar) or half a million dollars (in the case of Patel and Vijayan). (Doc. No. 1 at 29.) Relators say the capital call was ultra vires, because the Partnership's board did not properly approve it. (Id. at 30.) By this time, they had already tried and failed twice to obtain an injunction blocking the Partnership's actions. (Id.) After the capital call went unanswered, the Partnership moved to terminate the Relators' and Sonwalkar's ownership interests. A third request for injunctive relief at this point was unsuccessful in the trial court but more successful in the First Court of Appeals, which ruled that the physicians had demonstrated a probable right to relief against the unlawful deprivation of their voting interest in the Partnership. Sonwalkar v. St. Luke's Sugar Land P'ship, L.L.P., 394 S.W.3d 186 (Tex. App.--Houston [1st Dist.] 2012, no pet.).

         On remand, two days before the injunction hearing, St. Luke's apparently surprised Relators and Sonwalkar with a new argument: the Partnership had terminated their interests; the elimination of Class A units rendered the Partnership a defunct entity; SLCDC-SL was now the owner; and so the suit was moot. (Doc. No. 1 at 31-33.) The trial court accepted this argument and denied relief, prompting another trip to the First Court of Appeals. The appellate court again sided with Relators and Sonwalkar, ruling that their lawsuit was not moot. Patel v. St. Luke's Sugar Land P'ship, L.L.P., 445 S.W.3d 413, 424 (Tex. App.-Houston [1st Dist.] 2013, pet. denied). It ruled that the Partnership had not ceased to exist, because Relators' and Sonwalkar's ownership interests had not been validly eliminated. Id. at 422. The court also rejected St. Luke's theory that elimination of the physicians' interests would cause ownership of the hospital to automatically revert to SLCDC-SL by operation of Texas law. Even if their interests had been eliminated, numerous steps were necessary to wind up the Partnership; it would not happen automatically. Id. at 422-23. The failure of St. Luke's to take all these steps was another reason the suit was not yet moot. Id. at 423. In sum, “there is no evidence whatsoever, ” the court said, that “ownership of the hospital was actually transferred away from the Partnership.” Id.

         This was a split decision. One justice would have affirmed the trial court's ruling that the case was moot and the physicians' interests in the hospital had been terminated. Patel, 445 S.W.3d at 424 (Keyes, J., dissenting). St. Luke's also repeatedly sought review of the decision afterwards. It sought rehearing (denied in January 2014), review in the Supreme Court of Texas (denied in October 2014), and reconsideration of its petition for review (denied in January 2015). See Docket, St. Luke's Sugar Land P'ship L.L.P. v. Patel, No. 14-0183 (Tex. 2014).

         Relators believe that the First Court of Appeals' ruling on the mootness of their suit, issued on November 7, 2013, has significance under the False Claims Act. In Relators' view, any representations to the government after that date that SLCDC-SL, not the Partnership, owned the hospital must be factually false. (Doc. No. 1 at 44.)

         c. Misleading Texas and CMS

          Relators also assert that the First Court of Appeals' ruling should have come as no surprise to St. Luke's. They allege that the System's senior in-house counsel, Ann Thielke, wrote an email on October 26, 2011--after the purported termination of Relators' partnership interests--saying “that the Partnership was still in existence and in the winding up phase.” (Doc. No. 1 at 38.) As Relators see it, this “directly contradict[s] the self-serving … theory that the Hospital had automatically transferred to SLCDC-SL” that St. Luke's was advancing in court. (Id.) In another email to System executives the same day, Thielke carefully explained that “the idea … of the Hospital automatically transferring to SLCDC-SL was not correct.” (Id. at 39.)

         The Thielke emails are important to Relators' story because St. Luke's would soon represent to Texas and to the federal government that SLCDC-SL was the sole owner of the hospital. On December 2, 2011, the System submitted a form to the Centers for Medicare & Medicaid Services (CMS), Form 855A, giving notice of the change in the hospital's ownership. (Doc. No. 1 at 40.) According to Relators, CMS requires a “bill of sale” to corroborate such changes, but the System did not have one. In lieu of the required documentation, the System advanced the automatic-transfer theory that, by this time, its own senior counsel had debunked. (Id.) Moreover, three days later, its outside counsel, Haynes and Boone, confirmed to the System that Thielke's analysis was right. (Id.)

         Despite its attorneys' guidance, the System allegedly continued to misrepresent the hospital's ownership. In February and March 2012, it made three misrepresentations to the state of Texas: an email to the Texas Department of State Health Services (TDSHS), the administrator of Medicaid in Texas, on February 10; an attempt to pass off an unrelated document as a bill of sale on March 1; and another attempt to do so on March 14. (Doc. No. 1 at 40-42.) Relators also allege that the System never corrected its misrepresentations to CMS, which had approved the change of ownership in May 2012. (Id. at 42-43.) Consequently, the System based its change of ownership form and its annual cost reports ever since on information that it knew to be false.

         Two further developments warrant mention. First, in 2013, Defendant Catholic Health Initiatives (CHI) bought the System from the Episcopal Diocese of Texas, after the First Court of Appeals' decision in Sonwalkar but before its decision in Patel. (Doc. No. 1 at 45.) Relators allege that CHI knows all this history but still “decided to continue the System's ongoing misrepresentations to CMS and [Texas] about the ownership of the Hospital.” (Id. at 46.)

         Second, Relators' lawsuit in state court went to trial. A jury evidently returned a $3 million verdict for Relators, the plaintiffs in that suit, in June 2015. (Doc. No. 19 at 1.) The parties' filings do not reveal what further litigation unfolded in the state courts since then.

         II. APPLICABLE LAW

         a. False Claims Act

         The False Claims Act (FCA) is the federal government's “primary litigation tool for recovering losses resulting from fraud.” U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 267 (5th Cir. 2010). Passed in 1863 to combat fraud by private suppliers of the Union Army during the Civil War, it was “intended to protect the Treasury against the hungry and unscrupulous host that encompasses it on every side.” U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185 (5th Cir. 2009) (quoting S. Rep. No. 99-345 at 11).

         The FCA authorizes actions by the United States or by a relator in a qui tam capacity on behalf of the government.[2] 31 U.S.C. § 3730(a), (b). Through those actions, it imposes civil penalties and treble damages on any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the federal government. Id. § 3729(a)(1)(A). It imposes the same liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” Id. § 3729(a)(1)(B). The FCA defines “knowingly” to mean that a person “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information, ” but proof of the person's “specific intent to defraud” is not required. Id. § 3729(b)(1)(A)-(B). The FCA defines “material” to mean “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Id. § 3729(b)(4). The Fifth Circuit has summarized the FCA inquiry as follows: “(1) whether there was a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e., that involved a claim).” U.S. ex rel. Harman v. Trinity Industries, Inc., 872 F.3d 645, 653-54 (5th Cir. 2017) (quoting U.S. ex rel. Longhi v. Lithium Power Tech. Inc., 575 F.3d 458, 467 (5th Cir. 2009)).

         Defendants can incur liability under the FCA by submitting claims for services rendered in violation of the Anti-Kickback Statute (AKS) or the Stark Law. U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997). Those statutes are explained in separate sections below.

         b. Dismissal

         A court may dismiss a complaint for a “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). “[A] complaint ‘does not need detailed factual allegations, ' but must provide the plaintiff's grounds for entitlement to relief-including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.'” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir. 2007) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, (2007)). That is, a complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). The plausibility standard “is not akin to a ‘probability requirement, '” though it does require more than simply a “sheer possibility” that a defendant has acted unlawfully. Id.

         “[A] complaint filed under the False Claims Act must meet the heightened pleading standard of Rule 9(b).” Grubbs, 565 F.3d at 185. The rule provides that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake, ” though it permits “[m]alice, intent, knowledge, and other conditions of a person's mind [to] be alleged generally.” Fed.R.Civ.P. 9(b). The rule plays a “screening function, standing as a gatekeeper to discovery, a tool to weed out meritless fraud claims sooner than later.” Grubbs, 565 F.3d at 185. The Fifth Circuit has given Rule 9(b) a “flexible” interpretation in the FCA context in order “to achieve [the FCA's] remedial purpose.” Id. at 190. A complaint can survive either by alleging “the details of an actually submitted false claim” or by “alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Id.

         III. ANALYSIS

         Relators' first and second claims for relief concern the rescission offers and are based on both the AKS and Stark Law. The Court treats each statutory basis for the first two claims separately. Relators' third and fourth claims for relief concern the issue of hospital ownership and are based on the FCA. Relators' fifth and sixth claims also concern the issue of hospital ownership but are based on the Texas Medicaid Fraud Prevention Act (TMFPA).

         a. Claims I and II: ...


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