United States ex rel Williams v. Renal Care Group: 6th Circuit Refuses to Impose FCA Liability on Company that Took Lawful Advantage of Medicare Loopholes

In a startling reversal of a summary judgment entered in favor of the government in a False Claims Act (FCA) case, the 6th Circuit recently rejected attempts by the government to establish FCA liability simply because a company, Renal Care Group, Inc. (“RCG”), a dialysis provider, had “created a wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory scheme that would permit it to increase profits.” United States ex rel Williams v. Renal CareGroup, 2012 WL 4748104 (6th Cir.) In the absence of regulations and statutes clearly prohibiting such an arrangement, the Court found that RCG had not acted with reckless disregard of the truth or falsity of the claims submitted by its subsidiary to Medicare because RCG had taken several steps to try to determine whether its subsidiary relationship violated applicable statutes and had not made a secret of its corporate arrangement.  

RCG was a dialysis provider that provided dialysis services at more than 260 facilities and in addition provided “dialysis supplies and services to home dialysis patients.” RCG created a subsidiary, RCGSC, that only provided dialysis equipment, but not services, to home dialysis patients. Medicare reimbursed dialysis providers according to two different methods: Method I applied to dialysis providers who operated dialysis facilities and who also provided home dialysis and services. Method II applied to providers who provided equipment and supplies to home dialysis patients but who did not provide dialysis services. Medicare reimbursed Method II providers at a higher rate than those of Method I, and further provided that “Method II payments may only go to an entity that is not a ‘provider of services [or] a renal dialysis facility . . . '”

RCG created RCGSC for the purpose of obtaining the higher Method II Medicare reimbursements. Moreover, RCG controlled RCGSC’s operations. The two companies shared RCG’s employees, officers, and directors, all of whom "held key roles in RCGSC’s corporate structure” as well as shared “office space, payroll, insurance benefits, contracts, and human resource services.”

The government alleged that RCG and RCGSC violated the False Claims Act by submitting false claims “while knowing that RCGSC was a sham corporation created for the sole purpose of increasing Medicare reimbursements” and “while knowing that RCGSC was not in compliance with Medicare rules and regulations.” The government moved for partial summary judgment on the issues of falsity and materiality, which the Court granted. The Court went a step further, however, and later found that the defendants had acted with the requisite knowledge to violate the False Claims Act as well, and it entered judgment against the defendants in the amount of $82,000,000.

The 6th Circuit reversed the judgment on all counts and instead entered summary judgment for the defendants on the two False Claims Act counts. First, the Court rejected the government’s argument that the RCG’s subsidiary was an alter-ego of RCG, observing that “[t]he corporate form need not be disregarded when its adoption was meant to 'secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person.'” (citation omitted). RCG, the Court went on, had not acted with an unlawful purpose simply because it sought to “maximize profits,” saying “[w]hy a business ought to be punished solely for seeking to maximize profits escapes us.” Analyzing the statutory and regulatory basis underlying the differences in reimbursement, the Court concluded “[a]ll of this points to the conclusion that the structure of RCG and RCGSC is not obviously inconsistent with Congress's goals for the payment scheme.”

Second, the Court considered the government’s claim “that the regulations were clear that wholly-owned subsidiaries were ineligible” and that the defendants had acted with “reckless disregard” in seeking reimbursement for Method II claims by a subsidiary. The Court, however, found that the defendants had not acted with reckless disregard as to the truth or falsity of their claims, but instead had:

consistently sought clarification on the issue, followed industry practice in trying to sort through ambiguous regulations, and were forthright with government officials over RCGSC's structure. To deem such behavior “reckless disregard” of controlling statutes and regulations imposes a burden on government contractors far higher than what Congress intended when it passed 31 U.S.C. § 3729(b)(1)(A)(iii).
 

In turn, the Court detailed the steps the defendants had taken to obtain clarification, including (i) seeking counsel; (ii) seeking clarification from CMS; (iii) meeting with a government official; (iv) industry practice which appeared to permit such billings and (v) both the OIG and CMS were aware of RCGSC’s corporate ownership structure. As a result, the Court entered summary judgment for the defendants, finding that they had not knowingly submitted false claims to the government in billing for the RCGSC subsidiary.

Third, the Court rejected the government’s second FCA claim that defendants submitted false claims because RCGSC “was not in compliance with the durable medical equipment standards.” The Court found that “irrespective of whether [defendants] in fact violated the regulations, the False Claims Act is not a vehicle to police technical compliance with complex federal regulations.” The regulations which defendants allegedly violated were “conditions of participation” and did not give rise to False Claims Act liability.
 

Overall, it appears the 6th Circuit has brought a common sense perspective to bear in this case. The Court did not demonize a company’s desire for profits nor automatically jump to the conclusion that by structuring itself to take advantage of a Medicare loophole the company had engaged in misconduct. Rather, the Court reviewed the law and regulations carefully to discern whether they prohibited such an arrangement, and finding none, refused to read in what was not there. In turn, the Court credited the company’s efforts to obtain clarification as to the legality of its arrangement and its openness with Medicare and OIG as to its corporate structure. This is really a remarkable case, and I commend it to you.

 

A. Brian Albritton

October 16, 2012