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.”