* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 07-51042

UNITED STATES OF AMERICA, ex rel. Dr. Man Tai Lam, Dr. William

Meshel,

Plaintiff,

v.

DR. MAN TAI LAM; DR. WILLIAM MESHEL,

Plaintiffs-Appellants,

v. 

TENET HEALTHCARE CORPORATION,

Defendant-Appellee,

UNITED STATES OF AMERICA,

Intervenor-Appellee.

Appeal from the United States District Court 

for the Western District of Texas

No. 3:02-CV-525

Before DAVIS, SMITH, and DeMOSS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge.*

United States Court of Appeals

Fifth Circuit

F I L E D

July 22, 2008

Charles R. Fulbruge III

Clerk
No. 07-51042

R. 47.5.4.

2

The Relators, Man Tai Lam and William Meshel, appeal from the

dismissal of their qui tam claims alleging that Tenet Healthcare Corporation

made false claims for outlier medical benefits against Medicare. When, as in

this case, there has been public disclosure of the information on which the

relators’ allegations are based, no court has jurisdiction over an attempted qui

tam suit under the False Claims Act unless the relators are the original source

of the information. Because the record does not support a conclusion that the

Relators had direct and independent knowledge of the alleged fraudulent

practices of Tenet, the Relators cannot qualify as original sources and the

district court properly dismissed this case. 

I. 

In general, Medicare reimbursements do not vary with the cost oftreating

a particular patient. Rather Medicare reimburses a fixed amount per patient

based on the Diagnosis Related Group (“DRG”) into which the patient falls, and

further based on the patient’s diagnosis and procedures performed. Outlier

reimbursements, at issue in this appeal, come into play when a hospital treats

a patient with an unusually long hospital stay and/or unusually costly

treatments. A hospital can qualify for outlier payments when its cost-adjusted

charges exceed either a fixed multiple of the applicable DRG rate or a fixed

dollar amount established by the Center for Medicare and Medicaid Services

(“CMS”), called the “Outlier Threshold.” 42 U.S.C. § 1395ww(d)(5)(A)(iii). This

is designed to permit the hospital to obtain compensation for treatment that is

much more extensive than the norm.

Because hospital costs are difficult to determine, CMS regulations

establish a way to estimate a hospital’s costs. Prior to August 2003, those

regulations allowed outlier payments when a hospital’s charges multiplied by
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3

the hospital’s ratio of costs to charges in its most recent settled cost report,

exceed a certain threshold. See 42 C.F.R. § § 412.80, 412.84 (2002). (The exact

computation of outlier payments is outside the scope of this appeal.) The most

recent settled cost report is likely to be several years old. Outlier payments can

be manipulated if a hospital substantially increases its charges without a

corresponding increase in costs. In that situation, the inflated charges, when

multiplied by the hospital’s historical cost-to-current charge ratio, result in an

artificially high estimate of the hospital’s costs, and therefore unwarranted

payments from the outlier pool of funds. A hospital’s charges are rarely what

the hospital is paid for its services. The charges are deeply discounted by

contracts with insurers and replaced by a much lower fee schedule when

government insurance such as Medicare is involved. 

Relators allege that Tenet improperly manipulated the outlier payment

system by artificially inflating charges at two El Paso area hospitals when its

real costs did not increase in proportion to the charge increases, and even

declined. As a result, Tenet was allegedly able to qualify more patients as

outlier patients and receive reimbursements that it was not entitled to. 

II. 

Relators claim thatTenet violated theFalse Claims Act. The False Claims

Act, 31 U.S.C. § 3729, et seq., (“FCA”), prohibits the submission of false or

fraudulent claims for payment to the United States or the use of false

statements for the purpose of causing a false claim to be paid. A person who

violates the FCA is liable to the United States for civil penalties and for three

times the amount of the government’s damages. 31 U.S.C. § 3729(a). Suits to

collect statutory damages may be brought either by the Attorney General, or by

a private person (known as a relator) in the name of the United States in an

action called a qui tam suit. 31 U.S.C. § 3730(a) and (b)(1). 
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The FCA prescribes several important limitations on the jurisdiction of

courts over qui tam suits. The FCA’s “public disclosure” provision states:

(A) No court shall have jurisdiction over an action under this section

based upon the public disclosure of allegations or transactions in a

criminal, civil, or administrative hearing, in a congressional,

administrative, or [General] Accounting Office report, hearing,

audit, or investigation, or from the news media, unless the action is

brought by the Attorney General or the person bringing the action

is an original source of the information.

(B) For purposes of this paragraph, “original source” means an

individual who has direct and independent knowledge of the

information on which the allegations are based and has voluntarily

provided the information to the Government before filing an action

under this section which is based on the information.

31 U.S.C. § 3730(e)(4). As this Court has recognized, the public disclosure bar

divests courts of jurisdiction over qui tam suits where the allegations are “based

upon” a public disclosure, unless the relator can qualify as an “original source”

under the FCA. United States ex rel. Reagan v. East Texas Med. Ctr. Regional

Healthcare Sys., 384 F.3d 168, 176-77 (5th Cir. 2004). As stated in the statute,

an original source is one “who has direct and independent knowledge of the

information on which the allegations are based.”

III. 

This quitam action was filed by Relators in November 2002, but remained

under seal until July 18, 2005 after the Government declined to intervene. In

December 2005, Relators filed their Third Amended Complaint which alleged

that Tenet: (1) artificially inflated its “cost-to-charge” ratio to obtain more than

its proper share of funds from the Medicare/Medicaid outlier system (the outlier

claim); and (2) offered medical directorships and office-expense reimbursements

as kickbacks to induce physicians to refer their patients to the Tenet hospitals

(the kickback claim). Over time Relators submitted several versions of the

disclosure statement required to be filed by 31 U.S.C. § 3730(b)(2) with their
No. 07-51042

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complaint. Pursuant to this statute, Relators were obliged to include in this

statement “substantially all material evidence and information” in their

possession. Id.

Tenet moved to dismiss the claims in May 2006. The Government

supported the motion, explaining that Relators had zero impact on the

Government’s preexisting investigation. While the motion was pending, the

Government settled with Tenet for claims relating to 165 hospitals nationwide,

including the two hospitals in El Paso which Relators were familiar with. By

Order dated August 14, 2006, the district court granted in part and denied in

part Tenet’s motion. The district court dismissed the kickback claim. The

district court denied Tenet’s motion to dismiss the outlier claim. However, the

courtfound thatinformation concerning the Government’s outlier manipulation

theory was publicly disclosed in a publication called the Weakley Report prior

to Relators filing suit in this case. Relators do not challenge that finding. The

district court correctly observed that despite the publication ofthis information,

Relators can still sue if Relators were the “original source” of the information

underlying the outlier claims. The district court concluded that there was an

issue of fact on that question. 

The United States and Tenet moved for summary judgment in April 2007

on the issue of Relators’ status as original sources. In response to the motion,

Relators appended two declarations to substantiate their knowledge of Tenet’s

costs and increasing charges in response to deficiencies identified by Tenet and

the United States. The information in the declaration modifies and expands on

the information previously submitted in the Relators’ disclosure statements.

The disclosure statements and the declarations were the only evidence before the

district court on the motion for summary judgment. The district court granted

summary judgment in favor of Tenet and the United States. The court found

that Relators “cannot be said to have had direct and independent knowledge of
No. 07-51042

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the information on which the allegations are based, and thus Relators cannot

pass the public-disclosure bar.” Relators appeal. 

IV. 

Because the suit in this case was filed after disclosure of the allegations

in the Weakley Report and other publications, the Relators must qualify as an

original source of the information in order for this suit to proceed. As stated in

the statute, an original source must have “direct and independent knowledge”

that forms the basis of the allegations and must show that he “voluntarily

provided the information to the Government” before filing his qui tam suit. 31

U.S.C. § 3720(e)(4)(B). We focus on the first part of the test, whether the

Relators meet the standard of having “direct and independent knowledge.” 

Based on the relevant statute and the background information on outlier

payments, the defendants submit that the Relators’ claim of outlier Medicare

fraud would require knowledge:(1)that a hospital increased its charges,(2) with

no (or no proportional) increase in costs, (3) that Tenet was submitting claims

for outlier payments that were false or fraudulent, (4) with the intent to

manipulate the outlier payment system. 31 U.S.C. § 3729. The question then

is what type of knowledge is required. 

A review of the case law in this and other jurisdictions provides

background on what “direct and independent knowledge” means in the “original

source” definition. “Direct” and “independent” have distinct meanings. This

circuit surveyed other circuits’ interpretations of the terms as follows: “direct”

knowledge is obtained first hand, by the relator’s own efforts rather than by the

labor of others, and not derivative of the information of others. United States ex

rel. Laird v. Lockheed Martin Eng’g & Sci. Servs. Co., 336 F.3d 346, 355 (5th Cir.

2003). “Independent” knowledge cannot rely on any public disclosures. Id. This

court then interpreted the term “direct” by its plain meaning as “knowledge

derived from the source without interruption or gained by the relator’s own
No. 07-51042

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efforts rather than learned second-hand through the efforts of others.” Id. The

opinion also notes that Congress’s intent was “to encourage qui tam suits

brought ‘by insiders, such as employees who come across information of fraud in

the course of their employment.’” Id. at 355-56. Courts must “look to the factual

subtleties of the case before it and attempt to strike a balance between those

individuals who, with no details regarding its whereabouts, simply stumble upon

a seemingly lucrative nugget and those actually involved in the process of

unearthing important information about a false or fraudulent claim.” Id. at 356.

Relators found to have direct and independent knowledge are those who

actually viewed source documents or viewed first hand the fraudulent activity

that is the basis for their qui tam suit. For example in United States ex rel.

Cooper v. Blue Cross & Blue Shield of Fla., Inc., 19 F.3d 562, 568 (11th Cir.

1994), the relator’s knowledge of an alleged fraud by a Medicare secondary

payor was “direct” because it was acquired through “three years of [the relator’s]

own claims processing, research, and correspondence with members of Congress

and [the Health Care Financing Admin.]” In Minn. Ass’n of Nurse Anesthetists

v. Allina Health System Corp., 276 F.3d 1032, 1050 (8th Cir. 2002), the

Association alleged that its members had “personal knowledge that defendant

anesthesiologists have routinely billed Medicare for personal performance of

anesthesia procedures in which they were not continuously involved or present.”

It further alleged that its members “have personal knowledge of defendants’

false claims by virtue of communications with defendants themselves,

participation in the anesthesia procedures which were later fraudulently billed

by the defendant anesthesiologist, and familiarity with hospital records

disclosing defendants’ fraud.” The court rejected the defendants’ response that

the anesthetists did not have direct knowledge of the anesthesiologists’ billing

practices, which came to light in an audit, because the record showed that the

anesthetists often saw the anesthesiologistfilling out forms used for billing with
No. 07-51042

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the misleading information. These allegations were sufficient to establish that

the association had direct knowledge to qualify as an original source.

In Chen-Cheng Wang ex rel. United States v. FMC Corp., 975 F.2d 1412,

1417 (9th Cir. 1992), the relator was a mechanical engineer who brought suit

against his former employer claiming that it had defrauded the government by

its performance on various defense contracts. As to relator’s claims relating to

the Bradley Fighting Vehicle which had been publicly disclosed, the court found

that Wang’s knowledge of the Bradley’s transmission problems was direct and

independent because he worked (however briefly) on trying to fix them. His

claim failed for other reasons not related to this issue. 

In contrast, when a relator’s claim is based on knowledge received from

other persons it is not direct and independent. In United States v. Alcan Elec.

& Eng’g, Inc., 197 F.3d 1014, 1021 (9th Cir. 1999), the Ninth Circuit held that

a member of an electrical workers’ union did not meet the “direct” knowledge

element since “he never participated in the negotiating, drafting, or

implementation” of relevant agreements, “does not allege that he played any role

in submitting false claims to the government,” and simply heard second-hand (as

a member of the union) that the electrical contractors were submitting false

claims to the government.

In United States ex rel. Grayson v. Advanced Mgmt. Tech., Inc., 221 F.3d

580, 581 (4th Cir. 2000), the relators were attorneys who represented an

unsuccessful bidder for a contract with the FAA in administrative proceedings

to contest the contract award to a bidder they alleged had engaged in “bait and

switch” regarding its intended subcontractor. The court concluded that the

relators had not demonstrated that they had independent and direct knowledge

of the "bait and switch" allegations contained in the administrative protest.

Rather relators, in their role as attorneys for the unsuccessful bidder, at best
No. 07-51042

9

verified the information in the complaint. Such conduct was insufficient to

render them original sources.

Finally, in UnitedStates Ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A.

v. Prudential Ins. Co., 944 F.2d 1149 (3d Cir. 1991), the relator filed suit on

behalf ofthe United States againstPrudential Insurance Company alleging that

Prudential defrauded the Government by avoiding its statutory responsibility

to pay certain insurance claims as the primary insurer. Relator’s knowledge was

not direct because his “information about Prudential came through two

intermediaries.” Id. at 1160. Stinson further states that “[t]he paradigmatic

‘original source’ is a whistleblowing insider.” Id. at 1161. The Relators in this

case do not meet that standard. 

The parties in this case dispute whether Relators’ knowledge must be

established by the disclosure statements only or may be established by reference

to their declarations filed in opposition to the motion for summary judgment.

We need not decide that question because even the evidence in the declarations

falls short. First, Relators’ information about rising charges at Tenet hospitals

came primarily from patient complaints. They did examine a report of

comparative charges for five of the most common DRGs, which indicated that

Tenet’s charges were among the highest in the country. However, that report

did notindicate the historical changes in Tenet’s charges that would be required

to establish a case of outlier fraud. On the cost side, Relators’ information is

similarly indirect. Lam’s conclusion that there was no proportionate increase in

costs to warrant the increase in charges at Tenet hospitals was derived from

informal discussions in doctors’ lounges, staff meetings and observations about

general nursing staffing, new equipment, remodeling/expansions and the degree

of local wage increases. Meshel based his conclusion that it was inconceivable

that higher costs caused the higher charges at Tenet hospitals on interactions

with patients and doctors at the Tenet hospitals and general knowledge about
No. 07-51042

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the cost of medical staffing and supplies in the El Paso area that he learned

managing a non-Tenet hospital. As stated by the district court, “At no point do

Relators allege or prove knowledge of whether Tenet’s charges were rising,

whether Tenet was artificially raising its charges, whether the charges were

rising in relation to the hospital’s costs, and whether Tenet had knowledge that

the claims it submitted were false - all of which are necessary components in a

claim of outlier fraud.” Based on the caselaw outlined above, Relators’

knowledge is not the type of first-hand, insider knowledge that is required to

satisfy the original source standard. Further, as decided in Rockwell

International Corp. v. UnitedStates, 127 S.Ct. 1397 (2007), a relator’s suspicions

cannot substitute for the requirement of direct and independent knowledge. 

V.

The district court correctly concluded that Relators do not qualify as

original sources of the information underlying the claims of outlier fraud. Even

the information in Relators’ declarations in support oftheir opposition to Tenet’s

motion for summary judgment does not establish that Relators had direct and

independent knowledge of Tenet’s history of charges and costs that would be

required to establish a claim of outlier fraud. The district court properly granted

summary judgment to appellees and the judgment of the district court is

affirmed. 

AFFIRMED.