Opinion ID: 727292
Heading Depth: 5
Heading Rank: 1

Heading: Royalty Fees

Text: 20 The government contends that the royalty fees claimed were nonreimbursable because: (1) they were unrelated to patient care, see 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.9, and (2) they were not an actual expense, see 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.17. It argues that the royalty fee amounted to a franchise fee paid to a related party for the use of the Charter name. As such, CMC money was simply being moved from one pocket to another, making the fee nonreimbursable because it was not an actual expense. See 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.17. The government also argues that providers must accurately identify the nature and amount of each cost claimed. The cost reports here did not disclose that the royalty fees were paid to a related company, CMCI. 21 Calhoon challenges his convictions based on the claims for royalty fees on the grounds that there are no statutes or regulations clearly prohibiting reimbursement of the royalty fees, and that the former policy guideline on reimbursement of royalty fees was repealed in 1982 and superseded by more general guidelines that arguably permit reimbursement. See Prov.Reimb.Man., Part 1 § 2133, repealed by Transmittal No. 263 (Mar. 1982); Prov.Reimb.Man., Part I § 2135. More specifically, Calhoon argues that the statutory and regulatory standards governing whether a royalty fee is reimbursable require only that the costs be actually incurred and reasonably related to patient care. See 42 U.S.C. § 1395x(v)(1)(A) (reimbursable costs include reasonable cost of any services shall be actually incurred, except incurred costs found to be unnecessary in the efficient delivery of needed health services); 42 C.F.R. § 413.9 (reimbursements must be based on costs reasonably related to patient care). Calhoon contends that the royalty fees at issue were costs actually incurred because CMCI actually billed the hospitals and the hospitals paid the royalty fees to CMCI. As to whether the costs were reasonably related to patient care, Calhoon argues that the issue is open to debate and that the government failed to produce any evidence showing that the royalty fees were not related to patient care. Thus, Calhoon argues, his convictions cannot be upheld because the government failed to sustain its burden of negating any reasonable interpretation that would make the royalty fees reimbursable and thereby render the statements in the cost reports factually correct. See, e.g., United States v. Race, 632 F.2d 1114, 1119-21 (4th Cir.1980) (government failed to satisfy its burden of proving falsity where billings were authorized under a reasonable interpretation of the terms of the authorizing contract); United States v. Anderson, 579 F.2d 455, 459-60 (8th Cir.), cert. denied, 439 U.S. 980, 99 S.Ct. 567, 58 L.Ed.2d 651 (1978). Moreover, Calhoon argues, because there is no definite legal standard making royalty fees nonreimbursable, his convictions are unconstitutional. See Dunn v. United States, 442 U.S. 100, 112, 99 S.Ct. 2190, 2197, 60 L.Ed.2d 743 (1979) ([F]undamental principles of due process ... mandate that no individual be forced to speculate, at the peril of indictment, whether his conduct is prohibited.... Thus, ... courts must decline to impose punishment for actions that are not 'plainly and unmistakably' proscribed.). 22
23 We reject Calhoon's contention that there is no provision making the royalty fees paid to CMCI clearly nonreimbursable. Calhoon's arguments focus on whether any provision made the royalty fees clearly nonreimbursable by virtue of their nature as royalty fees. The critical fact is, however, that these royalty fees were paid to CMCI, a company related to the hospitals by common ownership. CMC, the parent company, owned both the hospitals that were paying the royalty fees for use of the Charter name and CMCI, the Nevada subsidiary that owned the Charter name and collected the royalty fees. Therefore, regardless of whether certain royalty fees are generally reimbursable, whether the royalty fees here were reimbursable is governed by 42 C.F.R. § 413.17 which applies to expenses paid to related organizations. 1 That regulation provides in relevant part:(a) Principle. Except as provided in paragraph (d) of this section, costs applicable to services, facilities, and supplies furnished to the provider by organizations related to the provider by common ownership or control are included in the allowable cost of the organization at the cost to the related organization. However, such cost must not exceed the price of comparable services, facilities, or supplies that could be purchased elsewhere. 24 . . . . . 25 (c) Application.... (2) If the provider obtains items of services, facilities, or supplies from an organization, even though it is a separate legal entity, and the organization is owned or controlled by the owner(s) of the provider, in effect the items are obtained from itself. An example would be a corporation building a hospital or a nursing home and then leasing it to another corporation controlled by the owner. Therefore, reimbursable cost should include the costs for these items at the cost to the supplying organization. However, if the price in the open market for comparable services, facilities, or supplies is lower than the cost to the supplier, the allowable cost to the provider may not exceed the market price. 26 42 C.F.R. § 413.17. 27 Under this regulation, expenses paid by the hospitals to CMCI--including the royalty fees at issue here--are reimbursable only at the cost to [CMCI], the supplying organization. See 42 C.F.R. § 413.17(c). At trial, the government's expert, Bessie Wheeler, explained that royalty fees paid to a related company solely for the use of a name would not be an actual expense for the company and, therefore, would not be reimbursable by Medicare. R.A. Vol. 6, p. 106. She explained that, for the fee to be reimbursable, it would have to be paid in exchange for an actual service that the related company provided at a real cost. Id. The reimbursable costs related to the Charter name may have been actual costs of acquiring and maintaining the Charter trademark. Whether the royalty fee paid is reimbursable depends in part on whether it reflected actual cost to CMCI of the acquisition or maintenance of the Charter name. See 42 C.F.R. § 413.17. If the royalty fees did not directly reflect such an actual cost, they would not have been reimbursable. See 42 C.F.R. § 413.17; cf. Prov.Reimb.Man., Part 1, § 1011.5 (Govt.Supp.Br., Ex. 7, p. 20) (policy guideline illustrating the application of § 413.17 in the context of a rental expense: where provider leases a facility from a related organization, costs of ownership of the facility are the allowable costs, not the rent paid to the lessor by the provider). The government, having apparently offered no evidence on this issue, failed to sustain its burden to prove the claim false by virtue of the nonreimbursable nature of the interest. 28
29 By concealing that the royalty fees were paid to a related company, however, Calhoon made the claim for reimbursement false. As stated above, falsity under section 1001 includes concealment of a material fact. See Tobon-Builes, 706 F.2d at 1096. Falsity through concealment exists where disclosure of the concealed information is required by a statute, government regulation, or form. See id. at 1096; United States v. Hernando Ospina, 798 F.2d 1570, 1578 (11th Cir.1986). 42 C.F.R. § 413.20(d) states that: 30 (1) The provider must furnish such information to the intermediary as may be necessary to-- 31 (I) Assure proper payment by the program, including the extent to which there is any common ownership or control (as described in § 413.17(b)(2) and (3)) between providers or other organizations, and as may be needed to identify the parties responsible for submitting program cost reports; .... 32 Moreover, the cost report forms specifically ask the provider the following questions: 33 A. ARE THERE ANY COSTS INCLUDED ON WORKSHEET A [on which the royalty fees were claimed] WHICH RESULTED FROM TRANSACTIONS WITH RELATED ORGANIZATIONS AS DEFINED IN HCFA PUB 15-I, CHAPTER 10?B. COSTS INCURRED AND ADJUSTMENTS REQUIRED AS RESULT OF TRANSACTIONS WITH RELATED ORGANIZATIONS: 34 C. INTERRELATIONSHIP OF PROVIDER TO RELATED ORGANIZATION(S): 35 The cost report form then specifically notifies the provider that: 36 THE SECRETARY, BY VIRTUE OF AUTHORITY GRANTED UNDER SECTION 1814(B)(1) OF THE SOCIAL SECURITY ACT, REQUIRES THE PROVIDER TO FURNISH THE INFORMATION REQUESTED ON PART C.... 37 THE INFORMATION WILL BE USED BY THE HEALTH CARE FINANCING ADMINISTRATION AND ITS INTERMEDIARIES IN DETERMINING THAT THE COSTS APPLICABLE TO SERVICES, FACILITIES, AND SUPPLIES FURNISHED BY ORGANIZATIONS RELATED TO THE PROVIDER BY COMMON OWNERSHIP OR CONTROL, REPRESENT REASONABLE COSTS AS DETERMINED UNDER SECTION 1861 OF THE SOCIAL SECURITY ACT. 38 The relevant cost reports failed to disclose that CMCI was a related organization and was receiving the royalty fees claimed for reimbursement. This fact, as discussed above, is critical to the determination whether the royalty fees could be reimbursable. Its concealment constitutes falsity for purposes of section 1001. 39