Court Opinion

ID: 63163
Source: CourtListenerOpinion
Date Created: 2010-04-26 04:52:09+00
Date Added: 2024-06-11T17:20:13.372564
License: Public Domain

IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                            FILED
                                                                           July 22, 2008

                                       No. 07-51042                   Charles R. Fulbruge III
                                                                              Clerk

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.*

       *
        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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
                                 No. 07-51042

       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 of treating
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

R. 47.5.4.

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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 that Tenet violated the False 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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                                  No. 07-51042

      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 qui tam 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

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                                  No. 07-51042

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
court found that information 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 of this 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

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                                  No. 07-51042

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

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                                  No. 07-51042

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 anesthesiologist filling out forms used for billing with

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                                  No. 07-51042

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

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                                  No. 07-51042

verified the information in the complaint. Such conduct was insufficient to
render them original sources.
      Finally, in United States 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 of the United States against Prudential 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 not indicate 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

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                                  No. 07-51042

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. United States, 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 of their 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.

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