Court Opinion

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Date Created: 2015-10-13 23:22:22.759995+00
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Opinions of the United
2009 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

1-5-2009

Longmont United Hosp v. St. Barnabas Corp
Precedential or Non-Precedential: Non-Precedential

Docket No. 07-3236

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NOT PRECEDENTIAL

                  UNITED STATES COURT OF APPEALS
                       FOR THE THIRD CIRCUIT

                               _____________

                                No. 07-3236
                               _____________

                    LONGMONT UNITED HOSPITAL;
             MAINE COAST MEMORIAL HOSPITAL, on behalf of
                  themselves, and on behalf of a Class of all
                          others similarly situated

                                      v.

    SAINT BARNABAS CORPORATION, d/b/a SAINT BARNABAS HEALTH
     CARE SYSTEM; CLARA MAASS MEDICAL CENTER; COMMUNITY
 MEDICAL CENTER; IRVINGTON GENERAL HOSPITAL; KIMBALL MEDICAL
CENTER; MONMOUTH MEDICAL CENTER; NEWARK BETH-ISRAEL MEDICAL
    CENTER; SAINT BARNABAS MEDICAL CENTER; UNION HOSPITAL;
  WAYNE GENERAL HOSPITAL; CLARA MAASS MEDICAL CENTER-WEST
                                     HUDSON;
THE OFFICERS OF SAINT BARNABAS CORPORATION, during the periods relevant
        hereto, as individuals in their official capacities; THE BOARD OF
   TRUSTEES OF ST. BARNABAS CORPORATION during the periods relevant
                  hereto, as individuals in their official capacities

                                   Longmont United Hospital,
                                              Appellant

                     _____________________________

                On Appeal from the United States District Court
                          for the District of New Jersey
                         District Court No. 06-CV-02802
              District Judge: The Honorable Dennis M. Cavanaugh

                                     1
                            _____________________________

                    Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
                                   October 23, 2008

                     Before: RENDELL and SMITH, Circuit Judges,
                              and POLLAK, District Judge *

                                 (Filed: January 05, 2009 )
                                      _____________

                                        OPINION
                                      _____________

SMITH, Circuit Judge.

       This case arises out of a purported scheme to defraud the federal government

through the practice of “turbocharging.” At its simplest level, the Saint Barnabas

Corporation (“SBC”), through a consortium of hospitals that it owned and operated

throughout New Jersey, allegedly received excessive Medicare payments by reporting

inflated patient treatment costs. After SBC settled a qui tam action with the United

States,1 Longmont United Hospital (“Longmont”), a Medicare participant located in

Colorado, filed a class action suit, claiming, inter alia, four violations of the Racketeer

Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961 et seq.2 On June

       *
        The Honorable Louis H. Pollak, Senior District Judge for the United States
District Court for the Eastern District of Pennsylvania, sitting by designation.
       1
       The settlement agreement expressly provided that it was not an admission of
SBC’s liability.
       2
       Specifically, Longmont alleged that SBC committed two RICO violations under
18 U.S.C. § 1962(c), and participated in a conspiracy to commit those RICO violations

                                              2
26, 2007, the District Court granted SBC’s motion to dismiss Longmont’s RICO claims

under Fed. R. Civ. P. 12(b)(6) because it held that Longmont’s complaint failed to show

both proximate causation and SBC’s participation in a RICO “enterprise.” Because we

agree with the District Court that SBC’s conduct was not the proximate cause of

Longmont’s injuries, we will affirm.3

       Inasmuch as we write primarily for the parties, who are familiar with this case, we

need not repeat the factual or procedural background.

       Under the civil RICO statute, “any person injured in his business or property by

reason of a violation of section 1962 of this chapter may sue therefor in any appropriate

under 18 U.S.C. § 1962(d). The “racketeering activity” asserted was multiple instances of
mail and wire fraud, and criminal transporting and receiving stolen or converted money.
See 18 U.S.C. §§ 1341, 1343, 2314, and 2315.
       In addition to SBC, Longmont also named as defendants ten hospitals associated
with SBC and the officers and trustees of SBC. The complaint claimed unfair
competition against SBC and the hospitals, and negligence against all defendants.
Longmont withdrew the negligence claims before the District Court made a ruling on
SBC’s motion to dismiss, and has not appealed the District Court’s decision to dismiss its
unfair competition claim. SBC is the only named defendant remaining.
       Finally, Maine Coast Memorial Hospital, a plaintiff in the action before the
District Court, has not appealed the District Court’s decision to grant SBC’s motion to
dismiss.
       3
        We have jurisdiction under 28 U.S.C. § 1291, and review the District Court’s
decision de novo, see Phillips v. County of Allegheny, 515 F.3d 224, 230 (3d Cir. 2008).
In doing so, we must “accept all factual allegations as true, construe the complaint in the
light most favorable to the plaintiff, and determine whether, under any reasonable reading
of the complaint, the plaintiff may be entitled to relief.” Id. at 233 (internal quotations
omitted). Because we hold that Longmont failed to show proximate cause, we do not
need to decide whether Longmont’s complaint sufficiently alleged SBC’s participation in
a RICO “enterprise.”

                                             3
United States district court . . . .” 18 U.S.C. § 1964(c). In order for the plaintiff to have

standing to assert a RICO claim under 18 U.S.C. § 1964(c), the alleged RICO violation

must be the proximate cause of the plaintiff’s injury. Anza v. Ideal Steel Supply Corp.,

547 U.S. 451, 457 (2006); Holmes v. Secs. Investor Prot. Corp., 503 U.S. 258, 268

(1992). “When a court evaluates a RICO claim for proximate causation, the central

question it must ask is whether the alleged violation led directly to the plaintiff’s

injuries.” Anza, 547 U.S. at 461. The motivating principles behind this need for “some

direct relation between the injury asserted and the injurious conduct alleged” include: 1)

the difficulty in ascertaining damages caused by remote actions; 2) the risk of duplicative

recoveries; and 3) the prospect that more immediate victims of an alleged RICO violation

can be expected to pursue their own claims. Id. at 457–60; see also Holmes, 503 U.S. at

269–70.

       Here, we have no difficulty finding that SBC’s conduct was not the proximate

cause of Longmont’s injuries. According to Longmont, SBC’s scheme reduced

Longmont’s Medicare reimbursements by both increasing the cost threshold necessary to

qualify for “Outlier Payments”—payments designed to compensate hospitals for treating

especially costly patients—and decreasing the amount of those payments. It is clear from

Longmont’s complaint, however, that the Centers for Medicare & Medicaid Services

(“CMS”) stands between SBC’s conduct and Longmont’s injuries. As Longmont

acknowledges, CMS is “the agency that interpreted the Medicare Act, promulgated and

                                               4
enforced Medicare payment regulations, and through its agents administered Medicare

payment[s].” (Class Action Compl. at 8 n.1.) The “Outlier [Payment] Threshold is the

amount established annually by CMS.” (Id. ¶ 49.) CMS also “assign[ed] the [statewide

average] to a hospital when its [cost-to-charge ratio fell] below the National Threshold . .

. .” (Id. ¶ 54.) This CMS policy “generate[d] excessive Outlier Payments” because the

“higher [statewide average] is then applied” to the formula used to calculate Outlier

Payments. (Id. ¶ 53.) It also allowed SBC to continue receiving excessive Outlier

Payments despite auditing. (See id.) Therefore, SBC’s alleged inflation of hospital costs

did not cause Longmont’s injuries; instead, it was CMS’s response to this

behavior—reimbursing SBC for its inflated costs without ensuring that they were justified

and raising the qualification threshold for Outlier Payments in subsequent years—that led

to a decrease in Longmont’s Outlier Payments.

       Longmont argues that CMS “merely occupied a ‘spatially intermediate position’

between SBC and the plaintiffs.” (Br. of Appellant at 32.) Longmont focuses on the

fixed loss threshold (“FLT”) that CMS used to calculate the qualifying threshold for

Outlier Payments.4 According to Longmont, “the rise in the FLT was a necessary,

automatic and foreseeable consequence of SBC’s fraud, a consequence required by the

rules governing the outlier pool.” (Id. at 28.) Longmont asserts that, in response to

       4
        The qualifying threshold for Outlier Payments is equal to the FLT “adjusted to
apply to each hospital on the basis of an area wage adjustment and an adjustment for the
type of area in which the hospital is located.” (Class Action Compl. ¶ 45.)

                                             5
SBC’s inflated cost reporting, CMS had to increase the FLT, which in turn raised the

threshold for Outlier Payments, because CMS was “mandated” to keep Outlier Payments

at 5.1 percent of the projected total budget for Medicare payments. (See id. at 29.)

Longmont, however, has not identified the source for such a mandate, nor what other

“rules governing the outlier pool” made the rise in FLT “necessary, automatic and

foreseeable.” This is not surprising. No such mandate or rule exists. CMS’s governing

statute only required it to keep Outlier Payments between five and six percent of

estimated total Medicare payments for that year. See 42 U.S.C. § 1395ww(d)(5)(A)(iv).

CMS certainly had the authority to keep FLT constant as long as total Outlier Payments

fell within that range.5

       Additionally, Longmont overstates the importance of CMS’s FLT-setting

methodology to our proximate cause inquiry. Separate and apart from its calculation of

FLT and the Outlier Payment threshold, CMS’s policy of substituting a statewide average

in place of below-threshold cost-to-charge ratios in calculating Outlier Payments and its

failure to adequately scrutinize the accuracy of SBC’s inflated cost reports are crucial in

any attempt to link SBC’s conduct to Longmont’s harm. Indeed, regulations enacted in

       5
         Longmont has not alleged facts sufficient to show that SBC’s cost inflation, by
itself, would have required CMS to raise FLT in any given year in order to meet its
statutory obligations. Although Outlier Payments during the relevant time period may
have ranged from 7.6 to 7.9 percent of total Medicare payments, (see Class Action
Compl. ¶ 64) these Outlier Payments resulted from “the behavior of a few hundred
hospitals” that “took advantage of the outlier program,” (id. ¶ 70), while SBC was only
alleged to have owned or operated ten different hospitals.

                                              6
2003 allowed CMS to prevent conduct like SBC’s from ever harming hospitals like

Longmont by “adjust[ing] Outlier payments retroactively once hospitals’ cost reports are

audited” and forcing those who violate the rules to “repay the money they receive[d]

improperly.” (See Class Action Compl. ¶ 71.) This underscores that government

discretion played a significant role in causing Longmont’s alleged injuries.

       Longmont also overlooks the significant temporal delay that occurred between

SBC’s reporting of inflated costs and Longmont’s injury. At the May 8, 2007 hearing on

SBC’s motion to dismiss, Longmont’s counsel stated that “what Congress has mandated

that CMS do is to project the costs in the following year and to project what the outlier

pool will consist of, but they use two-year-old data. So in 1999, they would be using

1998 data to project the 2000 year pool.” (J.A. 641–42.) This means that SBC’s conduct

would not have influenced the amount of Outlier Payments that Longmont received until

two years after SBC submitted the inflated cost report, and even then only if CMS made

no changes to the way that it calculated Outlier Payments, had not discovered SBC’s

allegedly fraudulent actions, nor otherwise adjusted the Outlier Payments made to SBC so

that they were not excessive. Finding proximate causation here would require stretching

the concept past its breaking point.

       The three motivating principles at the heart of the proximate cause requirement

support our holding in this case. First, it would be nearly impossible to ascertain the

amount of Longmont’s damages attributable to SBC’s reporting of inflated costs, as

                                             7
opposed to CMS’s interpretation of the Medicare Act, promulgation and enforcement of

Medicare payment regulations, and administration of the Medicare payment regime.

Second, it may well be that there is an appreciable risk of duplicative recoveries here, see

Holmes, 503 U.S. at 269, but even if there is not, our disposition remains unchanged, see

Anza, 547 U.S. at 459 (finding no proximate causation “[n]otwithstanding the lack of any

appreciable risk of duplicative recoveries . . .”). Third, although Longmont disputes

whether the government was a more direct victim of SBC’s alleged fraud, it cannot deny

that the government was a direct victim. Here, the government has already “vindicated

the laws by pursuing [its] own claims,” id. at 460, and entering into a $265 million

settlement with SBC on June 15, 2006.

       At best, Longmont suffered harms indirectly related to SBC’s alleged

“turbocharging.” Any impact that SBC’s conduct had on Longmont hinges entirely upon

CMS’s administration of the Medicare reimbursement system. Since “[t]here is no need

to broaden the universe of actionable harms to permit RICO suits by parties who have

been injured only indirectly,” id. at 460, we will affirm the District Court’s decision to

grant SBC’s motion to dismiss.

                                              8