Court Opinion

ID: 9910180
Source: CourtListenerOpinion
Date Created: 2023-12-15 01:00:33.941622+00
Date Added: 2024-06-11T12:51:18.708099
License: Public Domain

Case: 22-20659        Document: 00517002115             Page: 1      Date Filed: 12/14/2023

             United States Court of Appeals
                  for the Fifth Circuit                                              United States Court of Appeals
                                                                                              Fifth Circuit

                                     ____________                                           FILED
                                                                                 December 14, 2023
                                      No. 22-20659                                     Lyle W. Cayce
                                     ____________                                           Clerk

   United States of America, ex rel, Kent Vaughn,

                                                                    Plaintiff—Appellant,

                                            versus

   Harris County Hospital District, doing business as Harris
   Health System; Harris County Clinical Services,
   Incorporated; Memorial Hermann Health System;
   Christus Health; Christus Health Gulf Coast; HCA
   Healthcare; HCA Gulf Coast Division Incorporated;
   St. Joseph Medical Center; Houston Methodist; Texas
   Children’s Hospital; St. Luke’s Episcopal Health
   System; Affiliated Medical Services; Baylor College of
   Medicine; UT Physicians,

                                              Defendants—Appellees.
                     ______________________________

                     Appeal from the United States District Court
                         for the Southern District of Texas
                              USDC No. 4:17-CV-2749
                     ______________________________

   Before Graves, Higginson, and Ho, Circuit Judges.
   James E. Graves Jr., Circuit Judge:*

         _____________________
         *
             This opinion is not designated for publication. See 5th Cir. R. 47.5.
Case: 22-20659     Document: 00517002115          Page: 2   Date Filed: 12/14/2023

                                   No. 22-20659

         Appellant Kent Vaughn brought a False Claims Act suit against Harris
   County, and other hospital and medical Defendants, alleging fraud against
   the government. Because the District Court found that Vaughn’s second
   amended complaint was substantially the same as publicly disclosed allega-
   tions, it dismissed the suit. We AFFIRM.
                                  Background
         This appeal stems from Appellant Kent Vaughn’s False Claims Act
   (“FCA”) suit against the Appellees concerning Medicaid fraud. The
   Medicaid program is a cost-sharing program between the federal government
   and state/local governments, where the federal government pays at least 50%
   of the cost of each state’s Medicaid program. 42 U.S.C. § 1396d(b). States
   may offer additional supplemental Medicaid payments up to a federally
   established “Upper Payment Limit” (“UPL”), which is meant to get the
   reimbursement rates closer to the actual cost of providing care. Thus, the
   funding for the Medicaid program includes Medicaid reimbursements and
   supplemental payments. Some states, such as Texas, get funding from local
   governments to help with the state’s portion of Medicaid payments
   (“intergovernmental transfers”). In 1991, in order to stop state and local
   governments from shifting their contribution responsibilities to the private
   sector, Congress amended the Medicaid statute to exclude “non-bona fide
   provider-related donations” (“NBFD Statute”) from federal matching.
   42 U.S.C. § 1396b(w)(1).
         Here, Vaughn alleges that in 2008, the Appellees “engineered a
   scheme” to violate the NBFD Statute by collecting payments deemed to be
   “donations,” from private hospitals and submitting that payment as being
   entitled to Medicaid reimbursement in order to receive federal matching
   funds from the Government. This scheme, referred to as the Collaborative
   Program (the “Collaborative”), involved private hospitals paying as

                                        2
Case: 22-20659      Document: 00517002115          Page: 3   Date Filed: 12/14/2023

                                    No. 22-20659

   “donations,” inflated medical staffing costs and expenses provided by
   medical schools at and for Harris County Hospital District (“HCHD”)
   hospitals. HCHD then used these “donations” as cost savings and increased
   the amount of funds to the State of Texas through intergovernmental
   transfers, to fund the state/local government share of the Medicaid program.
   The federal government would then accordingly match the amounts Texas
   received from HCHD, and the increased funds were made available for UPL
   payments to the private hospitals involved in the Collaborative. Vaughn
   alleges that all of the non-federal parties involved in the Collaborative
   benefitted because “the private-hospital Defendants knew they would
   receive back in Medicaid payments substantially more than they ‘donated’
   to cover HCHD’s medical-staffing costs . . . the medical-school Defendants
   increased the amount they charged HCHD so that they received exorbitant
   payments . . . for their medical-staffing services [and] . . . HCHD’s hospitals
   saved the cost of medical staffing services, appeased the [medical school
   Defendants’ demands for higher pay], and were able to make increased
   intergovernmental transfers.” Vaughn alleges that this scheme was in
   violation of the NBFD Statute because the state and local governments did
   not cost-share with the federal government as the Medicaid program
   required, but shifted the financial burden to private hospitals who later
   recouped their contributions from increased federal funding.
          As a part of this scheme Vaughn alleges that the “federal
   contributions have been diverted away from supporting indigent and
   uninsured care” and instead have been “used to pay physician/provider
   salaries and medical-school faculty/staff expenses.” He states he learned of
   the Collaborative’s scheme when he was working for HCHD in 2010 as its
   “Associate Administrator of Provider Practices and Contracting.” During
   his employment, Vaughn attempted to make changes at HCHD to comply
   with the NBFD statute. However, after Vaughn was unable to achieve any

                                          3
Case: 22-20659      Document: 00517002115             Page: 4   Date Filed: 12/14/2023

                                       No. 22-20659

   meaningful changes or oversight, in August 2014 he wrote a letter to the chair
   of HCHD’s Compliance Committee and HCHD’s CCO informing them that
   the medical-school Defendants had been charging for physician and medical-
   director services in excess of fair market value and that FCA violations had
   occurred and were continuing to occur. Afterwards, HCHD launched an
   investigation into Vaughn, and transferred him and his staff to the finance
   department. Vaughn was ultimately terminated by HCHD.
                                Procedural History
          Appellant Kent Vaughn filed suit in August 2017 alleging that public
   hospitals, including HCHD, in concert with private hospitals in Harris
   County and other medical school Defendants, violated the False Claims Act
   by claiming and receiving excessive Medicaid funding. In April 2020,
   Defendants moved to dismiss Vaughn’s Second Amended Complaint. The
   magistrate judge recommended dismissing the claims because of the public
   disclosure bar and denying Vaughn’s request to file a third amended
   complaint. The district court adopted the magistrate judge’s order in full.
   Vaughn appealed.
                                Standard of Review
          The court conducts de novo review of a district court’s order to dismiss
   under Federal Rule of Civil Procedure 12(b)(6). Walker v. Beaumont Indep.
   Sch. Dist., 938 F.3d 724, 734 (5th Cir. 2019). “To survive a Rule 12(b)(6)
   motion to dismiss, the complaint ‘does not need detailed factual allegations,’
   but it must provide the plaintiff’s grounds for entitlement to relief—
   including factual allegations that, when assumed to be true, ‘raise a right to
   relief above the speculative level.’” Taylor v. City of Shreveport, 798 F.3d 276,
   279 (5th Cir. 2015) (citation omitted). “We may affirm a district court’s
   order dismissing a claim under Rule 12(b)(6) ‘on any basis supported by the
   record.’” Id. (citation omitted).

                                            4
Case: 22-20659      Document: 00517002115               Page: 5   Date Filed: 12/14/2023

                                         No. 22-20659

                                         Discussion
                                  I. False Claims Act
          The False Claims Act permits individuals who meet certain criteria to
   pursue damages on behalf of the government for false claims submitted to the
   government. 31 U.S.C. § 3730(b). Under this provision, the Government
   may elect to intervene with the action or decline to take over the action.
   Id. § (b)(4). If the Government elects not to proceed, the person who
   initiated the action may conduct the action. Id. § (c)(3). Whether or not the
   Government elects to proceed with the action, the individual who brought
   the action may receive a percentage of the proceeds from the action.
   Id. § (d)(1)—(2). The Act provides that:
                 (4)(A) [t]he court shall dismiss an action or claim
                 under this section, unless opposed by the
                 Government,        if     substantially    the   same
                 allegations or transactions as alleged in the action
                 or claim were publicly disclosed—
                 (i) in a Federal criminal, civil, or administrative
                 hearing in which the Government or its agent is
                 a party;
                 (ii)   in    a      congressional,        Government
                 Accountability Office, or other Federal report,
                 hearing, audit, or investigation; or
                 (iii) from the news media,
   31 U.S.C. § 3730(e)(4)(A). This section, deemed the “public disclosure
   bar,” seeks to “strike a balance between encouraging private persons to root
   out fraud and stifling parasitic lawsuits” based on publicly available
   information. Graham Cnty. Soil & Water Conservation Dist. v. United States

                                              5
Case: 22-20659      Document: 00517002115           Page: 6    Date Filed: 12/14/2023

                                     No. 22-20659

   ex rel. Wilson, 559 U.S. 280, 295 (2010). The public disclosure bar applies
   “whenever qui tam relators bring a suit based on publicly available
   information.” United States ex rel. Colquitt v. Abbott Lab’ys, 858 F.3d 365, 373
   (5th Cir. 2017) (quoting United States ex rel. Jamison v. McKesson Corp., 649
   F.3d 322, 327 (5th Cir. 2011)). The Act provides an exception to the public
   disclosure bar for individuals who are the “original source of the
   information.” 31 U.S.C. § 3730(e)(4)(A). “Together, the public disclosure
   bar and its original source exception calibrate the incentives for individuals
   to bring qui tam suits under the False Claims Act.” Colquitt, 858 F.3d at 373.
   “The purpose of the [] bar is both to promote private citizen involvement in
   fraud exposure while also ‘preventing parasitic suits by opportunistic late-
   comers who add nothing to the exposure of fraud.’” United States ex rel.
   Solomon v. Lockheed Martin Corp., 878 F.3d 139, 143 (5th Cir. 2017) (quoting
   United States ex rel. Reagan v. E. Tex. Med. Ctr. Reg’l Healthcare Sys., 384 F.3d
   168, 174 (5th Cir. 2004)).
          The court applies “a three-part test to determine whether this bar
   applies. It asks ‘1) whether there has been a ‘public disclosure’ of allegations
   or transactions, 2) whether the qui tam action is ‘based upon’ such publicly
   disclosed allegations, and 3) if so, whether the relator is the ‘original source’
   of the information.’” Colquitt, 858 F.3d at 373 (quoting Fed. Recovery Servs.,
   Inc. v. United States, 72 F.3d 447, 450 (5th Cir. 1995)). Under the test the
   court compares “the allegations contained in [the] original complaint with
   public disclosures available at the time the complaint was filed. If the
   complaint could have been synthesized from the disclosures, then we
   determine if the complainant was the original source of the disclosures.”
   Solomon, 878 F.3d at 143 (internal citations omitted). The parties do not
   dispute whether there has been a public disclosure, only whether Vaughn’s
   complaint is based on those publicly disclosed allegations. So we begin our
   inquiry at step two.

                                          6
Case: 22-20659      Document: 00517002115           Page: 7    Date Filed: 12/14/2023

                                     No. 22-20659

                             A. Public Disclosure Bar
          Vaughn argues that the public disclosure bar does not apply because
   the publicly available information did not (1) identify these specific
   Defendants; (2) address above-market payments and “other frauds”; or (3)
   show Defendants acted knowingly. The district court properly determined
   that Vaughn’s complaint was barred by the public disclosure bar because his
   complaint was substantially the same as allegations publicly disclosed.
          A Plaintiff’s FCA complaint is “based upon public disclosures if ‘one
   could have produced the substance of the complaint merely by synthesizing
   the public disclosures’ description of the joint venture scheme[.]’” Solomon,
   878 F.3d at 144. Thus, if the public disclosure was “sufficient to set the
   government on the trail of the fraud” then there will be “sufficient indicia of
   an FCA violation to bar a subsequently filed FCA complaint.” Id. The Fifth
   Circuit has adopted a test embraced by other circuits to determine if a public
   disclosure is “sufficient to set the government on the trail of fraud.”
                 Under this approach, ‘the combination of X and
                 Y must be revealed, from which the readers or
                 listeners may infer Z.’ Z is an inference of fraud
                 under the FCA, while X and Y are two required
                 elements for the inference: ‘a misrepresented
                 state of facts and a true state of facts.’ ‘The
                 presence of one or the other in the public
                 domain, but not both, cannot be expected to set
                 government investigators on the trail of fraud.
   Id. (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d
   645, 654—55 (D.C. Cir. 1994)). Notably, “[w]hen the elements of a
   fraudulent transaction are present in public disclosures, those public
   disclosures need not allege fraud in explicit language.” Id. at 145. The

                                          7
Case: 22-20659      Document: 00517002115          Page: 8    Date Filed: 12/14/2023

                                    No. 22-20659

   information publicly available prior to Vaughn’s FCA complaint was
   sufficient to set the government on the trail of fraud. A disclosure by the news
   media in 2007 provided that “Federal officials are questioning the financial
   arrangements that allowed the private hospitals to claim the supplemental
   funds for the first time . . . . [and whether these arrangements represented]
   an impermissible quid pro quo between a private hospital and public entity.”
   Robert Garrett & Sherry Jacobson, Texas Hospitals Face End of Funding Plan
   Federal Officials Halt Payments Medicaid Officials Halt Payments that Ease
   Indigent-care Burden, Dallas Morning News (Oct. 6, 2007).
   Furthermore, contrary to Vaughn’s assertion, the same source identified that
   “private hospitals in 25 communities throughout the state, including Dallas,
   Houston, San Antonio, Austin[,] and El Paso, were able to generate $264
   million in local matching funds . . . to get the federal dollars.” Id. Another
   source, in 2008, identified the scheme that Vaughn claims in his complaint:
                 [t]hese public-private agreements work like this:
                 a taxing entity sets aside money – in some cases,
                 8 percent of its tax levy, normally used for the
                 indigent program – to be used as a match for
                 additional Medicaid funds. With that match, the
                 hospitals    qualify   to    receive    a   higher
                 reimbursement rate for treating Medicaid
                 patients – roughly equivalent to what they
                 receive for treating Medicare patients. That’s
                 known as receiving the Medicaid ‘upper
                 payment limit.’ In return, the hospitals, often
                 through a nonprofit organization, take over
                 paying bills for the county’s indigent residents.
   Melissa Mcever, Indigent Program Drawing Scrutiny: Area Officials:
   Partnership Helping Needy, Valley Morning Star (July 14, 2008).

                                          8
Case: 22-20659     Document: 00517002115           Page: 9   Date Filed: 12/14/2023

                                    No. 22-20659

   Another media story in 2015 shows that the federal government was already
   on the trail of fraud: “federal officials questioned whether Texas hospital
   districts violate federal law by using money from private hospitals to gain
   federal matching funds for Medicaid and other needy patients.” Mary Ann
   Roser, State’s Medicaid Overhaul Draws Federal Scrutiny, Austin
   American-Statesman (Mar. 29, 2015). These examples are sufficient
   to show that the federal government was aware of the fraudulent scheme.
   Contrary to Vaughn’s assertion, the way in which the Defendants
   perpetrated the fraud (above market payments and non-indigent care) need
   not be alleged. See Solomon, 878 F.3d at 145 (“[t]he public disclosures need
   not expressly allege fraud. The question is whether the relator could have
   synthesized an inference of fraud from the public disclosures.”).
   Accordingly, these public disclosures, and many others not described in
   detail here, allege facts that make a potentially fraudulent scheme readily
   identifiable. See id. at 146. Thus, the public disclosure bar applies, and
   Vaughn’s complaint may only proceed if he qualifies as an original source.
                               B. Original Source

          An “original source means an individual who either (i) prior to a
   public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the
   Government the information on which allegations or transactions in a claim
   are based, or (ii) who has knowledge that is independent of and materially
   adds to the publicly disclosed allegations or transactions, and who has
   voluntarily provided the information to the Government before filing an
   action under this section.” 31 U.S.C. § 3730(e)(4)(B). Vaughn’s claims were
   not brought prior to the public disclosures and so only provision (ii) is

                                         9
Case: 22-20659         Document: 00517002115             Page: 10     Date Filed: 12/14/2023

                                          No. 22-20659

   relevant here.1 While the Fifth Circuit has not opined on when an original
   source qualifies as having “materially added” to a public disclosure,
   decisions from other circuits prove instructive. In United States ex rel.
   Winkelman v. CVS Caremark Corp., 827 F.3d 201, 211 (1st Cir. 2016), the
   court observed that “an addition is material if it is ‘[o]f such a nature that
   knowledge of the item would affect a person’s decision-making,’ or if it is
   ‘significant,’ or if it is ‘essential.’” Id. (citing Black’s Law Dictionary, 1124
   (10th ed. 2014)). “Our task is to ascertain whether the relators’ allegedly new
   information is sufficiently significant or essential so as to fall into the narrow
   category of information that materially adds to what has already been
   revealed through public disclosures. As the level of detail in public
   disclosures increases, the universe of potentially material additions shrinks.”
   Id. Similar to the public disclosure argument, Vaughn alleges that he qualifies
   as an original source because he (1) identified the specific Defendants; (2)
   alleged facts to establish Defendants’ scienter; and (3) alleged non-public
   facts showing a more expansive fraudulent scheme. None of the purportedly
   non-public information alleged by Vaughn “materially adds” to the publicly
   disclosed allegations. The district court was thus correct in finding that
   Vaughn does not qualify as an original source.

          First, the publicly available information identified Houston and Harris
   County as having been involved in these collaborative programs. Vaughn
   could not have materially added information on the identities of the specific
   Defendants when it was already known at least as early as 2004.

          Second, Vaughn’s assertion that his allegations of scienter materially
   add to the public disclosures lacks force. Vaughn alleges that the state and
          _____________________
          1
               Whether Vaughn voluntarily provided this information to the Government is not
   disputed.

                                               10
Case: 22-20659    Document: 00517002115           Page: 11   Date Filed: 12/14/2023

                                   No. 22-20659

   local governments did not cost-share with the federal government as the
   Medicaid program required, but shifted the financial burden to private
   hospitals who later recouped their contributions from increased federal
   funding. It defies logic to assume that Defendants were unaware that this
   arrangement was a potential violation of the law, when information and
   allegations about collaborative schemes such as and including this one were
   reported by the news media since at least 2004—2017. The court in
   Winkelman has likewise applied this logic:

                 the allegations gleaned from [the relator’s]
                 experience add nothing significant about CVS’s
                 knowledge: every indication from the public
                 disclosures was that CVS was fully aware that it
                 was refusing to provide its [Health Savings Pass]
                 prices to the Connecticut Medicaid program
                 prior to the legislative change—and, indeed,
                 adopted this firm position in spite of known
                 doubts about whether this conduct was legal.

   Winkelman, 827 F.3d at 213. Accordingly, adding details as to the
   Defendants’ scienter cannot be said to be a material addition.

          Vaughn’s argument that he alleges a more expansive fraudulent
   scheme due to Defendants’ use of above market payments and non-indigent
   care likewise fails. The crux of the public disclosures unearths the possible
   fraud in enumerating a quid pro quo, or program where private hospitals
   provide services, money, and/or care in order to receive greater government
   funding. Vaughn’s specific theory on the Collaborative’s use of above market
   payments adds nothing significant to the public disclosures. Another source
   had publicly disclosed that “the controversy stems from a complex payment

                                        11
Case: 22-20659     Document: 00517002115           Page: 12   Date Filed: 12/14/2023

                                    No. 22-20659

   system that served as a workaround for the non-public hospitals to put up
   their own matching funds . . . which the federal government initially intended
   to come from a local government source.” Matt Goodman, Breaking Down
   Why CMS Wants $27 Million Back from Dallas Area Hospitals, D CEO
   Healthcare (Sept. 8, 2016). Here, “above market payments and non-
   indigent care” qualify as the complex payment system that serves as a
   workaround for local government sources to avoid cost-sharing with the
   government. In a case such as this one, it is not unexpected for a fraudulent
   scheme to involve some sort of payment manipulation. Vaughn’s “addition”
   therefore cannot be material. Importantly, “offering specific examples of []
   conduct does not provide any significant new information where the
   underlying conduct already has been publicly disclosed.” Winkelman, 827
   F.3d at 212. Accordingly, Vaughn has not made any material additions to the
   public disclosure, and he thus fails to qualify as an original source. We move
   to Vaughn’s final argument on appeal, that the district court erred in denying
   him leave to file a third amended complaint.

                               II. Leave to Amend
          The district court denied Vaughn’s Motion for Leave to Amend
   holding that it would be futile, burdensome, and cause undue delay. Denial
   of leave to amend is reviewed for abuse of discretion. United States ex rel.
   Spicer v. Westbrook, 751 F.3d 354, 367 (5th Cir. 2014). The district court did
   not abuse its discretion in denying the motion. “The district court properly
   exercises its discretion under Rule 15(a)(2) when it denies leave to amend for
   a substantial reason, such as undue delay, repeated failures to cure
   deficiencies, undue prejudice, or futility.” Id. (citation omitted). Vaughn’s
   purported amendment would add additional facts about scienter, above-
   market payments and non-indigent coverage. But those facts do not
   materially add to what has already been publicly disclosed. Any such

                                         12
Case: 22-20659     Document: 00517002115             Page: 13   Date Filed: 12/14/2023

                                      No. 22-20659

   amendments are futile. The district court therefore could have denied the
   motion on that ground alone; however, the district court also found that
   Vaughn had essentially rewritten his complaint and based it on a new legal
   theory after four years of litigation. So undue delay is another reason in
   support of denial of the motion.
                                      Conclusion
          For all of the foregoing reasons, the judgment of the district court is
   AFFIRMED.

                                           13