US Ex Rel. Baltazar v. Warden

In the

United States Court of Appeals
For the Seventh Circuit

No. 09-2167

U NITED S TATES OF A MERICA,
on the relation of Kelly Baltazar,
Plaintiff-Appellant,
v.

L ILLIAN S. W ARDEN and A DVANCED
H EALTHCARE A SSOCIATES, S.C.,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 07 C 4107—Charles R. Norgle, Judge.

A RGUED O CTOBER 27, 2010—D ECIDED F EBRUARY 18, 2011

Before E ASTERBROOK, Chief Judge, and K ANNE and
W OOD , Circuit Judges.
E ASTERBROOK, Chief Judge. In this qui tam proceeding
under the False Claims Act, 31 U.S.C. §§ 3729–33, Kelly
Baltazar contends that her former employer submitted
fraudulent bills to the Medicare and Medicaid programs.
Baltazar, a chiropractor, worked for four months in
2007 at Advanced Healthcare Associates. According to
2 No. 09-2167

Baltazar’s complaint, she noticed that the firm’s staff
added to her billing slips services that had not been
rendered and changed the codes for services that had
been performed. (This latter practice, designed to
depict the procedure as one that fetches higher reim-
bursement, goes by the name “upcoding.”) After doing
a little digging, Baltazar concluded that this was
normal practice at the firm and that a substantial
fraction of all bills submitted to the federal government
had been fraudulently inflated on the instructions of
Lillian Warden, the firm’s owner. Baltazar quit and filed
this suit.
Qui tam suits under the False Claims Act cannot be
“based upon the public disclosure of allegations or trans-
actions” in public agencies’ reports revealing the fraud,
unless the relator is “an original source of the informa-
tion.” 31 U.S.C. §3730(e)(4)(A). See Graham County Soil &
Water Conservation District v. United States ex rel. Wilson,
130 S. Ct. 1396 (2010). (Section 3730(e)(4) was amended
in 2010, but Graham County concludes that the change
is not retroactive. 130 S. Ct. at 1400 n.1. We quote from
the version in force in 2007.) Invoking this subsection,
defendants asked the district court to dismiss the suit.
They observed that several governmental reports have
documented false claims submitted to the Medicare
and Medicaid programs. See, e.g., General Accounting
Office, Health Care Fraud: Characteristics, Sanctions, and
Prevention (1987); General Accounting Office, Medicare
Improper Payments: While Enhancements Hold Promise for
Measuring Potential Fraud and Abuse, Challenges Remain
(2000); Department of Health and Human Services Office
No. 09-2167 3

of Inspector General, Chiropractic Services in the Medicare
Program: Payment Vulnerability Analysis (2005).
The district judge, particularly impressed by the 2005
Report, granted the motion and dismissed the suit. The
2005 Report concluded that 57% of chiropractors’ claims
(in a sample of 400) were for services not covered by the
Medicare program, and another 16% were for covered
services that had been miscoded. This establishes such
prevalent fraud, the judge thought, that it is unneces-
sary to give private relators a piece of the action in order
to locate wrongdoers. Instead the United States should
file the suits and receive the entire recovery. The court
briefly considered the possibility that Baltazar should
be treated as an original source of the information that
led to this suit, but the judge observed that Baltazar
had not supplied any of the information underlying the
1987, 2000, or 2005 Reports and therefore is not the
“original source” of the disclosures that the judge had
found dispositive.
Section 3730(e)(4)(A) poses three questions: (i) are
“disclosures of allegations or transactions” revealing the
fraud in the public domain?; (ii) is the suit “based upon”
those disclosures?; and (iii) if so, is the relator none-
theless “an original source of the information”? The
district court resolved all three against Baltazar. Her suit
must be reinstated if she prevails on any one. We con-
centrate on (ii) and discuss (i) and (iii) only briefly.
Defendants pay scant attention to the statutory
language, which speaks of “disclosures of allegations or
transactions” that the suit is “based upon”. There have
4 No. 09-2167

assuredly been many allegations of unwarranted claims
by health care providers in general, and chiropractors
in particular. Yet although bills for services never per-
formed likely reflect fraud, miscoded bills need not;
the errors may have been caused by negligence rather
than fraud (which means intentional deceit). What is
more, none of the materials on which defendants
rely mentions Lillian Warden or Advanced Healthcare
Associates (or, indeed, any other provider). A statement
such as “half of all chiropractors’ claims are bogus” does
not reveal which half and therefore does not permit suit
against any particular medical provider. It takes a
provider-by-provider investigation to locate the wrong-
doers. Baltazar contends in this suit that defendants
are among the providers who have submitted inten-
tionally false claims. That allegation is not based on
public reports; it is based on Baltazar’s knowledge
about defendants’ practices. By placing defendants
among the perpetrators of fraud, Baltazar performed the
service for which the False Claims Act extends the
prospect of reward (if the allegations are correct).
Other courts of appeals have concluded that reports
documenting a significant rate of false claims by an
industry as a whole—without attributing fraud to par-
ticular firms—do not prevent a qui tam suit against
any particular member of that industry. See, e.g., In re
Natural Gas Royalties Qui Tam Litigation, 562 F.3d 1032,
1042–43 (10th Cir. 2009) (dictum); United States v. Alcan
Electrical & Engineering, Inc., 197 F.3d 1014, 1019 (9th Cir.
1999) (dictum); United States ex rel. Findley v. FPC–Boron
Employees’ Club, 105 F.3d 675, 687 (D.C. Cir. 1997) (dictum);
No. 09-2167 5

United States ex rel. Fine v. Sandia Corp., 70 F.3d 569, 572
(10th Cir. 1995) (dictum); Cooper v. Blue Cross & Blue
Shield of Florida, Inc., 19 F.3d 562, 566 & n.7 (11th Cir.
1994) (holding, and about asserted Medicare fraud in
particular). The United States could not file suit against
a chiropractor, tender copies of the 1987, 2000, and
2005 Reports, and rest its case. The chiropractor would
prevail summarily, because these reports do not so
much as hint that any particular provider has sub-
mitted fraudulent bills. It follows that these reports do
not disclose the allegations or transactions on which
a suit such as Baltazar’s is based.
This would be clear if the dispute concerned the
statute of limitations. No one would contend that the
1987, 2000, or 2005 Reports “disclosed” any given pro-
vider’s fraud and thus started the period of limitations
for suit by the United States; only information that a
particular provider had committed a particular fraud
would do that. Similarly a report by the SEC revealing
widespread securities fraud would not start the time to
sue every issuer for every fraud; again that requires a
person-specific disclosure that establishes not only
falsity but also intent to deceive, which is an element
of fraud. See Merck & Co. v. Reynolds, 130 S. Ct. 1784,
1796 (2010). If it takes specific information to start the
period of limitations, it also takes specific information
to conclude that a suit against a particular provider
was “based on” the public report, rather than being
based on other information about that provider. This
undoubtedly explains why the Department of Health
and Human Services did not stop, or reduce, payments
6 No. 09-2167

to any chiropractor based on the 2005 Report. Extra
information is essential—information of the kind that
Baltazar has provided.
As far as we can tell, no court of appeals supports
the view that a report documenting widespread false
claims, but not attributing them to anyone in particular,
blocks qui tam litigation against every member of the
entire industry. The closest is our own decision in
United States ex rel. Gear v. Emergency Medical Associates
of Illinois, Inc., 436 F.3d 726 (7th Cir. 2006). A GAO report
issued in 1997 concluded that the nation’s 125 teaching
hospitals regularly billed Medicare for medical services
performed by residents (recent medical graduates still
in training). Senior residents are allowed to act as
attending physicians and, when they do, their services
are compensable; but when they perform services as
part of their training programs, compensation to the
hospital comes through a grant for educational expenses
rather than a per-service fee. After the GAO concluded
that hospitals regularly disregarded the distinction be-
tween services that residents performed in the educa-
tional program and services that they performed as
attending physicians, the Department of Health and
Human Services began to audit all 125 of the nation’s
medical schools and their associated hospitals. Many
settlements were reached and publicly announced. While
the program of audits was under way, Gear filed a
qui tam action against one medical school and its affiliates.
We held that this action was barred by §3730(e)(4)(A)
for two principal reasons: first, the GAO had concluded
that the practice it described was normal, if not universal,
No. 09-2167 7

among teaching hospitals; second, Gear was unable to
describe any other facts underlying the suit, which there-
fore must have been “based on” the published report. (If
it was not based on the GAO’s work, and Gear had not
done any independent investigation, then its filing
violated Fed. R. Civ. P. 11(b)(3).)
Defendants rely heavily on Gear, but to say that
a report identifying a uniform practice activates
§3730(a)(4)(A) does not imply anything about the effect
of a report disclosing that some but not all firms use
a practice. Once the GAO concluded that teaching
hospitals routinely disregarded the required distinction
between work in the teaching program and work as an
attending physician, the only extra fact required was
that the defendant is a medical school or teaching hospi-
tal. That’s public knowledge. Gear’s suit did not
add one jot to the agency’s fund of information; the
panel rightly called it “parasitic.” 436 F.3d at 728.
Baltazar’s suit, by contrast, supplied vital facts that were
not in the public domain: that Advanced Healthcare
Associates not only was submitting false claims but
also was submitting them knowing them to be false,
and thus was committing fraud. Baltazar’s suit is “based
on” those defendant-specific facts, not on the public
information that false or mistaken claims are common.
We concluded in Glaser v. Wound Care Consultants, Inc., 570
F.3d 907, 920 (7th Cir. 2009), that a qui tam suit is “based
on” a published report if its allegations are “substantially
similar” to the report’s. (The 2010 amendment added
this rule to the statutory text.) A complaint “substantially
similar” to the published reports would be dismissed
8 No. 09-2167

summarily; Baltazar’s complaint goes beyond those
reports.
Our conclusion that Baltazar’s suit is “based on” her own
knowledge rather than the published reports makes it
unnecessary to decide whether those reports disclosed
the “allegations or transactions” underlying the suit. That
is a more difficult question, because the answer depends
on whether we understand the reports to allege wide-
spread fraud (that is, intentional deceit) or only errors:
fraud is actionable under the False Claims Act, while
negligent errors are not. It is similarly unnecessary to
decide whether Baltazar qualifies for the original-source
exception. If the complaint is accurate, Baltazar was the
original source of the information that defendants com-
mitted fraud. The question is whether the relator is an
original source of the allegations in the complaint and
not, as the district court supposed, whether the relator
is the source of the information in the published re-
ports. “ ‘[O]riginal source’ means an individual who has
direct and independent knowledge of the information on
which the allegations are based”. 31 U.S.C. §3730(e)(4)(B).
See generally Rockwell International Corp. v. United States,
549 U.S. 457 (2007).
Being an original source of the allegations is not
enough to take advantage of the exception. An original
source also must have “voluntarily provided the infor-
mation to the Government before filing an action
under this section”. §3730(e)(4)(B). Baltazar says that she
complied with this requirement by alerting an Assistant
United States Attorney that a False Claims Act suit was
No. 09-2167 9

soon to be filed. Yet Baltazar’s letter narrates the com-
plaint’s conclusions without specifics. A relator need
not have seen the claims submitted to the federal gov-
ernment, see United States ex rel. Lusby v. Rolls-Royce
Corp., 570 F.3d 849 (7th Cir. 2009), but must know
enough to make fraud a likely explanation for any
overbilling, id. at 854—and under §3730(e)(4)(B) must
furnish that information to the United States, not just
assert that there is a basis to be revealed eventually. We
need not decide whether the letter to the AUSA suffices.
The judgment of the district court is reversed, and the
case is remanded for further proceedings consistent
with this opinion.

2-18-11