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Precedential or Non-Precedential: Non-Precedential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NOT PRECEDENTIAL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