United States v. Jones

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
January 16, 2007
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk

No. 05-30942

UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
JEDD P. JONES,
Defendant-Appellant.

Cons. No.

No. 05-30998

UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
WILLIAM H. CLARK,
Defendant-Appellant.

Appeals from the United States District Court
for the Western District of Louisiana

Before JONES, Chief Judge, SMITH and STEWART, Circuit Judges.

CARL E. STEWART, Circuit Judge:

This appeal arises from sentencing and restitution orders of the district court following the

convictions of Jedd Jones and William Clark. In March 2003, Jones pled guilty to one count of health

care fraud in violation of 18 U.S.C. § 1347. Approximately two years later, Clark pled guilty to the

same count. Jones and Clark appeal their sentences and the amount of restitution. We address

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whether the district court erred in determining the offense level and amount of restitution owed by

Jones and Clark based on the government’s evidence. We conclude that the government submitted

insufficient evidence to support the sentence enhancements and amount of restitution; therefore, we

vacate the sentences and restitution orders and remand these cases to the district court for re-

sentencing consistent with this court’s opinion.1

I. MEDICARE REGULATIONS

Medicare provides federal health insurance benefits for people age sixty-five and older and

individuals with disabilities. The Medicare program permits health agencies to receive reimbursement

for necessary reasonable costs related to patient care. Fiscal intermediaries contract to manage the

Medicare program and administer the reimbursements, which entails reviewing bills and making

payments. Medicare providers submit cost reports at the end of the year to settle annual costs. The

Medicare regulations set forth specific guidance for providers that receive services from a related

organization. The regulations state that “costs applicable to services, facilities, and supplies furnished

to the provider by organizations related to the provider by common ownership or control are

includable in the allowable cost of the provider at the cost to the related organization.”2 42 C.F.R.

1
In this appeal, based on our decision to vacate the loss enhancement and restitution orders
of both defendants, we do not reach the issues of whether the “related organizations” rule, under 42
C.F.R. § 413.17, applies to the conduct of individuals, or whether the Ex Post Facto Clause prohibits
the sentencing of Clark under 18 U.S.C. § 1347.
2
The regulations, 42 C.F.R. § 413.17, define common ownership and control as follows:
(b) Definitions–
(2)Common ownership. Common ownership exists if an individual or individuals
possess significant ownership or equity in the provider and the institution or
organization serving the provider.
(3) Control. Control exists if an individual or an organization has the power, directly
or indirectly, significantly to influence or direct the actions or policies of an
organization or institution.

2
§ 413.17(a). Two organizations are “related” when “the provider to a significant extent is associated

or affiliated with or has control of or is controlled by the organizations furnishing the services,

facilities, or supplies.” 42 C.F.R. § 413.17(b)(1).

The Provider Reimbursement Manual, published bythe Health Care Financing Administration

(“HCFA”), explains the purpose of the “related party” regulation:

(1) to avoid the payment of a profit factor to the provider through the related
organization (whether related by common ownership or control), (2) to avoid
payment of artificially inflated costs which may be generated from less than arm’s
length bargaining.

Provider Reimbursement Manual § 1000.

At the end of the year, health care agencies submit reimbursement forms requiring the

disclosure of goods or services purchased from a “related party.” The fiscal intermediary receives

this form with each cost report. During periodic audits, the fiscal intermediary also inquires about

any related party transactions. Health care providers must disclose these relations because

reimbursements are limited to the provider’s actual cost or the cost of similar providers on the open

market, whichever is the lesser amount, for related organizations. 42 C.F.R. § 413.17(c)(2). This

regulation means that the “actual cost must not exceed the price for which comparable services,

products, or facilities could be purchased elsewhere.” U.S. ex rel. Reagan v. E. Tex. Med. Ctr. Reg’l

Healthcare Sys., 384 F.3d 168, 173 n.5 (5th Cir. 2004) (citing 42 C.F.R. § 413.17).

II. FACTUAL AND PROCEDURAL BACKGROUND

Jones served as a principal of Health One Management, Inc. (“Health One”). For Medicare

purposes, Health One was “related to” Riverbend Rehabilitation Hospital (“Riverbend”) in Covington,

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Louisiana, through common ownership and control.3 Jones incorporated Health One and later served

as its Secretary-Treasurer. Clark, the co-defendant of Jones, served as President and part owner.

Riverbend paid fees to Health One pursuant to a full-service management contract and Jones and

Clark pursuant to a management and consulting agreement. Jones and Clark, however, failed to

notify the fiscal intermediary, TriSpan Health Services (“TriSpan”), of the relation between Riverbend

and Health One. Riverbend received reimbursements for various costs, including management fees

to Health One, Clark, and Jones, for the treatment of Medicare patients at Riverbend. TriSpan

eventually requested competitive bids to determine the reasonableness of the management fees. In

response to TriSpan’s inquiries, Riverbend submitted fictitious bids and board meeting minutes.

TriSpan referred the case to the Office of the Inspector General for investigation and prosecution.

The government indicted Jones and Clark on several charges because of their failure to

disclose the relationship between the two organizations. They pled guilty to only one count of health

care fraud under 18 U.S.C. § 1347. Prior to sentencing, Jones and Clark filed objections to the

Presentence Report (“PSR”). The government and the defendants filed memoranda on the question

of whether Medicare suffered a loss from the offense. On July 20, 2005, the district court conducted

an evidentiary hearing on the issue. The government offered the PSR to prove the amount of loss

to Medicare. The PSR listed the full amount of Medicare’s reimbursements to Riverbend for

payments to Health One, and payments to Jones and Clark, individually.

3
In this case, the co-ownership and control components grew from the use of holding
companies and what the district court referred to as a “puppet owner.” Due to Jones’s and Clark’s
guilty pleas and the complexity of the ownership network, we do not discuss the history of the
entities’ formation and ownership.

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 The defense’s experts testified that Riverbend’s costs were reasonable and within the range

of typical payments to non-related organizations and individuals. One defense witness, the former

director of a Medicare fiscal intermediary, testified that TriSpan never reopened the previouslysettled

cost reports or conducted an audit to determine the reasonableness of the cost reports. The

government’s rebuttal witness, Robertson, alleged that TriSpan could not identify comparable local

facilities to Riverbend. The government offered the salary of the Chief Operating Officer (“COO”)

of St. Francis Medical Center in Monroe, Louisiana, a larger acute-care hospital, as a frame of

reference for the district court to determine the reasonableness of Riverbend’s costs. The

government’s witness admitted that Riverbend was not comparable to St. Francis Hospital.

The district court accepted the PSR as evidence regarding the actual costs incurred by

Riverbend. The court then reduced the loss amount by the estimated value of performed services.

The court again reduced the loss amount by the cost of bed leases evidenced in Riverbend’s cost

reports. In October 2005, the district court entered judgment and sentenced Clark and Jones.

Pursuant to U.S.S.G. § 2F1.1, the district court added a thirteen-level enhancement to Clark’s

sentence and a ten-level enhancement to Jones’s sentence. The court gave additional enhancements

for their roles in the offense and reductions for acceptance of responsibility. The district court

sentenced Clark to thirty-months imprisonment and three-years supervised release. Due to his

cooperation with the government’s investigation, Jones received a lesser sentence of one-year and

one-day imprisonment.4 The district court also ordered Jones and Clark to jointly and severally pay

restitution in the amount of $1,473,500, and Clark to individually pay additional restitution in the

amount of $1,236,293. Jones and Clark timely filed their notices of appeal.

4
On January 6, 2006, we granted Jones and Clark bail pending the outcome of this appeal.

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 III. STANDARD OF REVIEW

This court reviews the amount of loss, a factual finding, for clear error. United States v.

Sanders, 343 F.3d 511, 520 (5th Cir. 2003). The finding must be plausible in light of the record as

a whole. Id. We review de novo the interpretation and application of the Sentencing Guidelines.

The district court receives wide latitude to determine the amount of loss and should make a

reasonable estimate based on available information. United States v. Cothran, 302 F.3d 279, 287 (5th

Cir. 2002). We must determine in this appeal whether the sentencing court applied an acceptable

method of calculating the amount of loss, which must bear a reasonable relation to the actual harm

of the offense. United States v. Randall, 157 F.3d 328, 330-31 (5th Cir. 1998).

IV. DISCUSSION

A.

To impose a sentence enhancement, the government must establish that Medicare suffered

an actual loss. United States v. Alfaro, 919 F.2d 962, 965 (5th Cir. 1990). Under U.S.S.G. § 2F1.1,

the amount of loss, in cases involving the diversion of government program benefits, equals “the value

of the benefits diverted from intended recipients.”5 Jones and Clark argue that they should not be

liable for the entire amount of Medicare reimbursements because Medicare would have paid Health

One’s actual costs notwithstanding disclosure of the relationship between Health One and Riverbend.

Moreover, the government failed to show either the differential between Medicare’s reimbursements

and Health One’s actual costs or the reasonable value of Health One’s services. Accordingly, Jones

and Clark should not receive an enhancement from the base offense level and restitution order.

5
Section 2F1.1 has been replaced by § 2B1.1; however, the probation officer properly applied
the more favorable 1997 guidelines. See United States v. Harms, 442 F.3d 367, 379 n.7 (5th Cir.
2006).

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 The unsworn assertions of the government’s attorney do not provide a sufficiently reliable

basis for a defendant’s sentence. United States v. Patterson, 962 F.2d 409, 415 (5th Cir. 1992).

Similarly, “[b]ald conclusory statements do not acquire the patina of reliability by mere inclusion in

the PSR.” United States v. Elwood, 999 F.2d 814, 817-18 (5th Cir. 1993). The government

contends that the PSR contains reliable, specific evidence of the loss amount. For this reason, the

PSR’s loss calculations met its burden of proof. The government also maintains that Jones and Clark

did not show material inaccuracies in the PSR calculations, and their submission of false bids and

meeting minutes during TriSpan’s investigation hindered its ability to make an accurate cost

assessment. The PSR usually provides sufficiently reliable evidence for the district court’s

consideration. United States v. Cothran, 302 F.3d 279, 286 (5th Cir. 2002). In this instance,

however, the Probation Department acknowledged that the loss calculation drew only upon

information from the government without an audit and independent analysis of Health One’s actual

or reasonable costs. The government has failed to show why the submission of false bids and meeting

minutes to TriSpan precluded a later audit by the government pursuant to its power to subpoena the

records of Riverbend, Health One, Jones, and/or Clark.

In United States v. Gupta, several corporate defendants and Gupta were convicted for

conspiracy to submit false Medicare claims because the defendants failed to disclose a relation

between the health care provider and management consultant. 463 F.3d 1182, 1193 (11th Cir. 2006).

The district court found that the government suffered no loss because the defendants charged less

than the daily cost cap for services. Id. at 1196. The government cross-appealed the district court’s

sentence, arguing that amount of loss equaled the difference between Medicare’s reimbursements to

the provider and the management company’s actual costs. Id. at 1199. The government also

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submitted expert reports to establish the profit factor. Id. at 1195-96. The Eleventh Circuit reasoned

that the district court may use one of two common calculations: (1) the loss to the losing victims

method; and (2) the defendant’s gain or net gain method. Id. at 1200 (citing United States v.

Bracciale, 374 F.3d 998, 1003 (11th Cir. 2004) (internal quotations omitted). The court held that

In this case, the district court’s finding of no loss was an unreasonable method. The
district court did not apply relevant calculation[s] as to the greater of intended or
actual loss.... Moreover, the purpose of the related party rule is to prevent the
payment of artificially inflated consulting fees.

Id. at 1200. Accordingly, the Eleventh Circuit vacated and remanded the case for re-sentencing. Id.

We find persuasive the Eleventh Circuit’s net gain method for calculating loss under these similar

circumstances. In this case, the government presented no evidence to support the PSR. And even

though “loss need not be determined with precision,” without showing that the amounts paid to

Health One were either unreasonable or greater than its actual cost, the government has shown no

recoverable loss to support the sentence enhancements and restitution orders. The district court’s

reliance upon the PSR’s loss amounts, which included Medicare’s total reimbursement costs,

constituted an unreasonable calculation of the actual loss.

B.

In the context of a contract, the court must credit the defendant for the value of the performed

services. United States v. Sublett, 124 F.3d 693, 694 (5th Cir. 1997). The government asserts that

Jones and Clark failed to prove any services rendered to Riverbend from Health One. The

government bears the burden of proof, however, to prove whether Jones and Clark performed these

services. Alfaro, 919 F.2d at 965. At the evidentiary hearing, the government neglected to

8
substantiate its claim. Speculation from the government witnesses regarding whether Health One

actually provided services failed to meet its evidentiary burden.

The government also maintained that identifying no comparable facilities in the immediate area

thwarted its ability to calculate an accurate valuation of performed services. The inability to find a

comparable facility does not mean that the services have no value. In contrast to the government,

Jones and Clark put forth evidence, through the testimony of Robert Hicks, an expert in health care

accounting, hospital consulting, management contracts, and intermediary audits of management

contracts, that Riverbend paid Jones, Clark, and Health One, in the mid-level range of similar services

provided through a non-related organization. Hicks discussed his methodology at length, including

the hospitals relied upon for comparison. The district court discredited Hicks’s testimony without

explanation, other than questioning whether Jones and Clark actually performed any services, even

though the government presented no evidence that the services were not performed.

The district court valued all the services provided at only $150,000 a year. The court based

this valuation on the $178,000 salary of the COO at St. Francis Hospital, but because St. Francis

Hospital is significantly larger than the facilities at issue in this case, the court determined $150,000

was a reasonable yearly amount for the management of Riverbend. Nothing in the record, neither the

district court opinion nor the government witnesses testimony, establishes that the St. Francis COO

position was comparable to the work performed by Clark, Jones, and Health One, collectively. The

two hospitals provided fundamentally different patient services in different locations. Moreover, the

government presented no evidence reflecting the differences between the hospitals, the patient

services provided, what the employees did to earn their salaries, or what other employees were

responsible for various management tasks.

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 The government witness also did not consider the specific situation facing Riverbend when

Clark and Jones took management control. In the hearing transcript, defense counsel refers to

numerous debt and personnel problems existing at Riverbend, which the government witness admitted

could possibly necessitate a higher salary for management and consulting services. The district judge

seemingly overlooked these factors in adopting the COO salary as an appropriate comparison.6

Although the trial court is only required to make a reasonable estimate of loss, United States

v. Jimenez, 77 F.3d 95, 99 n.4 (5th Cir. 1996), we conclude that the portion of the loss calculation

based on an extrapolation from the COO salary of a typical medical facility was unreasonable. There

is insufficient evidence in the record to support the court’s valuation of the services involved in this

case.

V. CONCLUSION

We vacate the loss enhancement determined by the district court because the government

failed to meet its burden of proof to establish the amount of loss suffered by Medicare as a result of

Jones’s and Clark’s criminal behavior. The government presented no evidence on the following

requisite facts: the profit factor, if any, Jones and Clark gained by failing to disclose the relation

between Riverbend and Health One; whether Jones and Clark provided services to Riverbend; and

a comparable facility to determine the reasonableness of management and consulting fees paid to

Health One, Jones, and Clark. Accordingly, the district court may not apply any loss enhancement

on re-sentencing. For these reasons, we VACATE the sentence and restitution orders of Jones and

6
The district judge recognized the additional difficulties facing the particularly rural Riverbend
facility and stated he took this into account when setting the $150,000 amount. There is no
discussion, however, of any economic analysis of the two areas or systematic way in which the judge
analyzed this factor.

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Clark, and REMAND this case to the district court for re-sentencing not inconsistent with this

opinion.

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