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United States ex rel. Bookwalter v. UPMC

United States Court of Appeals, Third Circuit

December 20, 2019

UNITED STATES OF AMERICA, ex rel. J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J. SCLABASSI, M.D.; ANNA MITINA
v.
UPMC; UNIVERSITY OF PITTSBURGH PHYSICIANS, d/b/a UPP DEPARTMENT OF NEUROSURGERY J. WILLIAM BOOKWALTER, III, M.D.; ROBERT J. SCLABASSI, M.D.; ANNA MITINA, Appellants

          Argued: January 10, 2019

          On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 2:12-cv-00145) District Judge: Honorable Cathy Bissoon

          Patrick K. Cavanaugh Stephen J. Del Sole Del Sole Cavanaugh Stroyd LLC, Gregory M. Simpson [ARGUED] Simpson Law Firm Andrew M. Stone Stone Law Firm Counsel for Appellants.

          Kirti Datla Jonathan L. Diesenshaus Jessica L. Ellsworth [ARGUED] Mitchell J. Lazris Sarah C. Marberg Hogan Lovells U.S. Counsel for Appellees.

          Before: AMBRO, BIBAS, and FUENTES, Circuit Judges

          OPINION

          BIBAS, CIRCUIT JUDGE

         Table of Contents

         I. Background .......................................................................... 7

         A. Factual Background ........................................................ 7

         1. The University of Pittsburgh medical system ............. 7

         2. The neurosurgeons' compensation structure .............. 7

         3. The neurosurgeons' alleged fraud and its effects on salaries and revenues ............................................. 8

         B. Procedural History .......................................................... 9

         II. Standards of Review and Pleading ................................... 10

         III. The Stark Act and the False Claims Act ......................... 11

         A. The Stark Act ................................................................ 11

         1. Forbidden conduct ..................................................... 11

         2. Exceptions ................................................................. 12

         3. No built-in cause of action ........................................ 13

         B. The False Claims Act .................................................... 14

         IV. The Relators Plead Stark Act Violations ........................ 14

         A. The surgeons referred designated health services to the hospitals ............................................... 15

         B. The relators' complaint alleges an indirect compensation arrangement .......................................... 16

         1. An unbroken chain of entities with financial relationships connects the surgeons with the hospitals. . ............................................................ 17

         2. The surgeons' compensation took into account the volume and value of their referrals ..................... 17

         3. The hospitals knew that the surgeons' compensation took their referrals into account ......... 25

         V. The Relators Plead False Claims Act Violations ............. 26

         A. The pleadings satisfy all three elements of the False Claims Act .......................................................... 27

         B. The pleadings satisfy Rule 9(b) .................................... 28

         C. Pleading Stark Act exceptions under the False Claims Act .......................................................... 30

         1. The burden of pleading Stark Act exceptions stays with the defendant under the False Claims Act ........ 31

         2. Even if the relators bore this pleading burden, they have met it ......................................................... 32

         VI. Conclusion ....................................................................... 32

         Healthcare spending is a huge chunk of the federal budget. Medicare and Medicaid cost roughly a trillion dollars per year. And with trillions of dollars comes the temptation for fraud.

         Fraud is a particular danger because doctors and hospitals can make lots of money for one another. When doctors refer patients to hospitals for services, the hospitals make money. There is nothing inherently wrong with that. But when hospitals pay their doctors based on the number or value of their referrals, the doctors have incentives to refer more. The potential for abuse is obvious and requires scrutiny.

         The Stark Act and the False Claims Act work together to ensure this scrutiny and safeguard taxpayer funds against abuse. The Stark Act forbids hospitals to bill Medicare for certain services when the hospital has a financial relationship with the doctor who asked for those services, unless an exception applies. And the False Claims Act gives the government and relators a cause of action with which to sue those who violate the Stark Act.

         Here, the relators allege that the defendants have for years been billing Medicare for services referred by their neurosurgeons in violation of the Stark Act. The District Court found that the relators had failed to state a plausible claim and dismissed their suit.

         This appeal revolves around two questions: First, do the relators offer enough facts to plausibly allege that the surgeons' pay varies with, or takes into account, their referrals? Second, who bears the burden of pleading Stark Act exceptions under the False Claims Act?

         The answer to the first question is yes. The relators' complaint alleges enough facts to make out their claim. The relators make a plausible case that the surgeons' pay is so high that it must take their referrals into account. All these facts are smoke; and where there is smoke, there might be fire.

         The answer to the second question is the defendants. The Stark Act's exceptions work like affirmative defenses in litigation. The burden of pleading these affirmative defenses lies with the defendant. This is true even under the False Claims Act. And even if that burden lay with the relators, their pleadings meet that burden here.

         We hold that the complaint states plausible violations of both the Stark Act and the False Claims Act. So we will reverse.

         I. Background

         A. Factual Background

         1. The University of Pittsburgh medical system.

         On this motion to dismiss, we take as true the facts alleged in the second amended complaint: The University of Pittsburgh Medical Center is a multi-billion-dollar nonprofit healthcare enterprise. The Medical Center is the parent organization of a whole system of healthcare subsidiaries, including twenty hospitals. The Medical Center is the sole member (owner) of each hospital.

         More than 2, 700 doctors, including dozens of neurosurgeons, work at these hospitals. The doctors are employed not by the hospitals, but by other Medical Center subsidiaries. Three of these subsidiaries matter here: University of Pittsburgh Physicians; UPMC Community Medicine, Inc.; and Tri-State Neurological Associates-UPMC, Inc.

         These three subsidiaries employed many of the neurosurgeons who worked at the Medical Center's hospitals during the years at issue, from 2006 on. Pittsburgh Physicians' Neurosurgery Department employed most of the surgeons at issue. Tri-State employed two, and Community Medicine employed one. The Medical Center owns all three subsidiaries. In short, the Medical Center owns both the hospitals and the companies that employ the surgeons who work in the hospitals.

         2. The neurosurgeons' compensation structure.

         The surgeons who worked for the three subsidiaries here all had similar employment contracts. Each surgeon had a base salary and an annual Work-Unit quota. Work Units (or wRVUs) measure the value of a doctor's personal services. Every medical service is worth a certain number of Work Units. The longer and more complex the service, the more Work Units it is worth. Work Units are one component of Relative Value Units (RVUs). RVUs are the basic units that Medicare uses to measure how much a medical procedure is worth.

         The surgeons were rewarded or punished based on how many Work Units they generated. If a surgeon failed to meet his yearly quota, his employer could lower his future base salary. But if he exceeded his quota, he earned a $45 bonus for every extra Work Unit.

         3. The neurosurgeons' alleged fraud and its effects on ...


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