UNITED STATES OF AMERICA ex rel. KENYA SIBLEY, et al. v. UNIVERSITY OF CHICAGO MEDICAL CENTER d/b/a University of Chicago Medicine, et al.
No. 21-2610
United States Court of Appeals For the Seventh Circuit
ARGUED MAY 18, 2022 — DECIDED AUGUST 11, 2022
Before HAMILTON, BRENNAN, and KIRSCH, Circuit Judges.
Regulations specify that Medicare providers seeking reimbursement for “bad debts” owed by beneficiaries must have first made reasonable efforts to collect those debts. The relators’ allegations concern those regulations. UCMC, they assert, knowingly avoided an obligation to repay the government after it effectively learned that it had been reimbursed for noncompliant debts. Per the relators, MBO and Trustmark caused the submission of false claims to the government by flouting the regulatory requirements. Each relator also brings a retaliation claim against MBO and Trustmark.
The district court dismissed the operative complaint with prejudice. It ruled that UCMC could not be liable because it never recognized any obligation to repay the government. The court also concluded that
We affirm in part and reverse in part. The district court properly dismissed the claim against UCMC, which neither had an established duty to repay the government nor acted knowingly in avoiding any such duty. The direct false claim against MBO was also correctly dismissed. As to MBO, the relators did not meet the applicable standard because they failed to include specific representative examples of noncompliant patient debts, linked to MBO, for which reimbursement was sought. But the complaint includes specific examples of patient debts as to Trustmark, so we reverse the dismissal of the direct false claim against it. As for retaliation, Sibley and Collins have alleged facts that support the inference that they reasonably believed their employers were causing the submission of false claims to the government. We hold that their retaliation claims may proceed. Lopez cannot meet that standard, though, so her retaliation claim was appropriately dismissed.
I
A
The federal government reimburses Medicare providers for “bad debts” under
- The debt “must be related to covered services and derived from deductible and coinsurance amounts“;
- The provider “must be able to establish that reasonable collection efforts were made“;
- The debt must be “actually uncollectible when claimed as worthless“; and
- “Sound business judgment [must establish] that there was no likelihood of recovery at any time in the future.”
CMS has promulgated specific rules for what actions a provider must take to meet the second requirement—“reasonable collection efforts.” For years, those rules were contained in CMS‘s Provider Reimbursement Manual. Then, in 2020, CMS retroactively codified those regulations at
Under
B
This appeal reviews the district court‘s dismissal of the relators’ claims under
The UCMC bad debt scheme. Beginning in 2004, UCMC contracted with MBO to provide billing and collection services. Under the contract, UCMC paid MBO a monthly rate based on the number of MBO employees working full-time to collect debts owed to UCMC. They amended the contract in 2016 to allow MBO to handle additional UCMC accounts, including Medicare and Medicaid accounts receivable. Some of MBO‘s duties involved collecting debts that Medicare beneficiaries owed to UCMC, which would ultimately report many of those debts to CMS as Medicare bad debts.
UCMC authorized MBO to have up to nine employees working on the Medicare/Medicaid project. Instead, MBO assigned only two employees to work on collecting UCMC‘s Medicare and Medicaid beneficiary debt while falsely invoicing UCMC for the remaining authorized employees. Keith Sauter, UCMC‘s Financial Director, managed this arrangement. Sauter profited by receiving purported “consulting fees” from MBO in exchange for not reporting MBO‘s false invoices to UCMC executives.
The complaint alleges that, due to the audit, in late 2017 UCMC learned that MBO had only one person working part-time pursuing its Medicare beneficiary debt. Thus, after conducting the audit, UCMC effectively learned it was impossible that MBO had complied with federal regulations concerning reasonable collection efforts for the Medicare bad debts that UCMC had reported for the period between November 2016 and September 2017. At the time, UCMC‘s internal procedures for filling out cost reports dictated that the hospital system automatically submitted any amounts that MBO deemed uncollectable Medicare bad debts to the government.
In the latter half of 2017, UCMC submitted a cost report covering July 1, 2016 to June 30, 2017. UCMC certified that it had complied with all applicable regulations, and it sought reimbursement for Medicare bad debts, claiming approximately $1.16 million in adjusted reimbursable debt. According to the relators, the certification was false because UCMC knew of the procedures MBO followed when collecting debts. Despite that knowledge, UCMC never amended the 2017 cost report.
The Trustmark bad debt scheme. Trustmark has the same ownership and management as MBO, and the two companies share facilities, equipment, and employees. During the relevant period, Trustmark conducted MBO‘s bad debt collections for clients other than UCMC. The relators allege that Trustmark, when handling debt collection for other clients, declared Medicare beneficiary debts owed to its clients to be reimbursable bad debts. Trustmark did so even though it ignored the requirements for reimbursable bad debts under
There are three mechanisms through which the relators allege Trustmark violated the bad debt regulations:
- Disregarding the requirement that at least 120 days have passed after the first statement was mailed to the beneficiary,
id. § 413.89(e)(2)(i)(A)(5) ; - Disregarding the requirement of sending the beneficiary multiple statements, see
id. § 413.89(e)(2)(i)(A)(4) ,(6) ; and - Skipping review of many debts entirely.
As representative examples of how Trustmark‘s bad debt scheme operated, the relators point to debts that Trustmark handled on behalf of its client Community Hospital.
The operative complaint gives three examples in which MBO and Trustmark (acting on behalf of Trustmark‘s client, Community Hospital) wrote off patient deductibles as Medicare bad debts fewer than 120 days after the date of service. Trustmark also had access to Community Hospital‘s software systems. Once Sibley and Trustmark CEO Justin Manning approved Bad Debt Write Off Reports, those amounts were automatically classified as Medicare bad debts. Later, the debts were included in Community Hospital‘s cost report for that accounting period.
The relators’ complaints and terminations. Sibley began work for MBO as a manager in its customer service call center in September 2016. She then became a Director of Trustmark, overseeing about 12 employees. At first, Sibley reported directly to Manning, but in February 2017 he instructed her to report to Sandra Schade, a Vice President at Trustmark.
Sibley investigated and then confronted Manning after she learned her name was listed on the invoices sent to UCMC, even though she had not worked on those accounts. She also knew UCMC automatically logged any debt recorded as Medicare bad debt in its accounting systems, and she was aware of the requirement of reasonable collection efforts. Sibley sent Manning Bad Debt Turn Over Error Spreadsheets showing why various patient debts could not be categorized as Medicare bad debts under
Collins began work as a manager in Trustmark‘s bad debt collections and legal departments in 2016. She oversaw employees in each department. Collins learned that Trustmark used software systems to automatically report bad debt write-offs to its clients. In March 2017, Schade told Collins to categorize the debts of certain Medicare beneficiaries as Medicare bad debts. The patients in question had not received multiple statements, and fewer than 120 days had passed since their first statements had been issued. Collins protested that this practice violated federal regulations. Schade instructed Collins to follow her directions and prohibited Collins from using the term “illegal.” After terminating Sibley, Schade demoted Collins. Collins refused to accept the demotion, so she was fired.
Lopez was a customer service representative with MBO, and her duties included obtaining payments from patients. In October 2016, Lopez spoke to Manning about her concerns with MBO‘s billing practices, such as double billing. Months later, Lopez detailed her findings in support of her belief that MBO was illegally billing. MBO then terminated Lopez‘s employment.
C
The relators filed a complaint against several defendants in the United States District Court for the Northern District of Illinois, alleging numerous violations of the False Claims Act (“FCA“). The United States, Illinois, and Indiana each declined to intervene. Later, the relators filed their First Amended Complaint, naming UCMC, MBO, and Trustmark as defendants. Following the defendants’ motion, the district court dismissed that complaint in its entirety. The relators then filed their Second Amended Complaint, which the defendants also moved to dismiss.
II
We review de novo an appeal from a district court‘s grant of a Rule 12(b)(6) motion to dismiss. United States ex rel. Berkowitz v. Automation Aids, Inc., 896 F.3d 834, 839 (7th Cir. 2018). We accept all well-pleaded facts as true and draw all reasonable inferences in the relators’ favor. Our task is to decide whether the relators stated a claim for relief that is plausible on its face. Id.
We begin with the relators’ claim for relief against UCMC alleged in Count II of the Second Amended Complaint. Under the FCA, a provision forbidding reverse false claims establishes liability for any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”
UCMC contends this claim was properly dismissed for two reasons: (1) the relators did not plead facts sufficient to show UCMC had an obligation to the government; and (2) the operative complaint does not plausibly allege that UCMC acted knowingly in avoiding any such obligation.
A
The first step in analyzing whether the Second Amended Complaint sufficiently pleaded facts showing UCMC had an established duty to repay the government is determining the applicable pleading standard. It is uncontested that the heightened pleading requirements of
There is no dispute that under Medicare regulations and CMS guidance, hospitals such as UCMC are permitted to pursue collection of their own debts. Yet, the Second Amended Complaint does not include allegations about whether UCMC made any collection efforts before referring debts to MBO for collection. Without pleading that UCMC declined to conduct its own collection efforts, the relators have not alleged UCMC‘s failure to comply with the requirements under
Even more, the Second Amended Complaint alleges that two MBO employees spent a significant amount of their time attempting to collect the debts that Medicare beneficiaries owed to UCMC. But the relators do not specifically allege anything about what the two employees did, on a day-to-day basis, in connection with that work. Instead, the relators allege only that MBO provided far fewer employees than the number for which UCMC had contracted. From this, the Second Amended Complaint infers that MBO cannot possibly have provided UCMC with reasonable collection efforts under
Under Rule 9(b), though, “generalized allegations” of fraudulent practices are insufficient. Mamalakis, 20 F.4th at 301–02. Rather, to defeat dismissal, “specific representative examples” of false submissions are required. Id. at 302. Mamalakis involved allegations that an anesthesiology practice fraudulently billed Medicare and Medicaid at the elevated medical-direction billing rate for services that only qualified for the lower, medically supervised rate under applicable regulations. Id. at 297–99. Our court held that specific examples—there, the precise medical procedures that were performed on certain dates and billed at the medical-direction rate by specific doctors, despite failing to meet the regulatory requirements—were necessary to defeat dismissal of the relator‘s complaint at the Rule 12(b)(6) stage. See id. at 302–03.
Mamalakis teaches that the relators here must allege specific examples of patient debts. Those debts must have been incorporated into UCMC‘s cost reports as reimbursable Medicare bad debts despite not meeting the regulatory requirements, which would render them false claims. But the relators effectively concede they have not identified any specific patient debts that were unlawfully included in UCMC‘s cost reports. The pertinent allegations involve a “failure of degree” related to understaffing, not an objective lack of compliance with the regulation in any specific case. We therefore hold that the allegations against UCMC fail to adequately set out the requisite “who, what, when, where,
B
Even if we were to conclude the relators adequately alleged that UCMC had an “obligation” under
The scienter requirement of
By the terms of the Second Amended Complaint, the relators’ allegations do not fit comfortably within this framework. Notably, the operative complaint states that UCMC “never
determined how much Medicare bad debt [it] reported from November 2016 to August 2017 in [its] cost report received collection effort—let alone reasonable collection effort.” Thus, the relators themselves disavow any notion that UCMC had actual knowledge of an obligation to repay the government. To meet the applicable standard, then, they must allege facts that would show UCMC acted in either “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information at issue.
The only basis the relators have alleged for imputing to UCMC the knowledge that it had violated the law is that the internal audit revealed fewer than nine MBO/Trustmark employees worked on collections for the Medicare/Medicaid project. To conclude that UCMC knew it had an obligation to repay the government, one must assume the following:
- For specific debts that Medicare beneficiaries owed to UCMC, the two MBO employees who regularly worked on UCMC‘s Medicare accounts did not meet the requirements for reasonable collection efforts under
42 C.F.R. § 413.89 ; - UCMC did not itself perform sufficient additional review of the debts in question, either itself or in combination with MBO, or assign them to another debt collector, before declaring them to be reimbursable Medicare bad debts;
- Those debts were included in a cost report that UCMC submitted to the government; and
- The government had reimbursed UCMC for those debts.
Where a defendant‘s obligation to pay the government “depends on multiple assumptions,” it is “potential and contingent” and thus non-actionable under
Here, the relators are unable to dispute that any obligation to pay the government that UCMC might have had depends on several assumptions. If, for instance, the two MBO employees had complied with
Given these contingencies, upon discovering MBO‘s understaffing UCMC “did not have an obligation to remit the reimbursement back to the government; at most, [UCMC] merely had a potential liability and not an established duty.” Olson, 831 F.3d at 1074. UCMC thus cannot have acted knowingly in avoiding any obligation to repay the government, and the absence of scienter is an independent basis on which we affirm the district court‘s dismissal of the relators’ claim against UCMC. We hold that Count II of the Second Amended Complaint fails to state a claim on which relief can be granted.
III
Next, we turn to the direct false claims against MBO and Trustmark. This section first discusses the requirements for pleading a direct false claim under the FCA. Then, we consider the claims against MBO (Count I) and Trustmark (Count III).
A
Under
MBO and Trustmark first argue that they may not be held liable because the relators fail to allege that they made statements to the government to obtain payment. The relators respond that under
The relators have the stronger argument under both the statute and applicable case law. Start with the statute. Section 3729(a) establishes liability for a defendant that knowingly “causes to be presented” a false claim, or “causes to be made or used ... a false record or statement material to” a false claim. Those phrases denote liability for defendants who do not submit claims for payment directly to the government.
Case law leads to the same result. In United States ex rel. Sheet Metal Workers International Ass‘n, Local Union 20 v. Horning Investments, LLC, a subcontractor prepared payroll reports for a contractor, which the subcontractor knew later forwarded them to the government for payment. 828 F.3d 587, 590–91 (7th Cir. 2016). This court held that the relator had presented “more than enough” evidence of the first element of a direct FCA claim under § 3729—that the defendant made a statement in order to receive money from the government. Id. at 592. As the court noted, “False Claims Act liability can attach to any claim that eventually is submitted to the government, even if it goes through an intermediary.” Id. (citation omitted).
Likewise, other circuits have “made clear that unlawful acts by non-submitting entities may give rise to a false or fraudulent claim even if the claim is submitted by an innocent party.” United States ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377, 390 (1st Cir. 2011) (citations omitted); accord United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 243–44 (3d Cir. 2004) (reaching the same conclusion). So, we reject MBO and Trustmark‘s contention that they may not be held liable under the FCA because they did not submit requests for payment directly to the government.
B
The next question, then, is whether the relators have alleged facts sufficient to state a cause of action against MBO under
As discussed, the district court correctly required the relators to “provide specific representative examples” of false claims. Mamalakis, 20 F.4th at 302. But the relators did not include specific representative examples of patient debts that were included in UCMC‘s cost reports as reimbursable Medicare bad debts despite a lack of compliance with
C
Applying the same standard to the relators’ claim against Trustmark, alleged in Count III, yields a different analysis and result. The operative complaint alleges three specific examples of debts, owed to Community Hospital by its Medicare beneficiary patients and assigned to Trustmark for collection, that were written off as Medicare bad debts without being subject to reasonable collection efforts under
These are the types of specific representative examples of fraudulent activity that our court recently held are sufficient to defeat dismissal at the
The operative complaint plausibly alleges that the regulatory requirements for reasonable collection efforts, as well as Trustmark‘s certification of compliance, were material to the government‘s decision to reimburse the Medicare bad debts claimed by Community Hospital. This includes those three representative debts. See Mamalakis, 20 F.4th at 300; Prose, 17 F.4th at 740, 742–44. Trustmark made no argument as to materiality in its appellate brief, so it has forfeited the issue. Scheidler v. Indiana, 914 F.3d 535, 540 (7th Cir. 2019).
Drawing all reasonable inferences in the relators’ favor, we hold that they have pleaded facts that would be sufficient to establish
IV
Each relator also alleges retaliation against MBO and Trustmark in Counts IV, V, and VI of the Second Amended Complaint. In reviewing these claims, we first delineate the correct pleading standard for a claim under this section of the statute. Then, we apply that standard to each retaliation claim, considering the differences between the specific facts alleged by each relator.
A
Under
Just as with the reverse false claim against UCMC and the direct false claims against MBO and Trustmark, all of which arise under
With this in mind, we turn to the district court‘s analysis of the relators’ retaliation claims. Relying on Uhlig and Halasa, the district court ruled the relators could not “show” that a reasonable employee in their positions would have believed MBO and Trustmark were causing false claims to be submitted to the government. Yet, both cases on which the district court relied were decided at summary judgment. See Uhlig, 839 F.3d at 633; Halasa, 690 F.3d at 847–48.3 There, the issues concerned the quantum of evidence that each relator had adduced in support of his retaliation claim.
Here, the case was before the district court on a
Properly framed, then, the relators were not required to “show” that reasonable employees in their positions would have believed their employers were submitting false claims to the government. They were only required to allege facts that, when viewed in their favor, support the inference that it was objectively reasonable for them to believe their employers were committing fraud against the government. See id. at 588; Uhlig, 839 F.3d at 635.
By relying heavily on Uhlig and Halasa to dismiss the relators’ retaliation claims—without discussing the differences in procedural posture or the need to accept the pleaded facts as true and draw all reasonable inferences in the relators’ favor—the district court erred. Further scrutiny of each relator‘s
B
Consider first Sibley‘s retaliation claim. She asserts she was a Director of Trustmark, overseeing about 12 employees. She learned MBO was billing UCMC for nine full-time employees, including herself, while providing only the equivalent of one. Sibley knew UCMC automatically logged any debts that MBO recorded as Medicare bad debts in UCMC‘s accounting systems, and she knew of the requirements under
These allegations support an inference that a “reasonable employee in the same or similar circumstances might believe[] that the employer is committing fraud against the government.” Uhlig, 839 F.3d at 635. Sibley was not a low-level employee; she occupied a managerial role at Trustmark. Importantly, Sibley has alleged knowledge that (1) MBO logged debts that were not subject to reasonable collection efforts as Medicare bad debts; (2) the debts in question were automatically integrated into UCMC‘s cost reports, and (3) seeking reimbursement for such debts was in violation of regulatory requirements. Sibley‘s knowledge was personal, which distinguishes it from the “secondhand knowledge” this court concluded was insufficient to defeat summary judgment in Uhlig. See id. So, a reasonable employee in her position plausibly would have believed MBO and Trustmark were causing UCMC to submit false claims to the government by filing cost reports seeking reimbursements for debts that were ineligible under the applicable regulation.
Turning to causation, MBO cannot dispute that the facts Sibley alleges in support of her retaliation claim meet the applicable standard. The alleged facts—including Sibley‘s complaints, Manning‘s anger when Sibley raised concerns about false invoices, his refusal to accept the Bad Debt Turn Over Error Spreadsheets, and the decision to fire Sibley just after her medical event—permit an inference that Sibley was fired “because of” her efforts to stop potential violations of the FCA. See
C
Next, we consider Collins‘s retaliation claim. Collins was a manager in Trustmark‘s bad debt collections and legal departments. Through her job responsibilities, she learned Trustmark used software systems to automatically report bad debt write-offs to its clients. Schade instructed Collins to write off Medicare beneficiary debts as Medicare bad debts before 120 days had passed from the date of the patient‘s first statement and before the patient had received multiple statements. Collins objected to that practice as “illegal,” arguing it violated federal regulations. Schade then demoted Collins and fired her when she refused to accept the demotion.
Drawing all reasonable inferences in Collins‘s favor, we conclude that she has alleged sufficient facts to show that she engaged in protected activity under the FCA. The discussion of
Similarly, Collins alleges that she investigated Trustmark‘s noncompliance with regulatory requirements and reported her findings to supervisors, including Schade. Under
Thus, we infer from the well-pleaded facts that a reasonable employee in Collins‘s position would have believed that MBO and Trustmark were causing their hospital clients to submit false claims to the government. MBO and Trustmark do not offer any meaningful response for why they believe Collins did not engage in protected activity when she protested the categorization of ineligible debts as Medicare bad debts when speaking with Schade.
As to causation, at this stage Collins‘s allegations also meet the statutory requirement that she was fired “because of” her protected conduct.
Against this, MBO and Trustmark argue that Collins has not pleaded a connection between her internal complaints and the overbilling of UCMC. But that assertion is beside the point, as
D
Finally, we turn to Lopez‘s retaliation claim. The factual underpinnings of her claim are quite different from those that support Sibley and Collins‘s claims. Unlike Sibley and Collins, Lopez was not a manager, but rather a customer service representative with MBO. She did not work on projects relating to writing off patient debts as Medicare bad debts. Instead, Lopez sought to obtain payments from patients, often following the text of
Though we accept the facts pleaded in the Second Amended Complaint as true, we conclude that Lopez lacked a reasonable basis for believing MBO was causing the submission of false claims to the government. The operative complaint does not allege Lopez had personal knowledge of either (1)
Although the Second Amended Complaint asserts Lopez believed MBO‘s double billing was “illegal,” it does not elucidate why this would be so. Nor does the complaint explain how the double billing about which Lopez complained had anything to do with claims that were submitted to the government for payment. Even crediting all well-pleaded facts as true and drawing all reasonable inferences in Lopez‘s favor, Prose, 17 F.4th at 738–39, her report of illegal activity lacked the required “reasonable objective basis.” Lang v. Northwestern Univ., 472 F.3d 493, 495 (7th Cir. 2006). Accordingly, we affirm the district court‘s dismissal of Count VI of the Second Amended Complaint.
V
In conclusion, the relators’ reverse false claim against UCMC is subject to dismissal because they have not pleaded facts sufficient to show that UCMC either had an obligation to the government or acted knowingly in avoiding that obligation. And because the relators have not pleaded specific examples of noncompliant debts for which UCMC sought reimbursement, we also uphold the dismissal of the direct false claim against MBO. As to Trustmark‘s client Community Hospital, though, the relators have pleaded specific examples. So, their direct false claim against Trustmark may proceed.
On the retaliation claims, Sibley and Collins have alleged an objectively reasonable basis for believing their employers were causing fraudulent claims to be submitted to the government. They have also sufficiently alleged causation. Thus, the dismissal of their retaliation claims is reversed. But Lopez has not alleged facts that would show she had an objectively reasonable basis for believing her employer was causing fraudulent claims to be submitted to the government, so her claim was properly dismissed.
Our disposition of the district court‘s dismissal of the Second Amended Complaint is as follows:
- Count I, direct false claim against MBO—Affirmed;
- Count II, reverse false claim against UCMC—Affirmed;
- Count III, direct false claim against Trustmark—Reversed;
- Count IV, Sibley retaliation claim—Reversed;
- Count V, Collins retaliation claim—Reversed; and
- Count VI, Lopez retaliation—Affirmed
The judgment of the district court is AFFIRMED in part and REVERSED in part,