UNITED STATES OF AMERICA ex rel. THOMAS M. ZIZIC, M.D., Appellant v. Q2ADMINISTRATORS, LLC and RIVERTRUST SOLUTIONS, INC.
No. 12-2215
United States Court of Appeals for the Third Circuit
Opinion Filed: August 26, 2013
PRECEDENTIAL. Argued January 8, 2013. On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. 2-09-cv-05788). District Judge: Honorable Norma L. Shapiro.
Brian J. McCormick, Jr. (ARGUED)
Matthew C. Monroe
1528 Walnut Street, 4th Floor
Philadelphia, PA 19102
Counsel for Appellant
Stephanie C. Chomentowski
Blank Rome
130 North 18th Street
1 Logan Square
Philadelphia, PA 19103
Daniel E. Chudd
James C. Cox
Warren J. DeVecchio (ARGUED)
Marina K. Jenkins
Jenner & Block
1099 New York Avenue, Suite 900
Washington, DC 20001
Counsel for Q2Administrators, LLC
James A. Backstrom, Jr.
1500 John F. Kennedy Boulevard
2 Penn Center Plaza, Suite 200
Philadelphia, PA 19102
Jaime L. Derensis
Gary C. Shockley (ARGUED)
Baker, Donelson, Bearman, Caldwell & Berkowitz
211 Commerce Street, Suite 800
Nashville, NC 37201
Counsel for RiverTrust Solutions, Inc.
FISHER, Circuit Judge.
Relator Thomas M. Zizic, M.D. (“Zizic“) filed this qui tam1 suit under the False Claims Act (“FCA“),
I.
Because Zizic‘s FCA claims allege Medicare fraud, we first describe those two statutory schemes. Next, we relate the relevant factual background of this case.2 We finally recount the procedural history of this appeal.
A.
Zizic asserts claims under the FCA, which punishes the knowing presentation of a fraudulent demand for payment to the United States,
Zizic‘s FCA claims are based on allegations of fraud related to Medicare, a federal health insurance program for the aged and disabled. Medicare Part B subsidizes the costs
HHS contracts out the administration of DME coverage determinations to a DME Medicare administrative contractor (“DMAC“).
Second, the claimant may request a “reconsideration,”
Third, the claimant may appeal to an administrative law judge (“ALJ“),
B.
Zizic is the former President and CEO of the now-bankrupt BioniCare Medical Technologies, Inc. (“BioniCare“), a company formed to commercialize the BIO-1000, a DME designed to treat osteoarthritis of the knee. BioniCare attempted to bill Medicare for the BIO-1000, but many claims were denied as not medically reasonable and necessary. Zizic personally participated on behalf of BioniCare in the ALJ appeals of the QIC‘s denials of the BIO-1000 claims.
From July 2005 to about December 2006, Q2A contracted with HHS to serve as the QIC responsible for review of all DME claim denials across the nation. Q2A frequently denied BIO-1000 claims, always as medically unreasonable and unnecessary. However, Q2A‘s decisions
According to a March 28, 2007 affidavit by Wayne van Halem (“van Halem“), a former Q2A employee who managed all DME appeals for all DMAC regions from November 2005 to September 2006, Q2A employed only three or four physicians to review several hundred daily appeals of claim denials. Because Q2A was short-staffed, it first implemented an internal policy to deny all BIO-1000 claims, which were reviewed by a single nurse rather than a panel of physicians. Then, Q2A allowed non-physician subcontractors to prepare BIO-1000 appeals for review by a single physician. Q2A finally developed a mail merge letter that automatically denied BIO-1000 claims without any review.
From about January 2007 to the present, RTS replaced Q2A, contracting with HHS to serve as the QIC responsible for review of all DME claim denials throughout the country. RTS consistently denied BIO-1000 claims, often as medically unreasonable and unnecessary. Like Q2A, RTS arrived at its decisions without performing the physician review required by the Medicare Act, HHS regulations, and its Government contract. RTS employed only two physicians to review the more than one hundred thousand annual appeals of claim denials.
On July 26, 2007, BioniCare declared bankruptcy. Amended Complaint at ¶ 10, Almy v. Sebelius, No. 08-cv-
C.
On December 4, 2009, Zizic filed his complaint asserting FCA claims against Q2A and RTS,4 to which he attached van Halem‘s affidavit. The Government declined to intervene. Q2A and RTS moved to dismiss Zizic‘s complaint with prejudice for lack of subject matter jurisdiction under Rule 12(b)(1). Zizic filed an opposition, which included a request for leave to amend his complaint, but which did not include a draft amended complaint. The District Court, after holding a hearing, granted the motions to dismiss the complaint, concluding that it lacked jurisdiction because the
II.
Zizic argues that the District Court had subject matter jurisdiction over this case under
Zizic concedes that the District Court correctly concluded that Q2A and RTS launched a factual, rather than facial, jurisdictional attack, Zizic‘s Opening Br. at 19, by challenging “the actual failure of [his] claims to comport with
III.
In this appeal, Zizic asks us to reverse the District Court on three alternative grounds. First, Zizic asserts that the District Court erred in concluding that the FCA‘s public disclosure bar applied to his case because his allegations against Q2A and RTS were not based on public disclosures. Second, Zizic claims that even if his allegations against Q2A and RTS were based on public disclosures, the District Court erred in concluding that the public disclosure bar applied to his case because he was an original source of that information. Third, Zizic contends that even if the public disclosure bar did apply to his case, the District Court abused its discretion in dismissing his complaint with prejudice. We address and reject these arguments in the following discussion.
A.
The District Court concluded that the FCA‘s public disclosure bar divested it of subject matter jurisdiction over Zizic‘s claims in part because his claims against Q2A and RTS were based on the public disclosure of transactions warranting an inference of fraud in the Almy litigation. Zizic
The public disclosure bar, in pertinent part, withdraws jurisdiction over a qui tam suit that is “based upon the public disclosure of allegations or transactions in a . . . civil . . . hearing.”
1.
Starting out with the first and second elements, we analyze whether “information was [publicly] disclosed via one of the sources listed in
2.
Moving on to the third element, we consider whether the information publicly disclosed in the Almy litigation constituted allegations or transactions of fraud.6 An allegation of fraud is an explicit accusation of wrongdoing. United States ex rel. Dunleavy v. Cnty. of Del., 123 F.3d 734, 741 (3d Cir. 1997), abrogated on other grounds by Wilson, 559 U.S. 280. A transaction warranting an inference of fraud is one that is composed of a misrepresented state of facts plus the actual state of facts. Id.
We have adopted a formula to represent when information publicly disclosed in a specified source qualifies as an allegation or transaction of fraud:
“If X + Y = Z, Z represents the allegation of fraud and X and Y represent its essential elements. In order to disclose the fraudulent transaction publicly, the combination of X and Y must be revealed, from which readers or listeners may infer Z, i.e., the conclusion that fraud has been committed.”
Id. (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 654 (D.C. Cir. 1994)). The essential elements of the allegation of fraud [Z] are “a misrepresented [X] and a true [Y] state of facts.” Atkinson, 473 F.3d at 519 (citation omitted). Thus, the public disclosure bar applies “if either Z (fraud) or both X (misrepresented facts) and Y (true facts) are [publicly] disclosed by way of a listed source.” Id.
The District Court decided that the Summary Judgment Submission publicly disclosed a transaction
“Although the Medicare regulations required physician review at the QIC for claims for services or items provided by a physician, only two of the claims in [a certain case] show any indicia of physician review and only a small number of claims in [the same case] have indicia of nurse review. None of the claims in the other cases have any evidence of nurse or physician review. In fact, the QIC that originally reviewed claims for the BIO-1000 subjected none of the claims to physician or nurse review.”
Zizic argues that the Almy litigation did not publicly disclose a fraudulent transaction. Zizic admits that the true state of facts — that “unnamed QICs performed second-level reviews as part of a five-step appeals process that was generally fraught with problems at each level” — was publicly disclosed in the Almy litigation. Zizic‘s Opening Br. at 28. He asserts, however, that the misrepresented state of facts — that “either [RTS] or Q2A, in particular, performed sham second-level Medicare reviews in violation of Medicare regulations and statutes and their contracts” — was not. Id.
3.
Finishing up with the fourth element, we decide “whether the relator‘s complaint is based on those [public] disclosures.” Atkinson, 473 F.3d at 519. To be based on allegations or transactions of fraud, claims need not be “actually derived from” public disclosures. United States ex rel. Mistick PBT v. Hous. Auth. of the City of Pittsburgh, 186 F.3d 376, 385-88 (3d Cir. 1999). Rather, claims need only be
The District Court concluded that Zizic‘s claims were substantially similar to the fraud allegation that could be inferred from the fraudulent transaction publicly disclosed in the Almy litigation. Zizic contends that his claims were not based on that public disclosure because “the Almy Litigation never identifies or refers to [RTS] or Q2A.” Zizic‘s Opening Br. at 31. Zizic attempts to analogize this case to the Seventh Circuit‘s decision in United States ex rel. Baltazar v. Warden, 635 F.3d 866 (7th Cir. 2011). There, the relator alleged that a certain chiropractor submitted fraudulent bills to Medicare, and an HHS report publicly disclosed that about half of a sample of chiropractors engaged in similar improper conduct. The court reasoned that the public disclosure alone would not support an FCA suit because it did not reveal any particular responsible party. Instead, it was only the relator‘s identification of an individual chiropractor, which placed that particular provider among the unnamed wrongdoers referenced in the report, that enabled an FCA suit. Thus, the court held that the relator‘s claims were not based on the public disclosure.
Q2A and RTS counter that this case is comparable to the Seventh Circuit‘s decision in United States ex rel. Gear v. Emergency Med. Assocs. of Ill., Inc., 436 F.3d 726 (7th Cir. 2006). There, the relator alleged that a certain teaching hospital submitted fraudulent bills to Medicare, but Government and media reports publicly disclosed the same fraud throughout that industry. The court rejected the relator‘s argument that it was impossible to infer the identity
This case is closer to Gear than to Baltazar. Even if Q2A and RTS were not actually identified in the Almy litigation, they were directly identifiable from that public disclosure. According to Zizic‘s complaint, the QIC industry is an industry of one; Q2A and RTS were the only QICs during their respective contractual terms. App. at 32 ¶¶ 12 & 15. Additionally, the identities of Q2A and RTS were publicly available. HHS, Listing of Active Contracts—Centers for Medicare and Medicaid Services 31 (2011), available at http://www.hhs.gov/about/smallbusiness/Active%20Contracts/pdf/cms.pdf. Because Q2A and RTS were directly identifiable from the Almy litigation, Zizic‘s claims are substantially similar to the fraudulent transactions in the Summary Judgment Submission.
Separately, Zizic argues that his claims are not substantially similar to the Almy litigation because he added some information to the trustee‘s account of the fraudulent transaction. For example, Zizic points out that the trustee only alleged that QIC coverage decisions about medical reasonableness and necessity were inconsistent, see Summary Judgment Submission at ¶¶ 44-45, while he added an allegation that a particular nurse-reviewer at RTS was responsible for the inconsistent coverage determinations,
Nonetheless, the public disclosure bar is not confined to actions “solely based upon” public disclosures. Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 920 (7th Cir. 2009) (citing United States ex rel. McKenzie v. BellSouth Telecomms., Inc., 123 F.3d 935, 940 (6th Cir. 1997); Fed. Recovery Servs., Inc. v. United States, 72 F.3d 447, 451 (5th Cir. 1995)). Instead, the public disclosure bar covers actions simply “based upon” public disclosures, including actions “even partly based upon” such allegations or transactions. Id. (quoting United States ex rel. The Precision Co. v. Koch Indus., Inc., 971 F.2d 548, 552 (10th Cir. 1992)). We conclude that Zizic’s additional information, i.e., the identity of the QIC employee responsible for the inconsistent coverage determinations, is too insubstantial to prevent his otherwise substantially similar allegations from being based on the Almy litigation. Therefore, we hold that Zizic’s claims against Q2A and RTS were based on the publicly disclosed fraudulent transaction in the Almy litigation.9
The District Court’s conclusion that the FCA’s public disclosure bar deprived it of subject matter jurisdiction over Zizic’s claims was also based on its determination that Zizic was not an original source of that information. Zizic protests, arguing that he had direct and independent knowledge of the information on which his allegations against Q2A and RTS were based. We cannot agree.
Even if the public disclosure bar would otherwise apply to a claim, it does not when “the person bringing the action is an original source of the information.”
1.
The District Court determined that Zizic lacked direct knowledge to the extent his claims against Q2A depended on van Halem’s affidavit. A relator possesses direct knowledge if he obtains it without any “intervening agency, instrumentality, or influence.” Paranich, 396 F.3d at 335 (quotation omitted). In other words, direct knowledge is
Zizic argues that his knowledge was direct. He asserts that “no document was ever provided by any third party stating that medical reviews by Q2A . . . were not done . . . in the Medicare Appeal.” Zizic’s Opening Br. at 42 (emphasis omitted). However, van Halem provided that exact information in his affidavit. App. at 62 ¶ 17 (“[Q2A] simply issued a denial with a mail merge program without according the claims any review.”).
Zizic also contends that he had direct knowledge from his personal participation in the ALJ appeals and that van Halem’s affidavit “merely substantiated” his “suspicion of fraud.” Zizic’s Reply Br. at 13. Zizic analogizes his case to the D.C. Circuit’s decision in Springfield. There, civil discovery publicly disclosed information that did not constitute allegations or transactions of fraud, but that did pique the relator’s curiosity. The relator then “conduct[ed] its own investigation” of that information, 14 F.3d at 656, by “interview[ing] with individuals and businesses identified” in the discovery, id. at 657. Because the relator “bridged the gap” between the innocuous publicly disclosed information and the allegation of fraud through “its own efforts and experience,” the court held that it was an original source. Id.
2.
The District Court also determined that Zizic lacked independent knowledge of his surviving claims because his information was based on
Zizic presents two reasons why his knowledge was not dependent on the Almy litigation. First, he asserts that because only he “had the requisite medical expertise and background to understand and review the Medicare appeals files concerning the DMEs” that were produced during discovery in the Almy litigation, the trustee relied on his “labor and deduction” to construct her claims. Zizic’s Reply Br. at 16. However, we have repeatedly rejected the argument that a realtor’s knowledge is independent when it is gained through the application of expertise to information publicly disclosed under
Second, Zizic contends that his knowledge is independent because it is based on his “direct involvement with the DME Medicare appeals . . . over a number of years” prior to the Almy litigation. Zizic’s Opening Br. at 39; see also App. at 44 ¶ 93; id. at 47 ¶ 116. According to Zizic, the information in the administrative appeals is not part of the public domain because the public may not obtain that information by participating in those proceedings and because the information in those proceedings is protected pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),
At the outset, the record reflects neither the nature of Zizic’s role in the Medicare appeals nor the manner in which he gained his first-hand knowledge. For example, at oral argument, Zizic made the unsupported assertion that he became involved in the five-step appeals process between the QIC’s second-level review and the ALJ’s third-level review. In contrast, the complaint contains actual information indicating that Zizic’s earliest involvement in the appeals process came during the third stage when he reviewed the ALJ files. App. at 44 ¶ 95. Because Zizic has failed to persuade us otherwise, we interpret his argument to be that he
Zizic’s argument about the limitation on participation in the ALJ appeals is ultimately unconvincing. It is true that the ALJ appeals are not open to the general public. Nonetheless, the list of possible parties who may participate in the proceedings includes: beneficiaries, provider-assignees, supplier-assignees, and state agencies,
Zizic’s argument about the impact of HIPAA – namely, that his allegations were based on “the specific and
Second, it is true that the ALJ records are restricted by HIPAA,
The Almy litigation supports our suspicion. There, HHS produced HIPAA-compliant discovery from the ALJ appeals, see Summary Judgment Submission at ¶¶ 22-27, which publicly disclosed the medical information of anonymized beneficiaries, id. at ¶¶ 46-47. Zizic “personally
Zizic contends, however, that only he could deduce the significance of this information due to his expertise. But Zizic has not explained how his expertise aided his analysis. Surely a member of the public could conclude, with minimal labor, that the absence of evidence of a required review indicates that such a review was never performed. See Dunleavy, 123 F.3d at 743 (concluding that the omission of required information in a Government report publicly disclosed the misrepresented state of facts and completed the inference of fraud). Thus, the amount of deduction required to formulate the claims was low. See Atkinson, 473 F.3d at 523.
In these circumstances, Zizic has failed to persuade us that he has independent knowledge based on his participation in the ALJ appeals. We acknowledge that the original source exception to the public disclosure bar is a complicated area of the law, and that the HIPAA overlay makes this case
C.
The District Court implicitly denied Zizic’s request for leave to file an amended complaint by granting Q2A’s motion to dismiss with prejudice. Zizic charges that the District Court abused its discretion in so doing. We disagree.
Here, the District Court did not need to “worry about amendment,” Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247, 252 (3d Cir. 2007), because Zizic’s request for leave to amend his complaint was improper for two reasons. First, Zizic requested leave to amend his complaint without referencing
IV.
We hold that Zizic’s complaint must be dismissed for lack of subject matter jurisdiction under