Court Dismisses Government’s Claims Premised On Violations of Industry Standards Under Rule 9(b)

Posted by Scott Stein and Brad Robertson

It is relatively rare for courts to grant motions to dismiss FCA cases in which the United States has intervened. So we read with interest the recent decision of a federal district court in Maryland, United States v. Kernan Hospital, No. 11-cv-02961 (D. Md. July 30, 2012), in which the court dismissed the government’s complaint on Rule 9(b) grounds for failure to plead with particularity specific false statements submitted to the government and how those statements affected the defendant’s reimbursement.

The government’s complaint alleged that the defendant hospital systematically upcoded patients’ secondary diagnoses in order to make the hospital’s case mix appear more severe. The hospital allegedly had personnel review each patient’s chart after the fact for data consistent with malnutrition. The personnel then returned the chart to the treating physician to prompt him or her to consider including a secondary diagnosis of malnutrition. Hospital coders then entered the ICD-9-CM code for an extreme form of malnutrition known as Kwashiorkor for any malnutrition diagnosis.

The government alleged that it conducted an investigation of the hospital’s coding that concluded that 23% of the cases were inappropriate because the medical evidence in the chart did not justify the diagnosis or contained contradictory, incomplete, or ambiguous information. The government further alleged that the hospital’s conduct, and the resultant 23% error rate, violated “industry norms” and “applicable standards” established by the American Health Information Management Association (AHIMA). The government took the position that the hospital’s “practice of deliberately disregarding this industry standard rendered the coding false and fraudulent.”

The court dismissed the complaint, holding that it failed to link the alleged activity to any specific claims submitted to the government for payment. When pressed at oral argument, counsel for the government identified the hospital’s cost reports as the false claims at issue. However, the court noted, the complaint did not allege what effect the upcoded diagnoses had on cost reports, did not allege that the cost reports that cost reports were submitted to the government, or that the cost reports caused the government to pay for services that were not rendered. Indeed, the government conceded that each alleged “false” secondary diagnosis would not necessarily increase the hospital’s rate of compensation, but did not explain the circumstances in which a false diagnosis would result in falsely increased payments.

Because the government failed to allege any specific claims submitted—”the crucial link between the alleged scheme and ultimate False Claims Act liability”—the court dismissed its claims for failure to satisfy Rule 9(b). As the court explained, “The False Claims Act does not punish a system that might allow false claims to be sent to the government—instead, it punishes actual claims containing objective falsehoods.” (emphasis in original).

A copy of the court’s opinion can be found here.