U.S. ex rel. Schaengold v. Mem’l Health, Inc. (Summary)

FRAUD AND ABUSE – QUI TAM ACTIONS

U.S. ex rel. Schaengold v. Mem’l Health, Inc., No. 4:11-cv-58 (S.D. Ga. Dec. 18, 2014)

The U.S. District Court for the Southern District of Georgia granted in part and denied in part a hospital’s motion to dismiss a qui tam lawsuit filed by its former CEO and President. The lawsuit alleged claims for breach of contract, retaliatory discharge, and violation of the False Claims Act.

According to the CEO, his problems with the hospital began when he advised the Board that the hospital was paying excessive amounts of compensation to certain physicians. Although the Board initially cooperated with his attempts to implement a new compensation model, it ultimately continued to pay certain physicians at levels above fair market value. The CEO claimed that the Board had terminated his employment in direct retaliation for his efforts to report these compliance issues to the Department of Health and Human Services. The hospital had also withheld his severance pay unless he agreed to sign a release of his legal claims.

In its motion to dismiss, the hospital countered by arguing that the CEO’s complaint did not state an actionable legal claim and was not detailed enough in its allegations of fraud. Also, the hospital challenged the CEO’s ability to assert a breach of contract claim on behalf of the government, and argued that any retaliatory discharge claim would have to be pursued in an arbitration hearing.

The court granted certain parts of the hospital’s motion to dismiss. It dismissed some of the Stark violations that were tied to so-called “Bonus Pool” payments made to specific physicians, since the CEO’s complaint had failed to set an adequate benchmark for fair market value. Without any evidence of fair market value, the court explained that it was unable to determine whether the bonus payments were genuinely excessive.

It also granted the hospital’s motion to dismiss the False Claims Act violations. It reasoned that the CEO had not given enough evidence to show that the government actually made payments for services derived from illegal referrals. Without this evidence, the court held that the CEO had failed to plead a sufficient cause of action under the False Claims Act.

However, the court denied the hospital’s attempt to compel arbitration for the retaliatory discharge claim. It discovered that the CEO had attempted to pursue his retaliatory discharge claim in an earlier arbitration proceeding, but that the hospital had challenged the arbitrator’s jurisdiction over the claim. The court concluded that the hospital’s inconsistent courses of action were prejudicial to the CEO and that the hospital therefore had waived its right to compel arbitration at this point in the litigation.

It also denied the hospital’s attempt to dismiss other Stark claims relating to physician compensation, as the CEO had provided evidence of fair market value for these claims. Further, it denied the hospital’s attempt to dismiss the Anti-Kickback Statute violations, finding that the CEO had given “sufficient indicia” that the hospital intended its compensation arrangements to induce referrals from certain physicians. Lastly, the court granted the relator’s request to amend certain counts of his complaint.