`
`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF PENNSYLVANIA
`
`
`CIVIL ACTION
`
`
`
`NO. 16-683
`
`
`
`UNITED STATES OF AMERICA, STATE
`OF CALIFORNIA, STATE OF
`COLORADO, STATE OF
`CONNECTICUT, STATE OF GEORGIA,
`STATE OF INDIANA, STATE OF
`MONTANA, STATE OF NEVADA,
`STATE OF NORTH CAROLINA, STATE
`OF TENNESSEE, STATE OF
`WASHINGTON, STATE OF
`WISCONSIN, COMMONWEALTH OF
`MASSACHUSETTS, and
`COMMONWEALTH OF VIRGINIA, ex
`rel. TIMOTHY SIRLS,
`Plaintiffs,
`
`
`v.
`
`KINDRED HEALTHCARE, INC.,
`KINDRED HEALTHCARE OPERATING,
`INC., KINDRED HEALTHCARE
`SERVICES, INC., KINDRED NURSING
`CENTERS EAST, LLC, KINDRED
`NURSING CENTER WEST, LLC,
`KINDRED NURSING CENTERS SOUTH,
`LLC, and KINDRED NURSING
`CENTERS NORTH, LLC, ,
`Defendants.
`
`
`
`DuBois, J.
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`
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`February 4, 2021
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`
`TABLE OF CONTENTS
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`M E M O R A N D U M
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`I.
`
`INTRODUCTION .................................................................................................................. 1
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`II. BACKGROUND .................................................................................................................... 2
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`A. Overview of the Medicare and Medicaid Systems ............................................................. 3
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`B. First Amended Complaint ................................................................................................... 5
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`C. Second Amended Complaint .............................................................................................. 6
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`III.
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`LEGAL STANDARDS ...................................................................................................... 9
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`A. Rule 12(b)(1) ....................................................................................................................... 9
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`1
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 2 of 34
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`B. Rule 12(b)(6) ..................................................................................................................... 10
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`C. Rule 9(b) ........................................................................................................................... 11
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`IV.
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`DISCUSSION ................................................................................................................... 11
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`A. Applicable Law ................................................................................................................. 11
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`B. Staffing Requirements ...................................................................................................... 12
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`i. Materiality ..................................................................................................................... 12
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`ii. Scienter ......................................................................................................................... 15
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`iii.
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`Public Disclosure Bar ................................................................................................. 16
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`a.
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`Pre-March 23, 2010 Public Disclosure Bar ............................................................ 17
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`1.
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`2.
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`Relator’s Allegations ........................................................................................... 18
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`Original Source ................................................................................................... 21
`
`b.
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`Post-March 23, 2010 Public Disclosure Bar ........................................................... 22
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`1.
`
`2.
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`Relator’s Allegations ........................................................................................... 23
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`Original Source ................................................................................................... 24
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`C. Government Funding ........................................................................................................ 24
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`i.
`
`Falsity ............................................................................................................................ 25
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`ii. Materiality ..................................................................................................................... 26
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`D. Form 1500s ....................................................................................................................... 27
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`E. MDS Forms and Rule 9(b) ................................................................................................ 27
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`F. State Claims ...................................................................................................................... 28
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`i. RUG States.................................................................................................................... 28
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`ii. California, Tennessee, and Connecticut ........................................................................ 29
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`iii. Other States and Rule 9(b).......................................................................................... 31
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`V. CONCLUSION ..................................................................................................................... 32
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 3 of 34
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`I.
`
`INTRODUCTION
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`This is a qui tam action brought on behalf of the United States under the False Claims
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`Act (“FCA”) and on behalf of California, Colorado, Connecticut, Georgia, Indiana, Montana,
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`Nevada, North Carolina, Tennessee, Washington, Wisconsin, Massachusetts, and Virginia under
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`their analogous false claims laws1 by relator, Timothy Sirls, against defendants Kindred
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`Healthcare, Inc.; Kindred Healthcare Operating, Inc.; Kindred Healthcare Services, Inc.; Kindred
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`Nursing Centers East, LLC; Kindred Nursing Centers West, LLC; Kindred Nursing Centers
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`South, LLC; and Kindred Nursing Centers North, LLC. Presently before the Court is
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`defendants’ Motion to Dismiss relator’s Second Amended Complaint (“SAC”). For the reasons
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`set forth below, defendants’ Motion is granted in part and denied in part.
`
`
`1 These claims are brought pursuant to the California False Claims Act, Cal. Gov’t Code § 12651(a)(1) (Count 3);
`Colorado Medicaid False Claims Act, Colo. Rev. Stat. § 25.5-4-303.5 (l)(a)-(b) (Counts 4 & 5); Connecticut False
`Claims Act, Conn. Gen. Stat. § 17B-301b(a)(1)-(2) (Counts 6 & 7); Georgia False Medicaid Claims Act, Ga. Code
`Ann. § 49-4-168.l(a)(1)-(2) (Counts 8 & 9); Georgia Taxpayer Protection False Claims Act, Ga. Code Ann. § 23-3-
`12l(a)(1)-(2) (Counts 10 & 11); Indiana False Claims and Whistleblower Protection Act, Indiana Code § 5-11-5.5-
`2(b)(1)-(2) (Counts 12 & 13); Massachusetts False Claims Act, Mass. Ann. Laws Ch. 12, § 5(B)(a)(1)-(2) (Counts
`14 & 15); Montana False Claims Act, Mont. Code Ann. § 17-8-403(1)(a)-(b) (Counts 16 & 17); Nevada False
`Claims Act, Nev. Rev. Stat. § 357.040(1)(a)-(b) (Counts 18 & 19); North Carolina False Claims Act, N.C. Gen. Stat.
`§ 1-605(a)(l)-(2) (Counts 20 & 21); Tennessee Medicaid False Claims Act, Tenn. Code Ann. § 71-5-182(a)(l)(A)-
`(B) and Tennessee False Claims Act, Tenn. Code Ann. § 4-18-103(a)(1)-(2) (Counts 22 & 23); Virginia Fraud
`Against Taxpayers Act, Va. Code Ann. § 8.01-216.3(A)(1)-(2) (Counts 24 & 25); Washington Medicaid Fraud False
`Claims Act, Rev. Code Wash. § 74.66.020(1)(a)-(b) (Counts 26 & 27); and Wisconsin False Claims Act, Wis. Stat.
`§ 20.931(2)(a)-(b) (Counts 28 & 29).
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`1
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 4 of 34
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`II.
`
`BACKGROUND
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`The facts of this case are summarized in detail in the Court’s Memorandum dated June
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`29, 2020 (Document No. 60) (“Memorandum Addressing Defendants’ First Motion to Dismiss”).
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`They are recited in this Memorandum only as necessary to address the pending Motion.2
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`Relator Timothy Sirls worked as the Director of Nursing Services at Heritage Manor
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`Healthcare Center in Mayfield, Kentucky, between April 2014 and June 2014. Second Amended
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`Complaint (“SAC”) ¶ 7. Heritage Manor is a nursing facility that was operated by Kindred
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`Nursing Centers, LP from November of 2005 to December of 2015. SAC Ex. 1. Kindred
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`Nursing Centers, LP is one of several wholly-owned subsidiaries through which defendant
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`Kindred Healthcare, Inc. operated a network of nursing facilities around the country. SAC 1 n.1,
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`¶¶ 20-21. Kindred Healthcare, Inc. is a healthcare services conglomerate that operates through
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`its subsidiary companies in 46 states and Puerto Rico. Id. ¶ 20. Among those subsidiaries are
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`defendants Kindred Nursing Centers East, LLC; Kindred Nursing Centers West, LLC; Kindred
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`Nursing Centers North, LLC; and Kindred Nursing Centers South, LLC. Id. ¶ 25. These entities
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`owned and operated nursing facilities identified by relator in exhibits attached to the SAC. SAC
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`Exs. 1, 2. Each of these entities were owned by defendant Kindred Healthcare Operating, Inc.,
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`which itself is a subsidiary of Kindred Healthcare, Inc. Id. ¶¶ 20-21, 25-28.
`
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`2 Defendants filed a Request for Judicial Notice with their Motion to Dismiss (Document No. 67, filed August 25,
`2020). In evaluating a Motion to Dismiss, the Court may look beyond the pleadings to “items subject to judicial
`notice.” Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006) (internal citation omitted). Defendants
`specifically cite public records published by CMS, HHS, and the California Department of Health Care Services, a
`complaint filed in a prior lawsuit, and a news report. Judicial notice of these documents is proper as the Court may
`take judicial notice of public records such as those issued by CMS, HHS, and the California Department of Health
`Care Services, and documents that are publicly filed on a court docket. See Carroll v. Prothonotary, No. 08-1683,
`2008 WL 5429622, at *2 (W.D. Pa. Dec. 31, 2008). Courts may also take judicial notice of news reports to evaluate
`“what was in the public realm” at a given time. See Benak ex rel. Alliance Premier Growth Fund v. Alliance Capital
`Mgmt. L.P., 435 F.3d 396, 401 n.15 (3d Cir. 2006).
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`
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`2
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 5 of 34
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`A. Overview of the Medicare and Medicaid Systems
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`Medicare is a federal health insurance program administered by the Centers for Medicare
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`& Medicaid Services (“CMS”), a division of the U.S. Department of Health and Human Services
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`(“HHS”) that, inter alia, provides federally-funded insurance benefits for skilled nursing
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`facilities (“SNFs”). See 42 U.S.C. § 1395, et seq. Medicare reimburses SNFs using a
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`prospective payment system. SAC ¶ 41. The prospective payment system pays a per diem, per
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`patient amount at a rate that is based on the Resource Utilization Group (“RUG”) to which a
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`resident is assigned. See United States v. Long Grove Manor, Inc., 315 F. Supp. 3d 1107, 1110
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`(N.D. Ill. 2018). The RUG “uses measures of staff time and service frequency, variety, and
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`duration to classify patients.” Prospective Payment System and Consolidated Billing for Skilled
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`Nursing Facilities, 63 Fed. Reg. 26,252, 26,258 (proposed May 12, 1998). “RUG levels also
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`consider a person’s capacity to perform activities of daily living (‘ADL’) such as ‘bed mobility,
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`toilet use, transfer from bed to chair, and eating.’” United States v. Life Care Centers of
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`America, Inc., 114 F. Supp. 3d 549, 553 (E.D. Tenn. 2014) (quoting 63 Fed. Reg. 26,252).
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`Skilled nursing facilities use a clinical assessment tool referred to as the Minimum Data
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`Set (“MDS”) to periodically determine each beneficiary’s RUG classification. See 42 C.F.R. §§
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`413.337, 413.343. An MDS assessment is completed for each resident upon admission to a
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`facility and periodically throughout the resident’s stay. See 42 C.F.R. §§ 413.337, 413.343,
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`483.20. To conduct these assessments, facility staff evaluate the preceding seven days—the
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`“look-back period”—and report the resident’s self-performance of ADLs, as well as the level of
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`staff assistance that was required by and provided to the resident. Defs.’ Req. Judicial Notice
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`Ex. A, Centers for Medicare & Medicaid Services, Long-Term Care Facility Resident
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`Assessment Instrument User’s Manual Version 3.0 (Oct. 25, 2013), at G-3. Skilled nursing
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`3
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 6 of 34
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`facilities are instructed to identify “what the resident does for himself during each episode of
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`each ADL activity definition as well as the type and level of staff assistance provided.” Id.
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`These facilities are specifically instructed to code for the most support provided by staff over the
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`course of the look-back period—“even if that level of support only occurred once.” Id. This
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`information is specifically coded in Section G of the MDS form. Id. According to relator, such
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`facilities expressly certify in each MDS form that “the accompanying information accurately
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`reflects resident assessment information.” SAC ¶¶ 37, 61.
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`Medicaid is a health insurance program for low-income people that is jointly funded by
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`the federal and state governments. See 42 U.S.C. § 1396, et seq. Medicaid covers long-term
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`care in nursing facilities.3 Id. § 1396a. Both federal and state statutes and regulations apply to
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`the state-administered Medicaid programs. See id.
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`Each state Medicaid program has its own payment system. SAC ¶ 41. As such,
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`Medicaid reimbursement for nursing facilities varies from state to state. Relator alleges that the
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`Medicaid programs in Colorado, Georgia, Indiana, Massachusetts, Montana, Nevada, North
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`Carolina, Virginia, Washington, and Wisconsin mirror the Medicare reimbursement system by
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`adjusting the per diem rate based on the facilities case-mix index. Id. ¶ 134. According to
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`relator, “[i]n a case-mix adjusted payment system, the amount of reimbursement to a nursing
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`home is based on the resource intensity of the resident as measured by items on the MDS,
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`including in Section G.” Id. ¶ 135. Relator claims that the remaining states—California,
`
`
`3 Relator avers that all nursing homes specifically listed in the SAC qualified as both “skilled nursing facilities”
`covered by Medicare and “nursing facilities” covered by Medicaid. SAC ¶ 29; see also
`Northport Health Servs. of Ark., LLC v. United States Dep’t of Health & Human Servs., No. 19-5168, 2020 WL
`1696009, at *1 n.2 (W.D. Ark. April 7, 2020) (“The Medicare statute refers to ‘skilled nursing facilities,’ and the
`Medicaid statute refers to ‘nursing facilities.’ Despite this difference in terminology, the requirements placed on
`these facilities by each statute are materially identical”). The Court will use the terms “SNF” or “facility” to refer to
`the facilities referenced in the SAC.
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`4
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 7 of 34
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`Connecticut, and Tennessee—have Medicaid programs that also pay nursing facilities a per diem
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`rate but “do not use a case mix index in making adjustments to the per diem rate.” Id. ¶ 42.
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`B. First Amended Complaint
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`Relator filed the First Amended Complaint (“FAC”) on June 28, 2019 (Document
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`No. 18). In it, he alleged defendants exerted “top down” pressure on their nursing facilities to
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`“recruit residents with high acuity levels (i.e. residents who were extremely dependent upon staff
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`for their most basic care needs)” while intentionally understaffing the facilities in order to “reap
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`higher Medicare and Medicaid reimbursements.” First Amend. Compl. (“FAC”) ¶¶ 2, 7.
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`According to relator, defendants thus engaged in a “nationwide false claim scheme . . . to obtain
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`payment from Medicare and Medicaid for necessary resident care that it claimed to have
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`provided but, in fact, did not provide.” Id. ¶ 1. Relator alleged that as a result, from at least
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`2008 to the filing of the FAC, defendants knowingly presented or caused to be presented false or
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`fraudulent claims and certifications through the submission of “false claims for [prospective
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`payment system] payments for thousands of nursing home residents.” Id. ¶ 114.
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`Relator alleged in the FAC defendants defrauded the Medicare and Medicaid
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`reimbursement systems in four ways: (1) by submitting false RUG scores on forms for
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`reimbursement; (2) by expressly certifying the accuracy of those forms; (3) by understaffing
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`SNFs to the extent that they could not meet the needs of residents, in violation of federal and
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`state regulations, while expressly/impliedly certifying that the SNFs were in compliance with
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`those regulations; and (4) by using government reimbursement funds to expand defendants’
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`companies while providing inadequate care to residents and expressly/impliedly certifying that
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`they were in compliance with regulations that require they used government funds to ensure
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`residents’ needs were adequately met.
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`5
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 8 of 34
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`Defendants filed a Motion to Dismiss the FAC on August 22, 2019 (Document No. 48).
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`The Court granted in part and denied in part that Motion, ruling, inter alia:
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`1. The Public Disclosure Bar does not apply to relator’s claims based on theories of factual
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`falsity for inflated RUG scores and express legal falsity for certification of accuracy of
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`MDS Forms;
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`2. Relator failed to state a claim under a theory of express/implied legal falsity for
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`compliance with staffing requirements on the ground that he did not adequately allege
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`that compliance with staffing requirements was material to the Government’s payment
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`decision;
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`3. Relator failed to state a claim under a theory of express/implied legal falsity for
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`compliance with regulations on the use of government funds on the ground that the claim
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`was not based on violations of a statute or a regulation regarding the use of government
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`funds; and
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`4. Relator failed to state claims under the false claims laws of California, Connecticut, and
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`Tennessee on the ground that he did not allege how those states calculate Medicaid
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`reimbursement or that defendants provided false information to those states.
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`See United States ex rel. Sirls v. Kindred Healthcare, Inc., 469 F. Supp. 3d 431 (E.D. Pa. 2020).
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`C. Second Amended Complaint
`
`Relator filed the Second Amended Complaint on July 14, 2020, supplementing his
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`allegations with additional facts related to staffing requirements, restrictions on the use of
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`government funds, Form 1500s, and California, Tennessee, and Connecticut’s Medicaid
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`reimbursement systems.
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`6
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 9 of 34
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`First, relator added the following allegations in support of his claim that staffing
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`requirements are material to the Government’s reimbursement decision:
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`1. Two examples of CMS denying prospective payments to SNFs that were “found to
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`have significant and pervasive staffing violations of the kind described here,” SAC
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`¶ 125-1(c)4;
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`2. Five examples of cases in which the government has prosecuted FCA claims related
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`to Medicare, SAC ¶ 124;
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`3. The Office of Inspector General of Health and Human Services (“OIG”)’s
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`Compliance Program Guidance for Nursing Facilities, which states that SNFs can
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`face penalties including criminal sanctions, suspension of Medicare payments,
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`exclusion from program participation, and execution of a corporate integrity
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`agreement for violating regulations, SAC ¶ 125-1(a); and
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`4. A report published by OIG titled “Incidents of Potential Abuse and Neglect at Skilled
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`Nursing Facilities Were Not Always Reported and Investigated,” which states “CMS
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`developed the Conditions of Participation (CoPs) that healthcare organizations must
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`meet to start and continue participating in Medicare and Medicaid, that these CoPs
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`establish health and safety standards, which are the foundation for improving quality
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`and protecting the health and safety of beneficiaries,” SAC ¶ 125-1(b).
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`Second, relator added allegations to support the theory of express/implied certification of
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`compliance with regulations governing the use of government funds. The SAC changed a
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`citation to the regulation governing “nursing home allocation and use of government funds.”
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`SAC ¶ 131. The newly-cited regulation provides, in pertinent part, “A facility must be
`
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`4 Due to a typographical error, the SAC has two paragraphs numbered 125. The Court refers to the first of these two
`paragraphs as “¶ 125-1” and the second as “¶ 125-2.”
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`7
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 10 of 34
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`administered in a manner that enables it to use its resources effectively and efficiently to attain or
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`maintain the highest practicable physical, mental, and psychological well-being of each
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`resident.” 42 C.F.R. § 483.70. Relator added allegations that this regulation is material to the
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`Government’s reimbursement decision through two examples of situations in which the
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`Government has pursued unjust enrichment causes of action.
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`Third, relator added allegations that defendants falsely certified the accuracy of CMS-
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`1500 Forms (“Form 1500s”). The FAC did not include an allegation that the submission of
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`Form 1500s involves an express certification that the forms are accurate. As such, when relator
`
`raised this argument in his Response to Defendant’s Motion to Dismiss Relator’s First Amended
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`Complaint, the Court did not address it. In the SAC, relator included allegations that the Form
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`1500s included an express certification of accuracy.
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`Fourth, relator added facts to support his allegations that defendants submitted false
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`Medicaid claims to California, Tennessee, and Connecticut. The SAC alleges that California’s
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`Medicaid Plan “requires that nursing facilities be reimbursed in part based on resident acuity”
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`and cites to Attachment 4.19 D to California’s State Medicaid Plan. SAC ¶ 43. It further alleges
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`that SNFs must meet state and federal requirements in order to receive reimbursement. Id.
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`Similarly, the SAC states that Tennessee’s Medicaid Plan “requires that all nursing facilities
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`participating in the Medicaid program meet all applicable federal and state requirements for
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`Medicaid reimbursement, and further requires that nursing facilities are reimbursed on the basis
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`of patient acuity” and cites to Attachment 4.19 D to Tennessee’s State Medicaid Plan. Id. ¶ 45.
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`Finally, on this issue, the SAC avers that, “[i]n Connecticut, similar to the federal law,
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`Connecticut’s Public Health Code requires each nursing home to employ sufficient nursing and
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`nurse aides to provide appropriate care of patients housed in the facility 24-hours per day, seven
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`8
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 11 of 34
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`days a week, and requires that all nursing homes meet these staffing requirements for Medicaid
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`reimbursement.” Id. ¶ 43 (internal quotations omitted).
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`Defendants filed a Motion to Dismiss Second Amended Complaint on August 25, 2020.
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`(Document No. 66). Relator filed his Response on October 6, 2020 (Document No. 68), and
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`defendants filed a Reply on October 27, 2020 (Document No. 72). The United States filed a
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`Statement of Interest under 31 U.S.C. § 3730(d) on December 15, 2020 (Document No. 77). The
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`Motion is thus ripe for decision.
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`III. LEGAL STANDARDS
`
`A. Rule 12(b)(1)
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`Federal Rule of Civil Procedure 12(b)(1) provides that a court may dismiss a complaint
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`for “lack of jurisdiction over the subject matter” of a case. The plaintiff has the burden of
`
`establishing subject matter jurisdiction. See Carpet Group Int’l v. Oriental Rug Imp. Ass’n, 227
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`F.3d 62, 69 (3d Cir. 2000) (citing Mortensen v. First Fed. Sav. & Loan Ass’n, 549 F.2d 884, 891
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`(3d Cir. 1977)). “Without jurisdiction the court cannot proceed at all in any case.” Steel Co. v.
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`Citizens for a Better Env’t, 523 U.S. 83, 94 (1998) (citation omitted).
`
`In evaluating a Rule 12(b)(1) motion, the Court must first determine whether the motion
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`“presents a ‘facial’ attack or a ‘factual’ attack.” Long v. Se. Pa. Transp. Auth., 903 F.3d 312,
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`320 (3d Cir. 2018). A facial attack “considers a claim on its face and asserts that it is insufficient
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`to invoke the subject matter jurisdiction of the court.” Id. When ruling on a facial attack, the
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`Court “considers only the complaint, viewing it in the light most favorable to the plaintiff.” Id.
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`By contrast, a factual attack is an argument that challenges the “factual allegations underlying
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`the complaint’s assertion of jurisdiction, either through the filing of an answer or ‘otherwise
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`presenting competing facts.’” Davis v. Wells Fargo, 824 F.3d 333, 346 (3d Cir. 2016). When
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`9
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 12 of 34
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`ruling on a factual attack, the Court weighs the evidence and must satisfy itself as to the
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`existence of its power to hear the case. Id. To the extent that defendants’ Motion to Dismiss
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`seeks dismissal of relator’s claims based on the FCA’s public disclosure bar, the Motion presents
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`a factual challenge because defendants argue additional facts—namely, public disclosures—
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`establish that the Court lacks jurisdiction over the claims pursuant to 31 U.S.C. § 3730(e)(4).
`
`B. Rule 12(b)(6)
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`The purpose of a 12(b)(6) motion to dismiss is to test the legal sufficiency of the
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`complaint. Liou v. Le Reve Rittenhouse Spa, LLC, No. CV 18-5279, 2019 WL 1405846, at *2
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`(E.D. Pa. Mar. 28, 2019) (DuBois, J.). To survive a motion to dismiss, a plaintiff must allege
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`“sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face.”
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`Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal citations omitted). “A claim has facial
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`plausibility when the pleaded factual content allows the court to draw the reasonable inference
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`that the defendant is liable for the misconduct alleged.” Id. at 678. In assessing the plausibility
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`of a plaintiff’s claims, a district court first identifies those allegations that constitute nothing
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`more than mere “legal conclusions” or “naked assertion[s].” Bell Atl. Corp. v. Twombly, 550
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`U.S. 544, 557, 564 (2007). Such allegations are “not entitled to the assumption of truth.” Iqbal,
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`556 U.S. at 679. The Court then assesses “the ‘nub’ of the plaintiff[’s] complaint—the well-
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`pleaded, nonconclusory factual allegation[s]”—to determine whether it states a plausible claim
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`for relief. Id. at 680. “In deciding a Rule 12(b)(6) motion, a court must consider only the
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`complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly
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`authentic documents if the complainant’s claims are based upon these documents.” Mayer v.
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`Belichick, 605 F.3d 223, 230 (3d Cir. 2010). The Court may also consider “any ‘matters
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`incorporated by reference or integral to the claim, items subject to judicial notice, matters of
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`10
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 13 of 34
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`public record, orders, [and] items appearing in the record of the case.’” Buck, 452 F.3d at 260
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`(quoting 5B Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1357 (3d ed.
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`2004)).
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`C. Rule 9(b)
`
`FCA relators are required to satisfy Rule 9(b)’s heightened pleading standard. The Third
`
`Circuit has held that “it is sufficient for a plaintiff to allege ‘particular details of a scheme to
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`submit false claims paired with reliable indicia that lead to a strong inference that claims were
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`actually submitted.’” Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 155 (3d Cir. 2014)
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`(quoting United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)). A
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`relator is not required to show “the exact content of the false claims in question” to survive a
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`motion to dismiss, id., but must allege “all of the essential factual background that would
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`accompany the first paragraph of any newspaper story—that is, the who, what, when, where, and
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`how of the events at issue,” U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812
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`F.3d 294, 307 (3d Cir. 2016) (quoting In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d
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`198, 217 (3d Cir. 2002)).
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`IV. DISCUSSION
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`A. Applicable Law
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`The FCA imposes liability upon a defendant who (1) “knowingly presents, or causes to
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`be presented, a false or fraudulent claim for payment or approval,” or (2) “knowingly makes,
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`uses, or causes to be made or used, a false record or statement material to a false or fraudulent
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`claim.” 31 U.S.C. § 3729(a)(1)(A)-(B). To plead an FCA violation, a relator must allege three
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`elements: causation, falsity, and scienter. United States ex rel. Jackson v. DePaul Health System,
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`No. 15-020, 2020 WL 1875608, at *6 (E.D. Pa. April 15, 2020). Since the Supreme Court
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 14 of 34
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`decision in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989
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`(2016), the Third Circuit has held that a relator must also allege materiality—i.e., that the alleged
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`misrepresentation was material to the Government’s payment decision. See United States ex rel.
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`Doe v. Heart Solution, PC, 923 F.3d 308, 317-18 (3d Cir. 2019) (“[M]ateriality is an element of
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`all FCA claims”).
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`B. Staffing Requirements
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`Relator alleges defendants defrauded the Government through the Medicaid and
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`Medicare systems by intentionally understaffing its SNFs to the extent they could not provide the
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`necessary level of care, as required by federal regulations, while falsely certifying that they were
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`in compliance with those regulations. In the Memorandum Addressing Defendants’ First Motion
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`to Dismiss, the Court held that relator had properly pled the causation and falsity elements of this
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`theory. Kindred Healthcare, 469 F. Supp. 3d at 444-48. However, the Court also ruled that
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`relator failed to allege that compliance with staffing requirements was material to the
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`government’s payment decision. Id. In the SAC, relator added allegations as to materiality.
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`i.
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`Materiality
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`Defendants argue that relator has still not adequately alleged that compliance with the
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`staffing requirements was material to the Government’s payment decision. Defs.’ Mot. 12-17.
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`In Escobar, the Supreme Court affirmed that “a misrepresentation about compliance with a
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`statutory, regulatory, or contractual requirement must be material to the Government's payment
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`decision in order to be actionable under the False Claims Act.” Escobar, 136 S. Ct. at 2002.5
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`The Supreme Court further held that a “misrepresentation cannot be deemed material merely
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`because the Government designates compliance with a particular statutory, regulatory, or
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`5 The Supreme Court made clear that the materiality inquiry is “demanding” but not “too fact intensive” for courts to
`apply at the dismissal stage. Escobar, 136 S. Ct. at 2003, 2004 n.6.
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`Case 2:16-cv-00683-JD Document 85 Filed 02/05/21 Page 15 of 34
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`contractual requirement as a condition of payment.” Escobar, 136 S. Ct. at 2003. While such a
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`label is “relevant,” it is not dispositive. Id. On this issue, the Supreme Court rejected the
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`argument that “any statutory, regulatory, or contractual violation is material so long as the
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`defendant knows that the Government would be entitled to refuse payment were it aware of the
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`violation.” Id. at 2004.
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`In Escobar, the Supreme Court focused the materiality inquiry on the “effect on the likely
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`or actual behavior of the recipient of the alleged misrepresentation.” Id. at 2003 (quoting 26 R.
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`Lord, Williston on Contracts § 69:12, p. 549 (4th ed. 2003)). Courts should consider “evidence
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`that the defendant knows that the Government consistently refuses to pay claims . . . based on
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`noncompliance with the particular statutory, regulatory, or contractual requirement.” 6 Escobar,
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`136 S. Ct. at 2003. “Conversely, if the Government pays a particular claim in full despite its
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`actual knowledge that certain requirements were violated, that is very strong evidence that those
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`requirements are not material.” Id.
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`In the SAC, relator added four categories of allegations that compliance with staffing
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`requirements is material to the Government’s payment decision.7 In response, defendants argue
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`that: (1) relator’s new allegations are not relevant to this case; (2) relator pleads that federal
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`regulations are “conditions of participation,” not “conditions of payment,” and conditions of
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`participation are not material; and (3) the Government’s decision not to interven