Kenley Emergency Medicine v. The Schumacher Group of Louisiana

Background

Dr. Eric Kenley owns Kenley Emergency Medicine Corporation, the relator in this qui tam action. A relator is a private party who brings a lawsuit alleging fraud against the government under the False Claims Act. Kenley’s corporation contracted with California Emergency Associates, an affiliate of The Schumacher Group of Louisiana, Inc., which does business as SCP Health, to provide emergency medical services at a hospital.

The third amended complaint alleged that SCP Health and its affiliates used two systematic billing practices. First, the complaint alleged that SCP Health pressured providers to document critical-care services when the requirements for critical care had not been met. Second, it alleged that SCP Health’s coders changed non-critical-care services to higher-paying codes. The relator alleged that these practices were used nationwide and resulted in false claims submitted to government programs and private insurers.

The complaint asserted claims under the federal False Claims Act, the California False Claims Act, and false-claims or insurance-fraud laws of other states. The United States and the plaintiff states declined to intervene. The defendants moved to dismiss the third amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim, and argued that the fraud allegations also failed Rule 9(b)’s requirement that fraud be pleaded with particular detail.

Court’s Analysis

The court rejected the defendants’ argument that the relator’s lawsuit violated the Constitution’s appointments clause. The court stated that Ninth Circuit precedent had rejected that argument and remained binding.

The court held that injunctive relief was not a proper remedy under the federal False Claims Act. It did not accept the defendants’ argument that a refund of $154,522.49 to the government eliminated the relator’s standing. The court stated that the record did not establish whether the refund related to the relator’s claims or fully covered the alleged fraud, and there was no evidence that the government accepted the refund in exchange for releasing other liability.

The court concluded that the complaint adequately alleged materiality—the requirement that the alleged misrepresentation could influence the government’s decision to pay. The complaint alleged that billing codes determine reimbursement, that the government pays only for medically necessary and reasonable services, and that the government and private insurers do not pay claims when they know miscoding occurred.

The court also found the allegations sufficiently detailed concerning who allegedly directed the coding practices, what the coding practices were, and how the practices allegedly pressured providers or caused coders to increase billing levels. The court held that the allegations about the timing of the critical-care practices were sufficient even though the alleged start date was imprecise. For non-critical-care upcoding, the court allowed limited discovery concerning a period equivalent to the relator’s contracted employment and stated that the relator could later seek permission to expand that inquiry if discovery supported doing so.

Regarding state-law claims outside California, the court found that the complaint plausibly alleged a nationwide scheme through SCP Health’s centralized management, standardized practices, and operations involving hospitals in multiple states. The court denied SCP Health’s motion to dismiss those state-law claims. However, it dismissed the non-California state-law claims against California Emergency Associates because the complaint did not adequately support those claims against that California-based affiliate. The court’s conclusion states that this dismissal was without leave to amend; the earlier ruling also described the dismissal as with prejudice.

Discovery and Disposition

The court found a discovery-scope dispute moot after ruling on the motion. It also held that the parties’ stipulated protective order satisfied the requirements for sharing protected health information in discovery under the Health Insurance Portability and Accountability Act. The defendants could not withhold discovery on that basis.

The court dismissed the non-California state-law causes of action against California Emergency Associates without leave to amend. It denied the defendants’ motion in all other respects and ordered the parties to appear for another case-management conference.