Opposition Brief — Bourseau v. United States (No. 08-558)

No. 08-558 ite teas

In the Supreme Court of the Gnited States

ROBERT [. BOURSEAU, ET AL., PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FORA WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

EDWIN S. KNEEDLER

Acting Solicitor General

Counsel of Record

MICHAEL F. HERTZ

Acting Assistant Attorney

General

DOUGLAS LETTER

DANIEL R. ANDERSON

ROBERT J. MCAULIFFE

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTIONS PRESENTED

1. Whether petitioners were properly held liable

under the “reverse false claims” provision of the False

Claims Act, 31 U.S.C. 3729(a)(7), based on their submis-

sion of Medicare cost reports in which petitioners over-

stated their reimbursable costs and thereby reduced or

concealed their obligation to repay the Medicare pro-

gram for overpayments.

2. Whether the government sustained damages from

petitioners’ submission of Medicare cost reports that re-

duced or concealed petitioners’ obligation to make im-

mediate repayment of overpayments that petitioners

had received from the Medicare program.

3. Whether the court of appeals correctly held that

the district court’s award of treble damages did not vio-

late the Excessive Fines Clause of the Eighth Amend-

ment or the Due Process Clause of the Fifth Amend-

ment.

TABLE OF CONTENTS

Page

eee rere eee ee Perr ry eye 1

PN isc Gin-a es gp ieg dea ho Rae BA Re 1

IIE ony ak Wb oa hue 6 ee Ode ee ke eget eee 2

SE ss ovo Mika e ee Tae weed nea ee oeeae 6 cena 7

SIN oa) acerca waite manele baie ewe eta aie apd eee 22

TABLE OF AUTHORITIES

Cases:

Cook County v. United States ex rel. Chandler,

ee ee SNE lac vaca eked eke erence kes 21, 22

Costner v. URS Consultants, Inc., 153 F.3d 667

NL I oo ies oo kas ae aed Clee ne hea one 13

Gray v. Bicknell, 86 F.3d 1472 (8th Cir. 1996) ......... 14

Hays v. Hoffman, 325 F.3d 982 (8th Cir), cert. denied,

ee Se ee Eo ow ow os oa ec eee ceeen 14

Neder v. United States, 527 U.S. 1 (1999) ..... 5, 6, 8, 9, 10

Providence Hosp. v. Shalala, 52 F.3d 213 (9th Cir.

Pe a ar Ree eee Re a ee ea eae 3

Rabushka ex rel. United States v. Crane Co., 122 F.3d

559 (8th Cir. 1997), cert. denied, 523 U.S. 1040

SO Rots cae wat: Veh ticket ei Goede aan ioe eer aw aaa 13

State Farm Mut. Auto. Ins. Co. v. Campbell, 5388 U.S.

MI ogo Sys ns 5s eke Cha eo eee 21

United States v. Bajakajian, 524 U.S. 321 (1998) ...... 20

United States v. Bornstein, 423 U.S. 303 (1976) ........ 22

United States v. Hibbs, 568 F.2d 347 (3d Cir. 1977) ..... 19

United States v. Mackby, 339 F.3d 1013 (9th Cir.

2003), cert. denied, 541 U.S. 936 (2004) ........ 6, 20, 21

(III)

Cases—Continued: Page

United States v. Miller, 645 F.2d 473 (5th Cir. 1981) .... 19

United States v. Newfert-White Co., 390 U.S. 228

I edn RE ere ta Gell tae ag Dl aor a rk 11

United States v. Rogan, 517 F.3d 449 (7th Cir. 2008) ... 12

United States ex rel. A+ Homecare, Inc. v.

Medshares Mgmt. Group, Inc., 400 F.3d 428 (6th

Cir.), cert. denied, 546 U.S. 1063 (2005) ... 10,11, 12, 21

United States ex rel. Bahrani v. Conagra, Inc.,

465 F.3d 1189 (10th Cir. 2006), cert. denied, 128

Se ne em a ee gr aid eg Sag ove oS AD 12

United States ex rel. Cantekin v. University of

Pittsburgh, 192 F.3d 402 (3d Cir. 1999), cert.

denied, 531 U.S. 880 (2000) ....................4-- 13

United States ex rel. Costner v. United States,

317 F.3d 883 (8th Cir.), cert. denied, 540 U.S.

Sy re a recs tats Ba We en hee & 13, 14

United States ex rel. Harrison v. Westinghouse

Savannah River Co., 352 F.3d 908 (4th Cir. 2003) ... 13

United States ex rel. Schwedt v. Planning Research

Corp., 59 F.3d 196 (D.C. Cir. 1995), cert. denied,

ee I oes a ee weu vawewn 16, 19

Winters v. United States ex rel. A+ Homecare, Inc.,

Se ad I ccc as eo eceuw acu ceeecedew eds 15

Constitution, statutes and regulations:

U.S. Const.:

Amend. V (Due Process Clause) ..........ccccccces 21

Amend. VIII (Exeessive Fines Clause) ............ 20

False Claims Act, 31 U.S.C. 3729 et seq. ..............- 4

DEED een cub capes s vereannd sce teks 4,5

V

Statutes and regulations—Continued: Page

ee 7, 8, 9, 10, 19

nc ccc ewe c cc eessees 19

SP os os ss ss --s- ~~~ passim

Medicare Act, 42 U.S.C. 1395¢ et seg. ..............226.. 2

el wind ee cee yccescceccess an

42 U.S.C. 1395d (2000 & Supp. V 2005) .............. 2

42 U.S.C. 1395g(e) (2000 & Supp. V 2005) ............ 2

EE 2

20.2.0. 9eeta) Gapp. V 2005) ................. 2

OE 2

42 C.F.R.:

Pt. 405:

DT i Sew soe mw eew en 3

Pt. 412:

EE ee 2

ES 2

EE - -

ec cc cece cece: oa eal

Ce i ewa tween 2

es enc abweeceewwen 2

ee odin w was ceca ccasawen 3

ek, cee eusecves 4,6, 17

na vec cc ee ee ees ise dvsaea ee

Vi

Miscellaneous: Page

H.R. Rep. No. 660, 99th Cong., 2d Sess. (1980) ......... 11

11

S. Rep. No. 345, 99th Cong., 2d Sess. (1986) ...........

United States Department of Health and Human

Services, Provider Reimbursement Manual

ee aes whine e Weld i 8.4% 3, 4, 15, 16, 17

Jn the Supreme Court of the Gnited States

No. 08-558

ROBERT I. BOURSEAU, ET AL., PETITIONERS

v.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-33)

is reported at 531 F.3d 1159. The opinion of the district

court (Pet. App. 34-70) and the district court’s order

amending the opinion and judgment (Pet. App. 73-80)

are not published in the Federal Supplement but are

available at 2006 WL 2961105 and 2006 WL 3949169,

respectively.

JURISDICTION

The judgment of the court of appeals was entered on

July 14, 2008. A petition for rehearing was denied on

August 19, 2008 (Pet. App. 838-84). The petition for a

writ of certiorari was filed on October 23, 2008. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

(1)

2

STATEMENT

1. The Medicare program provides health insurance

to persons 65 years of age and over, as well as to individ-

uals receiving Social Security disability benefits. See

42 U.S.C. 13895¢e. Under Part A of the program, Medicae

Act, 42 U.S.C. 1395c et seqg., Medicare beneficiaries are

entitled to have payments made on their behalf to hospi-

tals, including psychiatric hospitals, or to other

Medicare providers as reimbursement for certain hospi-

tal care and related services. 42 U.S.C. 1395d (2000 &

Supp. V 2005). Medicare reimburses providers for that

portion of their reasonable cost of providing services

that is incurred on behalf of Medicare beneficiaries. 42

U.S.C. 1395x(v)(1)(A). Fiscal intermediaries—private

entities, generally insurance companies, acting pursuant

to agreements with the Centers for Medicare and

Medicaid Services—play a principal role in administer-

ing payments to Medicare providers. See 42 U.S.C.

1395h; 42 C.F.R. 421.3.’

In order to ensure adequate cash-flow to the provid-

ers, intermediaries make large estimated payments

(called interim payments) to providers at frequent inter-

vals, based on the provider’s estimated treatment costs

for Medicare patients, subject to reconciliation at the

end of the cost reporting year. 42 U.S.C. 1395g(e) (2000

& Supp. V 2005); 42 C.F.R. 413.60, 413.64." The regula-

tory scheme therefore specifically contemplates that

' The fiscal intermediaries are now referred to as “Medicare admini-

strative contractors.” 42 U.S.C. 1395h(a) (Supp. V 2008).

* During the time period at issue in this case, psychiatric hospitals

were reimbursed on a cost basis, see 42 C.F .R. Pt. 413, rather than un-

der the prospective payment system, see 42 C.F.R. 412.400 et seq.,

which was made applicable to psychiatric hospitals in 2005, see 42

C.F.R. 412.20(b).

3

providers will at times be overpaid and at other times

underpaid. Each hospital annually submits to the appro-

priate intermediary a cost report that provides a final

accounting of its actual costs for the year. 42 C.F.R.

413.20.

If the provider’s cost report reflects that the Medi-

care program has overpaid the provider during the year,

“a full refund is to be remitted with the report.” United

States Department of Health and Human Services, Pro-

vider Reimbursement Manual Pt. I, § 2409.1.A.2 (2005)

(PRM). If the cost report indicates that the provider

was underpaid, the intermediary is directed to make a

tentative retroactive adjustment, after correcting

any obvious errors or inconsistencies in the cost report

and offsetting any unrecovered overpayment. PRM

§ 2408.2; 42 C.F.R. 413.64(f)(2). After a more complete

audit of the cost report, the intermediary issues a final

notice of provider reimbursement (NPR) “reflecting the

intermediary’s determination of the total amount of re-

imbursement due the provider,” which serves as “the

basis for making the retroactive adjustment * * * to

any program payments made to the provider during the

period.” 42 C.F.R. 405.1803.

When an intermediary believes either that a provider

is involved in bankruptcy proceedings or that insolvency

proceedings will shortly be instituted, the intermediary

is directed to take steps to prevent overpayments to the

provider. In such circumstances, “any payments to the

provider will be adjusted by the intermediary, notwith-

* The PRM “is an extensive set of informal interpretative guidelines

and policies published [by the agency which administers the Medicare

program |to assist intermediaries and providers in applying the reason-

able cost reimbursement principles.” Providence Hosp. v. Shatala, 52

F.3d 213, 218 (9th Cir. 1995).

4

standing any other regulation or program instruction

regarding the timing or manner of such adjustments, to

a level necessary to insure that no overpayment to the

provider is made.” 42 C.F.R. 413.64(i). The PRM simi-

larly directs intermediaries not to make additional pay-

ments to potentially insolvent providers as part of a ten-

tative initial adjustment based on the provider’s cost

report, but instead to wait until a final NPR is issued.

PRM § 2408.2.

2. The United States filed this action against peti-

tioners under the False Claims Act (FCA), 31 U.S.C.

3729 et seqg., and for unjust enrichment and common law

fraud. The government alleged that petitioners had de-

frauded the Medicare program while operating Bayview

Hospital and Mental Health Systems (Bayview), a Cali-

fornia psychiatric hospital owned and operated by peti-

tioners through their partnership California Psychiatric

Management Services (CPMS). The government con-

tended that petitioners had submitted various cost re-

ports seeking reimbursement for costs that either were

not actually incurred or were not eligible for Medicare

reimbursement.

Under the FCA, persons who commit a variety

of acts involving false claims against the federal govern-

ment are liable to the United States for civil penalties

“nlus 3 times the amount of damages which the Gov-

ernment sustains because of the act of that person.”

31 U.S.C. 3729(a). Section 3729(a)(7), commonly known

as the FCA’s “reverse false claims” provision, imposes

liability upon any person who “knowingly makes, uses,

or causes to be made or used, a false record or state-

ment to conceal, avoid, or decrease an obligation to pay

or transmit money or property to the Government.”

31 U.S.C. 3729(a)(7). The district court held that peti-

5

tioners had violated Section 3729(a)(7) by submitting

their 1997, 1998, and 1999 cost reports, which decreased

the amount CPMS owed Medicare by $5,219,195. Pet.

App. 59-67; id. at 75. In particular, the court found that

CPMS had fraudulently included in its cost reports in-

terest ostensibly charged to CPMS by one of its credi-

tors, which was never paid by CPMS and which was un-

related to the treatment of Medicare patients at Bay-

view; bankruptcy fees unrelated to care for Medicare

patients; a fictitious rent expense; costs associated with

space that was not used for patient care; and manage-

ment fees paid to a related entity that provided no man-

agement services. /d. at 42-52. Pursuant to 31 U.S.C.

3729(a), the district court awarded the United States

treble damages in the amount of $15,657,585, as well as

$31,000 in civil penalties. Pet. App. 75.

3. The court of appeals affirmed. Pet. App. 1-33.

Like the district court, the court of appeals concluded

that the government had proved all the elements neces-

sary to establish liability under the FCA’s reverse false

claims provision—7.¢., that petitioners had (1) knowingly

(2) made, used, or caused to be made or used a record or

statement that was (3) materially (4) false, (5) with the

purpose to conceal, avoid, or decrease an obligation to

pay money to the government. /d. at 10-27.

The court of appeals rejected petitioners’ argument

that the false costs claimed on the cost reports were not

material to the implementation of the Medicare pro-

gram. Pet. App. 25-27. Applying the standard estab-

lished by this Court in Neder v. United States, 527 U.S.

1 (1999), the court of appeals concluded that the false

statements contained in CPMS’s cost reports “were ma-

terial because they had the potential effect, or natural

tendency, to decrease the amount CPMS owed Medicare

6

in overpayments.” Pet. App. 27; see id. at 26 (quoting

Neder, 527 U.S. at 16 (“[i]n general, a false statement is

material if it has ‘a natural tendency to influence, or [is]

capable of influencing, the decision of the decision-

making body to which it was addressed.”) (brackets in

original).

The court of appeals also rejected petitioners’ con-

tention that CPMS’s fraudulent cost reports did not

damage the United States. Pet. App. 27-31. The court

explained that “[dlamages for a reverse false claim con-

sist of the difference between what the defendant should

have paid the government and what the defendant actu-

ally paid the government.” /d. at 30. The court con-

cluded that petitioners “had a legal obligation to pay the

government money at the time they submitted the cost

reports,” id. at 23, and that “the difference between

what CPMS should have repaid the government and

what it did repay the government [was] $5,219,195,” id.

at 30. The court rejected petitioners’ argument that

their precarious financial position relieved them of any

obligation to repay the overpayment. /d. at 27-28. The

court explained that, under the relevant Medicare regu-

lation, special care should be taken to prevent over-

payments to potentially insolvent providers. /d. at 28

(citing 42 C.F.R. 413.64(i)).

The court of appeals rejected petitioners’ argument

that the district court’s award of treble damages plus

civil penalties violated petitioners’ constitutional rights.

Pet. App. 31-33. Examining the four relevant factors

identified in United States v. Mackby, 339 F.3d 1018,

1016 (9th Cir. 2003), cert. denied, 541 U.S. 936 (2004),

the court concluded that (1) making false claims to the

government was a serious offense, (2) the government

had sustained harm to its fiscal interests and to the in-

7

tegrity of the Medicare program, and (3) petitioners fell

squarely within the class of persons targeted by the

FCA. Pet. App. 33. The court found that one Mackby

factor—the fact that the district court had imposed the

maximum penalty permitted under the FCA—favored

petitioners. Jd. at 32. The court of appeals concluded,

however, that nothing prohibited the district court from

awarding the maximum amount, and that when all four

factors were considered in the aggregate, the award was

not grossly disproportionate to the gravity of petition-

ers’ offenses. /d. at 33.

ARGUMENT

The court of appeals’ decision is correct and does not

conflict with any decision of this Court or of any other

court of appeals. Further review is not warranted.

1. Petitioners contend (Pet. 14-18) that the false

statements on their cost reports were not “material” to

the government’s administration of the Medicare pro-

gram, and that the court of appeals’ analysis of material-

ity conflicts with decisions of the Eighth Circuit. Con- —

trary to petitioners’ contention, the evidence in this case

satisfied both the “natural tendency” test adopted by the

Third, Fourth, Sixth, Seventh, Ninth, and Tenth Cir-

cuits, and the “outcome materiality test” that petitioners

contend has been adopted by the Eighth Circuit.

a. Although the FCA does not contain a distinct ma-

teriality element, the submission of a false statement to

a government official does not, in and of itself, violate

the statute. The most commonly-invoked provision of

the FCA imposes liability upon a person who “knowingly

presents * * * [to the federal government] a false or

fraudulent claim for payment or approval.” 31 U.S.C.

3729(a)(1). When a defendant’s asserted liability under

8

Section 3729(a)(1) is premised on a false statement made

on or in connection with a claim form, the false state-

ment will not render the “claim” itself “false or fraudu-

lent” unless the statement is potentially relevant to the

government’s payment decision.

The FCA provision at issue in this case imposes lia-

bility on one who “knowingly makes [or] uses * * * a

false record or statement to conceal, avoid, or decrease

an obligation to pay or transmit money or property to

the Government.” 31 U.S.C. 3729(a)(7). Under Section

3729(a)(7), a false statement that has no potential bear-

ing on the government’s collection of funds is not appro-

priately characterized as being made or used “to con-

ceal, avoid, or decrease an obligation to pay or transmit

money or property to the Government.” Thus, while the

FCA contains no separate materiality element, the per-

tinent hability provisions require proof of a logical con-

nection, substantively analogous to a requirement of

“materiality” as that term has traditionally been under-

stood, between a defendant’s false statement and the

government’s payment or collecticn of money.

b. Petitioners contend (Pet. 11, 15) that, in order to

establish that a defendant’s misrepresentation was ma-

terial under Section 3729(a)(7), the United States must

prove that the defendant’s actions actually deprived the

government of money it was lawfully due. That argu-

ment lacks merit for at least three reasons.

i. In Neder v. United States, 527 U.S. 1 (1999), this

Court stated that “actionable ‘fraud’ had a well-settled

meaning at common law,’ and that “the well-settled

meaning of ‘fraud’ required a misrepresentation or con-

cealment of material fact.” Jd. at 22. Consistent with

that traditional understanding, the Court construed the

federal mail fraud, wire fraud, and bank fraud statutes

9

to contain a materiality requirement. /d. at 20-25. The

Court further explained that, “[iJn general, a false state-

ment is material if it has a natural tendency to influence,

or is capable of influencing, the decision of the decision-

making body to which it was addressed.” Jd. at 16

(brackets, inter: al quotation marks, and citation omit-

ted).

The Court in Neder made clear, however, that a con-

viction under those federal fraud statutes does not. re-

quire proof that the victim actually relied on the false

representations or was damaged by the defendant’s mis-

conduct. See 527 U.S. at 24-25. The Court treated those

elements of common-law fraud as separate from the re-

quirement that a defendant’s misrepresentations be ma-

terial. See ibid. The Court held that “the elements of

reliance and damage would clearly be inconsistent with

the statutes Congress enacted” because those statutes

refer to “‘scheme[s] to defraud,’ rather than the com-

pleted fraud.” Jd. at 25. In light of the Neder Court’s

holding that the government may prove materiality

without proving reliance or damages, there is no basis

for petitioners’ contention that a misrepresentation is

necessarily immaterial if it did not ultimately deprive

the government of money it was lawfully due.

ii. The text of the FCA also does not support petition-

ers’ contention that liability under the Act depends on

proof of an actual effect on the government’s payment or

recoupment decision. Under 31 U.S.C. 3729(a)(1), any

person who “knowingly presents” a “false or fraudulent

claim” to the federal government is liable for damages

and civil penalties. Because Section 3729(a)(1) attaches

liability upon presentment of a false or fraudulent claim,

rather than actual payment on that claim, the question

whether the provision was violated in a particular case

10

should be resolved based on the facts as they existed at

the time of presentment. Whether a particular false

statement would have the “natural tendency” to affect

the government’s payment decision can be determined

without reference to events (such as the government’s

actual disposition of the claim) that postdate the claim’s

submission. Thus, just as Congress’s decision to pro-

hibit certain “scheme{s] to defraud” was held to reflect

a decision not to require proof of reliance and damages

under the federal fraud statutes at issue in Neder, see

527 U.S. at 24-25, Congress’s focus on the “present-

[ment]” of false claims under 31 U.S.C. 3729(a)(1) mani-

fests a similar intent.

Similarly, the reverse false claims provision, Section

3729(a)(7), focuses on the “mak[ing]” or “use[]” of false

records or statements. Although Section 3729(a)(7) im-

poses the additional requirement that the false record or

statement be made or used “to conceal, avoid, or de-

crease an obligation to pay or transmit money or prop-

erty to the Government,” that language is most sensibly

construed simply to require a logical connection between

the false record or statement and a defendant’s obliga-

tion to pay money or property to the United States. Sec-

tion 3729(a)(7) requires knowing concealment or avoid-

ance, but it does not require that the defendant’s mis-

conduct culminate in any particular result. See United

States ex rel. A+ Homecare, Inc. v. Medshares Mgmt.

Group, Jue., 400 F.3d 428, 445-446 (6th Cir.), cert. de-

nied, 546 U.S. 1063 (2005). And there is no reason to

suppose that Congress, having focused on the potential

(rather than the actual) effect of a claimant’s conduct in

31 U.S.C. 3729(a)(1), would require proof of an actual

impact on the federal fisc in the later-enacted Section

3729(a)(7). To the contrary, the legislative history

11

strongly indicates that the two provisions should be con-

strued in pari materia. See S. Rep. No. 345, 99th

Cong., 2d Sess. 18 (1986) (Section 3729(a)(7) “provide|[s ]

that an individual who makes a material misrepresenta-

tion to avoid paying money owed the Government would

be equally liable under the Act as if he had submitted a

false claim to receive money.’’); H.R. Rep. No. 660, 99th

Cong., 2d Sess. 20 (1986) (Section 3729(a)(7) reflects the

view “that there is no reason to treat a false claim filed

against the Government to fraudulently reduce an obli-

gation owed to the Government differently from orie

filed for the purpose of fraudulently obtaining money.”).

iii. “[E }valuating materiality based on the potential

effect rather than actual result is more consistent with

the underlying purpose of the FCA.” A+ Homecare,

400 F.3d at 446. This Court “has broadly interpreted

the statute to cover ‘all fraudulent attempts to cause the

Government to pay out sums of money.’” /bid. (quoting

United States v. Neifert-White Co., 390 U.S. 228, 233

(1968)). The logical implication of petitioners’ theory,

however, is that a claimant who seeks to obtain govern-

ment funds through fraud will escape FCA liability alto-

gether if the government detects the misrepresentation

before payment is made and thereby avoids an actual

financial loss. Creation of such a loophole would subvert

Congress’s intent to deal comprehensively with efforts

to obtain federal money or property by dishonest means.

c. The court of appeals concluded that the false

statements on petitioners’ cost reports “were material

because they had the potential effect, or natural ten-

dency, to decrease the amount CPMS owed Medicare in

overpayments, despite the fact that cost reports were

never audited.” Pet. App. 27. That conclusion is consis-

tent with the Sixth Circuit’s ruling in A+ Homecare, the

12

only other appellate decision directly on point. As in

this case, the defendant in A+ Homecare included a

false cost in its cost report, but the intermediary de-

layed completing its audits pending the outcome of the

fraud investigation. A+ Homecare, 400 F.3d at 456.*

The Sixth Circuit concluded that, under Section

3729(a)(7), a court’s determination of materiality should

be “based on the potential effect rather than actual re-

sult” of the defendant’s false statement, zd. at 446, and

that the intermediary’s failure to complete the audit was

“irrelevant in this case * * * because the mere act of

placing the false accrual on the Cost Report is sufficient

to find [defendant] liable under the FCA,” 7d. at 446

n.13. The same analysis applies here.

d. The Ninth Circuit’s “natural tendency” test is

consistent with the standard for FCA liability adopted

by five other circuits. Those courts have recognized

that, so long as the defendant’s false statements reason-

ably could have influenced the government’s payment or

collection of money, the FCA does not require proof of

any actual fiscal impact. See United States v. Rogan,

517 F.3d 449, 452 (7th Cir. 2008); United States ex rel.

Bahrani v. Conagra, Inc., 465 F.3d 1189, 1204 (10th Cir.

2006), cert. denied, 128 S. Ct. 388 (2007); A+ Homecare,

* Petitioners assert that their fraudulent cost reports were not audi-

ted because the fiscal intermediary knew of CPM%S’s precarious finan-

cial situation and the PRM precludes any action with respect to the cost

reports of a provider suspected of insolvency. Pet. 6, 8, 17, 22-23. As

discussed below, petitioners misunderstand the pertinent regulatory

and PRM provisions. See p. 17, infra. Moreover, petitioners are incor-

rect as a factual matter. The trial record disclosed that the intermedi-

ary discontinued its audit because, after receiving an allegation of

fraud, the Medicare program initiated an investigation culminating in

this FCA action by the United States. See C.A. E.R. 242-243; C.A.

Supp. E.R. 25-26.

13

400 F.3d at 446; United States ex rel. Harrison v. West-

inghouse Savannah River Co., 352 F.3d 908, 913, 916-

917 (4th Cir. 2003); United States ex rel. Cantekin v.

University of Pittsburgh, 192 F.3d 402, 415-416 (3d Cir.

1999), cert. denied, 531 U.S. 880 (2000).

Petitioners contend (Pet. 11, 15) that the court of ap-

peals’ decision in this case conflicts with the Eighth Cir-

cuit’s decision in Costner v. URS Consultants, Inc., 153

F.3d 667, 677 (1998) (Costner /). Petitioners construe

the decision in Costner I as requiring the government to

show “that the defendants’ actions actually caused the

United States to pay out money it was not obligated to

pay or actually deprived the United States of money it

was lawfully due.” Pet. 11. The Ninth Circuit in this

case likewise understood the Eighth Circuit to have ap-

plied an “outcome materiality test,” which the Ninth

Circuit regarded as inconsistent with its own “natural

tendency” standard. Pet. App. 26. For two reasons, any

tension between the legal standards adopted by the

Ninth and Eighth Circuits in this area provides no basis

for further review here.

i. More recent decisions of the Eighth Circuit indi-

cate that the court has not yet settled on a precise stan-

dard for defining the circumstances under which a defen-

dant’s misrepresentations will give rise to FCA liability.

In United States ex rel. Costner v. United States, 317

F.3d 883, cert. denied, 540 U.S. 875 (2003) (Costner 17),

the Eighth Circuit characterized its earlier decision in

Rabushka ex rel. United States v. Crane Co., 122 F.3d

559, 563 (1997), cert. denied, 523 U.S. 1040 (1998), as

merely “suggestling] that outcome materiality is the

proper standard,” and similarly regarded Costner J as

only “impl[yzng| a materiality standard stricter than

mere relevancy.” Costner /], 317 F.3d at 887 (emphases

14

added). The court in Costner I] concluded that it “need

not decide the precise contours of the materiality re-

quirement” because there was no evidence to show that

the defendant’s alleged false statement “was even rele-

vant to [the agency’s] payment decision.” /bid.

The Eighth Circuit subsequently reiterated that

Costner II had “confirmed that a showing of materiality

is implicit in the FCA, though we did not define ‘the pre-

cise contours’ of this requirement.” Hays v. Hoffman,

325 F.3d 982, 992, cert. denied, 540 U.S. 877 (2003)

(quoting Costner I], 317 F.3d at 887). In Hays, the de-

fendants conceded in their reply brief “that the false

claims were material if they were capable of influencing

the government’s payment decision.” J/bid. (internal

quotation marks and citation omitted). The Eighth Cir-

cuit noted that “[t]he district court’s instructions in-

cluded that concept in a definition of materiality,” and

the court further observed that the defendant’s false

representations were “capable of influencing, and did in

fact influence, the government’s Medicaid reimburse-

ment decisions.” /bid. The court of appeals concluded

that “the instructions ‘taken as a whole and viewed in

light of the evidence and the applicable law, fairly

and adequately submitted the issues in the case to the

jury.’” Jbid. (quoting Gray v. Bicknell, 86 F.3d 1472,

1485 (8th Cir. 1996)). Costner J] and Hays suggest that

the Eighth Circuit has thus far declined to choose be-

tween the “natural tendency” test employed by the court

of appeals in this case, and the more demanding “out-

come materiality” standard advocated by petitioners.

Because the Eighth Circuit has not defined the “precise

contours” (Costner 1], 317 F.3d at 887) of its materiality

standard and has not unequivocally chosen the standard

petitioners urge, any tension between the existing Ninth

15

and Eighth Circuit precedents does not warrant this

Court’s review.

ii. Even if a fully developed circuit conflict did exist,

this case would be an unsuitable vehicle for resolving it,

because there is no reason to suppose that petitioners

would have escaped FCA liability under the “outcome

materiality” standard that petitioners advocate. The

FCA’s reverse false claims provision imposes liability on

any person who knowingly uses “a false record or state-

ment to conceal, avoid, or decrease an obligation to pay

or transmit money or property to the Government.” 31

U.S.C. 3729(a)(7). As the court of appeals correctly ex-

plained, petitioners “had a legal obligation to pay the

government money at the time they submitted the cost

reports.” Pet. App. 238; see id. at 58 (“Hospitals are re-

quired to remit a full refund of overpayments to Medi-

care at the time they file their cost reports.”); see also

PRM § 2409.1.A.2 (“When the provider files a cost re-

port indicating that an overpayment has occurred a full

refund is to be remitted with the report.”). Petitioners’

fraudulent conduct therefore resulted in a different

“outcome’”—.e., a failure to repay the Medicare pro-

gram the amount that an accurate cost report would

have identified as due and owing—than would have oc-

curred if petitioners had complied with their legal obli-

gations. Petitioners do not contend that any decision of

the Eighth Circuit has held Section 3729(a)(7) to be in-

applicable in circumstances like these.

This Court recently denied a petition for a writ of

certiorari regarding the FCA’s materiality standard

from the Sixth Circuit’s decision in A+ Homecare,

in which the court of appeals upheld an FCA judgment

in a Medicare reimbursement case substantially similar

to this one. See Winters v. United States ex rel. A+

16

Homecare, Inc., 546 U.S. 1063 (2005). There is no rea-

son for a different result in this case.

2. The court of appeals correctly concluded (Pet.

App. 27-30) that petitioners’ false cost reports damaged

the United States. Contrary to petitioners’ contention

(Pet. 17-19), that holding does not conflict with the deci-

sions of any other court of appeals.

a. Petitioners contend that the government could not

prove damages in this case because it could not show

that it “relied on a false claim or representation in mak-

ing a payment decision.” Pet. 17 (citing United States ex

rel. Schwedt v. Planning Research Corp., 59 F.3d 196,

199-200 (D.C. Cir. 1995), cert. denied, 516 U.S. 1068

(1996)). Unlike Schwedt, however, this case involves the

FCA’s reverse false claims provision, which prohibits

the making or use of “a false record or statement to con-

ceal, avoid, or decrease an obligation to pay or transmit

money or property to the Government.” 31 U.S.C.

3729(a)(7). Both in general and in this case, the harm

that ean naturally be expected to result from a violation

of Section 3729(a)}(7) is a failure by the government to

receive funds owed to the United States, rather than the

disbursement of federal money to persons who are not

entitled to receive it.

There is consequently no basis for petitioners’ con-

tention (Pet. 17), in a suit filed under Section 3729(a)(7),

that the government’s ability to prove damages depend-

ed on evidence that it “relied” on petitioners’ false state-

ments in “making a payment decision.” As explained

above (see p. 15, supra), the court of appeals correctly

held that petitioners “had a legal obligation to pay the

government money at the time they submitted the cost

reports” showing an overpayment by the Medicare pro-

gram. Pet. App. 23; see id. at 58; PRM § 2409.1.A.2.

17

The government therefore was damaged when petition-

ers submitted cost reports that fraudulently reduced the

amount that CPMS was required to repay the govern-

ment.

Petitioners contend that immediate reimbursement

of any overpayment is required “unless the provider was

in bankruptcy or insolvent, which was the case here.”

Pet. 22; see Pet. 6 (contending that, under PRM

§ 2408.2, “no action is taken on a cost report submitted

by a provider when the provider is potentially insolvent

or is the subject of bankruptcy proceedings”). The court

of appeals correctly rejected that reading of the perti-

nent regulatory and PRM provisions. See Pet. App. 27-

28. Rather than relieving potentially insolvent providers

of any obligation to repay overpayments, the provisions

at issue protect the Medicare program by directing in-

termediaries to take particular care to avoid overpay-

ments to such providers. The applicable Medicare regu-

lation provides that, “notwithstanding any other regula-

tion or program instruction regarding the timing or

manner of such adjustments,” when an intermediary

believes that a provider may be insolvent, “any pay-

ments to the provider will be adjusted by the intermedi-

ary * * * toa level necessary to insure that no over-

payment to the provider is made.” 42 C.F’.R. 413.64(i).

The PRM similarly states that the intermediary should

not make a tentative adjustment payment to a poten-

tially insolvent provider on the basis of the provider’s

unaudited cost report. PRM § 2408.2. In any event, to

the extent that petitioners’ disagreement with the court

of appeals’ damages analysis turns on the proper inter

pretation of the Medicare regulations and the PRM, pe-

titioners do not allege a conflict in the circuits on that

issue, nor do they identify any other reason that the dis-

18

puted question of Medicare law would warrant this

Court’s review.

b. Petitioners also contend (Pet. 23) that the United

States was not damaged by petitioners’ fraud because

the intermediary took no action to collect even the

fraudulently reduced amounts that CPMS’s cost reports

acknowledged had been overpaid by the Medicare pro-

gram. That assertion is factually inaccurate. By filing

a claim in the bankruptcy proceedings, the government

has attempted to collect the overpayments that were

acknowledged on CPMS'’s cost reports but that CPMS

did not immediately remit. Pet. App. 35.

Even if the government had forgone any effort to

collect the smaller amount of CPMS’s acknowledged

debt to the Medicare program, the United States would

still have been damaged by petitioners’ fraudulent un-

derstatement of the sum owed to the United States and

their attendant failure to pay that additional debt. In

arguing that the government was not harmed by their

fraudulent conduct, petitioners appear to contend (see

Pet. 23) that, because the intermediary made no effort

to collect the smaller amount that petitioners conceded

was owed, it would likewise have ignored the much

larger debt that an accurate cost report would have

identified if petitioners had acknowledged the existence

of the larger debt but had failed to pay it when the cost

report was submitted. That contention is both factually

speculative and legally flawed. To determine whether

(and how greatly) the government was harmed by peti-

tioners’ fraudulent understatement of CPMS’s debt to

the United States, the courts below correctly took as

their point of comparison the money that the govern-

ment would have obtained if petitioners had fully com-

plied with their legal obligations—i.e., if they had ac-

19

knowledged the additional debt and had promptly paid

it in accordance with applicable Medicare rules.

c. Petitioners contend (Pet. 17, 23-24) that the court

of appeals’ damages analysis conflicts with that of the

D.C. Circuit in Schwedt. As noted above, however, the

court in Schwedt did not construe the FCA’s reverse

false claim provision, but rather addressed the require-

ments for showing damages in an FCA action for sub-

mitting “a false or fraudulent claim for payment or ap-

proval,” 31 U.S.C. 3729(a)(1), or submitting “a false re-

cord or statement to get a false or fraudulent claim paid

or approved,” 31 U.S.C. 3729(a)(2). See Schwedt, 59

F.3d at 199. In that context, the court held that reliance

on the false record, statement, or claim in making or

approving a payment was necessary to prove damages.

Id. at 200.

A violation of Section 3729(a)(7), by contrast, injures

the United States whenever the wrongdoer fails to pay

the government the fraudulently concealed debt, even

though no federal official relies on the false statement in

making any payment decision.’ To the extent petition-

ers rely on Schwedt for the broader proposition that

damages are allowable under the FCA only if they were

proximately caused by the defendant’s fraud, 59 F.3d at

200, the decision of the court of appeals is not to the con-

trary. Rather, the court determined that $5,219,195 was

“the difference between what CPMS should have repaid

the government and what it did repay the government”

* The Fifth and Third Circuit decisions on which the court in Schaweadt

relied, see 59 F.3d at 200 (citing United States v. Hibbs, 568 F.2d 347

(3d Cir. 1977), and United States v. Miller, 645 F.2d 473 (Sth Cir.

1981)), are similarly distinguishable because neither involved reverse

false claims.

20

and further confirmed that “none of the disputed costs

was allowable.” Pet. App. 30-31.

3. The court of appeals correctly rejected petition-

ers’ constitutional challenges to the treble damages

award against them, see Pet. App. 31-33, and that hold-

ing does not conflict with the decision of any other court

of appeals.

a. Petitioners contend (Pet. 20) that the court of

appeals adopted a categorical rule that “a District court

is prohibited from reducing a judgment below statutory

limits based on the excessive fines clause.” The court of

appeals issued no such holding. Rather, the court ap-

plied its earlier decision in United States v. Mackby, 339

F.3d 1013, 1016 (9th Cir. 2008), cert. denied, 541 U.S.

936 (2004), which, consistent with this Court’s decision

in United States v. Bajakajian, 524 U.S. 321 (1998), con-

cluded that an award violates the Excessive Fines

Clause if it is grossly disproportionate to the gravity of

the defendant’s conduct, Mackby, 339 F.2d at 1016. See

Pet. App. 32. The court in Mackby identified four fac-

tors to be considered in determining whether an award

is grossly disproportionate: (1) the severity of the of-

fense and its relation to othe criminal activity; (2) the

maximum penalty faced; (3) the harm caused; and (4)

whether the defendant falls within a class of persons

targeted by the applicable law. 339 F.3d at 1016-1017.

In this case, the court of appeals concluded that the

first, third, and fourth Mackby factors favored the

United States because (1) making false claims to the

government is a serious offense, (2) the government sus-

tained harm to its fiscal interests and to the integrity of

the Medicare program, and (3) petitioners fell squarely

within the class of people targeted by the FCA. Pet.

App. 38. The court found that the second Mackby factor

21

favored petitioners “because the district court imposed

treble damages and the maximum amount of allowable

civil penalties.” Jd. at 32. Looking at all four factors

together, the court of appeals concluded that the award

was not grossly disproportionate to the gravity of peti-

tioners’ offenses. /d. at 33.

That conclusion was correct. Petitioners caused the

making of false statements and false reports in order to

reduce by more than $5 million the amount CPMS owed

Medicare, and that amount has never been repaid.

Based on that conduct, the district court imposed judg-

ment against petitioners for $15,657,585 in treble dam-

ages and for a civil penalty of $31,000. Pet. App. 75.

That award is no more excessive than the treble dam-

ages awarded against the defendant in A+ Homecare,

400 F.3d at 454, or the award of nearly 12 times the gov-

ernment’s damages upheld in Mackby, 339 F.3d at 1015-

1019.

b. Petitioners’ challenge under the Fifth Amend-

ment’s Due Process Clause (Pet. 20-21) also lacks merit.

As the district court noted, an FCA damages award is

not the product of a jury verdict and does not have the

potentially arbitrary quality of a classic punitive dam-

ages award. Pet. App. 78-79. Moreover, treble damages

are well within the suggestion in State Furm Mutual

Automobile Insurance Co. v. Campbell, 538 U.S. 408,

425 (2003), that single-digit multiples of compensatory

damages do not run afoul of the Due Process Clause.

See Pet. App. 79 n. 3. And as this Court recognized in

Cook County v. United States ex rel. Chandler, 538 U.S.

119 (2003), some part of an FCA award “beyond the

amount of the fraud is usually ‘necessary to compensate

the Government completely for the costs, delays, and

inconveniences occasioned by fraudulent claims,’” zd. at

ra A

130 (quoting United States v. Bornstein, 423 U.S. 303,

315 (1976)), and for the unavailability of prejudgment

interest and other consequential damages, 7d. at 131.

The Court in Chandler explained that, while treble dam-

ages under the FCA “will exceed full compensation in a

good many cases,” ibid., they are significantly different

from “classic punitive damages,” zd. at 132.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

EDWIN S. KNEEDLER

Acting Solicitor General

MICHAEL F.. HERTZ

Actizig Assistant Altturney

General

DOUGLAS LETTER

DANIEL R. ANDERSON

ROBERT J. MCAULIFFE

Attorneys

JANUARY 2009