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CASE | DECISION | JUDGE | FOOTNOTES

Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  


SUBJECT:

John E. Calhoon,
Petitioner,

DATE: June 7, 2000
                                          
             - v -

 

The Inspector General

 

Civil Remedies CR641
App. Div. Docket No.A-2000-51
Decision No. 1729
DECISION
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FINAL DECISION ON REVIEW OF

ADMINISTRATIVE LAW JUDGE DECISION

John E. Calhoon (Petitioner) appealed a January 12, 2000 decision by Administrative Law Judge (ALJ) Steven T. Kessel. John E. Calhoon v. The Inspector General, DAB CR641 (2000) (ALJ Decision). In that decision, the ALJ upheld the Inspector General's (I.G.'s) decision to exclude Petitioner for a period of 10 years from participation in certain federally funded health care programs.(1) The I.G. imposed the exclusion pursuant to section 1128(a)(1) of the Social Security Act (Act), based on Petitioner's conviction for false statements in connection with his job as an accountant for a corporation which owns and operates hospitals.

On appeal, Petitioner contended that the length of his exclusion was unreasonable but did not specifically identify the findings of fact and conclusions of law (FFCLs) to which he was excepting. From his arguments, we conclude that he excepted to FFCL 4.b.: "Petitioner did not prove the presence of any mitigating factors." ALJ Decision at 9. As to this FFCL, Petitioner argued that the ALJ erred in not finding that Petitioner's contention that he was innocent of the crime for which he was convicted was relevant to setting the length of the discretionary portion of his exclusion. Petitioner also excepted to FFCL 4.a.i.: "The acts which were the basis for Petitioner's conviction resulted in a financial loss to Medicare of more than $1,500." ALJ Decision at 7. As to this FFCL, Petitioner argued that the ALJ erred in finding that Petitioner's acts resulted in an actual financial loss in excess of $1,500 to the Medicare program.

As to Petitioner's first exception, we conclude that the ALJ properly found that Petitioner failed to prove any mitigating factor. As to Petitioner's second exception, we conclude the record in this case does not support the ALJ's finding that the acts which were the basis for Petitioner's conviction, or similar acts, resulted in a financial loss to Medicare of $1,500 or more. We therefore remand this case to the ALJ to determine whether the elimination of one of the aggravating factors used by the I.G. in setting the discretionary portion of the exclusion makes the length of the exclusion unreasonable, and, if so, what the length should be.

I. Standard of Review

In reviewing an ALJ decision, the standard of review on a disputed issue of law is whether the initial decision is erroneous; for a disputed issue of fact, the standard is whether the ALJ decision is supported by substantial evidence on the whole record. 42 C.F.R. § 1005.21(h).

II. Background

Petitioner's convictions stemmed from his employment as an accountant for Charter Medical Corporation (Charter), an entity which owns and operates hospitals. Petitioner was convicted of making false statements by signing or causing to be signed Medicare cost reports claiming amounts he knew to be nonreimbursable.(2)

The FFCLS to which no exceptions were taken establish the following. First, Petitioner was convicted, within the meaning of section 1128(a), of criminal offenses related to the delivery of items or services under the Medicare program. Second, the I.G. was required to exclude Petitioner inasmuch as Petitioner has been convicted for such a criminal offense. Third, the I.G. proved the presence of the following two aggravating factors: the acts resulting in Petitioner's conviction, or similar acts, were committed over a period of one year or more, and Petitioner's sentence for his crimes included a period of incarceration.

III. Relevant Authority

Section 1128(a) of the Act mandates or permits the exclusion of certain individuals from participation in certain federally funded health care programs. Petitioner's exclusion is based on section 1128(a)(1), which mandates the exclusion of "[a]ny individual or entity that has been convicted of a criminal offense related to the delivery of an item or service under Title XVIII [Medicare]. . . ." The Board has previously explained its rationale for concluding that filing Medicaid cost reports containing false information is a criminal offense related to the delivery of an item or service. Charles W. Wheeler and Joan K. Todd, DAB No. 1123 (1990). Similarly, the Medicare cost reports here were filed for purposes of calculating Medicare reimbursement rates for the inpatient hospital services provided by the hospitals and, therefore, are related to the delivery of those services.

Section 1128(c)(3)(B) provides that a section 1128(a)(1) exclusion must be for a minimum of five years. The I.G. may lengthen the period of exclusion beyond five years.

Section 1001.102(b) of 42 C.F.R. lists the factors which "may be considered to be aggravating and a basis for lengthening the period of exclusion [pursuant to section 1128(a).]" (The ALJ Decision relied on the regulations in effect in 1997 when the I.G. imposed the exclusion.) Section 1001.102(c) lists three factors which may be considered mitigating and a basis for reducing the period of exclusion to no less than five years if any of the aggravating factors would otherwise justify an exclusion longer than five years.

The aggravating factor which is at issue in this case is set forth at section 1001.102(b)(1). It provided in pertinent part:

The acts resulting in the conviction, or similar acts, resulted in financial loss to Medicare and the State health care programs of $1,500 or more.(3)

The mitigating factors are set forth at section 1001.102(c). They involve misdemeanor convictions; diminished capacity, and cooperation with Federal or State officials in combating health care fraud.

III. Analysis

A. Petitioner's contention, that an appellate court decision established that he was innocent of the crime for which he was convicted, is unfounded and not relevant to determining the length of his exclusion.

Petitioner was convicted pursuant to 18 U.S.C. § 1001 for making false statements by signing or causing to be signed Medicare cost reports claiming amounts he knew to be not reimbursable. In order to prevail on such a charge, the government must prove that Petitioner made a false statement. Petitioner contended that the appellate decision in his case (United States v. Calhoon, 97 F.3d 518 (11th Cir. 1996)) establishes that the government failed to prove that he made any false statements and that, if anything, he should have been charged with the crime of concealment. Petitioner contended that his alleged innocence of the crime for which he was convicted is relevant to determining the duration of the discretionary portion of his exclusion.

For the following reasons, we conclude that the ALJ did not err in not finding that the Petitioner's alleged innocence was a mitigating factor in determining the appropriate length of the exclusion.

First, Petitioner is incorrect that United States v. Calhoon, while upholding his conviction, established that he was innocent of making a false statement under 18 U.S.C. § 1001. Petitioner apparently relied on the following statements in the decision: "the government . . . failed to sustain its burden to prove the claim false by virtue of the nonreimbursable nature of the interest" (Id. at 526) and "the government having offered no evidence about [the source and cost of the money] failed to sustain its burden of proving that the interest payment was nonreimbursable" (Id. at 528). P. Br. at 1. However, while the appellate court found the government had failed to prove certain facts as to falsity, it also ruled that "falsity under section 1001 includes concealment of a material fact." Id. at 526. The appellate court found that, because Petitioner concealed the fact that the disputed interest payments were made to a related company and this fact is material to the allowability of interest payments, Petitioner's statements on the cost reports were false. Therefore, the appellate court expressly found that Petitioner, by concealing a material fact, was guilty of making false statements under section 1001.

Second, the factors set forth in 42 C.F.R. § 1001.102 for determining the length of an exclusion do not include review of the validity of the underlying conviction.(4) The minimum five-year exclusion under section 1128(a)(1) may be extended if any of the aggravating factors defined at 42 C.F.R. § 1001.102(b) are present. In this case the I.G. determined there were three aggravating factors and extended the exclusion to 10 years. If any of the aggravating factors set forth in section 1001.102(b) justifies an exclusion longer than 5 years, section 1001.102(c) provides that certain mitigating factors should be considered as the basis for reducing the period of exclusion to no less than 5 years. Section 1001.102(c)(1)-(3) sets out a list of factors which may be considered mitigating. They are limited to the seriousness of the crime, diminished capacity in committing the crime, and cooperation with the government. Therefore, under the regulations promulgated by the Secretary, the validity of the underlying conviction is not relevant to determining the length of the discretionary portion of the exclusion because it is not among the limited list of mitigating factors.

This conclusion is consistent with the intent of section 1128(a)(1), which is to allow the I.G. to rely on the results of a criminal court proceeding and not be required to relitigate the validity of a conviction for crimes related to the delivery of an item or service. This intent is reflected in 42 C.F.R. § 1001.2007(d), which provides that when an exclusion is based on the existence of a conviction, the basis for the conviction is not reviewable and the individual may not collaterally attack the conviction in the appeal before the ALJ.

B. The finding that the acts resulting in Petitioner's conviction, or similar acts, resulted in financial loss to Medicare of $1,500 or more is not supported by substantial evidence on the whole record.

The ALJ found that the I.G. proved the presence of three aggravating factors under section 1001.102(b): that the acts which were the basis for Petitioner's conviction resulted in financial loss to Medicare of more than $1,500; that the acts were committed over a period of one year or more; and that the sentence imposed by the court included incarceration. Petitioner disputed the ALJ's finding as to financial loss. Petitioner asserted in the court proceedings and before the ALJ that any false statements on the cost reports never improperly increased Charter's Medicare reimbursement. Petitioner therefore concluded that there was no "actual" financial loss to Medicare.

The 1997 version of section 1001.102(b)(1) listed the following as an aggravating factor: "The acts resulting in the conviction, or similar acts, resulted in financial loss to Medicare and the State health care programs of $1,500 or more."(5) Petitioner argued that the wording of this statement ("resulted in") required the I.G. to prove an actual financial loss. In response to the Board's inquiry about the meaning of the provision, the I.G. informed the Board that she construes this language to require actual rather than intended financial loss. I.G. Supplemental Br. at 3. As explained below, we conclude that the record does not contain substantial evidence to support a finding that Petitioner's acts resulted in an actual financial loss to Medicare of $1,500 or more.

The I.G. and the ALJ relied on findings by the district court and appellate court to establish that, under section 1001.102(b)(1), Petitioner's acts resulted in financial loss to Medicare in excess of $1,500. However, as explained below, the courts' findings do not support the conclusion that Petitioner's acts caused such loss.(6)

First, the I.G. and the ALJ relied on a district court document titled "Judgement in a Criminal Case." I.G. Ex. 2. This document memorializes the district court's findings in sentencing Petitioner pursuant to the standards set forth in the United States Sentencing Guidelines (Sentencing Guidelines.) Under the Sentencing Guidelines, a court must make findings as to certain elements, such as loss attributable to a defendant, in order to determine the appropriate sentence. The I.G. cites the fact that, as to the element of loss, the district court wrote, "The Court finds that the loss amount was between $20,000 and $50,000." I.G. Ex. 2, at 5. However, while the district court spoke of a "loss amount," a review of the document and the record in this case demonstrates that the district court was setting an "intended" loss figure rather than an "actual" loss figure. We reach this conclusion for the following reasons.

  • The crimes for which Petitioner was convicted, false statements and use of the mail in making false statements, did not require actual loss. Rather, the elements for a false statement conviction under 8 U.S.C. § 1001 are: (1) that a statement was made; (2) that it was false; (3) that it was material; (4) that it was made with specific intent; and (5) that it was within the jurisdiction of an agency of the United States. Thus, the fact that Petitioner was convicted of these crimes does not establish that he actually succeeded in causing an actual loss to Medicare or that the judge was in any way concerned with actual loss at the sentencing phase of the trial.(7)

  • A portion of the transcript of the sentencing hearing was included in this record. The judge, the prosecuting attorney, and the defense attorney all repeatedly acknowledged that what was under consideration for sentencing was the question of the intended loss to Medicare. P. Ex. 9, at 1, 5, 8, 9, 11, 16, and 18. Therefore, the transcript clearly shows that when the judge wrote that "the loss amount was between $20,000 and $50,000," he was addressing intended loss.
  • On the portion of Exhibit 2 which deals with restitution, the judge noted "N/A" and required no restitution. Had there been a finding of actual loss, the judge should have addressed the issue of restitution under the Sentencing Guidelines. See U.S.S.G. § 5E1.1.

Therefore, we conclude that the sentencing document merely establishes that the district court found there was an intended loss of between $20,000 and $50,000.

The I.G. and ALJ also relied on the decision of the appellate court. However, our construction of the district court's finding as going to intended loss is also supported by the appellate court's decision. The appellate court plainly understood the district court to be addressing "intended" rather than "actual" loss. It is also apparent that the appellate court regarded "intended" loss as a relevant factor under the Sentencing Guidelines. The court phrased the issue on appeal as follows:

Calhoon argues that the district court erred in determining that he is responsible for $31,000 in intended loss pursuant to U.S.S.G. § 2F1.1(b)(1). He contends that only actual loss is relevant and that the Medicare program sustained none.

United States v. Calhoon, 97 F.3d at 530.

The appellate court expressly rejected Petitioner's argument that a finding of actual loss was required by the Guidelines. It wrote:

The Sentencing Guidelines recognize that attempted or intended loss is a valid measure of culpability. U.S.S.G. § 2F1.1, comment (n.7)(1988).

The court then found that Petitioner admitted that one particular claim, had it not been intercepted by auditors, would have netted Charter an additional $31,000 in reimbursement, and the court held that this admission was sufficient to establish that Petitioner intended Medicare to suffer a $31,000 loss. The appellate court therefore upheld the district court's loss range finding of $20,000 to $50,000.

Third, the only remaining evidence as to loss in this record, a settlement agreement between Charter and the Department of Justice and the I.G., does not constitute substantial evidence that Petitioner's acts resulted in an actual financial loss of at least $1,500. The agreement, executed January 1991, concerned cost reports filed between 1987 and 1989 when Petitioner was one of Charter's two Senior Directors of Reimbursement. The agreement stated that the United States had claims and causes of action against Charter and its subsidiaries under the False Claims Act, the Civil Monetary Penalties Law, and the Medicare and Medicaid Patient and Program Protection Act. The parties agreed that Charter would pay $948,363 as full settlement of any civil and administrative claims that might arise out of the subject matter of the I.G.'s investigation. The subject matter of the investigation was defined as:

The filing of Medicare cost reports on behalf of Charter and its subsidiaries by employees in Charter's Reimbursement Department for the years 1987 through 1989, covering the subsidiaries identified in Attachments A and B hereto, and involving the following Medicare reimbursement issues: malpractice premiums; start-up costs; CMCI, Inc. interest, royalty fees; and Outreach advertising and related expenses.

I.G. Ex. 3, at 3.

The agreement also provided that "Charter further agrees to forego and not to seek reimbursement on the claims identified in Attachments A and B." Id. at 2-3. (The record contains Attachment A but not Attachment B.)

While $948,363 is an enormous sum, more than 600 times the minimum amount of $1,500, this agreement does not sustain the I.G.'s burden for the following combination of reasons.(8) First, the fact that Charter agreed "to forego and not to seek reimbursement on the claims identified in Attachments A and B" makes it appear that the amounts on these attachments had not been paid by Medicare but were intercepted in the cost report auditing process. Therefore, the terms of the agreement raise a question as to whether any these amounts were ever paid and ever constituted actual losses to Medicare. Second, because false cost reports had been filed on behalf of Charter, Charter's exposure to federal criminal and civil penalties was enormous. Had Charter not been able to negotiate a settlement as to these improprieties, Charter and its subsidiaries risked financial ruin if they were excluded from federally funded health care programs. Therefore, Charter had a tremendous incentive to settle, and we do not know how that incentive impacted its evaluation of what was actually improperly claimed and reimbursed as a result of these cost reports. Third, not only was Petitioner not a party to this agreement, but, by the time of the agreement, Charter's interests were completely adverse to Petitioner's. The agreement indicates that he was the employee Charter left exposed as the person solely responsible for its predicament, even though Petitioner was not the supervisor for many of the institutions listed in Appendix A. Specifically, Charter negotiated a complete civil and criminal bar on behalf of itself and all its subsidiaries, officers, directors, and employees except for Petitioner. Id. at 4-5.

The I.G. argued that Petitioner cannot prevail because he did not produce any evidence to support his contention that there was no actual loss to Medicare. We reject this argument. It is the I.G.'s burden to prove the elements of the exclusion, including the aggravating factors set forth in 42 C.F.R. § 1001.102(b). See Tanya A. Chuoke, R.N., DAB No. 1721 (2000); David A. Barrett DAB No. 1461 (1994). While we agree with the I.G.'s statement that "[t]here is no requirement for the I.G. to formulate a mathematical equation to precisely account for every penny that was fraudulently diverted by Petitioner," (I.G. Supplemental Br. at 11), the I.G. must produce some credible evidence as to some actual loss, since she has stated that the regulation means actual, not intended, loss. The I.G. asserted that the financial consequences of Petitioner's acts were enormous, but it failed to provide persuasive evidence as to a minimum of $1,500 in actual loss. Petitioner effectively rebutted the I.G.'s evidence by pointing to the context and explaining why the evidence is unreliable as proof of actual loss.

Finally, we note that the I.G. has promulgated regulations which narrowly define the factors an ALJ may review in determining whether an exclusion is unreasonable in length. While one could argue that a person's untrustworthiness should be evaluated in relation to the loss the person attempted to cause rather the loss the person succeeded in causing, the I.G. has not chosen to interpret its regulation this way. On the basis of this record considered as a whole, one could infer that Petitioner attempted to defraud Medicare of much more than $1,500, but could not reasonably infer that he actually succeeded. Therefore, we cannot uphold the finding that Petitioner's acts resulted in a financial loss to Medicare of at least $1,500.

Accordingly, we conclude that the record as a whole does not contain substantial evidence to support a finding that Petitioner's acts resulted in financial loss of $1,500 or more. We therefore strike FFCL 4.a.i.

Conclusion

We affirm and adopt the uncontested FFCLs; we affirm and adopt FFCL 4.b., and we strike FFCL 4.a.i. We adopt the following Appellate FFCL:

The I.G. failed to prove by a preponderance of the evidence the existence of any aggravating fact under 42 C.F.R. § 1001.102(b)(1).

We remand this case to the ALJ to determine, on the basis of the existing record, whether the elimination of one of the aggravating factors used by the I.G. in setting the discretionary portion of the exclusion renders the 10-year length of the exclusion unreasonable, and, if so, to set an exclusion of a reasonable length.


 
JUDGE
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Judith A. Ballard

Donald F. Garrett

M. Terry Johnson
Presiding Board Member

FOOTNOTES
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1. Under the law in effect at the time of Petitioner's exclusion, the I.G. informed Petitioner that he would be excluded from Medicare, Medicaid, Maternal and Child Health Services Block Grant and Block Grants to States for Social Services programs. I.G. letter of January 10, 1997. Hereinafter, in this decision we refer to all these programs as federally funded health care programs.

2. Providers of services, such as hospitals, are required to maintain sufficient financial records, and statistical data for proper determination of costs payable under Medicare, following standardized definitions, accounting, statistics and reporting practices. See 42 C.F.R. § 413.20(a). Providers must file cost reports annually, with reporting periods based on the provider's accounting fiscal year. See 42 C.F.R. §§ 413.20(b); 413.24(f). Reimbursement rates for operating and capital costs of providing inpatient hospital services are generally determined under a prospective payment system, except for certain excluded hospitals or hospital units that are reimbursed on a reasonable cost basis. See generally 42 C.F.R. Part 412; § 413.52. Medicare reimbursement principles, set forth in 42 C.F.R. Part 413 and the HCFA Provider Reimbursement Manual, address the allowability of various cost items.

3. Section 1001.102(b)(1) addresses financial loss to a variety of federally funded health care programs. However, the dispute in this case involves whether Petitioner's actions caused financial loss to Medicare. Therefore, we discuss this issue in relation to financial loss to Medicare.

4. Of course, if Petitioner's conviction had been reversed or vacated on appeal, there would no longer be any basis for the exclusion and he would have been entitled to retroactive reinstatement in the Medicare program. See 42 C.F.R. § 1001.3005.(a)(1).

5. Effective September 2, 1998, section 1001.102(b)(1) was revised to provide that "The acts resulting in the conviction, or similar acts, resulted in financial loss to a government program or to one or more entities of $1,500 or more."

6. Two reasons why Petitioner's false statements might have had no actual impact on the amount these hospitals were reimbursed are the operation of the Medicare audit process and the operation of the cap under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA).

Under the audit process, providers' cost reports are reviewed prior to reimbursement. If an auditor questions a reported cost, payment of the associated reimbursement can be delayed and ultimately denied. From this record, we cannot tell whether reimbursement was paid on the basis of false statements in Petitioner's cost reports or whether the potential impact of the false statements on the hospitals' reimbursement rates was detected prior to calculating or using any reimbursement rate based on the cost reports.

Under TEFRA, a target amount is determined and used as a cap for subsequent claims. A provider is generally not reimbursed for costs exceeding the TEFRA cap. United States v. Calhoon, 97 F.3d at 532. Before the appellate court, Calhoon argued that the TEFRA caps for all but one of the hospitals for which he filed cost reports would have prevented reimbursement resulting from any false statements. The appellate court ruled it could not determine that the TEFRA cap barred reimbursement, but found that the existence of the cap did not "exculpate Calhoon from having made false reports." Id. While the TEFRA cap mechanism does not exculpate Petitioner from having made false statements, it does make this record unclear as to whether the false statements ever affected Charter's actual reimbursement.

7. The I.G. cited language in the indictment as support for a finding that Petitioner's acts resulted in actual loss. I.G. Supplemental Br. at 9-10. However, we reject this argument for the following reasons. First, the language cited by the I.G. in paragraph 9 is unclear. It states that the HCFA intermediary determined the "correct amount" of Medicare reimbursement based on the cost reports filed by Petitioner. This could mean that the fraudulent statements were detected and a "correct amount" determined. Second, the I.G. quotes a passage, ostensibly on page 3 of the indictment, which we are unable to locate anywhere in the indictment. And third, because actual loss was not an element of the crimes for which Petitioner was convicted, allegations in the indictment, which were contested by Petitioner and which are unsupported by other parts of the record, cannot be used, in and of themselves, to support a finding of actual loss.

8. It does not appear that Petitioner could have been associated with all of the $948,363 paid by Charter. He was one of two Senior Directors of Reimbursement and responsible for only a part of the hospitals listed in Appendix A. We do not even know what institutions were listed in Appendix B. Further, part of the amount paid concerned improprieties involving malpractice insurance, which was not an issue in Petitioner's criminal conviction. While section 1001.102(b)(1) does allow for loss caused by "similar acts," we do not know enough about the malpractice issue to conclude that it constitutes such a similar act.

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