Kuzma v. N. Ariz. Healthcare Corp

This was a case regarding a motion for summary judgment against the plaintiff, Gregory Kuzma, alleging violations of the False Claims Act (FCA) by the defendants, Northern Arizona Healthcare Corp. et al. (NAHC). NAHC acquired the Summit Surgery and Recovery Care Center (the Summit Center). Kuzma was VP and CFO of NAHC from 2004 to 2014. While still employed at NAHC, Kuzma performed a “high-level” business valuation of the Summit Center, concluding a fair market value of $8 million to $10 million. On December 31, 2014, the defendants purchased the Summit Center’s assets for $25.12 million. 

Kuzma sued the defendants, alleging violations of the FCA by overpaying for the Summit Center “to reward them for past business and to induce future business in violation of the federal Anti-Kickback Statute (‘AKS’).” After discovery, the defendants moved for summary judgment.

Defendants’ motion for summary judgment.

The defendants advanced three arguments: 

1. The acquisition price was at fair market value;
2. Kuzma had no evidence of scienter; and
3. Kuzma cannot show a causal link between the alleged kickback and the submission of false claims.

Fair market value.

Outside counsel hired experienced valuation advisors, Somerset CPAs (Somerset), to provide a fair market value valuation of the Summit Center and engaged the Coker group to review Somerset’s work. Somerset provided a report in September 2014 that arrived at a value of between $22.72 million to $25.12 million. The defendants relied heavily on Somerset’s worth; discovery had not shown they were unqualified or incompetent. Since there was no other valuation in the record, the defendants argued they thus paid fair market value for the Summit Center.

The defendants emphasized that Kuzma’s value took only a few hours, was a “ballpark” valuation, and did not follow valuation standards. The defendants also argued that Timothy Smith, Kuzma’s valuation expert, did not conduct a fair market value valuation that would undermine Somerset’s. Smith offered “corrections” to Somerset’s valuation, but, in the defendants’ opinion, they were not factual or mathematical “errors” but differences in professional judgment. Smith did not offer a competing fair market value conclusion that met professional standards. The defendants also argued that the multiple EBITDA Somerset used of 5.89 was not “necessarily” overstated.

Kuzma argued the record provided ample evidence that the purchase price was commercially unreasonable, also pointing out that the Somerset valuation was only a draft and was never finalized. Kuzma also argued they need not prove the fair market value but only that the purchase price exceeded it. “Relator argues, a jury could find that Defendants paid more than fair market value based on evidence that the valuation was inflated.” Among other things, Kuzma argued that Smith pointed out many flaws in Somerset’s valuation. Many of these issues were pointed out in the court’s opinion. They related primarily to issues that would negatively impact the projected cash flows for the future.

Kuzma “argues that Defendants’ arguments about his valuation and the correctness of his expert’s opinions go to the weight of the evidence and are more appropriately made to a jury.” The parties agreed that the standard outlined in Obert-Hong applied in this case, i.e., “[t]o comply with the AKS, the hospital must simply pay fair market value for the practice’s assets.” A court may “infer that any excess over fair value is intended to induce referrals.”

Fair market value in the context of the AKS must exclude any revenues from future referrals in determining fair value in a case such as this.

Kuzma’s evidence created a genuine issue of fact on whether the defendants paid fair market value for the Summit Center. The defendants’ assertions that neither Kuzma nor Smith offered a fair market value opinion that complies with the standards did not persuade the court that summary judgment was warranted. There was no authority requiring Kuzma to offer such an opinion for a summary judgment. Further, the Somerset Valuation was never issued in final form. Stephan Diagostino of Somerset testified in a deposition “that a final version of the Somerset Valuation was never prepared because one was never requested from Somerset. And materials distributed for September 11, 2014, Board of Directors meeting appear to acknowledge that the Somerset Valuation was not final.”

The defendant offered evidence of overpayment through his “high level” valuation of the Summit Center, which was significantly lower than the Somerset Valuation. “Relator’s evidence creates a triable issue regarding the fair market value of the Summit Center. Summary judgment is not appropriate on this issue.”

Scienter.

The defendants argued Kuzma could not establish that they committed a knowing and willful violation of AKS and, further, that the AKS required actual payment for referrals and not just the hope of referrals. The testimony of Dick Kruse, NAHC board member, spoke only to the desire or anticipation of referrals and not payment for increased referrals. “Defendants assert that discovery has not borne out Relator’s allegations that decisionmakers considered and rejected his high-level valuation or that another NAHC employee thought the company overpaid for the Summit Center.” The defendants argued that the fact that they hired independent third-party experts showed their intent to follow the law.

Kuzma argued he must show that the defendants knowingly and willingly offered or paid for referrals but not that they violated the AKS. Also, he argued he is not required to show that obtaining referrals was not the sole purpose of the purchase. Kuzma also pointed to the Kruse deposition wherein he said that the defendants discussed “capturing referrals” and getting more loyalty from referrers. Kuzma also referred to a PowerPoint presentation wherein referral references were stricken out. Kuzma also asserted that the defendants knew of errors in the Somerset Valuation but did nothing about it, including having it up to date when more current information indicated a downturn. The parties agreed at oral argument that “proof of deliberate ignorance could satisfy the knowing requirement of the AKS.”

Evidence from Kuzma showed that the defendants knew that Kuzma had arrived at a much lower value; that the Somerset Valuation was only a draft and was not updated for newer known information; knew the valuation was not reviewed internally or by a qualified source; viewed securing referrals as a pivotal point of the acquisition; discussed referrals in connection with the transaction; struck references to referrals from their PowerPoint presentation; knew the price was on the high side; and, for three years post-transaction, took impairment charges on the Summit Center.

Assuming that Kuzma must show that the defendants acted intending to violate the law, Kuzma has produced sufficient evidence to meet that test. The draft PowerPoint presentation supported Kuzma’s claim when considering the references to referrals stricken from the presentation. The defendants contended that they did not prepare the presentation. Kruse testified that such presentations are usually prepared internally. 

“Viewing the evidence in the light most favorable to Relator and drawing all reasonable inferences in his favor, a reasonable jury could find that Defendants knowingly and willfully overpaid for the Summit Center to secure referrals in violation of the AKS.”

Causation.

The defendants argued that Kuzma’s theory that every claim the defendants submitted to a government payer was false. They argued that nothing in the discovery indicated that the purchase of the Summit Center influenced physician-owners to make any referrals. The defendants argued that there was no evidence that physician-owner habits of referrals changed as a result of the purchase. Also, no specific claims have been shown to be violations of the AKS. They also argued they could not be liable for claims not filed by one or more of the defendants (facility claims).

Kuzma argued that he must show “only that there was a kickback followed by the physician-owners performing surgeries at Defendant’s new surgery center, even if the surgeries would have been performed absent the kickback.” Kuzma also argued that the noncompete with the physicians prevented them from performing surgeries elsewhere. “Relator argues that he must show only that the provider claims ‘actually sat in the causal chain,’” not that they were submitted with delegated authority. The AKS imposed a causation requirement on FCA claims premised on AKS violations. There was apparently no 9th Circuit guidance on this issue.

The court looked to the 3rd Circuit in the Greenfield case as the authority on this issue, deciding that some link was required, but it was less than the “but-for” standard the defendants asserted. In cases where the doctor who actually received the kickback then used the defendant’s services, courts have found a sufficient causal link.

In viewing the evidence in the most favorable light to Kuzma, a jury could find a causal link. A jury could find that the inflated purchase price was a substantial factor or that the decision to perform surgeries at the defendants’ facilities was a reasonably foreseeable and natural consequence of the excessive purchase price. “Relator’s evidence permits a reasonable inference that the overpayment for the Summit Center was linked to the subsequent claims for federal reimbursement. Ultimately, causation is a fact issue that must be resolved by a jury.”

The court was not convinced of any violations of patients admitted from the emergency room. The court granted summary judgment on any surgeries physician-owners performed on emergency room patients.

“IT IS ORDERED that Defendants’ motion for summary judgment is granted as to claims submitted for emergency room surgeries and denied in all other respects.”