Renal Care Group, Inc., (“Renal Care”) a dialysis provider, created a wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory scheme that would permit it to increase its profits. The United States intervened in a qui tam suit alleging False Claims Act violations against Renal Care and the subsidiary. The district court granted summary judgment to the United States with an award of $82 million. The Sixth Circuit reversed summary judgment and granted judgment for the Defendants instead. United States ex rel. Williams v. Renal Care Group, Inc. Case No. 11-5779, Oct. 5, 2012 (PDF).
Medicare allows for two types of dialysis-related reimbursements. Method I is reimbursement by Medicare to reimburse dialysis facilities for the cost of home dialysis equipment. Method II is applied to companies that provided equipment and supplies (but not services) directly to home dialysis patients. Eventually, Method II reimbursements became more lucrative than Method I reimbursements.
To take advantage of the two reimbursement types, Renal Care Group, Inc. created a wholly-owned subsidiary to supply the Method II services only. The corporate structures involved the same individuals and the subsidiary’s moneys were swept into the parent every night. Renal Care had sought legal advice and the attorney had sought clarification from a federal official with the Health Care Financing Administration on the legality of establishing such a relationship, and Renal Care followed the resulting recommendations.
Despite these efforts at keeping the subsidiary distinct, the district court granted summary judgment to the United States, concluding that the subsidiary was a mere alter ego of the parent. On appeal, the Sixth Circuit noted that the basis for concluding that the two entities were alter egos relied heavily on the fact that the subsidiary was created solely to take advantage of the Method II reimbursements. The Sixth Circuit rejected such an approach, stating that “[w]hy a business ought to be punished solely for seeking to maximize profits escapes us.” The Court noted that because Renal Care followed the advice of counsel in navigating the unclear regulations and observed the corporate formalities, there was no genuine issue of material fact as to whether Renal Care acted knowingly or with reckless disregard of the falsity of its Medicare reimbursements.