U.S. v. AUGUSTINE MEDICAL, INC., 0:03-cr-00321-ADM-AJB (D. Minn. Feb.

10, 2004)

MEMORANDUM OPINION AND ORDER

ANN MONTGOMERY, District Judge

I. INTRODUCTION

On January 20, 2003, the parties in the above-entitled action came before the undersigned United
States District Judge for oral argument on the Defendants' Motions to Dismiss the Superseding
Indictment [Docket Nos. 125, 148]. Defendants assert their conduct during the relevant time
frame did not violate any Medicare statute, rule or regulation and therefore cannot be considered
criminal. Further, they contend the reticulated Medicare requirements create a legal scheme that
is unconstitutionally vague to support indictment for the crimes alleged in this case. For the
reasons stated below, Defendants' Motions to Dismiss are denied.

II. BACKGROUND

This prosecution arises from Defendants' indirect submission of claims to Medicare for
reimbursement for a product called Warm-Up Active Wound Therapy ("Warm-Up"). Warm-Up is
an FDA-approved wound care system, designed for local management of wounds. See
Superseding Indict. ("Indictment") 12-16 [Docket No. 56]. Warm-Up is comprised of three
main components, the Wound Cover is warmed by the heater card, which is connected to a heater
control unit. Id. 12.

A. The Defendants

The individual Defendants each have some relation to the manufacture, marketing or distribution
of the product. Augustine Medical, Inc. ("Augustine"), now known as AMI, is a Minnesota
corporation that manufactures and sells Warm-Up. Dr. Scott D. Augustine ("Dr. Augustine") is
the founder of Augustine and the inventor of Warm-Up. Paul S. Johnson ("Johnson") was
Director of Reimbursement for Augustine's Wound Care Division, and Timothy W. Hensley
("Hensley") was Vice President of this Division. Phillip C. Zarlengo ("Zarlengo") is an
independent consultant who contracted with Augustine to provide analysis and advice regarding
Medicare reimbursement. Health Finance and Marketing, Inc., doing business as Strategic
Reimbursement, is the corporate entity under which Zarlengo provided his services. James
Randall Benham ("Benham") was General Counsel for AMI.

Defendant Arizant, Inc., the parent corporation of Augustine, was formed after the time of the
alleged conspiracy.

B. The Medicare Program and Defendants' Billing Pathway

Through the Medicare program, the federal government reimburses certain health care costs of
eligible persons for specified items and services, so long as the items and services are medically
"reasonable and necessary." 42 U.S.C. 1395y(a)(1)(A). The Secretary of the Department of
Health and Human Services ("HHS") is charged with making Medicare benefit determinations.
Id. 1395ff(a). The Centers for Medicare and Medicaid Services ("CMS"), an arm of HHS,
administers the Medicare Program. Indict. 19. Medicare is divided into two parts: Part A covers
heath care providers' allowable costs for treatment of Medicare patients, while Part B establishes
voluntary supplemental insurance for covered benefits. CMS contracts with insurance agencies
called Fiscal Intermediaries ("FIs") and "Carriers" to process claims, payments and applications
for codes and coverage determinations. FIs process Part A, and certain Part B claims, and
Carriers handle most Part B submissions.

FI claims are submitted on what is referred to as "UB-92" forms, on which the health care
provider indicates a "revenue code" for the item or service furnished. Id. 21. Defendants
instructed providers to use Revenue Code 270 for Warm-Up, the code for Medical Surgical
Supplies. Id. 21. 47, 59, 73. Additionally, both FIs and Carriers use codes from the Health
Common Procedure Coding System ("HCPCS") to identify certain items and services for which
providers are seeking reimbursement. Id. 23.

Three billing issues that arise from this process are coverage, categorization and coding of an
item or service. Generally speaking, coverage determinations are expressed in National Coverage
Decisions, Local Medical Review Policies promulgated by Medicare contractors, or on a claim-
by-claim basis. Similarly, categorization may be broken down into three general groups:
dressings, Durable Medical Equipment, and medical supplies. Coding refers to selection of the
appropriate revenue and HCPCS codes. Defendants' "recommended billing pathway" instructed
categorization of Warm-Up as a medical supply, use of Revenue Code 270, and case-by-case
adjudication.

C. The Indictment

The Indictment alleges that from July 1997 to July 2001, Defendants promoted "a fraudulent
Medicare reimbursement scheme based on materially misleading communications with
healthcare providers and Medicare representatives." Indict. 1. Defendants are accused of
counseling those responsible for billing the Medicare system to apply for reimbursement in such
a way as "to conceal Warm-Up from Medicare." Id. 3. This was necessary, the government
contends, because "defendants believed that if the true nature of Warm-Up were disclosed, then
either Medicare would not pay for the new device or" would pay "at a significantly lower
payment level than the defendants desired." Id. 2. The Indictment avers that Defendants'
accomplished their objectives by making false statements to providers about the device and how
to properly code it, despite knowledge of repeated coverage denials by Medicare contractors. Id.

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 28-40, 45, 50-52, 63-64. Based on these and related allegations, the Indictment charges
Defendants with Conspiracy to Defraud the United States in violation of 18 U.S.C. 2, 371
(Count One), with Healthcare Fraud in violation of 18 U.S.C. 2, 1347 (Count Two), and with
three counts of Mail Fraud, in violation of 18 U.S.C. 2, 1341 (Counts Three, Four and Five).
Count Six is a Forfeiture count seeking the proceeds traceable to violations of the substantive
counts of the Indictment.

III. DISCUSSION

Rule 12(b) of the Federal Rules of Criminal Procedure provides that "[a] party may raise by
pretrial motion any defense, objection, or request that the court can determine without a trial of
the general issue." Fed.R.Crim.Pro. 12(b)(2). In reviewing a 12(b) motion to dismiss the
indictment, the Court does not entertain an evidentiary inquiry, but rather accepts the allegations
of the Indictment as true. United States v. Ferro, 252 F.3d 964, 968 (8th Cir. 2001) (internal
citation omitted). An indictment sufficiently states a crime if it contains each element of the
offense charged and fairly apprises the defendants of the charges against which they must defend
See United States v. Morris, 18 F.3d 562, 568 (8th Cir. 1994) (quoting Hamling v. United States,
418 U.S. 87, 117 (1974)). Generally, an indictment is considered sufficient "unless no reasonable
construction can be said to charge the offense." United States v. Peterson, 867 F.2d 1110, 1114
(8th Cir. 1989).

Defendants argue the Indictment fails to state a crime because the government has not articulated
any Medicare rule or regulation that proscribed Defendants' billing practices or compelled any
other action by Defendants. The prosecution counters that the Indictment sufficiently alleges
Defendants knowingly made material false statements in violation of federal statutes prohibiting
fraud.

The crux of Defendants' argument is that because no national or local non-coverage policy
existed for Warm-Up during the relevant time, and reimbursement claims were adjudicated on a
case-by-case basis, the government cannot assert the product was not covered by Medicare. If
Warm-Up was potentially covered and the government can point to no Medicare violations in
Defendants' coding and categorization choices, Defendants contend, there has been no breach of
an explicit rule and hence, no crime has been committed. Defendants cite the doctrine of legal
impossibility, asserting that taking all allegations of the Indictment as true, even assuming
Defendants carried out the specified actions, such conduct did not constitute a violation of any
law.

Acknowledging the complexity and fluctuating nature of Medicare regulations, Defendants'

focus on the specifics of the regulatory scheme obscures the present inquiry. The issue at this
juncture is merely whether or not the Indictment states a crime. Here, the Indictment charges

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Defendants with three distinct offenses and avers with sufficient particularity the means by
which they allegedly violated these provisions of the United States Criminal Code. The
Indictment asserts manipulation of the system by making material omissions and false statements
regarding the Warm-Up product and its characteristics and use, so as to permit providers to
obtain reimbursement where they would otherwise not have been reimbursed or in an amount
significantly greater than they would otherwise have received. E.g. Indict. 52-55, 68, 73, 79.
While the government has retreated from some of its original assertions, such as the impropriety
of using Revenue Code 270 without HCPCS codes or a product description, the Indictment
continues to sufficiently set forth the crimes of conspiracy to defraud the United States,
healthcare fraud and mail fraud.

Citing other Medicare-related cases, Defendants contend that if the government cannot show
Defendants' coding and categorization methods were technically inaccurate under Medicare, the
case must fail. Though the opinions relied on by Defendants have some similarities to the case at
bar, each decision is distinguishable. United States v. Porter, 591 F.2d 1048 (5th Cir. 1979),
involved a service routinely covered by Medicare where defendants caused the government no
pecuniary loss and made no false statements. Id. at 1051, 1055. The case centered on the
meaning of "kickback or bribe" under the charged Medicare provision. Id. at 1052-54. In United
States v. Bobo, 344 F.3d 1076 (11 th Cir. 2003), the indictment contained no allegations of how
defendant's conduct, directed at a third-party, operated to defraud, harm, or even adversely affect
the government. Id. at 1084-85. Here, the Indictment avers that if Defendants had not lied about
the product, they would not have received the amount of Medicare reimbursements they in fact
received Finally,United States ex rel. Scott v. McKenna, No. SA CV 99-117 DOC (C. D. Cal.
May 23, 2001), is a civil false claims case that involved the claiming of distinct surgical
procedures under the appropriate billing codes to recover reimbursement for a type of surgery
not expressly covered by Medicare. The defendant surgeon's summary judgment motion was
granted because under such facts the relator could not prove a false claim defendant knew to be
false. Id. at 4, 11 (Luger Aff. Ex. B). The opinion contains no indications of allegations of
misleading statements or concealment in the face of coverage denials, as does the present
Indictment. See Indict. 25, 28, 40, 45, 46, 54, 55.

Referencing government pronouncements and opinions regarding the coding system and Warm-
Up specifically, Defendants maintain the ambiguity and imprecision in the applicable rules and
definitions requires dismissal of the Indictment. An open avenue for abuse, however, does not
render a defendant's actions necessarily legal. Even the stupidity of leaving one's keys in the
ignition with the motor running does not excuse a car thief from criminal liability. The
Indictment does not allege innocent mistaken billing, but rather an intentional, orchestrated
scheme to counsel providers to categorize and code Warm-Up in such a way as to circumvent
and evade Medicare review and evaluation of the device. Because there is no "automatic"

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coverage under Medicare law, this Court cannot say, as Defendants urge, that they are
conclusively absolved in the absence of a local or national non-coverage decision. See 42 U.S.C.
1395y(a)(1)(A) ("Notwithstanding any other provision of this subchapter, no payment may be
made . . . for any expenses incurred for items or services . . . not reasonable and necessary for the
diagnosis or treatment of illness or injury. . . .");but cf. McKenna, supra (no policy does not mean
non-coverage policy). As the parties agree, most coverage decisions are made on a claim-by-
claim basis. It is for the jury to determine whether Defendants knew the product was not covered
during the period they instructed others how to bill it to Medicare, and whether they made false
statements to effect such billing with the intent to profit financially. This is the conduct alleged in
the Indictment and which is made criminal by fraud statutes. See Indict. 1, 2, 83; 18 U.S.C.
371, 1347.

Reports and recommendations of the government's own agencies highlight the invitation for
abuse created by the coding pathway used by Defendants, which allowed supplies to be billed
without identifying descriptions, and therefore caused FIs "to pay medical supply claims without
knowing specifically what they are being asked to pay for." 1995 GAO Report at 5 (Luger Aff.
Ex. K).

Defendants' cogent and well-researched arguments may prove to provide a valid defense before a
jury, but at this stage "[t]he government is entitled to marshal and present evidence at trial and,
and to have its sufficiency tested by a motion for acquittal pursuant to Federal Rule of Criminal
Procedure 29." Ferro, 252 F.3d at 968.

Defendants also seek dismissal under the void-for-vagueness doctrine, arguing that the Medicare
Act and its regulations are impermissibly vague and ambiguous. The doctrine, embodied in the
Fifth Amendment's due process clause, requires that "laws provide fair notice of what is
prohibited, as well as standards of enforcement." D.C. v. City of St. Louis. Mo., 795 F.2d 652,
653 (8th Cir. 1986). A statute violates due process if people of average intelligence "must
necessarily guess at its meaning and differ as to its application. . . ." Connally v. General Const.
Co., 269 U.S. 385, 391 (1926).

Defendants' emphasis on the intricacies of the Medicare Act and its regulations does not thwart
the Indictment because the government does not argue that Defendants violated a specific
Medicare provision. Similarly, the government does not claim that there was a single, correct
way for Defendants' to bill their product. Instead, the government alleges that Defendants
intentionally manipulated the Medicare system which allowed providers to obtain payments for
Warm-Up. In its most basic terms, the Indictment claims that Defendants conspired to commit
fraud and in fact defrauded the government under circumstances where they knew that their
actions were illegal. See Indict. 1-84.

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Dismissal under the void-for-vagueness doctrine is not warranted in this case. While Medicare
regulations are admittedly complex, the statutes Defendants are charged with violating state
relatively straightforward descriptions of fraud and conspiracy to commit fraud, and thus provide
Defendants with sufficient notice as required by the Fifth Amendment. See 18 U.S.C. 371,
1341, 1347. These statutes do not specify the myriad of fraud schemes one might devise.
However, a statute "can be unambiguous without addressing every interpretive theory offered by
a party," so long as "the statute encompasses the conduct at issue." Salinas v. United States, 522
U.S. 52, 60 (1997). Further, the requirement that a statute provide notice of proscribed behavior
"cannot be used as a shield by one who is already bent on serious wrongdoing." United States v.
Cueto, 151 F.3d 620, 631 (7th Cir. 1998) (citations omitted). Therefore, Defendants' Motion to
Dismiss on vagueness grounds is denied.

IV. CONCLUSION

Based on the foregoing, and all the files, records and proceedings herein, IT IS HEREBY
ORDERED that Defendants' Motions to Dismiss the Superseding Indictment [Docket Nos. 125,
148] are DENIED.

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