The opinion of the court was delivered by: Michael M. Mihm United States District Judge
On April 23, 2008, Plaintiff filed a Complaint [#1] against the Defendants and on May 13, 2008, Defendants filed a Motion to Dismiss [#10]. On September 24, 2008, Magistrate Judge Byron G. Cudmore filed a well-reasoned Report and Recommendation, recommending that Defendant's Motion be granted in part and denied in part. Both parties submitted objections to the Magistrate's Report and, thereafter, responses to the opposing party's objections. The Court conducted a telephone conference with the attorneys on December 3, 2008 to discuss the current Motion and corresponding Report and Recommendation. This Order follows.
The Magistrate did an admirable job of setting forth the relevant facts, allegations, and standard of review in his Report. This Court will provide a brief summary of the relevant facts and allegations. For the purpose of this Order, the facts and allegations are taken as true.
Plaintiff, OSF Healthcare System ("OSF"), and Defendant, Peoria Day Surgery Center ("Peoria Day"), both provide outpatient ambulatory surgery. In 1992, OSF and Caterpillar Inc., the largest payer for healthcare services in the Peoria area, entered into a five-year exclusive agreement, which provided that OSF would be the "exclusive, fully-reimbursed provider of hospital services, including outpatient ambulatory surgery, for Caterpillar Members in the Peoria area." (Compl. ¶ 12). Caterpillar members using other facilities were responsible for a co-pay of 30% of the allowed costs (increased to 50% in 2006). In return for the expected high volume of patients, OSF deeply discounted its charges to Caterpillar. (Compl. ¶ 13). The co-pay gave Caterpillar members a substantial financial incentive to choose OSF's facilities for their surgeries, thus ensuring sufficiently high patient volume to make the discounts financially feasible. (Compl. ¶ 14). The exclusivity agreement was renewed in 1997 and 2001, with minor modifications.
The 1992 agreement had two "carve-outs," one of which provided full reimbursement to Peoria Urological Associates, the predecessor to Peoria Day, for urological services, but not for other services performed on Caterpillar members. Caterpillar told Dr. Banno and Peoria Day that it would pay only 70% of costs for nonurological procedures (but 100% of urological procedures), that the co-pay could not be waived, and that Peoria Day "was obligated to bill and attempt to collect" the co-pay. (Compl. ¶ 24). Dr. Banno and Peoria Day knew that Caterpillar members were highly unlikely to use the facilities at Peoria Day if they were obligated to pay a 30 percent (later 50 percent) co-insurance payment, often amounting to several thousand dollars, when they could have the same surgery performed by the same physician at OSF with no co-pay. (Compl. ¶ 25). In 2004, Caterpillar removed the urological procedure "carve-out" and those procedures were then covered at the 70% level, requiring a 30% co-payment. (Compl. ¶ 32).
The Complaint alleges that Peoria Day, through its surgeons and Dr. Banno, as President of Peoria Day, engaged in a fraudulent scheme by performing non-urological procedures (and, after 2004, urological procedures) on Caterpillar member patients, waiving the co-insurance payment fees, and correspondingly inflating the charges they sent to Caterpillar. (Compl. ¶ 33). OSF alleges that this scheme attracted more Caterpillar member patients than Peoria Day otherwise would have been able to attract and that this scheme denied OSF the benefit of their exclusivity agreement with Caterpillar. (Compl. ¶¶ 34, 36).
OSF pursues three RICO counts in its Complaint. Count I alleges that Dr. Banno, through his association with Peoria Day, an "enterprise", participated in a pattern of racketeering activity (mail and wire fraud) based on fraudulent billing, violating 18 U.S.C. § 1962(c). Count II, also under 18 U.S.C. § 1962(c), alleges that Dr. Banno and Peoria Day, while associated with "ASC Enterprise"*fn1, engaged in a pattern of racketeering activity (based on the same mail and wire fraud). Count III alleges Peoria Day received income from a pattern of racketeering activity and invested it in the operation of ASC Enterprise, violating 18 U.S.C. § 1962(a). OSF also pursues a state law claim under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1.
The Defendants moved to dismiss the Complaint. They first argue that all four counts fail to allege fraud with particularity as required under Fed. R. Civ. P. 9(b). Second, Defendants argue that OSF's RICO claims fail to adequately allege that Defendants' supposedly fraudulent conduct proximately caused OSF's alleged injuries. Third, Defendants argue that OSF fails to adequately allege the existence of an association-in-fact enterprise under Count II. Fourth, Defendants argue OSF fails to adequately allege a distinct injury caused by allegedly improper investment of funds under Count III. Lastly, Defendants argue that the Court should decline to exercise supplemental jurisdiction over the state law claim.
In his Report, the Magistrate stated that OSF had alleged sufficient detail of the fraudulent billing scheme with regard to the waived co-pays. However, the Magistrate found that OSF failed to allege how the wrong name and taxpayer identification furthered the fraudulent scheme and therefore, to the extent the RICO fraud claim is based on bills with the wrong name and taxpayer identification number, then the claim should be dismissed without prejudice to replead. The Report found that OSF sufficiently pled proximate cause because OSF was a foreseeable victim of and suffered a direct injury from Defendants' scheme to avoid the co-pay and that calculating damages is not too speculative. The Magistrate found that that OSF failed to adequately allege the existence of an association-in-fact enterprise under Count II and that OSF failed to adequately allege a distinct injury caused by improper investment of funds under Count III and recommended that these Counts be dismissed without prejudice to replead. The Magistrate recommended that the Court retain supplemental jurisdiction over the state claim.
While the parties filed objections to the Magistrate's Report, neither party objected to the Magistrate's recommendation that Count III of the Complaint be dismissed. Therefore, the Court DISMISSES COUNT III WITHOUT PREJUDICE TO REPLEADING, if OSF believes, in good faith, that they can do so. This Court will now discuss the remaining issues: (1) whether OSF adequately alleged fraud with particularity; (2) whether OSF adequately alleged how the fraudulent conduct proximately caused OSF injuries; (3) whether OSF adequately alleged the existence of an association-in-fact enterprise under Count II; and (4) whether the Court should decline to exercise supplemental jurisdiction over the state law claim.
A complaint should not be dismissed unless it appears from the pleadings that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41 (1957); Gould v. Artisoft, Inc., 1 F.3d 544, 548 (7th Cir. 1993). Rather, a complaint should be construed broadly and liberally in conformity with the mandate in Federal Rules of Civil Procedure 8(f).
For purposes of a motion to dismiss, the complaint is construed in the light most favorable to the plaintiff, its well-pleaded factual allegations are taken as true, and all reasonably-drawn inferences are drawn in favor of the plaintiff. See Albright v. Oliver, 510 U.S. 266, 268 (1994); Hishon v. King & Spalding, 467 U.S. 69 (1984); Lanigan v. Village of East Hazel Crest, 110 F.3d 467 (7th Cir. 1997); M.C.M. Partners, Inc. v. ...