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Alliance Healthcare Services, Inc v. Argonaut Private Equity

June 12, 2012

ALLIANCE HEALTHCARE SERVICES, INC., PETITIONER,
v.
ARGONAUT PRIVATE EQUITY, LLC AND MEDICAL OUTSOURCING SERVICES, INC., RESPONDENTS.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge:

MEMORANDUM OPINION AND ORDER

A panel of arbitrators issued an award in favor of Alliance Healthcare Services, Inc. related to its purchase of all membership interests in Medical Outsourcing Services, LLC (MOS) from Argonaut Private Equity, LLC and Medical Outsourcing Services, Inc. (MOS Inc.). Alliance has petitioned to confirm the arbitration award against Argonaut, and Argonaut has petitioned to vacate the award. The Court has jurisdiction based on diversity of citizenship. For the reasons stated below, the Court grants Alliance's motion to confirm in part and denies it in part and denies Argonaut's motion to vacate.

Background

Alliance provides diagnostic medical imaging services. In 2008, it purchased all of the membership interests in MOS, a company that provided mobile medical imaging. Argonaut owned seventy-five percent of MOS. MOS Inc. owned the remaining twenty-five percent. The parties to the sale executed a Membership Interest Purchase Agreement (Agreement), to memorialize the terms of the sale. The parties calculated the price of the sale as 4.5 times MOS's earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2007.

The Agreement contained a binding arbitration provision. It also provided that the sellers agreed to indemnify Alliance for, among other things, any breach of the representations and warranties the sellers made in the Agreement, provided that Alliance gave timely notice of the need for indemnification. The Agreement created an escrow account in the amount of $2,500,000 to cover future indemnification claims. The sellers were not required to indemnify Alliance for anything until the total amount owed by the sellers exceeded $200,000, and the Agreement placed a cap of $5,000,000 on the total indemnification liability the sellers could face.

After purchasing MOS, Alliance learned of billing practices that MOST had engaged in that Alliance considered illegal. As part of its imaging business, MOS used a radioactive pharmaceutical, fluorodeoxyglucose (FDG). MOS purchased the FDG from IBA Molecular North America, Inc. IBA charged MOS $475 per dose but provided substantial quantity discounts if MOS met certain monthly purchase targets. In 2007, MOS met those quantity targets every month and thus paid a price per dose of $165 in January and $160 every other month. IBA regularly sent MOS two different documents that reflected the purchase price. IBA first sent an invoice showing the full price of $475 and then sent a credit memo showing the true cost of $160 or $165. Despite the multiple documents, MOS did not pay the full price and get reimbursement later. Rather, it paid only the reduced price as reflected in the credit memo.

Many of MOS's medical scans were paid for by Medicare. Through a billing intermediary, MOS submitted the higher-amount IBA invoices to Medicare, but it never submitted the later credit memos to Medicare. Medicare reimbursement practices vary by state. In Illinois and Indiana, Medicare paid MOS $380 per dose of FDG, eighty percent of the invoice price of $475. Because MOS paid $160 or $165 for each dose, it received reimbursement more than $200 greater than what it paid for each dose.

In June 2009, after discussing its concerns about the billing practices with the sellers, Alliance chose to disclose MOS's billing practices to the United States Attorney for the Northern District of Illinois. Argonaut and MOS Inc. did not participate in the disclosure because they did not believe that MOS's billing practices were illegal. To date, the government has not taken any action to recoup any overpayments made to MOS. Nor have the entities that administer Medicare reimbursement in Illinois or Indiana sought to recover money from MOS or advised that they believe MOS overcharged them.

In June 2010, Alliance commenced arbitration asserting that MOS's Medicare invoicing practices violated several of the sellers' warranties contained in the Agreement. Among the warranties allegedly violated by MOS's practices were that it complied with all laws, it correctly billed the government and all third-party payors, it had no undisclosed claims or potential claims against it, it had no undisclosed liabilities, and the financial statements accurately reflected its financial position. Alliance also claimed that the sellers' concealment and false representations regarding MOS's billing practices constituted fraud. Finally, it requested a declaration that Argonaut and MOS Inc. would be liable for any future damages and expense resulting from government attempts to recover money as a result of MOS's billing practices.*fn1 Argonaut asserted a counterclaim to recover the money that the Agreement required to be placed in escrow for indemnification purposes.

On December 27, 2011, a majority of the three-arbitrator panel issued an award in favor of Alliance. The panel found that, in 2007, MOS was reimbursed more than $200 extra for each dose of FDG than it had paid. The panel found that this extra money resulted in large amounts of extra income reported in MOS's financial statements. Furthermore, the panel found that MOS withheld the IBA credit memos and reported to Medicare that it paid $475 per dose, even though its agreement with IBA never obligated it to pay that much.

The panel majority acknowledged the seller's argument that MOS billing practices were lawful. It noted that "Alliance has not identified any statute, ordinance, rule, regulation, order, judgment, or decree that declares [the billing] practice unlawful." Pet. Ex. A at 7. The panel majority stated, however, that even if no specific statute or rule addressed MOS's billing practice specifically, the practice had to be illegal. The panel majority stated:

Despite the absence of a specific statute, rule, etc. directed at [MOS's] billing practice, we cannot accept the claimed lawfulness of a practice that sought and obtained reimbursement for a product based on invoices stating an inflated price nearly triple the actual price, particularly when [MOS] kept secret the actual facts and never disclosed the true price to Medicare. No amount of ambiguity in the health care statutory and regulatory structure, or confusion among the Medicare agencies in their administration of the reimbursement program, could legitimize such a patently unfair and dishonest siphoning of money from the public fisc.

Id. The panel similarly discounted the fact that the government had not sought to recover any money from MOS, reasoning that the government has limited resources and cannot pursue every enforcement action.

The panel found that Argonaut and MOS Inc. had breached the representations and warranties they made in the Agreement by their failure to disclose all aspects of MOS's billing practices. The panel also found, however, that Alliance's fraud claim failed because Alliance had not presented clear and convincing evidence to establish either scienter or reliance. The panel declined to grant Alliance a declaration that the sellers would be liable for damages related to future attempts by the government to recapture overpayments. The panel determined that such a declaration was unnecessary ...


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