SUBJECT: Thomas M. Horras and Christine Richards,

Petitioner,

Inspector General

FINAL DECISION ON REVIEW OF
ADMINISTRATIVE LAW JUDGE DECISION

Respondents Thomas M. Horras (Horras) and Christine Richards (Richards) here appeal the April 29, 2005, decision of Administrative Law Judge (ALJ) Richard J. Smith. Thomas M. Horras and Christine Richards, DAB CR1300 (2005) (ALJ Decision). The ALJ affirmed a determination by the Inspector General (I.G.) imposing on Horras a seven-year exclusion from participation in federal health care programs, civil money penalties (CMPs) of $38,000 and an assessment of $673,212 under the Civil Monetary Penalties Law (CMPL). The ALJ reduced the remedies imposed by the I.G. on Richards to a one-year exclusion, a CMP of $2,500, and an assessment of $2,146.

We conclude that, contrary to the Respondents' contentions, no prejudicial legal error occurred and that the ALJ's factual findings are supported by substantial evidence. We also reject the I.G.'s argument that the exclusion, CMP, and assessment imposed on Richards by the ALJ should be increased. We therefore [Page 2] affirm the ALJ Decision, for the reasons more fully explained below.

Factual Background

Horras founded Hawkeye Health Services, Inc. (Hawkeye or Hawkeye/Auxi), a home health agency, in 1986, and served as its sole owner, president and chief operating officer until May 8, 1999. ALJ Decision at 26. ⁽¹⁾ Hawkeye grew from an office in Horras' private residence, to eventually encompass a main office in Knoxville (the "home office") and multiple branch offices in various parts of Iowa. Id. The home office generally provided administration and management services to the branches which directly served patients. Some of Hawkeye's patients received services paid for by Medicare or Medicaid during the years at issue. Costs incurred in operating the home office were reported annually to Medicare and Medicaid, and were allocated to the various branch offices as part of the calculation of interim and final rates for various services provided to patients.

Richards was hired by Hawkeye in 1991 and was promoted that year to Comptroller, reporting to Kim Yap (Yap) who served as Director of Finance. ALJ Decision at 27. In June 1993, Richards took over Yap's position as Director of Finance, reporting to Horras. Id. In 1995, Richard Clock (Clock) became Director (and later Vice-President) of Operations and took over supervision of Richards for daily operations of policies and procedures, while Horras continued to supervise her role in financial issues and cost reporting. Id.

On March 9, 1999, Hawkeye was sold to Auxi. As part of the merger/sale agreement, Auxi continued to employ Horras as President of Hawkeye, which was then a wholly-owned subsidiary of Auxi, until he was terminated on August 5, 1999. ALJ Decision at 28.

The present dispute began when the I.G., by letter dated May 20, 2002, alleged that Horras knowingly presented claims for payment under Medicare and Medicaid which he knew or should have known were either not provided as claimed or were false or fraudulent. The allegations focused on the inclusion of numerous personal [Page 3] expenses, charitable donations, and costs not related to patient care in the annual cost reports on which Hawkeye's reimbursement rates were based. The I.G. proposed to exclude Horras for seven years and to impose on Horras a CMP in the amount of $38,000 and an assessment of $784,072. ALJ Decision at 1-2. By a different letter of the same date, the I.G. proposed to exclude Richards for five years and to impose on her a CMP in the amount of $20,000 and an assessment of $100,000, based on similar allegations about a subset of the same claims. Richards and Horras filed hearing requests on July 19 and 23, 2002, respectively. Their cases were consolidated for hearing below, and the ALJ Decision in the consolidated matter was issued on April 29, 2005. Both Richards and Horras appealed that ALJ Decision to the Board pursuant to 42 C.F.R. § 1005.21.

Legal background

Medicare provides coverage for "home health services" provided by a "home health agency" (HHA) as described in section 1861(m) of the Social Security Act (Act). ⁽²⁾ (The term "home health agency" is defined in section 1861(o) of the Act.) Throughout the time in question, home health agencies providing services to Medicare beneficiaries were reimbursed for the reasonable cost of services provided, defined as those "costs actually incurred, excluding therefrom any part of the incurred cost found to be unnecessary in the efficient delivery of needed health services . . . ." Section 1861(v)(1)(A) of the Act. Implementing regulations consistently required that the costs be "necessary and proper," meaning those costs that "are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities" and that "are usually costs that are common and accepted occurrences in the field of the provider's activity." 42 C.F.R. § 413.9(b)(2). The application of this principle to the varying costs of individual providers is described in the regulation as follows:

The determination of reasonable cost of services must be based on costs related to the care of Medicare beneficiaries. Reasonable cost includes all necessary [Page 4] and proper expenses incurred in furnishing services, such as administrative costs, maintenance costs, and premium payments for employee health and pension plans. It includes both direct and indirect costs and normal standby costs. However, if the provider's operating costs include amounts not related to patient care, specifically not reimbursable under the program, or flowing from the provision of luxury items or services (that is, those items or services substantially in excess of or more expensive than those generally considered necessary for the provision of needed health services), such amounts will not be allowable.

42 C.F.R. § 413.9(c)(3).

Throughout the period at issue, the Provider Reimbursement Manual (PRM, issued as Health Care Financing Agency Publication 15-1) contained agency guidance about these provisions. Two basic principles which the ALJ derived from sections 2100, 2102.2, and 2102.3 of the PRM are that reasonable costs are limited to those that a prudent and cost conscious buyer would incur and that reimbursable costs must be related to the care of patients who are beneficiaries. ALJ Decision at 45.

It is not disputed that these principles were applicable to the cost reporting at issue. Much of the dispute turns instead on how these principles should be applied to specific costs and whether Horras and Richards had knowledge of how they would be applied. On this question, the parties dispute whether the relevant law was altered by an amendment of section 1861(v) of the Act. That amendment added a new subsection 8 entitled "items unrelated to patient care," which provides that reasonable costs do not include certain enumerated items, including entertainment, gifts or donations, and the personal use of motor vehicles. See Balanced Budget Act of 1997 (BBA 1997), § 4320, Pub. L. No. 105-33 (1997). Section 2102.3 of the PRM was revised by a June 1998 transmittal in response to the BBA 1997 amendments, the substance of which we discuss in our analysis. ⁽³⁾

[Page 5] The CMPL enacted sections 1128A(a)(1)(A) and (B) of the Act. The CMPL, as in effect from 1987 to 1997, provided in pertinent part, that any person that "knowingly presents or causes to be presented" a claim which --

(A) is for a medical or other item or service that the person knows or should know was not provided as claimed . . . , [or]
(B) is for a medical or other item or service and the person knows or should know the claim is false or fraudulent,

* * * *

shall be subject . . . to a civil money penalty of no more than $2,000 for each item or service wrongly claimed . . . .

In addition, each such person was responsible for an assessment of up to twice the amount claimed.

For claims filed after January 1, 1997, the CMPL provides that such persons are subject to penalties of $10,000 for each item or service and assessments of not more than three times the amount claimed. Section 1128A(a)(1) of the Act provides that a person liable under the Act may also be excluded from participating in federal health care programs, including Medicare and Medicaid. Section 1128A(l), added in 1988, provides that a principal is liable for penalties, assessments, and an exclusion for the actions of the principal's agent acting within the scope of the agency. The applicable federal regulations governing CMPL cases are at 42 C.F.R. Part 1003.

Standard of review

The regulations provide that the standard of review on appeal from an ALJ decision under the CMPL on a disputed issue of fact is "whether the initial decision is supported by substantial evidence on the whole record" and on a disputed issue of law is "whether the initial decision is erroneous." 42 C.F.R. § 1003.21(h). The regulations further provide that the Board will not disturb an otherwise appropriate ruling, order or act by the ALJ for harmless error, i.e., where the substantial rights of the parties are not affected. 42 C.F.R. § 1005.23.

[Page 6] Issues

The following issues were raised by Respondents on appeal of the ALJ Decision:

A. Issues relating to the proper parties to the case:

1. Did the ALJ err in concluding that Hawkeye/Auxi was not a necessary party?

2. Did the ALJ err in his resolution of the effect of the I.G.'s settlement with Hawkeye/Auxi on the I.G.'s cases against the Respondents?

3. Did the ALJ err in determining that Richards was properly subject to the CMPL and that her responsibility was not foreclosed by the doctrine of respondeat superior?

B. Issues relating to the nature of the claims at issue:

1. Did the ALJ err in concluding that his jurisdiction over the Respondents' appeals from the I.G. actions was not precluded by the authority of the Provider Reimbursement Review Board (PRRB) over the allowability of costs?

2. Did the ALJ err in determining that the individual cost items in the home office cost reports constituted the "claims" for purposes of the CMPL rather than the branch office cost reports to which the home office costs were ultimately allocated?

3. Did the ALJ err in concluding that claims could be false or fraudulent even though the nature of the costs was disclosed on the face of the cost reports?

4. Did the ALJ err in failing to require a showing of materiality or actual payment by the government in reliance on false claims as an element of liability under the CMPL?

C. Issues relating to the applicable legal standards:

1. Did the ALJ err in determining that the BBA 1997 was properly applied retroactively here?

[Page 7] 2. Did the ALJ use an erroneous standard to evaluate whether the Respondents knew or should have known that the claims involved were false or fraudulent or not provided as claimed?

D. Issues relating to allegations of procedural error:

1. Did the ALJ commit prejudicial error in admitting exhibits at the hearing over Respondents' objections?

2. Did the ALJ issue the ALJ Decision after the time period set out in the regulations, and, if so, what is the remedy available to Respondents?

E. Issues relating to the factual findings:

1. Were the findings of fact challenged by Horras supported by substantial evidence?

2. Were the findings of fact challenged by Richards supported by substantial evidence?

In addition, the I.G. contends in his response brief that the ALJ erred by reducing the length of the exclusion and the amounts of the CMP and assessment imposed on Richards from those originally sought by the I.G. Richards moved to have us strike those contentions from the I.G. brief on the ground that the I.G. failed to appeal the ALJ Decision and should not therefore be permitted to challenge the ALJ's findings and conclusions. These contentions thus require us to address the following additional issues:

F. Issues relating to the I.G.'s contentions:

1. Should we strike the I.G.'s arguments that the ALJ erred in setting Richards' penalties from the record?

2. Did the ALJ err in reducing the penalties imposed on Richards below those which the I.G. originally sought?

Based on the regulation governing this appeal, certain issues are not in dispute before us. The regulations require parties appealing an ALJ decision to the Board to specify their exceptions to the ALJ decision and to provide reasons supporting those exceptions. 42 C.F.R. § 1005.21(c). Horras and Richards each identify the specific findings and conclusions of the ALJ Decision to which they except. We list those exceptions here. All parts of the ALJ Decision not identified by a party as the [Page 8] subject of an exception are summarily affirmed as to that party, unless otherwise modified herein.

Horras objects to the following parts of the ALJ Decision:

• Section IV, Part A, �� 1, 20, 37, and 43 (ALJ Decision at 8, 11, 14-15);
• Section IV, Part B, �� 6-45 (ALJ Decision at 18-22);
• Section VI, Parts A, B, C and D (ALJ Decision at 34-89); and
• Section VII (ALJ Decision at 111).
  

Richards objects to the following parts of the ALJ Decision:

• Section IV, Part A, �� 1, 6, 35, 41, 46, 48, 49 (ALJ Decision at 8-9, 14-16);
• Section IV, Part C, �� 2, 3, 7-9, 11-27 (ALJ Decision at 22-25;
• Section V, Parts C and D (ALJ Decision at 29-33);
• Section VI, Parts A, B, E, F, and G (ALJ Decision at 34-45, 89-110).
  

We make the following observations and conclusions about certain of the exceptions noted by Horras and Richards:

• Paragraph 1 of Section IV, Part A, of the ALJ Decision reaffirms all of the ALJ's rulings. While this paragraph is listed in their objections to the ALJ Decision, neither Horras nor Richards specifically identifies the rulings to which they take exception. In his brief, however, Horras objects to the failure to add Hawkeye/Auxi as a necessary party and to certain evidentiary rulings; in her brief, Richards objects that she was not a person properly subject to the CMPL. We address these contentions below.



• Any rulings to which a party failed to raise specific objections are summarily affirmed as to that party.



• Richards objected to the ALJ's findings at Section IV, Part A, �� 46 and 49, but limited her objection to the assertion that dates therein were wrong. Since the dates involved are not material to the outcome of her appeal, we do not address these disputes.



• Several of the findings to which Horras or Richards objects contain quotations of regulatory language that do not precisely track that language (e.g., paragraph 43 [Page 9] of Section IV, Part A). We rely on the relevant language in the regulations, not on the quotes in the ALJ's findings, for the applicable legal standards. We note that neither party identified any misquotation and their objections appear instead to go to the application or interpretation of the regulations.

This case is complex and contentious with a voluminous record and lengthy briefing. Although some specific points made by the parties may not be discussed in detail in this decision, all of the arguments in the parties' appeal briefs were considered in reaching the conclusions set forth below. To the extent that any contention is not explicitly addressed, the ALJ Decision adequately covered the issue. The Board's role is not to reweigh the evidence and reevaluate the testimony but rather to ascertain whether the ALJ committed any of the asserted legal errors to the prejudice of a party and whether the factual findings are supported by substantial evidence in the record as a whole. We therefore limit our discussion below to the facts and legal authorities relevant to our narrow task without otherwise repeating material already in the ALJ Decision.

A. The ALJ correctly determined that the proper parties were before him.

Horras argues that this case should never have gone forward without including the corporate entity (Hawkeye or its successor Auxi) as a necessary party. Further, both Horras and Richards argue that, apart from whether Auxi was a necessary party to the dispute ab initio, the situation changed with respect to them when the I.G. reached a settlement with Auxi such that some or all of their liability should be considered to have been discharged. Richards argues in addition that she was never a proper party in that the CMPL was intended to run only against providers or the principals of providers, and that she was neither. We explain below why we reject each of these contentions.

1. Hawkeye/Auxi was not a necessary party to the case.

Horras argues that common law principles that require all necessary parties to be joined in litigation imply that the case against Horras and Richards should have been dismissed in the absence of Hawkeye/Auxi. Horras Br. at 4. According to Horras, the ALJ's rejection of Horras' motion to dismiss (based on the [Page 10] need to join Hawkeye/Auxi) led directly to the ALJ's further error in not treating the settlement with Hawkeye/Auxi as resolving any claims against Horras. Horras argues that Hawkeye/Auxi is a necessary party because Hawkeye/Auxi was the principal on behalf of which Horras acted in presenting the claims at issue.

The starting point for analysis here is, as the ALJ correctly noted, not the civil law of negligence or agency to which Horras refers, but the applicable federal statute. ALJ Decision at 35. The applicable federal statute provides that "[a]ny person" ⁽⁴⁾ who commits any of the acts enumerated in section 1128A(a) "shall be subject" to a civil money penalty. The Act further provides that a "principal is liable for penalties, assessments and an exclusion under this section for the actions of the principal's agent acting within the scope of the agency." Section 1128A(l) of the Act; see also 42 C.F.R. § 1003.102(d)(5). The regulations provide that whenever "more than one person was responsible for presenting or causing to be presented a claim . . . each such person may be held liable" for a penalty and that an assessment "may be imposed against any one such person or jointly and severally against two or more such persons" so long as the aggregate assessments collected do not exceed what could be collected if one person were solely responsible. 42 C.F.R. § 1003.102(d)(1).

Horras does not deny that he was a "person" under the terms of the statute and regulation; he also admitted that he could be held liable along with the corporation if he violated the Act based on his actions as Hawkeye's principal. Horras Br. at 6; 42 C.F.R. § 1003.102(d)(1). He also concedes that the I.G. had the authority to hold Hawkeye/Auxi and Horras jointly and severally liable. Horras argues, nevertheless, that the reference to "several" liability in the regulation did not suffice to permit the I.G. to sever the charges against Horras from the case against Hawkeye/Auxi. Therefore, Horras reasons, the settlement with Hawkeye/Auxi should be treated as a bar to the present action against Horras, in order to prevent the I.G. from recovering "twice for the same injury." Horras Br. at 6.

Horras offers no authority to support his position, and we find none. On the contrary, the meaning of "several" liability is precisely that the liability of Horras could be pursued [Page 11] separately from any determination of Hawkeye/Auxi's liability. "Several liability" is defined as being separate and distinct such that an action may be brought "against one defendant without joining the other liable parties." Black's Law Dictionary (7^th Ed.) at 926.

The CMPL and the implementing regulations thus broadly empower the I.G. to determine how to bring charges against multiple persons who are responsible for presenting claims and whether to proceed against each separately or to join one or more in one action. Horras essentially seeks to impose a requirement that the I.G. could not proceed to settlement of its claims against Hawkeye/Auxi without bringing charges at the same time jointly against all other persons that the I.G. considered responsible.

Nothing in the CMPL or its implementing regulations puts the I.G. to this narrow choice. The regulations provide that, where more than one person is liable, the I.G. may proceed against "each such person," which implies that any particular proceeding may not necessarily include every such person. 42 C.F.R. § 1003.102(d)(1).

We address next what effect the I.G.'s settlement with Hawkeye/Auxi has on the liability of Horras for assessments, but we find no basis for Horras' contention that the ALJ erred in ruling that Hawkeye/Auxi was not a necessary party in these proceedings.

2. The ALJ did not err in resolving the effect of the Auxi settlement on Horras and Richards.

a. The Auxi settlement did not compel dismissal of the charges against Horras or Richards.

Horras argues that the I.G. should have been "prohibited from imposing any further" CMPs or assessments against Horras once the I.G. accepted a settlement discharging Hawkeye/Auxi from further responsibility arising from the same actions for which Horras was being held responsible. Horras Br. at 5. Horras contends that this result arises from the basis on which the CMPL imposes liability on corporations such as Hawkeye/Auxi, which Horras equates to the common law theory of "vicarious liability under the doctrine of respondeat superior." Horras Br. at 7. Under that theory, according to Horras, so long as a principal/agent relationship existed between Horras and Hawkeye/Auxi (as it undoubtedly did), the I.G. release of Hawkeye/Auxi necessarily extinguished all claims against Horras as well. Horras Br. at 7-13. Richards similarly contends that agency tort law [Page 12] applies to extinguish any claim against her as employee with the release of Hawkeye/Auxi as her principal upon settlement with the I.G. Richards Br. at 1-17.

The various state court cases to which Horras and Richards refer for the concept that recovery against a principal perforce releases all liability of the agent are inapplicable on their terms. First, of course, the applicable law here is federal and preempts state law. To the extent these decisions are founded in the unfairness of permitting a duplicate recovery or preventing the agent from having recourse against the principal, federal law directly addresses the issue of duplicate assessments by providing that the "aggregate amount of the assessments collected may not exceed the amount that could be assessed if only one such person was responsible." 42 C.F.R. § 1003.102(d)(1). We find no error in the ALJ's interpretation that the practical effect of this regulation is to reduce the maximum exposure of the Respondents for assessments by the amount recovered from Hawkeye/Auxi. ⁽⁵⁾ ALJ Decision at 38. Had the I.G. intended to impose a rule instead that the aggregate recovery of assessments from respondents is capped at the amount of settlement reached with any one of the respondents, the language would not have referred to continuing liability up to the aggregate amount that "could" be assessed.

Horras also suggests that the fact that the I.G. has express authority to settle or compromise under the Act somehow compels the conclusion that any settlement with one respondent represents a complete settlement of all assessments and penalties against all respondents implicated in the underlying acts. The only authority that Horras cites for this proposition is a Nebraska state case which holds that "where the liability of a master or principal for a tort committed by his servant or agent is predicated solely upon the doctrine of respondeat superior, a valid release of either of the parties in such relationship operated to release the other [because] . . . the damages recoverable for tort are entire and not severable." Ericksen v. Pearson, 319 N.W.2d 476 (Neb. 1982)(emphasis added). This language, quoted by Horras, highlights the irrelevance of the authority. The liability of Hawkeye/Auxi was not predicated on the doctrine of respondeat superior for a tort, much less predicated solely upon that doctrine. Instead, liability was [Page 13] predicated on the fact that a corporate entity participating in federal health care programs is bound by statutory and contractual obligations and therefore can reasonably be held liable if its agents violate federal law in the course of their duties. Cf. Horras Br. at 9.

Thus, the second important point about all the cited state cases is that, even if we were to consider them useful as guidance for the vicarious liability of a principal, they refer only to the private recovery of damages, not to the imposition of civil liability for administrative violations. The obligations breached were public and regulatory in nature, not private tort claims.

The main focus of an assessment is indeed to make the government whole from the injury done by the respondents' fraud against the public fisc. ALJ Decision at 37 and citations therein. In this area, it is true, as the ALJ recognized, that a complete recovery of all assessments that would be permissible against a single wrongdoer would preclude further assessment of other wrongdoers. The error of Respondents' misreading of the law becomes clear, however, in light of the very different focuses of the penalty and exclusion provisions on remediation and prevention of misconduct by principals/providers and agents/employees. An employer may hire another malfeasor to carry out further fraud while an agent willing to commit fraud may find another opportunity. The penalty and assessment seek to correct past misconduct and to provide incentives and deterrence against recurring misconduct by either actor, while the exclusion seeks to protect the government (and the beneficiaries on whose behalf the government operates these health care programs) from further harm until the particular actor has demonstrated trustworthiness. What may deter a specific individual or entity under particular conditions may have no impact on another. A penalty adequate to deter an individual agent might have no impact on a large employer, for example. A penalty effective in constraining a corporate entity may be useless in regard to a malefactor who no longer works for that company. Hence, it would make little sense to impose a penalty on a corporate entity and to assume that that remedy would necessarily affect the conduct of one of its present or former agents. Similarly, excluding an entity from participation in the federal programs would offer no protection from future misbehavior by the individual actors if they could freely move to another entity. In sum, culpability, trustworthiness or the lack thereof, and the magnitude of any appropriate remedy all require individualized evaluation.

[Page 14] We therefore disagree with Richards' claim that an individualized determination of liability with relation to Hawkeye/Auxi is "bizarre." Cf. Richards Br. at 15. While it is true that corporations act through human agents and are responsible for those actions done by their agents, it does not follow that identical measures would be appropriate as sanctions against a corporation and against each of its agents. Nor do the actions of the agents alone define the culpability and trustworthiness of a corporation, since a corporation may, for example, take steps to end the misconduct by new policies and/or to replace its agents and thereby demonstrate a change in its corporate behavior.

b. The ALJ adequately reflected the monetary recovery from the Auxi settlement in reducing the assessment amounts proportionately.

Although both parties mainly argue that the settlement with Hawkeye/Auxi should have eliminated any liability on their part, they also complain that the ALJ did not adequately explain how he arrived at his reduction of their respective assessments based on partial credit to each of them of the amount of the Hawkeye/Auxi settlement. See Horras Br. at 15-16; Richards Br. at 8-9, 15, n.1.

The ALJ noted that the effect of the Hawkeye/Auxi settlement under the relevant regulations was to limit the I.G.'s potential recovery for the assessments against Horras and Richards to no more than the amount that could be recovered had only one person been responsible. ALJ Decision at 37, citing 42 C.F.R. § 1003.102(d)(1). The amount of the settlement was $125,000 compared to a total assessment sought of $884,072 against Horras and Richards. The ALJ sustained assessments of $673,212 against Horras and $2,146 against Richards, for a total of $675,358. ALJ Decision at 111. Neither party argues that the total assessments imposed by the ALJ, combined with the settlement with Hawkeye/Auxi, exceeded the potential assessment for which liability could be imposed under the double and treble assessment provisions of the CMPL.

Instead, both Horras and Richards argue that the ALJ should have allocated the "benefit" of the Hawkeye/Auxi settlement in a way more beneficial to each of them. While each complains that the ALJ's methodology and calculations were not clear, neither offers an alternative approach that is more compelling. Horras Br. at 15-16; Richards Br. at 9, 15, n.1. Richards in particular cannot reasonably complain of the details of the calculations assigning a portion of the Hawkeye/Auxi settlement to reduce her [Page 15] assessment, given the ALJ's overall reduction of the assessment against her from $100,000 to just $2,146.

We decline to revisit the ALJ's division of the Hawkeye/Auxi settlement in assigning the respective assessment amounts, given that the total assessment amount was not alleged to have exceeded the regulatory ceiling.

3. Richards is a proper subject of the CMPL.

Richards does not deny that she is a "person" for purposes of the CMPL, which explicitly applies to both entities and individuals (except beneficiaries). Richards Br. at 3; section 1125A(a) of the Act. ⁽⁶⁾ She contends, however, that the intention of the CMPL was to reach only providers and their "principals," rather than "lower level employees who may have compiled the reports." Richards Br. at 4. While Richards cites cases in which principals have indeed been held responsible for claims which their agents prepared and submitted on their behalf, she cites no case in which an employee who met the provisions of the CMPL for knowingly presenting or causing to be presented claims which that person knew or should have known to be false was exonerated because that person was not a principal or provider. The ALJ rejected Richards' contention and concluded that an action lies against "any person" who caused presentation of a false claim. ALJ Decision at 90.

Richards argues that the ALJ misread two cases which he cited in this regard. Richards Br. at 6. We conclude that in fact it is Richards who misunderstands the import of the cases. In the Cabrera-Diaz case, a physician and his secretary were both held liable for violation of the False Claims Act for presenting false claims to Medicare for anesthesia services. United States v. Cabrera-Diaz, 106 F. Supp. 2d 234 (D.P.R. 2000). The court found that the secretary who "was responsible for preparing, computing, calculating and submitting" the claims, was jointly and severally liable for the fraud, along with the physician. Id. at 242. (The court also held that the employee's knowledge of the submission of the false claims would be imputed to the employer even absent actual knowledge because self-imposed ignorance of the subordinate's actions was not a shield. Id. at 239.) This case supports the proposition that Richards is not protected from [Page 16] the consequences of her own actions with respect to the cost reports by the concurrent responsibility of her principal/employer for the false claims. Richards suggests that this conclusion should not apply to her because the secretary in Cabrera-Diaz had defaulted by failing to appear in court, whereas Richards has appeared. Richards Br. at 6. While both the physician and the secretary indeed failed to appear, the court's analysis of the allocation of legal responsibility between them did not depend on this procedural default. The ALJ correctly concluded that this case provides authority which, by analogy, supports liability on the part of Richards as well as her employer.

The ALJ cited the Petrus case for the proposition that the I.G. may seek penalties under the CMPL against both an entity that presented a false claim and "any person who caused the presentation of that claim." ALJ Decision at 90, citing Edward J. Petrus, Jr., M.D., and The Eye Care Center of Austin, DAB No. 1264 (1991). Richards argues that the person charged in that case was a physician who owned the entity, so that the case is consistent with her position that the CMPL is aimed only at providers and "principals of providers." Richards Br. at 6. While Petrus involved an entity and its owner/physician, nothing in the decision suggests that the only person who could be liable under the CMPL was an owner or physician.

Throughout these proceedings, both Horras and Richards have attempted to distort the legal provisions that impose responsibility on the corporate principal in order to shirk responsibility for their own actions. The most striking example of this approach is the position taken by Richards that respondeat superior operates here to transfer all liability from her to her employer. We find this argument to be without merit for the following reasons.

Richards argues that Hawkeye/Auxi's liability is based on the same conduct as that alleged against Horras and Richards, that Hawkeye/Auxi had the authority to settle those claims and did so, and that the claims against Richards arose from her actions as an employee of Hawkeye. Richards Br. at 15. From these premises, Richards reasons that Hawkeye/Auxi "is liable for her conduct." Id. The question before us is not whether Hawkeye/Auxi bore responsibility for the claims at issue with regard to Richards, whether based on its direct responsibilities as a provider or based on its vicarious liability under the provision of section 1128A(a)(l) of the Act; [Page 17] Hawkeye/Auxi essentially resolved that issue as far as its liability to the federal government by settling with the I.G. It does not follow, however, that because Hawkeye/Auxi is liable for Richards' conduct that Richards is not liable for her own actions.

The Fourth Circuit addressed a similar attempt by a county bus driver to convert the doctrine of respondeat superior into a shield for the misbehaving agent rather than a tool to reach the principal (the county) as well. The Court held that - -

this doctrine imputes the negligence of the servant to the master and makes the latter liable for the torts of the former. Dhanraj v. Potomac Elec. Power Co., 305 Md. 623, 506 A.2d 224, 226 (1986). But that liability is joint and several; the servant is not relieved. See Chilcote v. Von Der Ahe Van Lines, 300 Md. 106, 476 A.2d 204, 208 (1984). Moreover, the doctrine is one of vicarious liability, not vicarious immunity, so any immunity the County may enjoy does not, absent the operation of some other principle of law, protect Carter.

Pavelka v. Carter, 996 F.2d 645 (4^th Cir. 1993). The ALJ recognized this general principle that respondeat superior serves to "impute fault up the employment hierarchy," allowing parties injured by an agent acting in the scope of employment to seek redress from the principal even where that principal had no direct knowledge or involvement in the wrong-doing, but not to absolve the direct actor of fault. See ALJ Decision at 37, citing Jackson Marine Corp. v. Blue Fox, 845 F.2d 1307, 1310 (5^th Cir. 1988).

The Board previously considered this argument in the context of the Clinical Laboratory Improvement Amendments of 1988, 42 U.S.C. § 263a et seq. A laboratory director argued that he should not be held responsible under the provision that debarred owners or operators of laboratories who committed certain violations from future participation for a period of time. The Board rejected his claim that respondeat superior principles required that only the laboratory and its owner could be debarred, and not an employee-operator, stating the following:

Respondeat superior is a common law doctrine "whereby a master is liable for his servant's torts committed in the course and scope of his employment." Burger Chef Systems, Inc. v. Govro, 407 F.2d 921, 925 (8th Cir. 1969), citing Restatement of Agency, § 219. However, it is not a doctrine intended to protect employees.

[Page 18] Sentinel Medical Laboratories, Inc., DAB No. 1762, at 13 (2001), aff'd, Teitelbaum v. Health Care Financing Admin., No. 01-70236 (9^th Cir. Mar. 15, 2002) (emphasis added).

Richards argues that Sentinel does not apply to her because she reads Sentinel to hold merely that Congress may change common law principles of respondeat superior. She contends that Congress chose not to do so in the case of the CMPL even if it did do so in the case of the law at issue in Sentinel. Richards. Br. at 16. It is true that the Board did hold in Sentinel that "congressional enactments can take precedence over principles of common law, including the principle of respondeat superior." Sentinel at 14, citing Price v. Westmoreland, 727 F.2d 494 (5th Cir. 1984) and United States v. A & P Trucking Co., 358 U.S. 121, at 124 (1958). Richards simply ignores, however, the additional holding in Sentinel that the principle of respondeat superior, even where applicable, does not act to protect an employee for consequences of his or her own actions. That holding is relevant here, even though a different statutory provision is at issue.

Thus, even were the doctrine of respondeat superior applicable directly here (rather than having been overtaken by the specific provision in the CMPL at section 1128A(a)(l) of the Act on the liability of principals), Richards would remain responsible for the consequences of her own actions.

B. The ALJ did not err in determining that the question of whether claims for costs included in Hawkeye's home office cost reports were false or fraudulent was properly before him.

1. The availability of Provider Reimbursement Review Board review of disputes about provider cost adjustments does not displace the jurisdiction of the ALJ and the Board over appeals under the CMPL.

During the time period involved here, home health agencies were paid for their services based on rates derived from their reasonable costs. Medicare cost reports passed through a review process with the fiscal intermediary during which a tentative assessment of cost allowability was made and then a more prolonged finalization process occurred which might include a desk or field audit. The fiscal intermediary then determined which costs were allowable for purposes of calculating reimbursement rates based on reasonable cost and made final cost adjustments removing unallowable costs. ALJ Decision at 43; 42 C.F.R. § 405.1803. The final cost adjustments were ultimately [Page 19] subject to appeal to the Provider Reimbursement Review Board (PRRB). 42 C.F.R. § 405.1801 et seq. The PRRB was established by section 1878 of the Act to permit a provider of services that is dissatisfied with the final determination by the fiscal intermediary on its cost report or that has not received a timely final determination, to seek a hearing within 180 days of the receipt or due date of the final determination, with certain restrictions.

Horras asserts that Hawkeye's home office cost reports for 1996 and 1997 never resulted in a timely final determination from the fiscal intermediary. Horras Br. at 17. Therefore, he reasons that the PRRB never had an opportunity to review those cost reports to determine the allowability of the costs therein. Horras then argues that the "PRRB has sole and exclusive jurisdiction to determine what costs are allowable and what costs are not" and that the I.G. "may not bypass the PRRB." Id. at 17-18.

The I.G. responds first that the Board should not consider this issue at all since Horras failed to raise it before the ALJ and did not allege any reason for the failure. I.G. Br. at 64-65, citing 42 C.F.R. § 1005.21(e). Next, the I.G. argues that the present case is not an appeal by a provider of a determination of costs but rather an appeal of an I.G. action under the CMPL, governed by different statutory and regulatory provisions discussed earlier. I.G. Br. at 66.

Horras has not pointed to any place in the briefing below where he raised his current argument, nor has he proffered any explanation for why he would not have been able to do so. Nevertheless, since the argument challenges the jurisdiction of the Board over these proceedings, we briefly address its merits here.

We agree with the I.G. that the ALJ, and this Board, have jurisdiction over appeals under the CMPL , even if they raise issues regarding cost reports, for the following reasons.

Horras' novel suggestion that the PRRB jurisdiction over provider cost determination somehow preempts the Board's jurisdiction over appeals under the CMPL is set out without citation to any authority. The evident reasoning, although not articulated in Horras' brief, seems to be that the fraud alleged here involved repeatedly including allegedly unallowable costs in cost reports and that allowability cannot be conclusively determined absent PRRB review. This reasoning reflects a misunderstanding about the scope of PRRB review and the relation between very different [Page 20] administrative appeals processes. Jurisdiction over allegations of fraud or misconduct in presenting of claims in cost reports is not necessarily the same as jurisdiction over review of disputes about the allowability of costs in those reports.

The core of the CMPL case is not a determination of whether individual cost items were properly adjusted as unallowable by the intermediary. Rather, the central question before the ALJ (and now before us) turns on whether Horras and Richards included costs in the three cost reports presented to the intermediary as a basis for determining Hawkeye's reimbursements which they knew or should have known to be not properly reimbursable by Medicare.

The procedures governing appeals of such questions are those under 42 C.F.R. Part 1005, as set out above, providing for review by an ALJ and appeal to the Board. 42 C.F.R. § 1003.109(b).

The fiscal intermediary issued its final determination on the 1995 Hawkeye home office cost report, while the final determinations on the 1996 and 1997 cost reports were not issued because the intermediary decided to refer the matter to the I.G. for possible fraud investigation. Within 180 days of its receipt of the fiscal intermediary determination as to 1995 cost report and within 180 days of the due date of such determinations on the two later reports, Hawkeye, as provider, could have sought PRRB review if it met the statutory and regulatory requirements to do so. There is no evidence in the record that Hawkeye ever did so. That process would have permitted Hawkeye to challenge the correctness of individual cost adjustments made by the intermediary. Neither Horras nor Richards is a "provider of services," as that term is used in the Act, and neither could have sought PRRB review separately from Hawkeye/Auxi. 42 C.F.R. § 405.1835(a)(hearing rights vest in the provider "but no other individual, entity or party"). The I.G. is not bypassing a PRRB process; Hawkeye/Auxi chose not to pursue PRRB review of its cost reports. Nothing in the Act or regulations empowers the PRRB to make general pronouncements about what costs are allowable or not in the absence of any provider appeal.

We conclude that jurisdiction to hear this appeal properly lies with the Board.

2. The ALJ did not err in finding that the cost items at issue constituted "claims" under the CMPL.

Horras presents several lines of argument directed at undercutting the ALJ's findings that cost items included in Hawkeye's home office cost reports constituted false claims subject to the CMPL. None of these arguments has merit or [Page 21] requires extensive discussion beyond what the ALJ presented in support of his findings. Horras first suggests that the ALJ erred by considering the home office cost items at issue to constitute claims. Instead, according to Horras, the only "claims" actually presented for payment were the individual branch office cost reports which contained the allocated shares of the home office costs. Horras Br. at 18-19. On that theory, Horras says we should reduce the number of claims at issue from 178 to 34 for the three-year period, since there were 34 branch office reports submitted in that period.

The statute expressly addresses the question of how to define a claim for an item or service in the context of cost reporting, defining claim as "any entry in the cost report, books of account or other documents supporting such claim." Section 1125A(i)(3)(B) of the Act (emphasis added). ⁽⁷⁾ The cost entries here were entered in the home office cost reports and then the totals were allocated by various cost allocation methods to the branch office cost reports. Ultimately, the branch office costs form the bases of calculation to determine the payment rates to be reimbursed for various services. Thus, an individual cost entry by the home office obviously has an indirect, but very concrete, impact on the calculations of how much money Hawkeye/Auxi receives from the Federal Government. It is reasonable, therefore, for the statute to treat the original entry which generated the figures that ultimately affect federal payments as the "claim" at issue.

3. The mere fact that the costs claimed were evident on the face of the home office cost report does not suffice to prove that they were not falsely or fraudulently claimed.

Horras also argues that the entries cannot be false or fraudulent claims because they accurately reflect true costs incurred by Hawkeye. Horras Br. at 19. The I.G. does not allege that the money was not spent as recorded but alleges that the expenditures were not reimbursable by Medicare or Medicaid. Including the items in the cost reports without explicitly identifying them as [Page 22] unallowable constituted an implicit assertion that they were properly reimbursable. It is that assertion which is alleged to have been false; the allegations are based on the premise that Horras and Richards knew or should have known that the assertion of allowability was false or fraudulent.

Horras also makes the related argument that the claims could not have been false or fraudulent because their inclusion in the cost reports was not surreptitious or concealed. Horras Br. at 23. The I.G. responds that Hawkeye/Auxi did not follow the process required to delete or identify as "protested" costs which a provider knows to be unallowable. I.G. Br. at 75.

Providers are not permitted to include unallowable costs in their costs reports without so identifying them (and must submit such costs identified as protested in order to preserve their ability to appeal the allowability issue). See PRM § 2150.3; see also Adams House Health Care v. Bowen, 862 F.2d 1371 (9th Cir. 1988); Community Hosp. of Roanoke Valley v. Dept. of Health and Human Services, 770 F.2d 1257, 1263 (4^th Cir. 1985); Tr. at 810-13, 1129, 2415, 2433 (Munk-Gilbert, I.G. expert witness). In a criminal false claims case based on items in cost reports, one court has explained why it is not enough to simply include a cost in the report without also disclosing to the intermediary that the provider knows the nature of the cost to be presumptively nonreimbursable (based on the laws, PRM manual or past adjustments).

While it is true that a provider may submit claims for costs it knows to be presumptively nonreimbursable, it must do so openly and honestly, describing them accurately while challenging the presumption and seeking reimbursement. Nothing less is required if the Medicare reimbursement system is not to be turned into a cat and mouse game in which clever providers could, with impunity, practice fraud on the government. As Wheeler, the government's expert witness testified, if a provider disagrees with the intermediary, with the intermediary's past decisions, with the instructions or guidelines in the Provider Reimbursement Manual, or with the regulations, the provider must file the cost report "under protest."

United States v. Calhoon, 97 F.3d 518, 529 (11^th Cir. 1996). Horras and Richards do not deny that they were aware of this procedure.

[Page 23] Thus, the ALJ did not err in concluding that Horras could still be liable for presenting false or fraudulent claims even though the cost items were evident on the face of the cost reports.

4. Horras' argument that the CMPL requires a showing of materiality or actual payment resulting from false claims does not avail him here since each claim did result in some impact on payments to Hawkeye/Auxi.

Horras also argues that the ALJ erred in not requiring the I.G. to make a showing of materiality by proving that each claim resulted in causing the government to pay out funds. Horras Br. at 19-20. This argument rests on the undisputed fact that the actual rates paid by Medicare and Medicaid to the branch offices based on their cost reports were subject to cost caps which were exceeded on 20 of 34 branch office reports over the relevant three years. See I.G. Ex. 9D. Based on his erroneous focus on branch office cost reports as the relevant claims, Horras then argues that 20 of the 34 claims could not have been materially false, since including the challenged costs therein did not change the reimbursement sought. Horras Br. at 20-21. At times, Horras' argument appears to go beyond asserting some materiality requirement to extrapolating from some case law under the False Claims Act, 31 U.S.C. § 3729, the proposition that actual payment is a necessary element of a CMPL case. Horras Br. at 20, citing Costner v. URS Consultants, Inc., 153 F.3d 667 (8^th Cir. 1998) and Rabushka ex rel. U.S. v. Crane Co., 122 F.3d 559 (8^th Cir. 1997). The I.G. argues that the CMPL requires no showing of either materiality or actual payment. I.G. Br. at 77-79. The I.G. relies on Chapman v. United States, 821 F.2d 523 (10^th Cir. 1987).

Courts have differed on whether federal civil and criminal false claims provisions require a showing of materiality and, if so, whether to assess materiality by the tendency of the false statement or claim to elicit a payment or by the criteria of whether in retrospect the government would have made a different payment than it did, had the claim been accurate. See discussion of conflicting views in United States ex. rel. A+ Homeshares Inc. v. Medshares Mgt. Group, Inc., 400 F.3d 428, 441-46 (6^th Cir. 2005). The Chapman case, although it arises under the CMPL, does not directly address whether that statute has an implicit materiality requirement. Chapman does, however, make clear that the Congress chose not to require any showing of actual damages to support imposition of an assessment and penalties under the CMPL, holding that -

[Page 24] It is not unusual for statutes to provide for a heavy civil penalty, as an alternative to criminal punishment, to discourage objectionable activity and to insure adequate compensation. One court has noted, in reference to the CMPL, "Just as punitive damages in tort law or treble damages in anti-trust law encompass a civil remedy in excess of the tangible damages sustained by the plaintiff, here the government has made a determination that activities in violation of the [CMPL] result in damages in excess of the actual amount disbursed by the government to the fraudulent claimant." Mayers v. U.S. Dept. of Health & Human Services, 806 F.2d 995, 999 (11th Cir.1986). Thus, we find entirely reasonable the Secretary's opinion that by providing for an assessment in lieu of damages, Congress intended to obviate the need for the government to tie assessments to proven actual damages.

Chapman, 821 F.2d at 528.

In the present case, the legal question of whether any showing of material or actual payment by the government in reliance on the cost reports is required is moot because the ALJ found that the government incurred substantial costs in the investigation and prosecution of this matter in addition to any increased reimbursement payments resulting from including the unallowable cost items. ALJ Decision at 88. The I.G.'s expert witness, Ms. Munk-Gilbert, testified that the amount of government reimbursement paid out as to each of the unallowable home office costs was indeed less than the total amount claimed for those costs as a result of the operation of these cost caps. See Tr. at 852-53; I.G. Ex. 9D. Since at least some of the branch offices did not exceed the caps, however, all of the unallowable home office costs would have had some impact on the amount of payments made based on those cost reports unless the unallowable costs were removed. ⁽⁸⁾ Horras' argument fails for that reason as a matter of fact. Even if we accepted that a showing of [Page 25] materiality or actual payment was required (which we do not), we would find that such a showing had been made since the branch office caps would not prevent the unallowable cost items from affecting actual payments.

C. The ALJ made no prejudicial error in determining the appropriate legal standards.

1. The question of whether BBA 1997 should be applied retroactively is not material to the outcome here.

As mentioned above, BBA 1997 added a provision on costs unrelated to patient care that included specific references to some of the categories of costs involved in this case, specifically section 4320 of BBA 1997, which became effective January 1, 1998. Since some of the costs at issue were claimed prior to this effective date, the parties dispute what effect BBA 1997 had on the pre-1998 claims.

The amendment added the following language:

Reasonable costs do not include costs for the following --

(i) entertainment, including tickets to sporting and other entertainment events;
(ii) gifts or donations;
(iii) personal use of motor vehicles;
(iv) costs for fines and penalties . . . ; and
(v) education expenses for spouses or other dependents of providers of services, their employees or contractors.

Section 1861(v)(8) of the Act. Costs in the first three categories were involved in claims that are at issue and were presented before 1998.

The ALJ concluded that the BBA 1997 amendment merely codified pre-existing Medicare reimbursement policy on reasonable costs. ALJ Decision at 41. The ALJ went on, however, to also state that the BBA 1997 could properly be applied retroactively here because Congress did not expressly say otherwise and because doing so would not "invalidate any vested rights or interfere with any settled expectations that guided Respondents' conduct." Id. ⁽⁹⁾

[Page 26] We agree with the ALJ that BBA 1997 merely codified existing applicable policy in this regard. On that basis, we find it unnecessary to apply BBA 1997 retroactively in evaluating the propriety of the costs claimed. We therefore decline to adopt the ALJ's conclusion on retroactivity. CMS's interpretation of the pre-existing limits on reasonable costs to preclude payment for costs of entertainment, donations, and personal use of vehicles was a longstanding policy and was a reasonable reading of the statute and regulations, as in effect prior to the BBA 1997 amendment. Respondents had ample notice long prior to BBA 1997 that costs such as those enumerated were not considered reasonable for purposes of Medicare reimbursement policy.

We highlight here some of the sources on which we base our conclusions that the longstanding legal standards of the Medicare program disallowed the kinds of costs at issue and that the Respondents had actual notice of these standards. Additional support for these conclusions may be found in the ALJ Decision and the record before the ALJ.

As early as 1986, the Medicare regulations specified that the "determination of reasonable costs of services must be based on cost related to the care of Medicare beneficiaries." 42 C.F.R. § 413.9(c)(3). The regulations further explained that reasonable costs included indirect and administrative expenses necessary to operate a business furnishing services to patients but warned that "if the provider's operating costs include amounts not related to patient care, specifically not reimbursable under the program, or flowing from the provision of luxury items or services (that is, those items and services substantially in excess of or more expensive than those generally considered necessary for the provision of needed health services), such amounts will not be allowable." Id. Throughout the relevant period, section 2102.3 of the PRM also contained language disallowing costs unrelated to patient care. In 1979, a separate section was updated to prohibit the cost of social club dues. PRM, section 2138.3 at I.G. Ex. 10D, at 1-3, 5. In 1993, section 2102.3 was revised to add the specific example of charitable donations as costs not related to patient care. I.G. Ex. 10A, at [Page 27] 8-9. ⁽¹⁰⁾ Clearly, BBA 1997 did not introduce the prohibition on costs not related to patient care, or on costs that were in excess of need, but rather codified more specific examples of such unallowable costs.

Furthermore, the same categories of costs were disallowed under the rubric of "unrelated to patient care" for many years before the statutory change. The I.G. points out, and the Respondents do not deny, that decisions of the PRRB from as early as 1978 established that personal use of an automobile was not related to patient care and must be separated out by use of a mileage log. I.G. Br. at 56, n.29, citing Home Health Svcs. of Allegheny County, Pittsburgh, Pa., PRRB Decision No. 77-49 (June 27, 1978) and Albert Gellatin Visiting Nurses Assn., Uniontown, PA., PRRB Decision Nos. 93-1200, 94-1794 (September 18, 1997). These decisions are consistent with adjustments made to Hawkeye's own cost reports in audits for years as early as 1990 through 1994, which are discussed below as evidence of Respondents' actual knowledge of the policies.

CMS proffered testimony of expert witnesses who asserted that the cost items specifically barred by BBA 1997 had been previously unallowable "as a longstanding health care policy" and that "charitable donations have been unallowable under Medicare policy since actually the inception of the program." Tr. at 2441 and 2366-67 (Sandra Cavanaugh, formerly Hetrick); see also Tr. at 2361-69 (Cavanaugh). Similarly, Michelle Munk-Gilbert, from the fiscal intermediary, testified that BBA 1997 codified some examples of costs not related to patient care but did not change the pre-existing definition of that concept. Tr. at 1024-25. The I.G. also provided a post-hearing declaration from Sandra Cavanaugh in response to the ALJ's request for additional briefing on this point. Cavanaugh Declaration, dated November 29, 2004, attached to the I.G. Supplemental Post-Hearing Brief (Cavanaugh Decl.). Ms. Cavanaugh stated that she had worked on Medicare cost reimbursement policies, including revisions to the PRM and guidance to fiscal intermediaries since 1990. Cavanaugh Decl. at 2. She stated that fiscal intermediaries had, in conformity with CMS's pre-existing interpretation of what costs are related to patient care, disallowed costs in these three categories for many years and that the effect of BBA 1997 (and of the corresponding revision to section 2102.3 of the PRM) was merely to incorporate examples of costs already deemed unallowable. Id. at 2-5.

[Page 28] Essentially, CMS established that its position, expressed through its PRM manual provisions and the longstanding practices of its fiscal intermediaries in disallowing costs, was that personal expenses, charitable donations and social club dues were not related to patient care and thus were not reasonable costs at any relevant period. Neither Horras nor Richards argues that this position was not a reasonable interpretation of the statutory limit to reasonable costs or of the regulatory restriction implementing that limit by requiring costs to be reasonable and necessary and related to patient care. They argue rather that this interpretation was not clear to them or binding on them until after the amendment.

The Board has long explained that it will defer to an operating division's interpretation of law which it implements and of its own regulations, so long as that interpretation is a reasonable one, even where it is not the only possible interpretation. The operating division's interpretation is binding on those who had adequate notice of that interpretation or, in the absence of notice, did not reasonably rely on a contrary interpretation. See, e.g., Oklahoma Health Care Authority, DAB No. 1924, at 11 (2004); Alaska Dept. of Social and Health Services, DAB No. 1919, at 14 (2004), citing Louisiana Department of Health and Hospitals and Community Action Agency of Franklin County, DAB No. 1581 (1996).

We discuss below the actual notice which both Horras and Richards had received of the interpretation that the "related to patient care" requirement made these three categories of costs unallowable. However, even had they not received actual notice, neither Horras nor Richards put forward a reasonable alternative interpretation of the requirement upon which they could be said to have relied in claiming the expenditures at issue. At best, the arguments made by Horras and Richards might be read to contend that, prior to the BBA 1997 amendments, no absolute bar had been set up to prevent an individualized showing that a particular expenditure for entertainment, donation or personal use of a vehicle was indeed somehow reasonable and related to patient care and hence reimbursable. The adoption of BBA 1997 suggests that Congress concluded that no such showing was possible, and hence that a blanket exclusion of such expenditures from cost-based reimbursement was appropriate. But whether or not such a showing could ever have been made, certainly neither Horras nor Richards has made it on this record. Neither has even attempted to suggest any sense in which expenditures for Horras' personal use of Hawkeye's luxury vehicles or the donations to the University of Iowa and other charitable causes, for example, benefitted the care of Hawkeye's patients.

[Page 29] Horras admits that "[e]ach and every year the Medicare auditors of Hawkeye reviewed the automobile expense account and made adjustments" for personal use and luxury automobiles, although Horras considered the particular amounts to be unpredictable and subject to being "haggled over, and negotiated." Horras Br. at 32-33. He contends that he therefore "did no wrong in signing the claims containing these openly known costs which the rookie auditors practiced their skills by auditing." Id. at 33. Certainly, this cavalier attitude does not suffice to establish reasonable reliance on an alternative interpretation of the meaning of "related to patient care."

On charitable donations, Horras states only that he stopped the practice of charging these to the cost reports when the statute was amended. Horras Br. at 34. He offers no explanation of how such donations could have ever been thought to be related to patient care. Nor does he point to any evidence that he could reasonably have believed that these costs were allowable.

As for the Embassy Club dues, Horras states that he reasonably believed them to be allowable because rental of meeting rooms elsewhere for board meetings would have been allowable, that the dues payments were not "material", and that the only issue was the club's "theoretical status as a 'social club.'" Horras Br. at 33. The costs of the meetings themselves were, as Horras recognizes, allowed and thus not at issue; the amount of the dues is not relevant to their unallowability; and the status of the club as a social club is a matter of fact settled by the ALJ based on substantial evidence in the record. ALJ Decision at 70. The dues represented his personal membership, not a corporate membership. Horras did not show on this record that payment of dues was a prerequisite to holding the meetings at the Embassy Club. Moreover, even if the meetings held at the Embassy Club were related to patient care and the monthly dues were somehow considered part of the cost of the meetings, they could not be considered "reasonable" costs that would be incurred by a prudent buyer, unless no alternative, suitable site could be obtained for less than the combined cost of the dues and the meetings at the Embassy Club. Horras made no attempt to justify claiming the costs on this basis, however.

Furthermore, the record is replete with evidence that both Respondents were well aware, even before the cost reports were submitted for the years in question, that CMS interpreted the requirement that costs be reasonable and related to patient care to preclude reimbursement for the very kinds of costs at issue in this regard. Hawkeye had had prior adjustments to its cost reports in earlier years relating to personal automobile [Page 30] expenses. ALJ Decision at 68, citing I.G. Exs. 16, at 1-4, 23, and 17, at 1, 2, 8, 10. An internal memorandum from Yap to Horras in 1992 already emphasized the importance of keeping logs to distinguish personal usage. ALJ Decision at 67, citing I.G. Ex. 440, at 2. The social club dues had been removed by Medicare auditors as early as 1993 from the 1991 cost reports. ALJ Decision at 69, citing I.G. Ex. 17, at 17, 25, 30. In fact, the ALJ noted that the fiscal intermediary warned Horras in writing in 1993 that including personal expenses such as these "could lead to a fraud investigation and is very strongly discouraged." ALJ Decision at 69-70, citing I.G. Ex. 17, at 3, 17, 25. Social club membership dues were addressed in section 2138.3 of the PRM prior to BBA 1997 as unallowable because "[t]heir objectives and functions cannot be considered reasonably related to the care of beneficiaries." ALJ Decision at 70. PRM transmittals as early as December 1993 informed Hawkeye that charitable donations are not related to patient care and therefore unallowable. ALJ Decision at 73, citing I.G. 10A, at 5 and Richards Ex. 36A, at 11. Hawkeye donations were disallowed by the auditors from the 1991 cost reports, and Horras was advised of this adjustment by 1993. Id., citing I.G. Ex. 17, at 21. The ALJ found that Richards, too, was well aware of the prior audit adjustments on these issues, and prepared an audit exposure list in 1993 that reflected this awareness. ALJ Decision at 92-97 citing, inter alia, Richards Post-Hearing Br. at 18, I.G. Exs. 12, 16, at 45-54, 17, at 29-30, 22, at 7, 23, at 2 and 6, and Tr. at 2543, 2185, 2820, and 2909-10.

We conclude that CMS had a longstanding reasonable interpretation of the reasonable cost restriction that precluded reimbursement for costs unrelated to patient care, including personal expenses, social club membership dues and charitable contributions. We further conclude that substantial evidence in the record supports the ALJ's finding that Horras and Richards had actual notice of this policy and did not reasonably rely on any contrary interpretation in claiming these costs. BBA 1997 ratified CMS's interpretation, but need not be applied retroactively here because the claims at issue were equally unallowable before and after the amendment of the statute.

2. The ALJ did not err in the scienter standard he applied in evaluating whether the Respondents violated the CMPL.

The ALJ made explicit factual findings about the state of knowledge of each Respondent on each individual cost item. He also reached conclusions as to whether the I.G. proved in each case that the Respondent acted knowingly in presenting or causing [Page 31] to be presented claims that the Respondents knew or should have known were false or fraudulent or not provided as claimed. See ALJ Decision, Section IV, Part B, �� 6, 8-11, 13-15, 17-22, 24-25, 27-28, 30-31, 33-38, 43 (as to Horras) and �� 11-22 (as to Richards). Horras argues that the ALJ erred in several respects in evaluating the evidence in light of the statutory standards for scienter. Horras argues that the ALJ erroneously applied a "simple negligence standard" in assessing whether Horras should have known the falsity of a claim. Horras Br. at 3. Horras also asserts that the ALJ erroneously imposed a duty on Horras to review "each and every invoice and payment made by his company." Id.

We begin by quoting the ALJ's formulation of the scienter standard which he applied to evaluate liability under the CMPL:

14. Prior to December 1987, the Act provided for imposition of a penalty, assessment, and exclusion against a person who filed a claim for an item or service where that person "knows or has reason to know" that the item or service was not filed as claimed. Act, § 1128A(a). In 1987, Congress enacted the Omnibus Budget Reconciliation Act (OBRA) where the phrase "should know" was substituted for the phrase "has reason to know." Pub. L. 100-203, section 4118(e) (1987).

15. The actions which form the basis of the I.G.'s penalty, assessment and exclusion against both Respondents in this case were presented or caused to be presented after Congress' 1987 enactment of OBRA, therefore, the standard of knowledge that applies to all claims at issue in this case is "knows or should know."

16. In 1996, Congress enacted the Health Insurance Portability and Accountability Act (HIPAA) which clarified the standard of knowledge required for liability to be imposed under the CMPL by adding "knowingly" before "presents." See HIPAA § 231(d), 110 Stat. at 2013; compare 42 U.S.C.A. §1320a-7a (1991) with 42 U.S.C.A. § 1320a-7a (2002 Supp. Pam).

17. The term "knowingly" as used in the Act is defined consistently with the definition set forth in the Civil False Claims Act which states "a person, with respect to information, has actual knowledge of information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information, and that no proof of [Page 32] specific intent to defraud is required. See 42 C.F.R. § 1003.102(e); 31 U.S.C. § 3729(b).

18. In proceedings brought pursuant to the Act, the I.G. has the burden of proving, by a preponderance of the evidence, that a respondent presented or caused to be presented claims for items or services which the respondent knew or should have known were not provided as claimed and/or were false or fraudulent. 42 C.F.R. § 1005.15(b)(2) and (d).

19. In proceedings brought pursuant to the Act, a respondent has the burden of proving the existence of any mitigating factors (42 C.F.R. § 1005.15(b)(1)); and the I.G. has the burden of proving the existence of any aggravating factors by a preponderance of the evidence. 42 C.F.R. § 1005.15.

20. For liability to be established in this case, the I.G. must prove by a preponderance of the evidence that: (1) the respondent (a "person") (2) "presented or caused to be presented" (3) the Medicare and Medicaid "claims" in issue (4) to the Medicare and/or Medicaid program ("agency") (5) for medical "items or services" when, in fact, (6) these items and services were "not provided as claimed" and/or were false and fraudulent; and (7) the respondent "knew or should have known" that the claims were not provided as claimed and/or were false or fraudulent.

21. The CMPL and implementing regulations contain slightly different language with identical meaning. Under section 1128A(a)(1) of the CMPL, liability attaches when the person "knowingly presents or causes to be presented." Under section 1003.102(a)(1) of the regulations, liability attaches when "the person knew or should have known."

ALJ Decision, Section IV, Part A, at 10-12.

The ALJ thus articulated in considerable detail the statutory standards for scienter which he was applying to evaluate liability under the CMPL. ⁽¹¹⁾ Horras is concerned, nevertheless, [Page 33] that the ALJ equated the "should have known" standard with too low a level of awareness, i.e., with "mere" negligence as opposed to "gross" negligence. Horras Br. at 28. Horras' concern is founded on three instances in which the ALJ refers to "negligence." ALJ Decision at 28.

Horras overlooks the full context of the ALJ's references to negligence. The ALJ makes abundantly clear that he does not read the "should have known" standard to impose liability whenever a person is in the dark about the information that makes a claim false. Instead, he explained that "voluntary ignorance" applies to an individual who has a special duty to investigate and who is in receipt of information that should have alerted anyone with the particular "education, skill, experience" and position involved to find out the facts, but who nonetheless relies on a claim of unawareness to avoid personal responsibility. ALJ Decision at 43. In reaching this understanding, the ALJ reviewed the legislative history of the CMPL, the preamble to its implementing regulations, treatises interpreting the "should have known" standard in tort law, and prior decisions of other ALJs. ALJ Decision at 47, 79-80.

We need not revisit these legal authorities here, however. In the end, the ALJ plainly concluded that Horras' level of responsibility far exceeded any boundary between mere and gross negligence. Thus, the ALJ summarized as follows:

In spite of the overwhelming evidence that he had prior knowledge of the unallowable costs, he purposely continued to submit these claims in Hawkeye's Medicare and Medicaid cost reports. In fact, he acted in reckless disregard of their accuracy. Horras should have known that the cost report claims he submitted to Medicare were "not provided as claimed."

Id. at 80. We therefore find no merit in Horras' argument that the ALJ used too low a threshold to evaluate Horras' responsibility under the "should have known" rubric.

[Page 34] Horras also contends, however, that the ALJ imposed a duty to investigate that would require every signatory of a cost report to "personally examine each invoice and check that formed the basis for the cost totals in the cost report," as well as to evaluate the nature and allowability of the item or service billed. Horras Br. at 26-27. Horras cites nothing in the ALJ Decision to support his claim that the ALJ ever "believed that [any signatory that failed to do all this] would be liable for a CMP for what they would have found had they looked." Id. at 27. Horras cites nothing because the ALJ never said anything adopting such a rule. The ALJ would have had little reason to even consider such a rule in the context of Horras' involvement in the cost items at issue here. The allegations here did not involve expenses incurred by someone else which Horras could not have discovered without meticulously probing each invoice that might underlie a cost line item but rather involved expenses he himself incurred or about which he was personally concerned. Horras would hardly need to look at each and every invoice and check, for example, in order to be aware of what cars he drove and how much he used them on personal business, or what gifts he chose to give as donations, or why he was having a business valuation performed, especially given the extensive evidence of Horras' hands-on control of such decisions in this solely-owned business. In order to ascertain that such expenses were not being improperly included in claims to Medicare and Medicaid, Horras need have done little more than give instructions that they not be included or ask the cost report preparer whether they had been. The ALJ did not find that Horras made any such effort to avoid or inquire about improper claiming, finding rather that Horras engaged in an intentional scheme "intended systematically to extract" excessive reimbursement. ALJ Decision at 21.

To be sure, the ALJ did state, and correctly so, that Horras had a duty to make some effort to assure that the cost items claimed were truthful. ALJ Decision at 81-80. As an officer and principal of a provider, Horras had a corresponding responsibility to be aware of and adhere to applicable law, regulations, and policies for making such claims. Id. The ALJ framed this requisite duty to investigate in terms of what could be expected of a "reasonable provider," however, not in terms of requiring a principal to look at "every invoice and check." See id. at 79-81. Evaluating Horras' claims that he was oblivious to the inclusion of improper claims and completely dependent on consultants and advisors in that context, the ALJ rejected them as patently not believable. Thus, commenting on these claims in [Page 35] the context of the business valuation expenditures related to Horras' divorce, the ALJ stated the following:

Even if Horras' assertions had not been directly contradicted, his assertions that he was ignorant of the Medicare reimbursement system strain the limits of credulity. I cannot accept that the President and CEO of such a large business was ignorant of the manner in which he claimed the reimbursement which accounted for a large percentage of his business. Furthermore, his claims of ignorance or uncertainty were belied by other testimony he and his former employees and consultants gave which showed he was keenly aware of his business' cash flow, operating expenses, and ultimate profit margin. Hawkeye was, during the times at issue, a large HHA [home health agency] with aspirations to even greater growth. Its lifeblood was its income from federally-funded health care programs. It is simply impossible as a matter of law for businesses and individuals in that position to avoid the responsibility to keep themselves at least minimally informed of their duties and responsibilities in connection with those programs. See Cary Health and Rehabilitation, DAB No. 1771 (2001); The Heritage Center, DAB CR 1219 (2004).

ALJ Decision at 54.

Horras suggests that the ALJ was misled into believing that too probing an investigation was required because the ALJ was confused about the content of the certification required of the signatory of a cost report. It is true that the ALJ Decision became a bit confusing in describing the certification. ⁽¹²⁾ Any [Page 36] confusion that might have crept into the ALJ Decision on this point did not, however, result in the ALJ's imposing a requirement that Horras have examined every invoice and check, contrary to what Horras suggests. The ALJ concluded instead that Horras could "have easily discovered that he was filing false claims by taking a cursory look at them before they were filed." ALJ Decision at 79. We therefore conclude that any error in the ALJ's discussion of the content of the certification is harmless.

Horras also argues that all that was required of him was "initially to do no more than have an approved accounting system in place" and, when specific circumstances called for more, "to seek expert advice as he did regarding the allowability of certain other expenses." Horras Br. at 28. Horras offers no source for this extremely narrow vision of his duties in presenting claims to Medicare and Medicaid. He does reference testimony from I.G. witness Michelle Munk-Gilbert agreeing that providers may receive reimbursement if they retain consultants or employ accounting staff to assist with Medicare cost report preparation. Tr. at 1069-72. Horras then asserts that he relied on "an array of excellent employees and consultants," used accepted accounting systems and methodologies, and used accounting firms to "insure that the accounting was proper and that individual expenses of Horras were properly attributed to him as income and not to the company as expenses." Horras Br. at 28. These assertions are essentially irrelevant. The costs of the employees and consultants whom Horras used to keep Hawkeye's books, provide accounting services, and prepare cost reports were indeed reimbursed. The allegations before us do not include accounting failures or tax improprieties, but rather making claims for reimbursement for cost items which Horras himself knew or should have known were unallowable. Nothing in Ms. Munk-Gilbert's testimony remotely supports Horras' position that he had no responsibility for making such claims so long as he hired consultants. On the contrary, she testified that providers often complete their costs reports as "an everyday activity," without hiring consultants, and that, whatever means they chose to use to develop the reports, providers are ultimately responsible to do what they need to do in order to [Page 37] sign the certification statement. Tr. at 1070-73. In fact, Horras' counsel asked Ms. Munk-Gilbert specifically whether Horras was required to cross-check "all of the numbers" and review "these many thousands of transactions" before signing the cost reports. Tr. at 1073. Ms. Munk-Gilbert did not assert that he was required to do so. Rather, she opined that, having received prior notice "on many of these issues," Horras "should have known that these costs were not allowable." Tr. at 1074. Given that knowledge, Ms. Munk-Gilbert opined that what Horras was required to do was that he "should have ensured that they were not included, not just at the final preparation of the cost report, but as an ongoing operation of that business." Id.

The foregoing discussion makes evident that Horras' claim that the ALJ imposed an impossible burden on signatories to personally review every invoice and check before signing a cost report is a red herring. This red herring seeks to divert attention from the level of responsibility which the ALJ found Horras had for a scheme to obtain payment for unallowable expenditures. In no sense can the ALJ's conclusions about Horras' personal responsibility be characterized as based merely on an omission by Horras to comply with some duty to look at every single invoice and check before signing a cost report. Furthermore, the record as a whole shows that Horras did not set up systems to ensure that his personal expenses would not be claimed as Medicare reimbursable expenses. We conclude that the ALJ did not err in holding Horras responsible where the ALJ found that Horras knowingly signed costs reports that Horras knew or should have known included costs for which Hawkeye was not entitled to Medicare or Medicaid reimbursement.

D. Horras' allegations of prejudicial procedural error are without merit.

1. The ALJ's handling of the I.G.'s exhibits did not constitute prejudicial error.

Horras argues that he was prejudiced because the ALJ received all I.G. exhibits at the beginning of the hearing, even though Horras and Richards objected to their admission. Horras Br. at 29. ⁽¹³⁾ [Page 38] Horras contends that the ALJ's "en mass[e] receipt" of these exhibits "on his own motion prior to the receipt of any evidence and without notice of such a procedure" was not consistent with due process. Id. The I.G. responds that the ALJ admitted the exhibits of all parties for limited purposes initially, in order to facilitate a clear record at the hearing, while expressly allowing counsel to raise objections to or questions about any specific documents during the course of the hearing or in later briefing. I.G. Br. at 93.

The ALJ required the parties to raise any objections to the authenticity of any documentary exhibit prior to the hearing. ALJ Order dated October 28, 2002. Horras and Richards filed their objections to the authenticity of I.G. exhibits on March 7, 2003. The ALJ overruled those objections by ruling dated March 31, 2003. He stated that the Respondents had not made any clear showing of any basis for an objection and that he would ascertain the reliability of the I.G.'s exhibits by admitting them "subject to any voir dire by the parties." At the start of the hearing, the ALJ again noted these objections and indicated that they were preserved, but stated that he would admit the exhibits "for purposes of discussion with witnesses and for purposes of their being part of the record." Tr. at 81-82. The ALJ expressly instructed counsel that this action did not prevent them from raising or renewing objections as testimony was presented as to the reliability of particular exhibits, from cross-examining as to the foundation for particular exhibits, or from arguing about the weight to which particular exhibits should be entitled. Id.

We see no reason why this procedure would have prejudiced Horras. The regulations provide that the ALJ has the authority to determine the admissibility of evidence and is not bound generally by the Federal Rules of Evidence. 42 C.F.R. § 1005.17. The regulation requires the ALJ to exclude irrelevant and immaterial evidence, offers of settlement, and privileged material and provides some guidance on other categories of evidence, but does not specify any particular procedure for the ALJ to use in determining to exclude or admit evidence. The [Page 39] ALJ's approach to the exhibits here essentially sought to ensure that all parties and witnesses would discuss the hundreds of exhibits in a manner that could be consistently tracked with the numbering system used in the prehearing exhibit exchanges. All parties remained free to raise objections during the hearing. Horras' complaint appears to be that the ALJ's procedure in effect presumed admissibility absent a contrary showing. That approach is a reasonable one in an administrative proceeding where no laypersons can be confused by exhibits that are admitted but later excluded from consideration.

The I.G. proffered numerous witnesses who purported to authenticate, provide foundation for, and explain the relevance and significance of various exhibits. In each case, counsel for Horras was provided ample opportunity to cross-examine or voir dire and to renew any appropriate objections, as well as to explain in post-hearing briefs why any particular exhibit should have been stricken or disregarded. Before us, Horras fails to identify a single exhibit and explain why the ALJ erred in admitting it or according it evidentiary weight. Instead, Horras simply recites that the ALJ "allowed for the introduction of evidence without proper foundation, of unknown completeness and authenticity, and of unestablished reliability." Horras Br. at 29. This vague, blanket condemnation of hundreds of exhibits after thousands of pages of testimony about them is patently insufficient to permit us to second-guess the ALJ's initial admission of or subsequent rulings on any I.G. exhibits.

2. The ALJ did not exceed the regulatory deadline in issuing his decision.

Horras asserts that the ALJ Decision was untimely. Horras Br. at 16. According to Horras, the ALJ violated the regulation stating that the ALJ "will issue the initial decision to all parties within 60 days after the time for submission of post-hearing briefs and reply briefs, if permitted, has expired." 42 C.F.R. § 1005.20(c). The regulation further states that, if "the ALJ fails to meet the deadline contained in this paragraph, he or she will notify the parties of the reason for the delay and will set a new deadline." Id. Horras asserts that the ALJ here "failed to provide an adequate explanation as to why a ruling was not issued in a timely fashion . . . ." Horras Br. at 16. Horras neither explains how he calculated the regulatory deadline nor specifies any action that he asks the Board to take as a result of the alleged untimeliness.

The ALJ issued his initial decision exactly 60 days after he issued a ruling on February 28, 2005 in which he denied a motion [Page 40] to strike (filed by Horras) and expressly closed the record to further briefing for purposes of calculating the decision deadline. We note that this case was hotly litigated below (as it has been on appeal) with many motions filed by the parties requiring multiple rulings, as well as a request for post-hearing oral argument. The briefing period was reopened twice to permit the parties to brief the effect of the Hawkeye/Auxi settlement agreement and the question of whether the I.G. was retroactively applying BBA 1997. In this context, it is not entirely obvious when the time for submission of post-hearing briefs may be said to have expired. The ALJ reasonably resolved the issue in his February 28, 2005 ruling closing the briefing period at that point.

In any case, even were we to conclude that the briefing period expired at some earlier date, the regulation allows the ALJ to set a different date by notifying the parties of the reason for delay. Horras' December 14, 2004 motion to strike obviously required the ALJ to allow response and to rule on the motion, in order to resolve the state of the record. We therefore would consider the February 28, 2005 ruling to suffice as notice of the reason why a decision could not be issued sooner.

Finally, neither Horras, nor the regulatory language itself, suggests an appropriate remedy in the event that an ALJ issues a decision more than 60 days after the briefing period expires. Since Horras made no request to us, we do not now resolve whether some remedy might ever be available. We simply find no remedy warranted here.

E. The ALJ's factual findings are supported by substantial evidence on the record as a whole.

We turn now to the parties' challenges to the ALJ's factual findings. We first sketch out the general principles that apply to our appellate review of these challenges and then address those raised by Horras, Richards, and the I.G. in turn.

As set out earlier, we are to uphold factual findings in an ALJ decision when they are supported by substantial evidence in the record as a whole. Substantial evidence is "relevant evidence" which a reasonable person "might" accept to reach the conclusion drawn. The ALJ is not required to cite all evidence in the record supporting his or her findings, so long as substantial evidence in the record as a whole supports these findings. If a party believes that an ALJ has failed to consider evidence in the record rebutting a finding, the party should, on appeal, specifically identify that evidence and explain why it means that [Page 41] the finding is not supported by substantial evidence in the record as a whole. Board guidelines for review of an ALJ decision direct parties to set forth "the basis for challenging each element of the ALJ decision" and to support each challenge by "precise citations to the record before the ALJ." See http://www.hhs.gov/dab/guidelines/prov.html; see also April 29, 2005 cover letter transmitting ALJ Decision (instructing Horras to "cite each part of the record you want the Board to consider").

The Board has long held that an ALJ's assessment about the relative credibility of testimony by witnesses who appear in person at the hearing will not generally be disturbed absent a compelling reason to do so. Koester Pavilion, DAB No. 1750, at 21 (2000). Thus, the Board has explained that -

A reviewing panel does not have the opportunity to evaluate the credibility of a witness by listening in person to the witness's testimony or observing the witness's demeanor. The evaluation of the credibility of a witness is properly left to the hearing officer. . . .  Thus, we defer to the ALJ's evaluations of the credibility of the witnesses who appeared before him in this matter.

South Valley Health Care Center, DAB No. 1691, at 22 (1999); see also Oak Lawn Pavilion, Inc., DAB No. 1638 (1997) and Bernard J. Burke, M.D., DAB No. 1576, at 14 (1996). Given these guiding principles, we now turn to the specific challenges to the ALJ's findings of fact.

1. The challenged findings of fact in relation to Horras were supported by substantial evidence.

Horras argues that insufficient evidence was adduced to support the charges against him on any of the eight categories of cost items at issue. Horras Br. at 30-31. The ALJ identified the eight categories into which the 178 individual claims fell as follows:

1. $132,035.86 in professional fees for business valuation and expert witness testimony paid to BKD [Baird, Kurtz, and Dobbins] in connection with Respondent's divorce;

2. $107,215.64 in professional fees for marketing program fees paid to B&W [Barnhart & Walker] to increase patient utilization of Hawkeye;

[Page 42] 3. $14,472.85 in advertising fees paid to Julie S. Murphy for a flu shot program to increase patient utilization of Hawkeye;

4. $44,678.55 in automobile expenses which included unallowable expenses related to personal mileage for luxury vehicles, a Lexus SC 400 and a Chevrolet Suburban;

5. $1,411 in Embassy Club dues;

6. $514.96 in fees paid to Menninga for pest control services at Horras' private residence;

7. $16,013.54 in charitable donations; and

8. $26,937.58 in professional fees paid for legal and business valuation expenses related to the sale of Hawkeye.

ALJ Decision at 46, citing I.G. Ex. 9D, Attachment A; I.G. Prehearing Br. at 6-7, n. 6.

a. We decline to review factual challenges put forward with no reference to record evidence.

In six pages of his brief addressing the factual findings against him, Horras does not offer a single citation to any evidence in the record. His broad assertions and unsupported characterizations of the record made without such citations are entitled to little weight in the face of the evidence of record marshaled in the ALJ Decision on each of the contested cost items ⁽¹⁴⁾. Where there was conflict in the testimony of different [Page 43] witnesses, the ALJ was entitled to determine which to credit. Horras provides no argument which could remotely justify overturning the ALJ's determinations. We therefore decline to review the ALJ factual findings as to Horras.

b. Horras' characterizations of several allegations were misleading.

Although we decline to review the ALJ's factual findings as to Horras, we note that Horras' brief contains a few mischaracterizations of the nature of the allegations against him. We address those matters to avoid confusion in the record.

In regard to the BKD bills for preparing a "favorable" business valuation for purposes of Horras' divorce, for example, Horras makes general assertions about the "many so-called expert consultants in Medicare reimbursement" who advised him that these costs were a proper business expense and "could also be included as a Medicare allowable expense." Horras Br. at 30-31. Horras does not identify a single "expert" who opined that the costs of creating a favorable business valuation for use in a personal divorce was ever an allowable Medicare expense. The ALJ recited testimony (which he credited) to the effect that, although the initial BKD contacts were led to believe that the valuation might also be used in preparing an employee stock ownership plan, in fact Horras intended the valuation only for his settlement with his ex-wife. ALJ Decision at 48-54, and record citations therein. Horras was so personally involved in this arrangement that he "intentionally intercepted the mail" and specifically directed the billing clerk to code the BKD bill as a Medicare cost. ALJ Decision at 53, and record citations therein. General claims of reliance on the advice of experts are particularly unpersuasive where the experts were not given accurate information on which to base any opinion about allowability. Much of the content of the advice that Horras now attributes to the experts is also completely inapposite to the allegations against him. Horras asserts, for example, that his divorce lawyer told him the bills were business expenses. Horras Br. at 30. The charges here were that the BKD bills were not allowable for Medicare purposes, not that they were improperly paid by Hawkeye or could not constitute business expenses for some other purposes.

[Page 44] Also, Horras strongly denies charges that were never made while failing to adequately counter those that were made against him. For example, in addressing business valuation costs, he asserts that his divorce lawyer's bills "were not included on the cost report nor were they paid by Hawkeye." Horras Br. at 30. Yet, no charge was ever made that Hawkeye paid Horras' divorce lawyer. Moreover, refraining from seeking Medicare reimbursement for his divorce lawyer's bills in no way exonerates Horras from seeking Medicare reimbursement to defray other costs of his divorce.

In another example of misdirection, Horras suggests, in relation to the costs of the Julie Murphy flu shot program, that he was entrapped into a "false claims" case by following the "encouragement" of the government to offer flu shots. Horras Br. at 32. Horras points to the testimony of a government witness (Ms. Hetrick) that the costs of administering a flu shot program are allowable as demonstrating that the cost claims were proper. Id. In fact, the costs of administering a flu shot program and of providing shots to patients were not questioned and were not at issue. The ALJ found that the costs of the Julie Murphy "flu shot program" that were at issue were costs of a marketing initiative to reach non-patients through direct mail advertising in an effort to increase patient utilization. ALJ Decision at 63-65, and record citations therein.

The same sort of misdirection of attention away from the ALJ's actual findings toward more defensible, but irrelevant, conduct is exemplified by Horras' continuing failure to acknowledge the difference between offering a service to patients and trying to promote a business to non-patients. Thus, Horras continues to claim that the B&W promotional campaign was of the same nature as a patient wellness newsletter, even though the ALJ found that the campaign involved repeated mailings of brochures, videos and mousepads, the great majority directed to non-patients. Compare Horras Br. at 31-32 with ALJ Decision at 55-62. The principle is that Medicare beneficiaries should not bear the cost of advertising aimed at business expansion. Hawkeye's own documents described the B&W plan as part of an "aggressive approach towards marketing to the general public" with the "whole purpose" of extending "beyond the patient base and reach[ing] potential patients . . . ." ALJ Decision at 62, citing I.G. Ex. 128, at 40. To describe the distinction between such advertising and a patient wellness newsletter as an obscure concept found only "in the eye of the beholder," as Horras does, would require closing one's eyes to the weight of the factual evidence.

In regard to the Embassy Club dues, Horras suggests that the costs would have been allowable "just as if Hawkeye rented space [Page 45] for company meetings at a hotel and conference center" but for the club's "theoretical status as a 'social club.'" Horras Br. at 33. The issue here was not the rental or use of meeting rooms for purposes legitimately related to Medicare costs, but rather the cost of Horras' personal membership dues in the club. ALJ Decision at 68-70, and record citations therein. Horras cites to nothing to rebut the ALJ's conclusion that the Embassy Club was indeed a social club and that dues for membership in such a club were unallowable.

Finally, Horras remarks that an arbitrator ⁽¹⁵⁾ found "no evidence to suggest" that his "conduct amounted to knowing fraud." Horras Br. at 34. The arbitrator had no authority to preclude the federal government from reaching different conclusions about Horras' level of responsibility based on a different record as developed before the ALJ. Further, the legal standards applicable to the arbitration forum are unrelated to those applicable here, so the arbitrator's conclusions are simply irrelevant.

We conclude that none of these contentions by Horras detract from the plain weight of evidence relied on by the ALJ in making his factual findings about Horras.

c. Horras' challenges to the ALJ's culpability determination are without merit.

Horras also contends that the ALJ got his "'culpability' wrong." Horras Br. at 36. His contentions here raise mixed questions of fact and law, but for convenience we address them all in this section.

Horras argues that the ALJ's discussion of Horras' actions in relation to the penalty phase characterizes his behavior as more intentional and egregious than did the ALJ's descriptions in relation to some of the individual cost items. Horras Br. at 36. We do not read the ALJ Decision as inconsistent in this regard. In relation to each individual cost item, the ALJ concluded that Horras met the legal standard that he knowingly presented claims that he knew or should have known were false or fraudulent. Those conclusions are not inconsistent with an overall evaluation of Horras as having had "actual knowledge" that he was engaged in claiming practices that "were inconsistent with Medicare [Page 46] reimbursement rules and regulations" and that he "actually knew" the false content of the claims. ALJ Decision at 85.

Horras also asserts that the ALJ improperly characterized the excess claims as involving "substantial sums" for "personal expenses." Horras Br. at 35. This assertion is based in part on Horras' claim that none of the questioned costs caused any payment of Medicare or Medicaid funds. We have already rejected this claim. Although interim payments were indeed based on cost reports for earlier years and some of the branch offices had reached cost caps for some of the years in question, the claims submitted were part of an ongoing process of rate adjustment based on cost report claims that determined how much of the money paid out based on interim rates could be retained. Horras also states that not all of the cost items involved "personal" expenses, but some of the examples Horras points to as non-personal, such as Horras' membership in the Embassy Club and donations to the University of Iowa sports programs, can fairly be characterized as personal, and the amounts associated with his divorce were alone enough to be considered substantial. Cf. Horras Br. at 35-36.

Horras contends that the ALJ erred in declining to treat the absence of a prior offense as itself a mitigating factor. Horras Br. at 36. Horras claims that "the absence of a history of offenses is a clear mitigator under 42 C.F.R. § 1003.106(b)(5)." That provision, however, says nothing whatsoever about treating absence of prior offenses as a mitigating factor. The next subsection does permit the ALJ to consider "other" circumstances of a mitigating nature if required in the interests of justice, but nothing in that provision on its face demands that the ALJ treat the absence of prior offenses as a mitigating factor. 42 C.F.R. § 1003.106(b)(6).

Horras argues that the ALJ was wrong to find that improper claims submitted in earlier years constituted aggravating factors. He asserts that there was no evidence of such improper claims except for one pest control bill. Horras Br. at 36-37. As with his factual challenges to the ALJ's findings on the individual cost items, Horras fails to include a citation to any record evidence [Page 47] or to respond to the evidence cited by the ALJ. ⁽¹⁶⁾ This is not sufficient to establish error by the ALJ.

Horras also argues that the ALJ should have accepted copies of his bankruptcy filing as sufficient evidence of his insolvency. Horras Br. at 37. The ALJ declined to rely on the contested personal bankruptcy filings alone. He concluded that it was up to Horras to provide credible evidence of his net worth and that Horras had failed to provide documentation of his actual financial condition. ALJ Decision at 87. We find no error in the ALJ's conclusion that full disclosure of a respondent's financial condition is a key prerequisite to relying on it as a mitigating factor in setting the amount of the penalty or assessment.

2. The challenged findings of fact in relation to Richards were supported by substantial evidence.

Richards accepts the ALJ's articulation of the elements of the offense as framing the appropriate measure of proof required. Richards Br. at 17, quoting ALJ Decision, Section IV, Part A, ��17, 21, at 11 (set out in text supra). Essentially, she thus acknowledges that she may be held liable if she has knowingly caused false claims to be presented where she has "actual knowledge of information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information." ALJ Decision at 11. She contends that the I.G. failed to adduce evidence to sustain that burden as to each of the four categories of cost items for which the ALJ held her responsible: unallowable automobile expenses, Horras' Embassy Club dues, charitable contributions, and professional fees relating to the sale of [Page 48] Hawkeye. ⁽¹⁷⁾ ALJ Decision at 90-91; Richards Br. at 19, 21, 25 and 28. Richards denies that any luxury car rule existed, contends that the club dues were legitimate business expenses and de minimis, and asserts that the I.G. adduced no evidence at all that she "knowingly" included costs of the Hawkeye sale in the 1997 cost report or "fraudulent charitable contributions" in the 1995 and 1996 cost reports. Richards Br. at 21; see also Richards Br. at 19-29.

a. Substantial evidence supported the ALJ's conclusion that Richards knew that the prudent buyer principle limited luxury car reimbursement.

Richards' repeated assertion that no luxury car rule exists is based on the undisputed fact that no single dollar amount is set in the Act, or regulations, or PRM as a ceiling on the allowable cost of a vehicle to be charged to Medicare. Costs of luxury automobiles are instead made unallowable by the rule that Medicare will pay only for the reasonable costs that would be incurred by a prudent buyer. The prudent buyer principle holds that a "prudent and cost-conscious buyer not only refuses to pay more than the going price for an item or services, he also seeks to economize by minimizing cost." PRM, section 2103. This rule applies to excessive and luxury purchases of all kinds, not merely luxury automobiles, making it obvious how difficult it would be to establish a single price list that would be applicable in different places and over a long period of time. As guidance, as early as 1990, the fiscal intermediary for Iowa notified providers that an "automobile considered to be a luxury auto for IRS [Internal Revenue Service] purposes could also be considered a luxury auto for Medicare purposes." I.G. Ex. 10F (March 19, 1990 newsletter). ⁽¹⁸⁾ If a provider were uncertain about whether a particular vehicle purchase was likely to be considered a luxury item, specific guidance could have been sought from the fiscal intermediary in advance. There is no evidence that anyone from Hawkeye ever made such inquiries about whether, for example, the acquisition of a customized Chevrolet [Page 49] Suburban for more than $87,700 in 1996 would exceed prudent buyer limit (although the price alone raises questions about reasonableness).

Thus, while Richards may be correct that one "cannot violate a rule which does not exist," substantial evidence supported the ALJ's conclusion that she should have known that claiming the full costs of the automobiles at issue as allowable on the cost reports violated the prudent buyer rule, the existence of which she was well aware. ALJ Decision at 94, and record citations therein. The evidence on which the ALJ relied included her admitted preparation of an audit exposure list in 1993 identifying for outside accountants exactly which categories of costs included in pending 1992 cost reports would likely be disallowed by the fiscal intermediary. ALJ Decision at 94, citing I.G. Ex. 12. Costs of Horras' automobiles were included in the list. ⁽¹⁹⁾ The excessive value of the automobiles driven by Horras, as well as the failure to exclude costs related to his personal use of the vehicles, had been identified in prior adjustments and had been the subject of warnings from the fiscal intermediary. Id.; see also I.G. Ex. 16. ⁽²⁰⁾ Richards points to no evidence that she reasonably thought that a prudent buyer would consider these automobiles not to be a luxury item.

Richards' further assertion that the automobile claims could not be fraudulent because they "are completely truthful entries in Hawkeye's books" is equally unavailing. Richards Br. at 28. The I.G. did not charge Richards with making false entries on Hawkeye's books. The element of fraud charged by the I.G. here arises from including the claims as allowable cost items in [Page 50] Medicare cost reports when Richards knew or should have known that they were unallowable.

b. Repeated inclusion of Embassy Club dues was not excusable as de minimis.

Richards first claims that she reasonably believed the dues for Horras' membership at the Embassy Club were included as "ordinary and necessary business expenses" because the club was used for some business functions and because the dues "had never been an issue with the fiscal intermediary." Richards Br. at 28. In addition, Richards asserts that, regardless of the allowability of the expense, their amount was "de minimis" and that they were challenged as part of an attempt to coerce Richards into giving testimony favorable to the I.G.'s positions. Id. at 29.

We have already noted that not all business expenses can be considered reasonable costs related to patient care for purposes of Medicare reimbursement and that only the personal dues were disallowed, not the costs of legitimate Hawkeye business functions held at the club. Richards' claim that the fiscal intermediary had no concern about the club dues is belied by substantial evidence in the record. The ALJ found that the dues were disallowed in 1993 adjustments to Hawkeye's 1991 cost report. ALJ Decision at 95, citing I.G. Ex. 17. Richards included the club dues in the audit exposure list of items that were included as allowable costs in the 1992 cost report but were likely to be disallowed based on past adjustments. I.G. Ex. 12. The ALJ also found that Richards informed a representative from Auxi that these dues, and other personal expenses, were included in cost reports she prepared for Hawkeye. ALJ Decision at 95, citing Tr. at 2301. Richards argues that the dues were noted but allowed on the 1992 cost report review. The page cited by Richards shows precisely the reverse, however, listing $2,683 in "nonallowable costs" in the entertainment category as including $144 for the Embassy Club. Compare Richards Br. at 29 with I.G. Ex. 18, at 42. ⁽²¹⁾

[Page 51] Richards' most disturbing allegation is that the I.G. included these costs among the charges against her in order to "attempt to intimidate Christine Richards into changing her testimony after Agent Ewers' repeated threats to try to indict her had failed." Richards Br. at 29. This bald allegation is set out without a single reference to any evidence in the record. Given the inflammatory nature of the allegation, we have reviewed the record below relating to Richards' claim of intimidation. Summaries of interviews conducted by I.G. Special Agent George H. Ewers (Ewers) with Richards on December 15, 1998, and June 25, 1999, appear in the record as I.G. Exhibits 22 and 23, respectively, and contain nothing supporting Richards' charges of threats. Richards testified that Ewers accused her of lying about various points and told her she might be indicted if she did not tell the truth. See, e.g., Tr. at 2789-95. Ewers testified that he never threatened Richards, but did inform her that she could be a potential target of the investigation and may have told her that he did not believe she was being truthful. Tr. at 468-69.

We do not view statements of disbelief by Ewers or accurate information about the possibility of criminal prosecution as inherently intimidating or coercive. Whether such statements were employed in an effort to force the witness to provide untrue testimony in order to protect herself from an unjustified criminal prosecution is a question of fact depending largely on the conflicting accounts of Richards and Ewers. Richards did not specifically testify that she was threatened or coerced, but did assert that she was accused of lying when she was being cooperative and truthful. Tr. at 2789-95. The ALJ has the primary role in evaluating the credibility of witnesses testifying before him. It is evident from the ALJ's discussion of Richard's liability for the cost items discussed and of her culpability that the ALJ did not believe her testimony on a number of points and did rely on Ewers' interview reports as reliable. See, e.g., ALJ Decision at 93-94. Richards has presented nothing to persuade us to disturb the ALJ's evaluation of Richards' and Ewers' relative credibility, much less to support a conclusion that the dues were not properly included in the case against her.

The small dollar value of the disallowed dues does not undercut the ALJ's finding that Richards should have known that they were not properly included in the cost reports. First, the evidence shows that Richards included the same claim repeatedly year after year, even though Hawkeye was advised that it was improperly included, and she was aware of this history. Second, the cost of the dues was only one item in a list of improper expenses [Page 52] repeatedly claimed by Hawkeye during Richards' tenure. Considering all of the circumstances, the ALJ could reasonably infer that it was unlikely that she merely overlooked the dues because of their small scale.

c. Substantial evidence supported the ALJ's conclusion that Richards improperly included costs of the Hawkeye sale in the 1997 cost report.

Richards argues that the I.G. produced "no one who could say that Richards had knowledge of the expenses that were being incurred" in preparation for the sale of Hawkeye. Richards Br. at 20. Hawkeye's 1997 cost report included $26,937.58 paid to law firms and brokers for legal and business valuation costs related to possible sale of the business. Richards asserts that she "never saw those bills or invoices," since Horras tried to keep the possible sale secret and Richards prepared the cost report from a summary of costs. Id. at 20-21.

The ALJ agreed that the I.G. had not proven that Richards had actual knowledge that the fees from the law firm (referred to as BW&G) were related to the sale of Hawkeye, especially since the invoices do not say so on their face and the firm did perform other legal work for Hawkeye. ALJ Decision at 99. He nevertheless found that Richards acted with reckless disregard in including the costs in the 1997 cost report. Id. He noted that she claimed not to have participated in any meeting with BW&G from August through October 1997, but he found documentation that she attended a meeting at the BW&G offices on September 19, 1997. Id. While it was not certain that the meeting involved the sale, the ALJ noted that the timing was consistent with that. Id. He could reasonably infer that she was aware of the nature of the legal work being performed in that period, especially since she provided no independent evidence that the valuation was not discussed at the meeting.

The ALJ also agreed with Richards that the I.G. had not proven that she had actual knowledge that business valuation costs charged by a firm referred to as SMK were related to the prospective sale of the company. Id. at 101. Again, however, the ALJ concluded that Richards had sufficient information that she should have known to inquire about the allowability of these costs rather than simply include them in the cost reports. Id. Among the reasons for the ALJ's conclusion was the prior notice which Richards had that similar cost items for business valuation had previously been disallowed. Id. at 99-101. Richards acknowledged that she was aware of the previous disallowance of [Page 53] business valuation costs at the time she included the SMK fees in the 1997 cost report. Tr. at 2917.

We conclude that substantial evidence in the record supported the ALJ's conclusion that Richards should have known that the professional fees at issue should not have been included in the 1997 cost report.

d. Substantial evidence supported the ALJ's conclusion that Richards improperly included charitable contributions in the 1995 and 1996 cost reports.

Richards asserts that the policy on charitable contributions changed and that she learned of the changed policy against charitable contributions only after filing the 1996 cost report in May 1997 and thereafter included one claim for $45 in 1997. Richards Br. at 24. ⁽²²⁾ Further, she contends that the fiscal intermediary handled charitable contributions inconsistently so that Richards did not have adequate notice as to which donations were unallowable. Id. at 24-25.

We have already explained that donations to charitable causes were unallowable long before the BBA 1997 because they have no relation to patient care. Hence, Richards' inclusion of such expenses in 1995 and 1996 cost reports is not justified under Medicare policy in effect when those reports were prepared. We turn then to her claim that she was not on notice of this policy and hence should not be held to have "knowingly" included false claims based on these cost items.

The ALJ relied on multiple sources of evidence of Richards' state of knowledge. ALJ Decision at 96-97. Richards' audit exposure list included donations after such costs were disallowed in 1993 (from the 1991 cost report). Id. at 96, citing I.G. Exs. 12 and 17, at 2-5. The ALJ found that Richards attended an exit conference with the fiscal intermediary in 1994 on the 1992 cost [Page 54] report in which Hawkeye was warned about continuing to include unallowable costs. ALJ Decision at 96-97; see, e.g., Tr. at 2540-43.

Richards also asserts that the cost report forms have a specific category for charitable contributions so that her entries there were "in no way hidden from the auditors." Richards Br. at 22. The cost report categories identify many kinds of costs which a business may incur, but do not imply that all those entries are therefore also allowable Medicare costs. As discussed before, the provider is responsible for identifying and "backing out" the unallowable business outlays. Moreover, contrary to what Richards argues, the related costs of the donation in 1997 were in fact obscured from auditors, because they were included in the general professional fees category and were not self-disallowed.

We conclude that substantial evidence in the record supports the ALJ's conclusion that Richards knew or should have known that the donations at issue should not have been included as allowable costs in the cost reports for 1995 and 1996.

3. The I.G.'s argument that sanctions imposed on Richards should be increased is not persuasive.

a. The I.G.'s argument is properly before us.

Before addressing the merits of the I.G.'s argument that the ALJ erred in reducing the sanctions imposed on Richards, we must rule on Richards' contention that the argument is not properly before us. The I.G. made this argument in his brief responding to both appeals, without filing a separate notice appealing the ALJ Decision on this point. By letter dated October 7, 2005, Richards filed a motion to strike the related parts of the I.G. brief, to which the I.G. was permitted to reply. ⁽²³⁾ Richards argues that her brief did not raise any issue as to the length, amount or calculation of the exclusion, CMP, or assessment. Richards Motion to Strike at 2. She contends that permitting the I.G. to request the Board to increase those sanctions without [Page 55] having filed a separate notice of appeal violates Richards' constitutional due process rights. Id.

Richards acknowledges that the regulations governing this appeal allow a party to "raise any relevant issue not addressed in the exceptions, within 30 days of receiving the notice of appeal and accompanying brief" of another party. 42 C.F.R. § 1005.21(c). She argues, however, that this language is ambiguous and should not be read to permit the I.G. to avoid deadlines for filing a notice of appeal by first objecting to the ALJ Decision in a responsive brief. Richards' Brief in Support of Motion to Strike at 1-2. Richards interprets the regulation to limit the issues in a responsive brief to those raised by the opposing party's appeal (or those which "qualify as a mere defense" to such appellate issues). Id. at 4. For support, she offers as sources of analogous authority the Board's guidelines and case law on appellate review of provider participation determinations by the Centers for Medicaid & Medicare Services (CMS) and to Rule 4 of the Federal Rules of Appellate Procedure (FRAP) and case law under that Rule. Id. at 2-4. These sources, according to Richards, all demonstrate that parties are not permitted to raise a new challenge to the judgment below for the first time in a reply brief on appeal. Id.

The I.G. responds that his argument that the ALJ erred in reducing the actions proposed against Richards flowed from Richards' challenges to specific FFCLs. I.G. Response to Motion to Strike at 2, 4-6. The I.G. further argues, based on the language of section 1005.21(c), that the regulations expressly permit raising an issue on appeal in responsive briefing. The I.G. bolsters this interpretation by pointing to section 1005.21(e) which provides that the Board "will not consider any issue not raised in the parties' briefs . . . ." 42 C.F.R. § 1005.21(e) (emphasis added). From this provision, the I.G. infers that the Board will consider issues not raised in a notice of appeal so long as they are raised in the briefs. Id. at 3, 6.

While the Board has not interpreted section 1005.21(c) as broadly as the I.G. suggests, the Board has consistently applied it to permit a party that chose not to file a request for review to timely raise its own exceptions to the ALJ decision in its responsive brief. This is the clear intent of the provision since it refers to "any relevant issue not addressed" in the exceptions (i.e., the exceptions to the ALJ decision in the notice of appeal.) Richards' arguments have no merit because they rely on authorities that set out different rules for different cases than the regulation that applies to the case before us. Board guidelines for CMS provider appeals governed by [Page 56] part 498, to which Richards cites for the proposition that the Board "will not consider issues not raised in the request for review" are simply irrelevant here. ⁽²⁴⁾

Rule 4 of FRAP, as Richards admits, does not govern administrative appeals. Since the cases she cites are interpreting the FRAP, and not part 1005, they are not binding here. Cf. cases cited in Richards' Brief in Support of Motion to Strike at 4. Moreover, the Rule 4 scheme is obviously different from that in part 1005, since the FRAP provides time for other parties to review a first appeal and decide whether to act. Part 1005 sets a single time frame of 30 days from issuance of the ALJ decision (extendable for good cause for up to 30 days) for any party to appeal. The problem this presents is that every party might feel compelled to file an appeal if it disagreed with any part of an ALJ decision, even if the disagreement is relatively minor, because the time to appeal might have expired before that party learns whether other parties will challenge the ALJ decision. Part 1005 resolves the problem by allowing the party to raise appeal issues in its responsive brief.

Richards refers in her motion to an impairment of her constitutional rights to due process arising from this approach, but offers nothing to explain the basis for such a claim. Richards apparently overlooks the explicit provision in the same section of the regulation under which she could have requested an opportunity to reply to the I.G.'s arguments. 42 C.F.R. § 1005.21(c). This opportunity to reply offered by the regulation assures that no party is prejudiced if an issue is raised in a response brief rather than a request for review. Richards chose not to request an opportunity to file a reply brief to answer the I.G.'s arguments. In granting Horras' request for oral argument, however, the Board offered Richards the opportunity to make an oral presentation at the same time. Richards was thus afforded an opportunity to reply to the I.G.'s argument and has no basis to demand that the Board instead strike the argument against her from the record.

[Page 57] Accordingly, we deny the motion to strike.

b. The I.G.'s argument does not persuade us that the exclusion, penalty and assessment imposed on Richards by the ALJ must be increased.

The I.G. asks that the Board increase the exclusion, penalty, and assessment against Richards to the levels originally proposed, i.e., a five-year exclusion, $20,000 penalty, and $100,000 assessment. The I.G. argues that the ALJ incorrectly treated relative culpability as a mitigating circumstance, whereas the regulations permit culpability to be considered as a mitigating factor only where prompt corrective action was taken. I.G. Br. at 205, citing 42 C.F.R. § 1003.106(b)(2). ⁽²⁵⁾

The regulation specifies one circumstance that demonstrates a degree of culpability which is to be considered as mitigating and four that evidence an aggravating degree of culpability. 42 C.F.R. § 1003.106(b)(2). We are not persuaded that these specified circumstances exhaust the ways in which a mitigating or aggravating degree of culpability may be displayed. The language is not exclusive, i.e., the regulation does not state that a low level of culpability may be considered mitigating only in the case of prompt corrective action. The regulation also provides that other circumstances not enumerated as aggravating or mitigating should be taken into account "as justice may require." 42 C.F.R. § 1003.106(b)(6). Given that open-ended provision, it is reasonable to interpret the regulation to permit the ALJ to review the range of circumstances that bear on an individual's degree of culpability. Even if we viewed the culpability provision more narrowly as the I.G. proposes, we would read the [Page 58] ALJ Decision to mean that the ALJ concluded that justice required him to consider the circumstances he did consider in evaluating the appropriate penalties.

In the present case, the ALJ did not, as the I.G. suggests, merely compare Richards' culpability to Horras' culpability and conclude that the relatively lower culpability of Richards was a mitigating circumstance. Instead, the ALJ discussed in some detail Richards' individual role in the decisions that led to the presentation of false claims. It is apparent that he reached two principal conclusions: (1) Richards was sufficiently involved to be held responsible, ⁽²⁶⁾ and (2) Richards was essentially a passive player in a scheme orchestrated by Horras. ALJ Decision at 104-06 (also referencing discussions of Richards' role in prior parts of the ALJ Decision). The ALJ found that Richards, despite her title, was not given a major role in any management decisions, but deferred to Horras, who generally made "the principal legal, financial, and business decisions" independently. Id. at 105. In addition to describing the peripheral role Richards played, the ALJ pointed to Richards' motivation. He concluded that she showed a reckless disregard for the program rules in the way she submitted cost reports for Hawkeye without insisting on removing Horras' personal expenses and other unallowable costs, but she showed no "cupidity, greed, or . . . self-aggrandizement." Id. at 105. He further noted that Richards had no personal stake in Hawkeye except as her employer and derived no personal benefit from the overclaiming. The ALJ concluded that these facts tended to mitigate the amount of a penalty appropriate for Richards. This conclusion is supported by the record and is reasonable.

The I.G. next argues that the ALJ found aggravating factors and no proper mitigating factors in relation to Richards, and that the regulation requires an aggregate penalty and assessment set at or near the maximum where "substantial or several aggravating circumstances" are present, "so as to reflect that fact." 42 C.F.R. § 1003.106(c)(2); I.G. Br. at 206. The I.G. calculates the maximum penalty that could be imposed on Richards as $808,000 based on presenting 112 false claims and the maximum assessment at $249,069, for a total of $1,057,069. I.G. Br. at 206. The I.G. does not explain his decision to seek an aggregate of only $120,000 (for the 124 claims the I.G. originally alleged were [Page 59] false), except to say that the original proposal was "reasonable" and more consistent with the regulation than the aggregate of $4,646 set by the ALJ. I.G. Br. at 207. The I.G. also points to the further statement in the regulations that "[b]ut for the existence of extraordinary mitigating circumstances, the aggregate amount of the penalty and assessment should never be less than double the approximate amount of damages and costs sustained by the United States, or any State." 42 C.F.R. § 1003.106(c)(3).

In this argument, the I.G. basically fails to acknowledge that the ALJ did not accept the I.G.'s view of the evidence relating to Richards. The ALJ plainly found that the degree of mitigation reflected in his findings relating to culpability, as well as his discussion of Richards' financial status ⁽²⁷⁾ and other factors discussed in his decision, was "very substantial." ALJ Decision at 106. The same regulation requires that, correspondingly, where "substantial or several mitigating circumstances" are present, the aggregate amount should be set sufficiently low to reflect that fact. 42 C.F.R. § 1003.106(c)(1). Further, the ALJ rejected some of the aggravating factors cited by the I.G., finding specifically that the I.G. failed to prove actual knowledge of the falsity of the claims as to Richards, although he did prove it as to Horras. ALJ Decision at 105.

Given that the factual predicates for Richards' liability found by the ALJ were significantly different than those alleged by the I.G., it is appropriate that the ALJ would have to revisit the question of whether the amount of the aggregate penalty and assessment proposed by the I.G. remained reasonable. In reviewing the ALJ's conclusion in this regard, we do not ask whether the figure chosen by the ALJ is the precise figure we would have selected in the first instance but rather whether the ALJ has chosen a figure which is reasonable given the applicable law and the facts as he found them. The determination of an appropriate sanction is tied to the very specific circumstances of this individual situation, and is hence a heavily fact-based inquiry as to which deference is appropriate. ⁽²⁸⁾

[Page 60] It is true that the ALJ did not make an express finding that the mitigating circumstances to which he had alluded were "extraordinary" before reducing the aggregate penalty and assessment below the figure cited by the I.G. as double the actual damages. Nevertheless, the ALJ was clearly aware of that regulation in deliberating on the appropriate sanction, since he included this precise language in his numbered conclusions of law. ALJ Decision at 13. It is therefore implicit in his decision to reduce Richards' aggregate penalty and assessment below that figure that he did consider the mitigating circumstances to meet the regulatory requirement. The ALJ also made a reduction to reflect the settlement with Hawkeye/Auxi. ⁽²⁹⁾

Accordingly, we deny the I.G.'s request that we increase the remedies imposed on Richards.

[Page 61] Conclusion

For the reasons explained above, we affirm the ALJ Decision.

Donald F. Garrett

Sheila Ann Hegy

Judith A. Ballard
Presiding Board Member

1. The facts included in this general background are drawn from the ALJ Decision, which contains relevant citations, and are presented here merely to provide a general framework for understanding the rest of our decision. They are not intended to substitute for the ALJ's findings.

2. We reference the provisions of the Act throughout this decision. The current version of the Act can be found at www.ssa.gov/OP_Home/ssact/comp-ssa.htm. Each section of the Act on that website contains a reference to the corresponding United States Code chapter and section. Also, a cross reference table for the Act and the United States Code can be found at 42 U.S.C.A. Ch. 7, Disp Table.

3. The ALJ determined that the I.G. could permissibly apply the BBA 1997 amendment retroactively to costs incurred by Hawkeye prior to the January 1, 1998 effective date set out for the PRM revision. ALJ Decision at 39-42. Horras challenged this determination on appeal, and we consider the effect of the amendment on these proceedings below. See Horras Br. at 21.

4. "Person" is defined to include "an organization, agency, or other entity," but to exclude "a beneficiary." Section 1128A(a) of the Act.

5. The settlement does not allocate the payment from Hawkeye/Auxi between penalty and assessment, but the ALJ treated the total, including interest, as an assessment in crediting the Respondents.

6. The regulations furthermore define "person" broadly to mean "an individual, trust or estate, partnership, corporation, professional association or corporation, or other entity, public or private." 42 C.F.R. § 1003.101.

7. The I.G. points out that if it had treated each category of costs that appeared in each of the branch office cost reports as a claimed item, that would have multiplied the false claims. I.G. Br. at 73-74. We agree that the I.G. reasonably focused on the original entries that triggered the false claiming, rather than on the entries in the branch office cost reports determined through cost allocation.

8. There was testimony that the excess payments actually made to Hawkeye based on the costs at issue were more than $70,000. Tr. at 851-53. It is not necessary for purposes of this section to determine the precise amount of overpayment that resulted, or what amounts may have been sought but forestalled as a result of adjustments. The point is simply that it makes no difference in this case whether a showing of materiality or actual harm was required, because both were evident on the undisputed record.

9. We note that the I.G. had explicitly denied before the ALJ any intention of seeking to apply BBA 1997 retroactively to prior conduct by either Respondent, contending instead that the costs at issue were unallowable without regard to the amendment. I.G. Supplemental Post-Hearing Br. at 2-13.

10. This section was revised again after BBA 1997 in June 1998 to incorporate the specific items from that legislation.

11. Some of the ALJ's statements do not clearly distinguish the "knowingly" standard (which modifies presenting or causing to be presented) from the "knew or should have known" standard (which applies to the nature of the claims as false or fraudulent or not provided as claimed). Any possible confusion is irrelevant, however, since the Respondents did not dispute having knowingly presented the claims. The dispute was over whether they knew or should have known that the claims were false or fraudulent or not provided as claimed.

12. The ALJ quoted the certification Horras signed on each disputed cost report that "to the best of [his] knowledge and belief, it is a true, correct and complete report prepared from the books and records of the provider in accordance with applicable instructions, except as noted." ALJ Decision at 82, quoting I.G. Ex. 2A, at 108. Yet, in the next paragraph, the ALJ asserted that this "unqualified certification statement on the claims at issue is contrasted with certifications with qualifiers (i.e., 'to the best of any knowledge and belief')." Id. It is difficult to reconcile the ALJ's comment with the language from the certification which plainly contains a similar qualifier. Possibly the ALJ was referring to other, non-qualified statements (which he also quoted from the certification) to the effect that Horras certified having "examined" the cost report, balance sheet, and statement of revenue and expenses and being "familiar with the laws and regulations regarding the provision of health care services" and certified that the services covered by the cost report were provided in compliance with those laws and regulations. Id.

13. Horras also asserts that the ALJ failed to afford him "an adequate opportunity to object to exhibits." Horras Br. at 29. He does not explain this assertion, which appears inconsistent with the argument that the ALJ admitted exhibits over Horras' objections. Presumably, Horras intends to allege that his opportunity to object was somehow not "adequate," but he offers no additional basis for this claim beyond those discussed above in relation to the ALJ's process of receiving exhibits subject to later argument on their reliability and weight. We therefore do not discuss further Horras' claim that he lacked "opportunity" to object.

14. The attitude expressed by Horras toward the factual findings was communicated in statements in his brief such as the following: "The government's claim with respect to B&W fees is a wonderful work of fiction upon fiction, a circular argument inside a circular room with no way out that serves only to dizzy the mind and confound the same," "Mr. Horras did no wrong in signing the claims containing these openly known costs which the rookie auditors practiced their skills by auditing," and "Mr. Horras candidly admitted to the high crime that he ran some of the pre-divorce Menninga bills for home spraying through Hawkeye . . . ." Horras Br. at 32-34. Such pronouncements do not provide any basis to reject the overwhelming evidence cited by the ALJ that Horras consciously included unallowable costs in Hawkeye's cost reports in order to maximize reimbursement.

15. The ALJ admitted into the record the June 14, 2004, decision of an arbitrator in a case involving Horras' challenge to his termination by Hawkeye/Auxi. ALJ Decision at 5.

16. Horras merely states that an interview with one individual who provided cleaning services to both Horras' home and Hawkeye's offices is not enough to establish wrongful conduct. This characterization of the basis for the ALJ's findings ignores considerable other evidence cited by the ALJ. That evidence shows that Horras had been informed by the auditors well before submitting 1993 and 1994 cost reports that some items were being improperly billed and that Horras nevertheless included unallowable claims for personal automobile use, Embassy Club dues, and charitable donations in those cost reports. ALJ Decision at 86.

17. The ALJ determined that the I.G. conceded that Richards had not been shown to have been aware of the actual nature of the other categories of cost items for which Horras was held responsible. ALJ Decision at 91, n.35.

18. The reference is to tax rules that at various times set dollar amount standards to define which cars were to be considered luxury in nature.

19. Handwritten notations on the audit exposure list by the accountant refer to discussing with Richards the need to reclassify these expenses, since even though she considered them business costs, they had been disallowed by Medicare as "luxury" car expenses. I.G. Ex. 12, at 3.

20. Richards argues that the adjustments to the 1990 cost report did not put her on notice of a luxury car rule because only the automobile insurance costs were actually adjusted. Richards Br. at 26-27. The auditor workpapers plainly show that the automobile insurance expenses were disallowed to the extent that they reflected the excess luxury value of the vehicles involved, referencing the prudent buyer/reasonable cost provisions of section 2103 of the PRM. I.G. Ex. 16, at 21-22. The workpapers state that the vehicle involved "is considered a luxury automobile." Id. at 22.

21. Since Richards cites no support for her claim that the dues were included in the 1993 and 1994 cost reports as well without being challenged, we give no weight to that claim. In any case, even if auditors failed to catch a particular expense in reviewing cost reports some years, that would hardly suffice as a basis to believe they were allowable in the face of express adjustments disallowing the identical costs in previous years.

22. Richards does not explain the basis for her assertion that she presented only $45 in claims for unallowable charitable contributions in 1997. The ALJ found that the 1997 cost report included two donations, a cash contribution of $10 and a total of $1,315.20 in professional and legal fees which were reclassified because they related to the donation of two buildings by Hawkeye to the Catholic Church. Richards had included the donated value of the buildings themselves in the donations category but backed out that amount as "self-disallowance." Richards Br. at 22.

23. As a result of the briefing on this motion by Richards, and the subsequent grant of Horras' request for oral argument, the period for briefing in this matter did not close until January 9, 2006. This date controls for purposes of the requirement that the DAB issue its decision within 60 days of the expiration of the time for submission of briefs. 42 C.F.R. § 1005.21(i).

24. Guidelines for Appellate Review of Decisions of Administrative Law Judges Affecting a Provider's Participation in the Medicare and Medicaid Programs, available at http://www.hhs.gov/dab/guidelines/prov.html. Compare Guidelines for Appellate Review of Decisions of Administrative Law Judges In Cases to Which Procedures in 42 C.F.R. Part 1005 Apply, available at http://www.hhs.gov/dab/guidelines/procedures.html.

25. The I.G. relies on another case in which the Board found that an ALJ erred in concluding that a mitigating factor existed and increased the penalty imposed. I.G. Br. at 205-206, citing St. Anthony Hospital, DAB No. 1728 (2000). In that clinical laboratory case, the Board held that the ALJ did not err in recognizing remediation as a mitigating factor under the applicable law, but found that the particular acts relied on by St. Anthony were merely efforts to avoid termination. The Board concluded that the ALJ had decreased by too much the amount of the CMP under the circumstances involved, and therefore increased the penalty amount somewhat, although not to the extent sought by the I.G. The determination as to the appropriate CMP in that case was heavily fact-based and offers little useful comparison for the present matter.

26. The ALJ noted that Richards had access to multiple sources of information from which she should have been able to determine that the contested costs were not allowable and that she had "some element of discretion" given her management position. ALJ Decision at 109.

27. The ALJ pointed to the "compelling" anecdotal evidence of Richards' present financial difficulty as another factor in reducing the monetary sanctions, while noting that, absent more documentation, "total remission" was not justified. ALJ Decision at 107.

28. The ALJ specifically emphasized that, while he did not find Richards to be personally untrustworthy, he would not "shrink" from imposing sanctions on senior-level managers in other circumstances where they are found to have violated the CMPL. ALJ Decision at 110.

29. In reducing the penalties and assessments for Horras and Richards to reflect the settlement with Hawkeye/Auxi, the ALJ arrived at a pro rata share based on the relationship between the settlement amount and the assessments sought by the I.G. against Horras and Richards. ALJ Decision at 39. The ALJ then applied that percentage reduction to the assessment amounts that he imposed against each of the respondents. Id. The ALJ substantially reduced Richards' assessment exposure for reasons other than the settlement (as explained above), but then applied the same percentage to that reduced assessment amount. While this approach might not be the only acceptable method of calculation, the I.G. did not offer any reasonable alternative basis for calculating Richards' penalty and assessment amounts that is consistent with the ALJ's findings.