AUSTIN – The Texas Supreme Court Friday delivered a one-two punch to a group of dentists and a state contractor who were pointing fingers at each other over allegations of massive fraud in the state’s Medicaid orthodontic program.
In one case, the court said Xerox, a contractor hired by the state to preauthorize claims, couldn’t designate dental providers as responsible parties in the state’s pursuit of $1 billion in damages for the questionable claims. In the other case, the court upheld the dismissal of counterclaims filed by several dentists against the state as proper under sovereign immunity.
The rulings are the latest chapter in a long-running dispute over claims the state says should not have been authorized because they were not medically necessary.
Critics had claimed the lower court rulings in the two cases, now upheld by the Supreme Court, exempt the state from ordinary rules of litigation like apportionment of damages and expose private contractors to extraordinary liability.
In re Xerox
Xerox Corporation and Xerox State HealthCare administered the Texas Medicaid program under contracts with the state for nearly a decade. Its duties included approving or denying requests for prior authorization for orthodontic services.
The State of Texas says the company used unqualified and inadequately supervised clerical employees who routinely “rubber stamped” requests. Texas sued Xerox and filed separate lawsuits against the orthodontic providers. Xerox filed a general denial and sought to unite the separate proceedings in an effort to shift liability to the providers.
A Travis County district court in 2015 granted the state’s motion to strike Xerox’s third-party claims and denied Xerox’s motion attempting to designate responsible third parties. The Austin Court of Appeals denied a Xerox mandamus petition in 2016.
Justice Eva Guzman wrote the opinion for the Supreme Court. Justices Jeffrey Boyd and Jimmy Blacklock did not participate in the decision.
Guzman said the apportionment of damages under Chapter 33 of the Texas Civil Practice and Remedies Code does not apply to a civil-remedy action under the Texas Medicaid Fraud Prevention Act because the civil remedies sought by the state are not “damages.”
“Applying Chapter 33 would undermine the carefully crafted monetary incentives the Legislature adopted to uncover fraud in the Texas Medicaid system,” Guzman said.
In addition, the court said, apportioning fault would deter those with knowledge of fraudulent activity from pursing a whistleblower, or qui tam, action to help prosecute fraud on the government’s behalf.
David Gunn of Beck Redden represented Xerox. J. Campbell Barker of the Texas Attorney General’s Office represented the state.
Nazari v. Texas
In 2014, Texas sued Dr. Behzad Nazari and several other dental providers alleging they submitted false prior-authorization and payment requests, sought payments for services never rendered, misrepresented the qualifications of service providers and in some cases accepted illegal kickbacks. The providers denied the allegations and asserted third-party claims against Xerox, alleging the state and Xerox conspired to rubber-stamp the providers’ authorization and payment requests.
The state argued that the counterclaims were barred by sovereign immunity. The Travis County trial court dismissed the third-party claims in 2015 and the Austin Court of Appeals upheld the dismissal in 2016.
Justice Jeff Brown wrote the opinion for the 5-2 majority. Justice Debra Lehrmann, joined by Justice Phil Johnson, wrote an opinion concurring in part and dissenting in part from the majority. As in the Xerox case, Justices Boyd and Blacklock, both former assistant attorneys general, did not participate.
Brown noted that the underlying facts in the case are much in dispute and include allegations from the dentists that the state turned a blind eye to Xerox’s rubber-stamping of their requests in order to fend off additional liabilities in a series of long-running federal lawsuits over how Texas administered Medicaid for children.
The dentists said the attorney general waived the state’s sovereign immunity when it filed suit. One of the cases the dental group relied on was Reata Construction Corp. v. City of Dallas. In that 2006 case, the Texas Supreme Court waived Dallas’ immunity based on monetary damages the city was seeking.
In the dentists’ case, however, the court said the state was seeking penalties and not damages.
“Instead, we hold that the Reata rule – under which the state, by participating in certain litigation, steps outside the sphere of protection that common-law immunity from suit provides – never applies when the state initiates litigation to enforce a substantive prohibition against unlawful conduct by imposing a monetary penalty,” Brown said.
In her 22-page opinion, Lehrmann concurred with the majority’s belief that SCOTX lacked interlocutory jurisdiction to address the dentists’ third-party claims against Xerox, but she dissented from the rationale that the state could claim, in effect, a “law enforcement” exemption under the Reata rule.
As contemplated under Reata, Lehrmann said the state’s decision to file the lawsuit “encompassed a decision to leave its sphere of immunity from suit.” The dentists’ counterclaims “are germane, connected, and defensive” to the state’s lawsuit, she said. As such, it would be fundamentally unfair to allow the state to pursue its claims against the providers while under a cloak of immunity for its participation in the same set of acts.
Jason Ray of Austin’s Riggs & Ray represented the dentists. Scott Keller of the attorney general’s office represented the state.
PhRMA Briefs
The Pharmaceutical Research and Manufacturers of American, PhRMA, weighed in with amicus briefs in both cases. The trade group said Texas has adopted a “broad and dangerous interpretation of the Texas Medicaid Fraud Prevention Act, seeking to impose extraordinary financial liability in suits in which the State claims to be exempt from the ordinary rules of litigation.”
In arguing that its claims are not subject to defenses such as waiver and offset, the state could recover the entire amount of its overpayments twice, from both the Xerox and Nazari defendants, the group said.