Case: 09-50995 Document: 00511401469 Page: 1 Date Filed: 03/03/2011




        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                 Fifth Circuit

                                              FILED
                                                                 March 3, 2011
                                 No. 09-50995
                                                                 Lyle W. Cayce
                                                                      Clerk

PERSONAL CARE PRODUCTS, INC., a Missouri Corporation, BRAD
STATLER, an individual, and GARY WYANKO, an individual,

                                    Plaintiffs – Appellants

v.

ALBERT HAWKINS, in his official capacity as Commissioner of the TEXAS
HEALTH AND HUMAN SERVICES COMMISSION, a governmental entity of
the State of Texas; RALPH C LONGMIRE, in his official capacity as Sanctions
Manager of the Office of Inspector General, an agency within TEXAS HEALTH
AND HUMAN SERVICES COMMISSION, a governmental entity of the State
of Texas; TEXAS HEALTH AND HUMAN SERVICES COMMISSION, a
governmental entity of the State of Texas; PAREATHA I. MADISON, in her
official capacity as Sanctions Specialist of the Office of Inspector General, an
agency within TEXAS HEALTH AND HUMAN SERVICES COMMISSION, a
governmental entity of the State of Texas,

                                    Defendants – Appellees




                Appeal from the United States District Court
                     for the Western District of Texas


Before HIGGINBOTHAM, CLEMENT, and OWEN, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
      Personal Care Products, Inc. (PCP) furnishes incontinence supplies to
Medicaid recipients in twelve states, including Texas.        In the course of a
Medicaid fraud investigation, the Texas Health and Human Services
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                                       No. 09-50995

Commission withheld reimbursements from PCP. PCP filed suit against state
officers, alleging civil rights violations under 42 U.S.C. § 1983 and seeking
damages and injunctive relief. The district court dismissed all claims, primarily
on the grounds that PCP lacked a protected property interest in Medicaid
payments withheld pending a fraud investigation. We affirm.


                                            I.
       Medicaid providers agree to comply with federal and state laws that
govern the program, including billing and documentation requirements.
However, state Medicaid agencies, such as the Texas Health and Human
Services Commission, regularly overpay providers for services rendered because
of incomplete paperwork, inadvertent errors, or fraud. To reduce these excess
expenditures, the federal Medicaid statute mandates that state programs
“provide for procedures of prepayment and postpayment claims review . . . to
ensure the proper and efficient payment of claims and management of the
program.”1 It also requires states to maintain a fraud control unit to manage the
collection of overpayments.2 Serving as this unit, the Commission conducts
audits of current providers and reviews reimbursement claims from years past
to ensure proper payment. Under Texas law, the Commission may recover all
overpayments, regardless of the cause.3



       1
           42 U.S.C. § 1396a(a)(37).
       2
           42 U.S.C. § 1396b(q)(5).
      3
        1 Tex. Admin. Code § 371.1703 (allowing recovery of all overpayments “whether the
overpayment resulted from error (by the provider, the claims administrator, or an operating
agency), misunderstanding, or a program violation proven to result from fraud or abuse”).

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                                       No. 09-50995

       One way to assure the state recovers overpayments is for the agency to
withhold current reimbursements, even legitimate ones, while investigating the
old, erroneous payments. Under federal regulations, a state Medicaid agency
may withhold reimbursements “in whole or in part, . . . upon receipt of reliable
evidence that the circumstances giving rise to the need for a withholding of
payments involve fraud or willful misrepresentation.”4 Accordingly, Texas’s
regulatory framework provides two avenues for recovering overpayments. First,
“[w]hen no wrongdoing is established through investigation, the Inspector
General may refer the matter for routine payment correction.”5 However, when
prima facie evidence of fraud is present, “[a] payment hold on payments of future
claims submitted for reimbursement will be imposed.”6 Further, a “payment
hold may be imposed prior to completion of an investigation.” 7


                                             II.
       On May 31, 2006, the Commission notified PCP that it was conducting a
preliminary investigation of PCP’s billing and had identified a potential
overpayment for reimbursements issued for claims dating from January 1, 2004


       4
        42 C.F.R. § 455.23. Federal regulations define “fraud” as “an intentional deception
or mispresentation made by a person with the knowledge that the deception could result in
some unauthorized benefit to himself or some other person.” 42 C.F.R. § 455.2.
       5
           1 Tex. Admin. Code § 371.1701.
       6
         1 Tex. Admin. Code § 371.1703. Under this Texas regulation, a payment hold may
also be imposed for any number of program violations listed in § 371.1617, which appear to
include items that could at times be inadvertent filing mistakes, such as billing for an item
that required prior authorization. PCP does not contend that these regulations are
inconsistent with federal law.
       7
           1 Tex. Admin. Code § 371.1703.

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to December 31, 2005. The notice included allegations that PCP submitted false
statements to obtain compensation greater than the amount that PCP was
legally entitled.     Further, the notice included a spreadsheet specifying the
services reviewed and the violation associated with each service. As a result of
the prima facie evidence of fraud, the Commission stated it would withhold all
Medicaid payments to PCP until the investigation was complete.
       PCP timely sought a hearing to contest the payment hold, but it could not
contest the merits of the fraud allegations or the overpayment amount until that
amount became final.8 After informal negotiations, the hold was lifted in August
2006, allowing a $600,000 payment to PCP for its pending Medicaid claims. In
October 2006, the Commission notified PCP of a potential overpayment of
approximately $4 million, plus an administrative penalty of an additional $4
million. PCP requested an informal review and expedited appeal but was denied
because there were no new sanctions imposed.9                      Later that month, the
Commission instituted a 25% payment hold, in part because PCP refused to
provide a security interest to assure the Commission that PCP was acting in
good faith.10 PCP requested a hearing to challenge this payment hold, but the


       8
         See 1 Tex. Admin. Code § 371.1647 (“In the case of recoupment [of overpayment], a
statement of the provider’s or person’s right to request a formal appeal hearing of the potential
sanction is not provided in the initial notice letter, since this is not a final sanction. A
statement of the provider’s or person’s right to request a formal appeal hearing of the final
sanction will be subsequently provided with the final written notice of the Inspector General’s
final overpayment determination.”).
       9
        At that time, the Commission had not imposed a payment hold, and PCP could not
challenge the fraud or $4 million overpayment because the amount had not been finalized.
       10
          See Tex. Hum. Res. Code § 32.0321(a) (allowing the Commission to require a provider
to file a surety bond if the Commission identifies a pattern of suspected fraud or abuse
involving criminal conduct).

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parties could not agree upon a date. In September 2007, PCP filed this lawsuit;
the Commission subsequently terminated the payment hold and released
$350,000 that had accumulated from the October 2006 hold. A few days later,
the Commission issued a notice of final sanctions for a $1.15 million
overpayment and an administrative penalty of $2.3 million.                        When the
overpayment amount was finalized, PCP had the right to a formal hearing on
the merits of the overpayment and fraud.11
       In its lawsuit, PCP claimed the Commission denied it due process and
tried to coerce settlement of the alleged Medicaid overpayment. The district
court dismissed the case, concluding that PCP did not have a protected property
interest in the reimbursement payments. PCP timely appealed.


                                                III.
       We review de novo a grant of motion to dismiss, viewing the facts pleaded
in the complaint in the light most favorable to the plaintiff.12 To survive a
motion to dismiss, the plaintiff must state a “plausible claim for relief.” 13 If the
well-pleaded facts, accepted as true, do not suggest unlawful conduct, a
plaintiff’s complaint must be dismissed.14
       Our question here is whether PCP has a property right in its Medicaid
reimbursements, even those withheld pending a fraud investigation. A property


       11
            See 1 Tex. Admin. Code §§ 371.1647(d)(5), 371.1667.
       12
        See, e.g., Harrington v. State Farm Fire & Cas. Co., 

, 147 (5th Cir. 2009);
Benton v. United States, 

, 21 (5th Cir. 1992).
       13
            Ashcroft v. Iqbal, 

, 1950 (2009).
       14
            

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interest requires “more than a unilateral expectation” of a benefit.15 Instead, a
person must “have a legitimate claim of entitlement to it.”16 Property interests
“are not created by the Constitution.                Rather they are created and their
dimensions are defined by existing rules or understandings that stem from an
independent source such as state law-rules or understandings that secure
certain benefits and that support claims of entitlement to those benefits.” 17
       Nothing in Texas or federal law extends a property right in Medicaid
reimbursements to a provider that is the subject of a fraud investigation. PCP
admits that it may not have property rights in Medicaid reimbursements that
are under investigation, but, PCP asserts, it does have a property interest in
legitimately earned, current reimbursements that are not subject to
investigation. In other words, since the payments actually withheld were not
under investigation, the Commission was not entitled, so the argument goes, to
withhold those payments while investigating past payments for fraud. PCP may
be correct in that the federal regulations do not make clear whether a state
agency can withhold legitimate payments while investigating previously paid
fraudulent claims—the regulations simply allow payment holds.18 However,


       15
            Bd. of Regents of State Colleges v. Roth, 

, 577 (1972).
       16
            

see also Yorktown Med. Lab. v. Perales, 

, 89 (2d Cir. 1991) (“Property
interests in Medicaid payment . . . must derive from federal or state law.”).
       18
         See 42 C.F.R. § 455.23 (allowing payment holds when the need arises because of fraud
or willful misrepresentation but not indicating which funds may be withheld). Like our
colleagues on the Fourth Circuit, we note the complexities of these statutes and regulations,
which no doubt create compliance and enforcement problems for both providers and regulators
alike. See Rehab. Ass’n of Va., Inc. v. Kozlowski, 

, 1450 (4th Cir. 1994) (“There
can be no doubt that the statutes and provisions in question, involving the financing of

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                                         No. 09-50995

Texas regulations plainly permit current reimbursements to be withheld
pending investigation on prior payments, noting that “payments for future
claims” may be withheld and stating that payment holds are “used to withhold
payments to providers that may be used subsequently to offset the overpayment
or penalty amount when [an] investigation is complete.”19 Federal law does not
prohibit these payment holds and state law explicitly allows them.                         The
statutory scheme does not give PCP a property interest in its present
reimbursement claims while past claims are under investigation for fraud.20


                                               IV.
         The Commission’s investigation of PCP found prima facie evidence of
fraud.         Texas law gave PCP no claim of entitlement to its Medicaid
reimbursements pending the outcome of the fraud investigation. The judgment
below is AFFIRMED.




Medicare and Medicaid, are among the most completely impenetrable texts within human
experience. Indeed, one approaches them at the level of specificity herein demanded with
dread . . . .”).
         19
              1 Tex. Admin. Code § 371.1703 (emphasis added).
       20
          See 

(finding that a provider has no property interest
grounded in federal or New York law “to payment for claims pending investigation to
determine illegality”); see also 

agency], however, may not withhold payment
indefinitely without some findings as to unacceptable practices. [The agency], in effect, may
only refuse to pay for services ‘for cause.’”); 42 C.F.R. § 455.23 (requiring that payment holds
cease when the agency determines there is insufficient evidence of fraud or when legal
proceedings related to the provider’s alleged fraud are completed).

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