A lawsuit by a group of Pennsylvania hospitals suing other in-state hospitals for alleged RICO fraud in obtaining reimbursements for treating indigent patients has been reinstated by the U.S. Court of Appeals for the Third Circuit.

A three-judge appellate panel ruled in St. Luke's Health Network v. Lancaster General Hospital that the case was improperly dismissed for failure to demonstrate standing for a civil Racketeer Influenced and Corrupt Organizations Act claim, as the plaintiffs allegations were plausible enough to proceed.

According to Third Circuit Judge Joseph Greenaway's July 22 opinion, the St. Luke's Hospital network sued Lancaster General and the University of Pennsylvania health systems, alleging they abused the federal Department of Health and Human Service's Extraordinary Expense (EE) program, enacted under the Tobacco Settlement Act to reimburse hospitals for treating uninsured patients. Hospitals are audited to keep track of their uses of the funds.

The plaintiffs, on behalf of all EE participating hospitals, claimed John Does working for the defendants "knew that [Lancaster's] claims were grossly inflated but nevertheless continued to submit them even after being called out by the auditor general." They claim the defendants committed wire fraud to inflate Lancaster General's coffers by $9 million from fiscal years 2008 to 2012.

The defendants moved to dismiss the complaint, arguing that their alleged conduct did not amount to a proximate cause of injury to the plaintiffs under the RICO act, according to Greenaway. The district court agreed and dismissed the case.

But on review, the Third Circuit held that the plaintiffs did provide sufficient facts to sustain a civil RICO claim.

"At the outset, it is important to specify the purported conduct constituting a RICO predicate and the resulting injury. The complaint shows that plaintiffs' theory of liability extends to defendants' submission of allegedly fraudulent claims between Fiscal Years 2008-2012. Plaintiffs therefore claim collective injury in the form of a decreased proportion of EE program funds during each of those years," Greenaway said.

The judge said the case at hand was "nearly identical" to the U.S. Supreme Court case Bridge v. Phoenix Bond & Indemnity. In that case, perspective buyers of tax liens sued other buyers claiming they committed fraud to get a greater share of liens.

"Plaintiffs' theory of liability and alleged injury in the present case are nearly identical to that of the Bridge plaintiffs," Greenaway said. "Because the EE Program has a fixed pool of assets, defendants' alleged manipulation to increase their share of the limited funding necessarily resulted in plaintiffs receiving a decreased proportion of those assets. So, we must similarly conclude that plaintiffs have adequately demonstrated proximate causation for purposes of civil RICO standing."

Kevin Fay of Eckert Seamans Cherin & Mellott in Philadelphia represents the defendants and did not respond to a request for comment. Brian Barnes of Cooper & Kirk in Washington, D.C., represents the plaintiffs and did not respond to a request for comment.