Court: District Court, S.D. New York; April 2, 2015; Federal District Court
The Government has initiated legal action against Narco Freedom, Inc. for alleged violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) due to its practice of offering below-market housing exclusively to individuals enrolled in its Medicaid-funded drug treatment programs. The Government seeks a preliminary injunction to prevent Narco Freedom from making residence in its "Freedom Houses" contingent upon enrollment in its programs, mandating that residents cannot be required to move within the first thirty days of residency, and prohibiting the closure of any Freedom House without prior notice. Additionally, the Government requests that the Court impose recordkeeping, reporting, and relationship management obligations on Narco Freedom regarding its patients.
On November 3, 2014, a temporary restraining order was issued, with Narco Freedom consenting to its continuation while awaiting the Court's decision on the preliminary injunction. An evidentiary hearing occurred from December 2 to December 4, 2014, after which the case was held in abeyance for resolution discussions. On March 13, 2015, the New York State Attorney General indicted Narco Freedom's CEO Gerald Bethea and Comptroller Richard Gross, leading to their arrests on March 18, 2015. Following this, the Government sought a temporary receiver, and the New York Office of Medicaid Inspector General (OMIG) placed a fifty percent withholding on Narco Freedom’s Medicaid payments and notified Bethea and Gross of their exclusion from the Medicaid program, which also applied to Narco Freedom effective April 6, 2015.
The Court has reviewed the evidence and, based on its findings, has granted the Government's motion for a preliminary injunction. Narco Freedom operates drug treatment programs across several New York City boroughs and serves over 3,000 clients, many referred by various probation and parole agencies. Its programs, including drug-free outpatient and methadone treatment, are regulated by state and federal agencies, and Medicaid covers costs for up to seventy-five treatments for eligible individuals. The organization also manages three-quarter houses known as Freedom Houses for its outpatient program participants.
Three-quarter houses operated by Narco Freedom lack in-house services, licensing, and formal government oversight. The staff is inadequately trained in mental health, with ratios as low as one staff member for every hundred residents. Currently, eighteen out of twenty-one Freedom Houses are operational, housing approximately 1,500 residents, including over 471 parolees. Funding comes from residents assigning monthly housing allowances from the New York City Human Resources Administration (HRA), currently $215, and additional funds from Narco Freedom's programs. Employees indicated that HRA funding is insufficient to cover operational costs, yet no documentation was provided to substantiate this claim. Narco Freedom leases these houses from real estate owners, with Jay Deutchman being the largest landlord. Deutchman described a profit-based formula used by the former CEO, Alan Brand, to determine the viability of opening new houses based on income from HRA and Medicaid versus expenses. Housing is exclusively for clients enrolled in Narco Freedom's drug treatment programs, and marketing efforts emphasize this connection. Marketing consultant Donna DeCicco confirmed that referrals to Freedom Houses were contingent upon clients needing both residence and outpatient treatment. Additionally, Narco Freedom targets marketing towards inpatient counselors in local hospitals, highlighting the houses as part of its clinical services.
Dr. Greene testified that Bronx-Lebanon counselors coordinate with DeCicco for housing placements for clients completing inpatient programs. Gerald Bethea, former CEO of Narco Freedom, stated that the organization’s budget requires all residents at Freedom House to participate in their substance abuse programs. Upon arrival, residents must sign a 'Code of Conduct' mandating daily attendance at treatment or counseling sessions, and a 'Waiver of Tenant’s Rights' which limits their rights under landlord-tenant law and allows for eviction if they leave the program. The Code also requires residents to prepare for reassignment every 28 days, seemingly to avoid compliance with New York City eviction laws.
Declarations from current and former residents indicated that some had no prior substance abuse history but attended Narco Freedom programs to secure housing, a claim disputed by Narco Freedom. Bethea acknowledged that while assessments are typically conducted, some individuals are allowed temporary residence before evaluation. Evidence presented by Narco Freedom emphasized the importance of stable housing for successful substance abuse treatment, with expert testimonies supporting the notion that homelessness negatively impacts recovery efforts. The Government does not contest the detrimental effects of homelessness on drug treatment but questions the adequacy of housing provided by Narco Freedom.
Rashwant Mack, a resident of Freedom House, testified about significant issues at the facility, including insufficient bathrooms, asbestos exposure, drug use among residents, and inadequate staffing. His claims were supported by declarations from other residents. In contrast, Narco Freedom submitted positive testimonials from other residents. In 2012, a joint investigation by the Office of Inspector General for the Department of Health and Human Services and the U.S. Attorney’s Office began to examine potential violations of 42 U.S.C. § 1320a-7b(b) by Narco Freedom. On October 14, 2014, the Government alerted Narco Freedom to its suspicions of an unlawful kickback scheme, warning that it would seek injunctive relief unless the organization severed ties between its substance abuse programs and Freedom Houses.
In July 2014, CEO Brand resigned, and Bethea took over. Subsequently, Brand and Narco Freedom faced indictment in New York state court in October 2014, while an ongoing investigation by the Medicaid Fraud Control Unit continued. On October 28, 2014, the Government sought a temporary restraining order, which was granted the next day, prohibiting Narco Freedom from requiring participation in its drug treatment programs for placement in Freedom Houses. Following a hearing in December 2014, the case was placed in abeyance during resolution discussions. A superseding indictment was issued against Bethea, Gross, and Narco Freedom on March 13, 2015, leading to their arrests on March 18.
On March 19, the Government sought a temporary receiver, with the Medicaid Inspector General subsequently placing a 50% hold on Narco Freedom’s Medicaid payments. Bethea and Gross were excluded from the New York Medicaid program effective March 31, 2015, and Narco Freedom faced exclusion effective April 6, 2015. The legal provisions cited include 18 U.S.C. § 1345(a)(1)(C), which allows civil action against federal health care offenses, and defines such offenses under 42 U.S.C. § 1320a-7b.
42 U.S.C. § 1320a-7b(b)(2)(B) criminalizes the offering or payment of remuneration, including kickbacks, to induce purchases or recommendations of goods or services under federal healthcare programs, punishable by fines up to $25,000 and/or imprisonment for up to five years. The Government alleges that Narco Freedom is violating this statute by providing below-market housing to patients to induce them to obtain drug treatment counseling funded by Medicaid.
A preliminary injunction is an extraordinary remedy not automatically granted; the requesting party typically needs to demonstrate irreparable harm and either a likelihood of success on the merits or serious questions regarding the merits that favor litigation, along with a balance of hardships favoring the requester. However, when a statute allows the government to seek such relief without requiring proof of irreparable harm, courts may presume irreparable harm from the statutory violation itself or interpret the statute's plain language as not necessitating such proof.
Under § 1345(a), the Attorney General can initiate civil actions to prevent federal health care offenses, and § 1345(b) permits the court to issue restraining orders without needing a showing of irreparable harm. The government must demonstrate that an injunction is necessary to prevent substantial injury to the United States or affected individuals. Although irreparable harm is not a requirement, the court must still weigh the hardships faced by both the public and the defendant in deciding whether to grant a preliminary injunction.
Judicial standards for injunctive relief under federal securities laws require consideration of fairness, even in SEC cases. The SEC's enforcement actions do not necessitate a finding of irreparable injury if a likelihood of future violations is established. In violations of § 1320a-7b, the government typically has the advantage in hardship assessments due to the significant public costs these violations entail. Courts diverge on the government's burden of proof under § 1345, with some requiring only a preponderance of evidence for probable cause to issue a preliminary injunction, while others mandate proof of a violation by a preponderance of the evidence. Regardless of the standard applied, the government has demonstrated that Narco Freedom is engaged in a federal health care offense.
The government alleges that Narco Freedom is violating § 1320a-7b(b)(2)(B), which necessitates proof of knowingly offering remuneration to induce purchasing of services covered by federal health care programs. Narco Freedom acknowledges that its substance abuse programs qualify for federal reimbursement but disputes the claims of offering remuneration and the intent to induce purchases of Medicaid services. The definition of remuneration under § 1320a-7b(b) includes any kickback or benefit, not limited to outright bribes, and encompasses anything of value. Therefore, the provision of residence at the Freedom Houses is considered remuneration, as it offers an in-kind benefit below market value to Medicaid beneficiaries.
Narco Freedom contends that reduced-priced housing should not be classified as 'remuneration' under the relevant statutes, referencing a proposed rule change by the Office of Inspector General interpreting § 1320a-7a(i)(6)(F). However, the Government argues this point is flawed since it pertains to criminal penalties under § 1320a-7b, while the proposed rule relates to civil penalties under § 1320a-7a. Section 1320a-7a(a)(5) imposes civil monetary penalties on those who offer remuneration to individuals eligible for health care programs with the intent to influence their benefit decisions. Remuneration includes waivers of costs and services provided below fair market value.
An additional exception exists under § 1320a-7a(i)(6)(F), which excludes remuneration that promotes access to care and poses a low risk of harm. However, this exception applies only to § 1320a-7a, not § 1320a-7b, where the action against Narco Freedom is based. The Government highlights that if Congress intended this exception to apply to § 1320a-7b, it would have stated so explicitly. Additionally, the proposed rule clarifies that exceptions to the definition of 'remuneration' for civil monetary penalty rules do not extend to the anti-kickback statute (AKS), which lacks any exceptions to its broad definition of remuneration.
Even if the 'low risk' exception were applicable, providing reduced-price housing could lead to increased costs for the Medicaid program due to overutilization of Narco Freedom's drug treatment services, contradicting the criteria for 'low risk' remuneration outlined by the Office of Inspector General.
Joan Salmon, the Director of the Comprehensive Treatment Institute-Bronx, testified that many patients transferred to Narco Freedom for free housing, despite their success in existing programs. Freedom House residents also declared attendance at Narco Freedom's outpatient programs without substance abuse issues to access inexpensive housing. Narco Freedom referenced two Office of Inspector General advisory opinions concerning non-profit hospitals providing housing and meal assistance to financially needy families, which deemed those programs compliant with the law. The first opinion recognized a children’s hospital offering support without billing for services, noting low risk of overutilization and no cost shifting to federal programs. The second opinion allowed free lodging and transportation for families of inpatients under specific conditions, emphasizing similar compliance factors. In contrast, Narco Freedom’s program involves Medicaid reimbursement for a high volume of drug treatment services, which presents a higher risk of overutilization. Additionally, Narco Freedom advertises its housing services and shifts costs to Medicaid, leading the Court to conclude that it provides remuneration to Medicaid recipients through below-market housing.
The court determines that the Government must demonstrate that 'one purpose' of the Freedom Houses is to induce Medicaid beneficiaries to enroll in Narco Freedom’s drug treatment programs, rather than proving that this is the 'primary purpose.' Under Section 1320a-7b(b)(2)(B), health care providers are prohibited from offering remuneration to induce individuals to order services covered by federal health care programs. Case law supports the 'one purpose' standard, indicating that only one of the motives for offering remuneration needs to be inducement.
The court highlights that Narco Freedom operates the Freedom Houses partly to encourage Medicaid beneficiaries to join its outpatient programs, as testified by multiple witnesses. Eviction is a consequence for residents who do not participate in Narco Freedom's programs, reinforcing that the provision of housing is linked to treatment enrollment. Despite Narco Freedom's claims of providing housing solely to assist patients in staying drug-free, evidence indicates a requirement for clients to switch from other successful programs to Narco Freedom's offerings. This establishes a quid pro quo arrangement, suggesting that a significant purpose of the Freedom Houses is to induce Medicaid enrollment in Narco Freedom’s treatment programs.
Narco Freedom acknowledges that it will persist in conditioning residence in the Freedom Houses on participation in its treatment programs unless restrained by an injunction. Despite the resignation of its CEO, the organization has continued this practice and has ignored requests from the Government to amend its policy. Evidence of ongoing unlawful conduct substantiates the Government's claim of violations under § 1320a-7b(b)(2)(B). The Government has demonstrated a likelihood of success on the merits, with potential public harm arising from Narco Freedom's remuneration practices, which may lead to the overuse of federally funded health care services.
Narco Freedom contends that a preliminary injunction would jeopardize its treatment model and potentially lead to the closure of the Freedom Houses; however, it has not provided any financial evidence to support this assertion. Testimony regarding the viability of the Freedom Houses was made without documentation. The Court notes that the injunction would not prevent Narco Freedom from housing residents who participate in its programs or requiring outpatient treatment attendance.
Additionally, Narco Freedom's argument that state regulation should preclude the application of § 1320a-7b(b)(2)(B) is deemed unmeritorious. The statute explicitly prohibits Medicaid providers from providing remuneration to induce participation in federally funded programs, and failing to apply this provision undermines its purpose. The Court possesses broad equitable authority under § 1345 to prevent ongoing substantial injury to the United States or affected individuals, further supporting the need for a preliminary injunction.
The Court has the authority to impose necessary relief to protect the public, as established in prior case law. Certain provisions in the preliminary relief order, while not explicitly prohibitive, are essential for ensuring compliance and public safety. Specific paragraphs prevent Narco Freedom from closing Freedom Houses without notice and require these facilities to remain open to inspection, thereby preventing substantial harm to affected individuals. Additional paragraphs ensure that residents are informed of the preliminary injunction and that Narco Freedom's compliance is monitored.
The Government's motion for a preliminary injunction is granted, with a separate order detailing its terms to follow. Deutchman reported that from 2006 to 2014, he contributed $13,300 monthly to staffing expenses as requested by Brand and later pleaded guilty to related charges. The definition of a federal health care program, including Medicaid, is cited, alongside relevant legal precedents concerning cost-sharing by pharmacies and the definition of "remuneration." Narco Freedom did not assert that any safe harbors apply to their case. The Government argued that the lack of an Office of Inspector General regulation does not negate the legal force of certain statutes. There is ongoing debate regarding Narco Freedom's ability to transition to OASAS-certified housing models and whether adequate resources would be available.
