COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2012

COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, the Company is not currently aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.

The Company is currently a defendant in a lawsuit stemming from another lawsuit filed on January 7, 2011 by Aetna Health Inc. and Aetna Life in the District Court of Harris County, Texas (Case Number 201101291) (the “State Court Action”) against the Company and St. Michael’s Emergency Center, LLC (“SMEC”). SMEC is one of the Company’s off-campus emergency departments. The State Court Action primarily claimed fraud/fraudulent non-disclosure and negligent misrepresentation and sought damages, expenses and attorneys’ fees. The claims were based on the billing practices associated with the contractual affiliation agreement between the Company and SMEC. Under the affiliation, when a patient is treated at the Company’s off-campus emergency department, the resulting claims for facility fees and related fees are submitted to insurers for reimbursement under the Company’s tax identification number. The State Court Action alleged that such facility fees and related fees are fraudulent and improper when submitted under the Company’s tax identification number because the Company and SMEC are not properly or sufficiently integrated and affiliated and because the relationship is an alleged sham. On February 14, 2011, the Company filed its original answer denying all allegations. Further, on March 2, 2011, the Company moved to dismiss the State Court Action on the grounds that the petition raised state law claims that are preempted by the Employee Retirement Income Security Act (ERISA) and because only federal courts have jurisdiction over ERISA matters.

In response to the Motion to Dismiss, on April 7, 2011, Aetna Life segregated its claims and filed an additional lawsuit with the United States District Court for the Southern District of Texas (Houston Division) (Case Number 4:11-cv-01341) (the “Federal Court Action”) against the Company and SMEC asserting state law claims for fraud/fraudulent non-disclosure and negligent misrepresentation and also an ERISA claim in connection with the billing practices associated with the affiliation agreement between the Company and SMEC.

After filing an amended petition in the State Court Action and filing an amended complaint in the Federal Court Action, Aetna Health, Inc. and Aetna Life nonsuited the State Court Action on November 18, 2011. Aetna Health, Inc. is not a plaintiff in the Federal Court Action.

The current complaint in the Federal Court Action, the Second Amended Complaint, continues to assert claims against the Company and SMEC. The complaint also asserts claims against the Company’s other off-campus emergency departments (Bellaire Emergency Center, LLC, Emergency Healthcare Partners, LP, Preferred Emergency Room LP, River Oaks Emergency Center, LLC, Shertx, LLC, and The Woodlands FEC, LLC), alleging that the affiliation with these other emergency departments give rise to the same claims as the affiliation with SMEC. The complaint asserts claims against three other parties (Diane Crumley and her related entities, Premier Health Services and Vital Weight Control, Inc.) who participated in the negotiation and formation of the affiliations between the Company and its off-campus emergency departments, claiming they are part of a conspiracy to defraud Aetna Life. The complaint also asserts claims against Brian Orsak (a representative of SMEC) and Dr. Shannon Orsak (a representative of SMEC) and alleges they are part of the conspiracy to defraud Aetna Life.

On December 14, 2011, the Company filed a partial motion to dismiss the Second Amended Complaint; seeking to dismiss all claims based on state law as such claims are preempted by ERISA, and seeking to require Aetna Life to proceed solely on its ERISA cause of action. On December 14, 2011, the Company also filed an answer and counterclaim to Aetna Life’s Second Amended Complaint. On December 23, 2011, Aetna Life filed a motion for judgment requesting a ruling that Aetna Life is entitled to all facility fees paid to the Company before November 2011.

On December 27, 2011, the Centers for Medicare and Medicaid Services (“CMS”) gave the Company a deadline of February 10, 2012, to show that the Company complied with Medicare’s requirement that a hospital provider must be primary engaged in providing inpatient services to be a provider within the Medicare program. According to CMS, the Company was not primarily engaged in inpatient services due to the significantly higher ratio of outpatients treated at its emergency departments. In response, on January 11, 2012, the Company informed CMS that it had decided to change the scope of its services to a more inpatient-focused model by terminating the relationship with its off-campus emergency departments. On January 13, 2012, Medicare acknowledged the Company’s proposal to avoid proposed termination from the Medicare program, and gave it until April 12, 2012 to meet the statutory Medicare definition of a hospital to remain in the Medicare program. On April 10, 2012, CMS informed the Company that, based on the progress made with the implementation of its corrective action plan, CMS was suspending the termination action on the hospital.

On January 13, 2012, the Company filed an opposition in response to Aetna Life’s motion for judgment. On February 20, 2012, Aetna Life amended its motion for judgment to seek all facility fees paid from July 25, 2009, to the present on the basis that it alleges the Company failed to meet the definition of a provider under the Medicare program during that period. The Court held an oral hearing on Aetna Life’s motion for judgment on February 21, 2012. On February 28, 2012, Aetna Life filed a notice with the court representing the amount of facility fees paid to the Company and its emergency departments from July 25, 2009, through November 10, 2011, to be $13.869 million. Aetna Life’s notice also represented that during this same period, $5.006 million was paid as ancillary fees that Aetna Life seeks to also recover. Aetna Life’s motion for judgment remains pending.

Discovery in the lawsuit is ongoing. Although the lawsuit as currently pled is not clear regarding damages, Aetna Life’s notice to the court described above in connection with its motion for judgment indicates it is seeking at least $18.875 million. Aetna Life’s notice states that it paid total fees of $46.974 million to the Company and its emergency departments from January 1, 2009, through December 31, 2011, of which (a) $13.869 million are facility fees paid through November 10, 2011, and (b) $5.006 million are ancillary fees paid through November 10, 2011, totaling $18.875 million in facility and ancillary fees that Aetna Life seeks to recover through November 10, 2011, excluding punitive damages and attorney fees. The Company has denied all claims and intends to continue to vigorously defend these claims. An estimate of the amount or range of loss or possible loss cannot be made at this time.

Certain of the co-defendants in these actions have requested that the Company provide indemnification for their legal fees and other costs or losses arising from the above litigation. An estimate of the amount or range of loss or possible loss arising from any alleged indemnification obligations cannot be made at this time.

- Definition

The entire disclosure for commitments and contingencies.

+ References

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+ Details

First Surgical Partners Inc. 10-Q