District Court Denies Motion to Dismiss in Government’s Groundbreaking Overpayment Suit

On August 3, Judge Ramos of the Southern District of New York denied the motion to dismiss of defendant hospitals (“Continuum”) accused of failing to timely return overpayments in violation of the FCA.  See U.S. ex rel. Kane v. Continuum Health Partners, Case No. 11-2325 (S.D.N.Y. Aug. 3, 2015).  In a decision that provides the first significant judicial guidance on the FCA’s overpayments provision, the court held that the statutory sixty-day clock to repay “identified overpayments” begins running “when a provider is put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained.”  As such, the decision portends potentially expansive FCA liability for failing to remediate overpayments promptly.

As discussed in our previous posts on this case here, here, and here, Continuum was notified in late 2010 that a software glitch had caused users to erroneously bill Medicaid.  Continuum asked the relator, then an employee, to examine the extent to which its billings may have been affected.  The relator sent a spreadsheet to Continuum’s management listing 900 claims.  As the government’s complaint in intervention acknowledged, the relator’s “email indicated that further analysis was needed to corroborate his findings,” and indeed, approximately half of these claims were not overpaid by Medicaid.  The relator was fired shortly thereafter, and he filed a qui tam suit sixty days after he sent the email.  According to the United States and New York, both of which intervened, Continuum did nothing further with the relator’s analysis until the state Comptroller raised the issue of the overpayments, at which point Continuum began taking steps to return the overpayments.

The FCA imposes liability on anyone who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”  The Affordable Care Act (“ACA”) amended the Social Security Act to impose liability under this provision based on the failure to report and return overpayments within sixty days of when they are “identified.”  Although the FCA defines “obligation,” there is no statutory definition of “identified,” and the relative degree of certainty that companies must have in order to have “identified” an overpayment has remained one of the most important open questions about the overpayments provision.  As reported here, CMS has issued guidance in the context of Medicare Advantage plans and Part D Sponsors (“Part C/D final rule”), concluding that “an MA organization or Part D sponsor has identified an overpayment when it has determined, or should have determined through the exercise of reasonable diligence,” that it received an overpayment.  However CMS has not yet finalized a proposed rule aimed at Part A/Part B providers (“Part A/B proposed rule”), and the Agency has never released overpayment guidance for Medicaid providers such as Continuum.

The district court’s ruling turned on its analysis of three issues raised by Continuum’s motion to dismiss: (1) the definition of “identify”; (2) whether the government had sufficiently alleged that defendants knowingly “concealed” or “avoided” an obligation; and (3) whether Medicaid payments are subject to the FCA’s overpayments provision.

Definition of “Identify.”  The court began by looking to dictionary definitions of the term “identify,” and concluded that because there are multiple dictionary definitions that could suggest different degrees of liability based on the facts alleged here, “the term ‘identified’ has no ‘plain meaning’ as it is used in the ACA.”

The court next considered four canons of statutory interpretation.  First, the court looked to the legislative history of the ACA.  Continuum noted that the House bill used the phrase “known overpayments.”  The ultimate decision to adopt the Senate’s language of “identified overpayments” indicated, according to Continuum, that some standard less than the FCA’s knowledge standard should apply.  Looking to the legislative history of the 2009 FCA amendments—which first defined “obligation” as “an established duty, whether or not fixed, arising . . . from the retention of an overpayment”—the court concluded that Congress intended “FCA liability to attach in circumstances where, as here, there is an established duty to pay money to the government, even if the precise amount due has yet to be determined.”  Accordingly, the court interpreted “identified” to mean something more general than “known,” namely, “pointed out” or “recognized (as).”  The critical effect of such a definition is that providers have “identified” an overpayment when they are “put on notice of a potential overpayment.”

Second, the court applied the canon of interpretation that disfavors any interpretation viewed as “absurd.”  Continuum argued that if the sixty-day clock begins to run merely whenever potential overpayments are identified, it would be virtually impossible within these time constraints for providers to conduct an internal audit, review claims, and calculate overpayment liability.  The court agreed that this “unforgiving rule” imposed a burden on providers, but noted that nowhere does the ACA “require[] the Government to grant more leeway or more time to a provider who fails timely to return an overpayment but acts with reasonable diligence in an attempt to do so.”  Nonetheless, the court predicted that the harshness of the sixty-day rule would be tempered by appropriate prosecutorial discretion and in all events “would be unlikely to succeed.”  The court did not, however, address the fact that relators and their counsel are not constrained by notions of prosecutorial discretion, and furthermore that even if a suit against a well-intentioned provider were unlikely to succeed, the threat of litigation could force a sizeable settlement far in excess of the provider’s culpability.

Third, the court looked to the legislative purpose of the FCA.  Again relying on statements in the legislative history, the court concluded that Congress wanted the FCA to serve as a robust means of combating fraud against the federal government, which cut against adopting Continuum’s more restrictive interpretation.

Fourth, the court considered whether to accord any deference to CMS’ interpretation of “identified” in the Part A/B proposed rule.  While acknowledging that this rule was a mere proposal not entitled to any formal deference, the court noted that the Part C/D final rule accorded the same definition to “identified.”  Even though neither rule was applicable to Continuum as a Medicaid provider, the court found it “hard to imagine how CMS could reasonably conclude that the word ‘identified’ bears multiple meanings within a single provision, § 3729(a)(1)(G), without express direction from Congress.”  But the idea that the term “overpayment” could bear multiple meanings depending on context is not as absurd as the court makes it out to be.  The ACA’s obligation applies to overpayments, defined as federal funds received or retained “to which the person, after applicable reconciliation, is not entitled.”  In turn, the time at which the “applicable reconciliation” occurs varies by provider type.  For Medicare Advantage plans it occurs at the “annual final deadline for risk adjustment data submission,” see 42 C.F.R. § 422.326(a); for Part D sponsors at the later of either the annual deadline for submitting prescription drug event (“PDE”) data or direct or indirect remuneration (“DIR”) data, see 42 C.F.R. § 423.360(a); and under the Part A/B proposed rule, the applicable reconciliation would have been the submission of a cost report, see 77 Fed. Reg. 9179, 9181 (Feb. 16, 2012).  These windows vary in length, which adds support to Continuum’s argument that the time period for “identification” may not be uniform across all providers.

Knowing Concealment or Avoidance.  The second question before the court was whether the government had sufficiently alleged that defendants knowingly “concealed” or “avoided” an obligation.  The court concluded that the government had adequately pled that Continuum avoided an obligation to repay.  Although Continuum argued the word “avoided” inherently entails undertaking some affirmative step, rather than simply failing to remit payment, the court ruled that the plain meaning of “avoid” encompasses a “failure to act quickly enough.”  Furthermore, this failure was plausibly “knowing” because the facts alleged by the government were consistent with recklessness or deliberate ignorance.

Application to Medicaid.  Finally, the court dismissed Continuum’s third challenge to the government’s complaint, that “obligations” under § 3729(a)(1)(G) only accrue to the federal government, and not state governments.  The court noted that Congress had repeatedly stated that claims submitted to Medicaid constitute false claims for the purposes of the FCA.

The court denied Continuum’s motion to dismiss New York’s complaint-in-intervention for the same reasons as outlined above.  In addition, the court ruled that the reverse false claims provision of New York’s analogue to the federal False Claims Act had retroactive effect.

A copy of the court’s opinion can be found here.  We will continue to closely monitor this important case.