Posted by Jaime L.M. Jones and Brenna Jenny
Although relators and the government have long leveraged statistical inferences to estimate damages in FCA cases, in two recent opinions, courts have permitted the extension of these approaches to efforts to establish FCA liability. This is a troubling signal for defendants because, particularly when utilized in conjunction with the lower pleading standard of certain circuits, these decisions will make it easier for FCA plaintiffs to fend off a motion to dismiss.
On September 29, 2014, the District of Tennessee significantly expanded the role of statistical sampling in FCA litigation, when it ruled that extrapolation from a small sample can be used not merely to calculate damages, but to establish liability. In U.S. ex rel. Martin v. Life Care Centers of America, Inc., the government alleged that Life Care Centers, which owns a chain of skilled nursing facilities, pressured therapists to overstate the amount and intensity of therapy residents required, resulting in higher daily per diem payments under Medicare Part A. The government did not present the court with any specific examples of patients who received medically unnecessary therapy. Instead, the government sought to select a random sample of 400 Medicare beneficiaries who received high-intensity therapy, examine their medical records to determine whether they any of this therapy was medically unnecessary, and then extrapolate any findings of unnecessary services received by these 400 patients across 54,396 patient admissions, comprising 154,621 claims, to ascertain the number of false claims the defendant submitted.
The defendant strongly disagreed that this novel statistical application could establish falsity or materiality in this case, arguing that the unique nature of each patient’s condition requires an individual assessment of medical necessity, thereby precluding extrapolation. This is particularly so because the per diem payments received by skilled nursing facilities hinge on a patient’s Resource Utilization Group (“RUG”) classification, and even if a portion of a patient’s therapy were medically unnecessary, a patient could remain in the same RUG based on the balance of the necessary portion of his therapy.
The court acknowledged the distinction between using extrapolation to establish damages after liability has already been proven, and using extrapolation to establish liability in the first instance. However, after assessing the case law marshaled by both sides, the court found all to be inapposite and, left to decide the matter in a perceived vacuum, the court determined that the fraud-fighting goals of the FCA would be stymied if the court sided with the defendants and effectively required a “claim-by-claim review” in every FCA suit. The court reasoned that if “Congress intended to preclude statistical sampling from being used in this context, it has had ample opportunity to have that intention reflected in the language of the FCA.” Furthermore, the court viewed defendants as sufficiently protected from specious statistics through other sturdy safeguards, such as the opportunity to cross-examine opposing expert witnesses.
A recent decision in U.S. ex rel. Greenfield v. Medco Health Systems, Inc., demonstrates how reliance on statistical inferences, in conjunction with adoption of the more lenient pleading standard, can resuscitate a qui tam suit that may otherwise struggle to survive a motion to dismiss. The relator alleged that defendants—providers of specialty pharmacy services and hemophilia therapy management programs—tied their charitable donations to hemophilia foundations to the recipients’ patient referrals back to the defendants. In addition, defendants allegedly gave gifts to patients, including Medicare and Medicaid beneficiaries, in order to encourage them to continue to use their services. The court dismissed the second amended complaint without prejudice, ruling that it failed to show that any of defendants’ charitable contributions were tied to federal funds. Indeed because the recipients of the donations used the funds to purchase insurance for financially needy patients, the court ruled that the alleged quid pro quo scheme “demonstrate[s] that defendants’ contributions were used by [the foundations] to avoid the need to avail themselves of any federal benefits program.” The court also concluded the “plaintiff’s math (and his corresponding assumption that federal funds are implicated) is too attenuated and derivative to state a viable claim under the heightened Rule 9(b) standard.”
The relator’s Third Amended Complaint still relied on statistical inferences. For example, the relator concluded that because nationwide, 6% of hemophilia patients are Medicare beneficiaries and one-third are Medicaid beneficiaries, 6% of defendants’ 401 hemophilia patients in New Jersey (24 patients) must be Medicare beneficiaries and 33% (133 patients) must be Medicaid beneficiaries. The relator’s estimates were either widely off—defendants had 53 patients in New Jersey who were Medicaid beneficiaries—or completely unsubstantiated—relator could only show the number of defendants’ Medicare beneficiaries (149) nationwide. Moreover, the relator could not point to any of these Medicare or Medicaid beneficiaries as having received inappropriate gifts from the defendants.
However, the Third Amended Complaint survived defendants’ motion to dismiss in no small part because in the intervening time period, as we previously reported, the Third Circuit Court of Appeals sided with the First, Fifth, Seventh, and Ninth Circuits in adopting a less restrictive pleading standard satisfied by “indicia that lead to a strong inference that claims were actually submitted,” rather than by representative samples of allegedly false claims submitted. The new standard transformed the plaintiff’s “attenuated and derivative math” into “plausible statistical inferences” that adequately pled a “a strong inference that claims were actually submitted for reimbursement for these illegally procured patient prescriptions from federal funds.”
As the Martin court observed, there is little pre-existing case law in this area, and the extent to which statistical sampling can evolve into a tool for establishing FCA liability is a topic we will continue to monitor.
Posted by Scott D. Stein and Brenna Jenny
We previously reported on the Department of Justice’s (“DOJ’s”) and the New York Attorney General’s pioneering suits against a provider network, based solely on a failure to timely refund overpayments. See U.S. ex rel. Kane v. Continuum Health Partners, Case No. 11-2325 (S.D.N.Y.).
On September 22, 2014, the defendants (“Continuum”) filed motions to dismiss the federal and State of New York False Claims Act suits, arguing that the relator’s internal email to colleagues listing a set of potential overpayments did not trigger an obligation to return “identified” overpayments. Continuum emphasizes that the relator’s preliminary assessment, by the DOJ’s own acknowledgement in its complaint, required “further analysis” to “corroborate” the relator’s suspicions. The focal point of Continuum’s brief is DOJ’s position that “mere notice of a potential but unconfirmed overpayment” is equivalent to “identifying” an overpayment. Continuum marshals arguments sounding in legislative history and statutory construction, but one of its most forceful points is to highlight the practical necessity of allowing providers sufficient time to investigate and confirm any potential overpayments uncovered during internal audits. Indeed, as Continuum observes, the government itself is rarely able to complete its own investigations within the initial sixty day timeframe during which a qui tam suit is held under seal.
Continuum also argues that even if it is deemed to have “identified” overpayments when the relator sent his email, the government has failed to allege that Continuum “concealed,” “avoided,” or “decreased” an obligation. Continuum alleges that these terms imply some affirmative conduct, not simply failing to act (report), and that the plaintiffs have alleged no such conduct.
Continuum also notes that the reverse false claims provision of the federal FCA applies to obligations to pay “the Government,” and Continuum maintains that the statutory treatment of this word indicates a narrow application to the federal government, and not state governments. As such, Continuum contends, its allegedly belated repayments of funds to New York Medicaid cannot create liability.
With regard to the New York False Claims Act, Continuum makes the further argument that its reverse false claims provision was not enacted until March 2013 and should not be applied retroactively. Because the alleged violations occurred two years prior to the provision’s enactment, Continuum contends, they cannot serve as a basis for liability.
Posted by Scott Stein and Brenna Jenny
The Southern District of Ohio recently granted defendants’ motion to dismiss in a FCA case based on alleged violations of the Anti-Kickback Statute (“AKS”) through “swapping.” Swapping allegations can take a variety of forms; here, relator claimed that defendant Mobilex (a provider of mobile, on-site x-ray services to Skilled Nursing Facilities (“SNFs”) and long-term care facilities) deeply discounted its services for Part A beneficiaries while charging higher rates to services for Part B beneficiaries. Because Mobilex’s clients are reimbursed on a per diem basis for the x-rays provided to Part A beneficiaries, the facilities allegedly received remuneration in the form of pocketing the extra discount on Part A services. This remuneration, according to relator, was intended to induce facilities to refer to Mobilex the opportunity to provide x-rays to Part B residents as well, at non-discounted prices.
After more than two years of seeking extensions of time, the United States declined to intervene. The relator moved forward, premising his swapping theory on the argument that Mobilex priced its Part A services below cost. Relator insisted the only appropriate measure of cost was “fully loaded costs,” which includes not only variable expenses, but fixed costs and overhead. There was no direct evidence of an intent to induce referrals through discounted prices. Instead, relator argued that Mobilex was deliberately ignorant to the fact that its Part A services were priced below cost.
In rejecting the relator’s theory of liability, the court relied heavily on an opinion we previously described here, in which a relator’s efforts to box a court into rigidly defining a single standard for calculating whether discounts are “below cost” fell equally flat. First, the court refused to find that Mobilex “knowingly” violated the AKS, ruling that even “arbitrary prices set ‘with intentional disregard for costs’ do not establish inducement” under the AKS. Slip Op. at 10. Second, relator failed even more fundamentally to show that Mobilex’s discounting violated the AKS. Relator had little response to Mobilex’s explanation that its prices were above Fair Market Value (“FMV”), other than to criticize FMV as a metric for analyzing discounts. Although relator cited as dispositive several Health and Human Services, Office of Inspector General (“OIG”) Advisory Opinions describing below cost discounts (often equated to below fully loaded costs) as “suspect,” the court reiterated that, under Supreme Court precedent, agency opinion letters are not entitled to deference, and furthermore, whether OIG further investigates “suspect” discounting practices does not render them per se illegal. The court concluded not only is a “fully loaded costs” analysis not required to determine whether discounting practices violate the AKS, but obligating such an approach would lead to absurd results, e.g., a corporate entity’s headquarters could alter overhead costs only tangentially related to the services at issue, which could nonetheless rework a contract’s fully loaded costs, significantly impacting the calculus of whether ongoing discount arrangements were legal.
Case law regarding the types of discounting practices that will be deemed to have violated the AKS has been sparse, and the OIG’s guidance has been consistently limited. This opinion adds support for the approach that where there is evidence a business’s costs meet at least one rational standard, such as FMV, a plaintiff should not be able to argue that the failure to meet a different standard establishes a violation of the AKS.
A copy of the court’s decision can be found here.
Posted by Scott Stein and Brenna Jenny
On June 27, 2014, the Department of Justice (“DOJ”) elected to intervene in a FCA suit based solely on an alleged failure to timely refund overpayments to the government. The failure to refund provision was one of the significant changes to the FCA wrought by the Affordable Care Act, and this suit is believed to be the first one in which DOJ has intervened based solely on allegations of a failure to refund.
The ACA amended the FCA by defining “obligation” as it is used in the “reverse false claims” provision to include retention of an overpayment from Medicare or Medicaid. Failure to report and return such overpayment within 60 days from the date on which the overpayment is “identified” creates potential liability under the FCA. The ACA left many open questions regarding the mechanics of the overpayment provision.
The relator is a former employee of Continuum Health Partners (now part of Mount Sinai Health System), who conducted an internal audit of Continuum’s claims after the New York Office of the State Comptroller notified Continuum in September 2010 that it had wrongly billed Medicaid as a secondary payor on certain claims. After concluding that a computer programming glitch was responsible for the error, relator emailed his managers on February 4, 2011, enclosing a spreadsheet indicating what he believed to be approximately 900 erroneous claims from three hospitals. Relator’s employment was terminated four days later. However, Continuum began refunding the claims at issue “in small batches,” such that 600 of the approximately 900 claims had been repaid as of June 2012, when Continuum received a subsequent Civil Investigative Demand. The remaining 300 claims were refunded by March 2013.
DOJ’s intervention in this case is notable in several respects. First, as we previously reported here, in February 2012, the Centers for Medicare and Medicaid Services (“CMS”) published a proposed rule to implement the ACA’s overpayment provision, as applicable to providers and suppliers under Medicare Parts A and B. Over two years later, CMS still has not published a final rule. Yet DOJ has apparently chosen this case as a vehicle to litigate the scope of the overpayment rule, notwithstanding that CMS has yet to issue final guidance. (While CMS has issued final guidance as to the meaning of “identified overpayment” for MA organizations and Part D Plan sponsors, it does not appear that this guidance applies to the claims at issue in this case).
DOJ’s complaint indicates that it believes that the defendants “identified” the overpayments on February 4, 2011, when relator provided the spreadsheet of claims at issue to his superiors. Relator also apparently shares that view, as the docket reflects that he filed his complaint under seal on April 5, 2011, exactly 60 days after writing the email to his managers detailing what he believed to be erroneous claims. Relator did so, even though (according to the complaint in intervention) his email to his superiors “indicated that further analysis was needed to corroborate his findings.” Thus, this lawsuit (and DOJ’s intervention, in particular) suggests that even preliminary, uncorroborated results from internal compliance activities may be sufficient to reach the point at which a company becomes sufficiently aware of an overpayment to trigger the countdown to FCA liability.
This suit also highlights the significant financial stakes at issue even in a case based solely on failure to timely refund overpayments. While the complaint contains the standard plea for treble damages, it appears from the allegations that Continuum already refunded the claims at issue, which would all but eliminate the prospect of damages. However, the defendants remain exposed to the possibility of civil penalties ranging from $5,500 to $11,000 for each claim that the government contends was not timely refunded. Through his initial review, relator believed 900 claims contained overpayments, which would yield damages totaling anywhere from $4,950,000 to $9,900,000. Yet the magnitude of the potential civil penalties remains an open issue. Relator’s amended complaint alleges that, if his initial calculations are extrapolated from the claims of the three hospitals he reviewed to all hospitals at issue, the number of claims tainted by overpayments would be much higher (although he does not provide an estimate of the number of claims). Additionally, the State of New York has elected to intervene, based on violations of the New York State False Claims Act. Violations of this state law carry a civil penalty of between $6,000 to $12,000 per false claim.
Had the government chosen to pursue enforcement under the Civil Monetary Penalties (“CMP”) Law instead of the FCA, the financial consequences could potentially have been catastrophic. Under the Department of Health and Human Services, Office of Inspector General’s (“OIG”) recently proposed approach to implementing the parallel overpayments provision of the CMP Law, OIG may impose fines of $10,000 per claim for each day an identified overpayment is not returned. 79 Fed. Reg. 27,080, 27,086 (May 12, 2014). Whereas even a belated but eventual cure mitigates financial penalties for overpayments under the FCA, under the CMP Law this may not be the case.
DOJ’s intervention in this case heightens the necessity of a timely internal assessment and response to complaints regarding overpayments. Given this relator’s filing on the first possible day that FCA liability could be incurred, companies may have little leeway in determining whether they have identified an overpayment.
Posted by Jaime Jones and Brenna Jenny
Three industry advocacy groups recently filed an amicus brief urging the Supreme Court to provide clear measures of proportionality between misconduct and financial liability under the FCA. See Gosselin World Wide Moving, N.V. v. United States ex rel. Bunk, U.S., No. 13–13–99, amicus brief filed 6/23/14. The Pharmaceutical Research and Manufacturers of American (“PhRMA”), the American Hospital Association (“AHA”), and the U.S. Chamber of Commerce are seeking review of a Fourth Circuit decision upholding a $24 million fine against a government contractor. The penalty was premised on the contractor’s one-time filing of a single false statement in a $3.3 million contract, which the contractor performed with no evidence of economic loss to the government. The industry stakeholders expanded on the appellant’s own arguments, which the Fourth Circuit rejected as we reported here, that this fine violates the Eighth Amendment’s Excessive Fines Clause.
The Fourth Circuit adopted a rigid approach to the imposition of penalties under the FCA, applying a separate penalty to each claim for payment that was tainted by the earlier false statement made during the contracting stage. Despite being mechanical, this approach has created great industry uncertainty. As the amici pointed out, healthcare is one of several sectors disproportionately penalized under this approach, due to the small-value, high volume nature of the claims often submitted to the government.
As the brief details, this issue presents a two-fold circuit split: not only have some courts rejected the application of the Excessive Fines Clause to FCA penalties, but those that have acknowledged Eighth Amendment-based limitations on fines have not adhered to Supreme Court precedent requiring penalties to bear a relationship to the extent of the defendant’s “clearly individualized” acts of fraud, the degree of his culpability, and the harm caused to the government.
We will continue to monitor the important developments in this case and under the Eighth Amendment, and provide updates as appropriate.
Posted by Scott Stein and Brenna Jenny
In May, the Department of Health and Human Services’ Office of Inspector General (“OIG”) published two proposed rules, one expanding its exclusion authority (“Proposed Exclusion Rule”) and the other broadening and strengthening the availability of civil monetary penalties (“Proposed CMP Rule“). Some of these proposals merely codify provisions of the Affordable Care Act (“ACA”), whereas others are a product of the OIG’s own initiative, but interwoven within both are changes reflecting the influence of the False Claims Act on the enforcement landscape.
For example, in the Proposed Exclusion Rule, the OIG is proposing to add a provision expressly stating that there is no time limitation for the conduct that can form the basis for exclusion, regardless of whether the conduct is based on the violation of a statute with a statute of limitations. 79 Fed. Reg. 26810, 26815 (May 9, 2014). Much of the OIG’s rationale reflected its desire to be able to match the time lag often associated with FCA litigation. The OIG explained that with a time limitation, it might feel compelled to file a notice of proposed exclusion against a defendant in a pending FCA suit to avoid losing its window of opportunity, even where it might subsequently decide against exclusion with a fuller understanding of the allegations.
The OIG also proposes to borrow definitional terms from the FCA for its own enforcement purposes. As a consequence of being excluded, individuals and entities cannot receive payment “for any item or service furnished” to a federal healthcare program (“FHCP”). The OIG’s new definition would expand the meaning of “furnish” to encompass not only individuals and entities who “submit claims to” FHCPs, but also those who “request or receive payment from” FHCPs, such as organizations that receive block grants from FHCPs. While this definition generally makes explicit the government’s pre-existing enforcement approach, the OIG specifically notes that this “revised wording would be consistent with the False Claims Act’s broad definition of ‘claim'” and “would appropriately encompass all current and future payment methodologies.” Similarly, in the Proposed CMP Rule, the OIG plans to codify the ACA’s new source of CMP liability, based on “any false statement, omission, or misrepresentation of a material fact in any application, bid, or contract to participate or enroll as a provider of services or a supplier under a Federal healthcare program.” The ACA did not define “material,” and the OIG proposes to define the word so as to “mirror the False Claims Act definition.”
Sidley’s client update providing more detail regarding the proposed rules is available here.
The Taxpayers Against Fraud (“TAF”) Education Fund recently reported that the Department of Justice’s (“DOJ’s”) False Claims Act data dramatically underestimates the amount of money actually recovered to the government. In fact, according to TAF, the federal government’s return on investment (“ROI”) related to federal FCA enforcement from fiscal years 2008 through 2012 exceeds 20:1, up significantly from the 16:1 ROI calculated by DOJ. TAF explains that this discrepancy is due to the fact that DOJ’s figures do not include criminal fines associated with federal FCA recoveries or any state FCA recoveries, which together account for almost an additional $9 billion above the approximately $9.4 billion figure attributable to civil net recoveries during the 2008-2012 period. In light of this, TAF views the DOJ as significantly underestimating the benefits of its own investment in health care fraud enforcement.
Other notable statistics cited in the TAF report include the following:
- From 1987 to 1992, a total of 62 new health care qui tam matters were filed, while in 2011 and 2012, respectively, there were 417 and 412 new matters.
- In 2012, whistleblowers received $284 million of the more than $2.5 billion in health care qui tam settlements and judgments.
- From 2008 to 2012, the federal government poured almost $575 million of funding into U.S. Attorney’s offices, the Office of Inspector General, and the DOJ to facilitate the investigation and prosecution of health care fraud.
Posted by Jaime Jones and Brenna Jenny
An Eastern District of New York judge recently declined to apply a relaxed pleading standard to qui tam claims, dismissing an FCA suit based on alleged violations of the Anti-Kickback Statute for relator’s failure to plead facts sufficient to identify false claims that were actually submitted to the government. In United States ex rel. Moore v. GlaxoSmithKline PLC, No. 1:06-cv-06047 (E.D.N.Y. Oct. 18, 2013), a former employee of GlaxoSmithKline (“GSK”) alleged that GSK induced doctors to prescribe its HIV drugs by offering honoraria and educational grants. The relator urged the district court to relax the Rule 9(b) pleading standard and require merely “an adequate basis for the Court to reasonably infer that false claims were submitted.” Slip op. at 7. The relator alleged the submission of false claims could be inferred from the fact that many patients who use GSK’s HIV products are federal healthcare program beneficiaries and allegations of one doctor’s supposed awareness of the alleged scheme.
In declining to relax the requirements of Rule 9(b), the District Court noted that the Second Circuit Court of Appeals has not yet weighed in on the issue, which has led to a Circuit split. However, the district court observed that the majority of lower courts in the circuit have rejected relators’ attempts to utilize a lower pleading standard. Siding with those courts, the Moore court required both the underlying scheme and the submission of a false claim to be pled with the particularity required by Rule 9(b). With respect to the latter, the court noted that it is not enough to portray the submission of a false claim as “merely conceivable or even likely.” Id. at 8. Instead, relators must allege with particularity “details of either a specific claim for payment that was submitted to the Government by either a medical provider or a pharmacist, or the specific details of an actual Medicaid/Medicare provider certification form signed by a particular physician.” Id. The court dismissed the claims because the relator failed to establish a connection between any alleged kickback and any actual claims for reimbursement.
As we recently reported, the Supreme Court recently expressed an interest (see related post here) in the government’s view of the pleading requirements for FCA claims. The Moore decision emphasizes not only the significance of the ongoing Circuit split on the issue, but the critical importance of Rule 9(b)—at least in some Circuits—to the pleading and defense of whistleblower FCA actions.
Posted by Jaime Jones and Brenna Jenny
The Eighth Circuit Court of Appeals recently reaffirmed that mere regulatory noncompliance, standing alone, is not sufficient to establish False Claims Act liability for claims submitted to Medicare. Rather, the court held, a relator must allege facts tying a defendant’s alleged conduct to Medicare’s expectations regarding material conditions of payment. See United States ex rel. Ketroser v. Mayo Found., No. 12-3206 (8th Cir. Sept. 4, 2013).
In the Ketroser case, relators alleged that the defendant violated the FCA when it submitted one written report, rather than two, as part of a pathology analysis incorporating a two-stage testing process. According to relators, because the CPT codes for the tests were both included in a section of the Medicare Codebook that required “reporting,” Medicare expected Mayo, to create two separate written reports. Mayo responded that it created a written report of the first test, and more broadly “reported” the results of the second test through oral communications between physicians and supplemental written comments as needed.
The court affirmed the district court’s dismissal of the claim based on relators’ failure to submit any “specific evidence” that Medicare considered separate written reports to be a material condition of payment. In this regard, the court joined other Circuits, including the Second, Fifth, Sixth, Seventh, and Ninth, in holding that pleading a “claim of regulatory noncompliance” does not satisfy FCA pleading requirements.
Furthermore, the court suggested that even if Medicare had expected a separate written report as a condition of payment, the Codebook’s “reporting” requirement was ambiguous, and Mayo’s reasonable interpretation negated any inference that Mayo had “knowingly” submitted a false claim. As other courts have held (see related posts here and here), the Eighth Circuit reiterated that where a defendant’s “interpretation of the applicable law is a reasonable” one, relators fail to plead the requisite scienter under the FCA.