Third Circuit Holds That Relator Who Made Disclosures Pursuant To A Plea Agreement Is Not An Original Source

On August 1, the Third Circuit affirmed the dismissal of the long-running Repko litigation. Repko, the former General Counsel of Guthrie Clinic and Guthrie Healthcare System in Pennsylvania, stole two million dollars and ultimately pleaded guilty to bank fraud. The plea agreement required Repko to cooperate by “providing information concerning the unlawful activities of others.” Pursuant to that agreement, Repko provided information to the government alleging fraud by his former employer. After the Government determined that Repko’s claims were “baseless,” Repko filed a qui tam in which the government declined to intervene.

The Third Circuit held that the district court correctly determined that Repko’s allegations that Guthrie violated Stark and the Anti-Kickback Statute were based on information that was publicly disclosed on websites and in prior litigation. Moreover, the Third Circuit held, Repko could not qualify as an original source because he did not “voluntarily provide[ ] the information” he had “to the Government before filing” the qui tam, as required to qualify for original source status. See 31 U.S.C. sec. 3730(e)(4)(B) (2008). Repko “gave this information only after he pleaded guilty to bank fraud, faced a substantial sentence, and bargained for a lower sentence.” Because “the plea agreement compelled Repko’s disclosures,” the Third Circuit concluded that “he could not be regarded as an ‘original source.'” A copy of the Third Circuit’s opinion can be found here.

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Court Dismisses AKS and Stark-Based FCA Claims For Failure To Plead Unlawful Remuneration With Particularity

A recent decision by a federal district court confirms that in FCA cases premised on alleged false certification of compliance with other laws, the allegations that those other laws were violated must be pleaded with the particularity required by Rule 9(b). In United States ex rel. Osheroff v. Tenet Healthcare Corporation, No. 09-22253-CIV (S.D. Fla.), a relator alleged that Tenet Healthcare Corporation and affiliated companies leased offices to physicians at below-market rental rates and included other compensating perks that constituted an improper remuneration under the Stark law (42 U.S.C. sec. 1395nn, 1396b(s)) and the Anti-Kickback Statute (42 U.S.C. sec. 1320a-7b(b)). Relator alleged that these violations led Tenet to falsely certify compliance with those statutes, in violation of the FCA.

On July 12, the Court granted in part Tenet’s motion and dismissed the complaint with leave to re-plead, on the ground that the Relator’s allegations of unlawful remuneration were too conclusory. Specifically, the court held that allegations of unlawful remuneration based on the provision of something offered for below fair market value must be pled with particularity under Rule 9(b). The court offered specific guidance about what Rule 9(b) requires: the relator “must allege a benchmark of fair market value against which Defendants’ rents to physician-tenants can be tested. Without alleging a benchmark of fair market value,” the court concluded, “it is impossible for the Court to infer whether Defendants’ rents to physician-tenants fall sufficiently below the benchmark so as to constitute remuneration. Relator must then allege some particular examples of rent being charged to its physician-tenants in a comparable unit during the same market that can be contrasted against the alleged benchmark.” The court held that such benchmarks had to be provided not only for the allegations concerning below-market rent, but also for any “other allegedly compensating perks, such as tenant improvement allowances.”

The Court held that a similar level of particularity was required to plead with particularity the “inducement” element of an AKS violation. The court rejected as insufficient Relator’s conclusory allegations that the remuneration was “intended to induce or reward referrals.” “In the context of AKS, [the inducement element] functions as a nexus to ensure Relator includes allegations that the use of remuneration influences the direction of referrals.” Relator’s allegations were deficient because there were “no allegations that any particular physicians were induced to alter their referral decisions on account of their financial relationship with the Defendants.” Relator did not allege “factual allegations suggesting any quid pro quo of below-fair-market-values leases in exchange for referrals,” or “that any physician-tenants felt pressure to refer patients to Defendants instead of other medical entities on account of their favorable rent nor allegations that insufficient referral numbers to Defendants would cause or were feared to cause rental rate penalties in future lease renewals.” Because “no facts suggest that any physician-tenants were induced by their rent to make referrals based on continued remuneration rather than concern for the health and well-being of each physician’s patient, the Court has no basis upon which to reasonably infer that any alleged remuneration clouded the independent judgment of any physician-tenant.”

It will be interesting to see whether the Relator is able to submit a pleading that complies with the Court’s guidance. Too often, relators alleging FCA claims premised on Stark and AKS violations are permitted to glide past the pleading stage based on conclusory allegations that seek to characterize ordinary business relationships as unlawful “remuneration.” This opinion properly applies Rule 9(b)’s requirement that the circumstances constituting fraud be pleaded with particularity by requiring a plaintiff in a false certification based on Stark and AKS violations to plead facts demonstrating that inferences of unlawful remuneration are warranted.

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Supreme Court Upholds Affordable Care Act; FCA And AKS Provisions Remain Standing

The Supreme Court this morning announced that the so-called “individual mandate,” the centerpiece of the Patient Protection and Affordable Care Act (PPACA), which requires most individuals to maintain a minimum level of health insurance, is a constitutional exercise of Congress’s power to tax. Separately, the Court held that a provision of PPACA that would penalize States that elected not to participate in the expansion of the Medicaid program by withdrawing their existing federal Medicaid funding is unconstitutional. However, the Court concluded that this violation can be cured by severing this provision from the rest of the law, leaving the remainder of PPACA standing.

Thus, those False Claims Act and Anti-Kickback Statute-related amendments enacted as part of PPACA, briefly listed here, remain standing: (1) the amendment to the AKS establishing that claims “resulting from” AKS violations that are submitted to the federal healthcare programs give rise to FCA liability (PPACA § 4204(f)(1)); (2) the further AKS amendment, clarifying that knowledge of and specific intent to violate the AKS are not necessary to establish a violation (PPACA § 6402(f)(2)); (3) amendments to the FCA’s “public disclosure bar” provision that convert it from a jurisdictional bar to an affirmative defense that can be raised by a defendant in a motion to dismiss but rejected by the government, precluding judicial resolution of the issue, and significantly limiting the types of disclosures that can give rise to the defense (PPACA § 10104(j)(2)); (4) requiring recipients of “overpayments” to report and return them, and making the failure to do so the basis of a “reverse false claim” cause of action under the FCA (PPACA § 6402(a)); and (5) creating additional civil monetary penalties that may be applied to conduct that violates the FCA (PPACA §§ 6402(d)(2), 6408(a)).

The opinion is available at http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf

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Massachusetts District Court Guts Relators’ Kickback and Off-Label FCA Claims on Motion to Dismiss

Posted by Jonathan Cohn and Josh Fougere

On June 1, Judge Rya Zobel issued a decision dismissing most of relators’ claims against pharmaceutical manufacturer Organon and two long-term care pharmacies, Pharmerica and Omnicare, concerning the antidepressant drug Remeron. Relators’ complaint was premised on allegations that defendants (1) received and/or paid kickbacks in exchange for switching patients to Organon’s preferred drugs, (2) misreported pricing and rebates associated with Organon drug sales to the federal government, and (3) promoted Organon drugs for off-label use in order to switch more patients to those drugs. The complaint alleged kickback claims against all defendants and pricing and off-label claims against Organon only.

Judge Zobel’s decision leaves little of the complaint standing. First, the court found that it lacked jurisdiction over all claims against Pharmerica and all kickback and pricing claims against Organon under the FCA’s first-to-file and public disclosure bars. Two aspects of this ruling are particularly noteworthy: (1) Following the D.C. Circuit, the court rejected relators’ contention that a first-filed complaint must satisfy Rule 9(b) because such a requirement would “frustrate the purpose of the first-to-file bar by raising the threshold for it to apply,” Slip Op. 12 n.17, and (2) It was enough for the first-filed complaint to list the Organon drug Remeron, and expressly naming defendant Organon was not necessary, id. at 15. The two complaints alleged the same essential elements of fraud and that was “sufficient to put the government on the trail.” Id. at 16. It did not matter that that these relators provided “additional details and types of kickbacks.” Id.

Second, the court dismissed off-label marketing claims brought under 31 U.S.C. § 3730(a)(1)-(3) because “if a state Medicaid program chooses to reimburse a claim for a drug prescribed for off-label use, then that claim is not ‘false or fraudulent,’ and liability cannot therefore attach for reimbursement.” Id. at 26. Relators alleged only that a state “may” deny coverage for an off-label prescription, not that any states actually did or that states must do so under the Medicaid statute. The allegation that states had a choice whether to cover such prescriptions and did, the court found, could not establish FCA liability for reimbursement claims purportedly filed because of an off-label marketing scheme. Id. at 27-28.

Third, the court dismissed claims against Omnicare premised on so-called “collateral kickbacks”—that is, incentive payments “such as research grants, sponsorship of annual meetings, data purchasing agreements, nominal-price transactions, and participation in corporate partnership programs”—because they failed to satisfy Rule 9(b). Id. at 28-33. The court found, for example, that “budget[ing] for payments to Omnicare does not confirm that such payments were actually made, that Omnicare solicited them, or that the payments were inducements to participate in the conversion or therapeutic interchange scheme alleged,” and the “conclusory allegation that ‘Omnicare actively pursued Organon to participate in corporate partnership programs, which were mainly ways to funnel money to Omnicare in exchange for Remeron prescriptions'” would not do. Id. at 33. (The court did not say whether dismissal was with or without prejudice.)

Although the court did not dismiss relators’ claims entirely, each of these rulings is critically important to limiting the scope of FCA liability that is frequently pursued in analogous cases against pharmacy providers and pharmaceutical manufacturers.

Related post: D.C. Circuit Splits with Sixth Circuit on Scope of FCA’s First-to-File Bar

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CMS Issues Guidance on Reporting and Refunding of Overpayments Actionable Under the FCA

Posted by Scott SteinBarbara Cammarata and Catherine Starks

On February 16, 2012, the Centers for Medicare and Medicaid Services (“CMS”) released a long-awaited proposed rule (“Proposed Rule“) to implement the overpayment reporting and refund provisions of the Patient Protection and Affordable Care Act (“PPACA”), which are enforceable in a “reverse false claims” action under the False Claims Act.

Under section 6402 of PPACA, providers and suppliers who have been overpaid by Medicare or Medicaid must report and return the overpayment within the later of: (1) 60 days of the date on which the overpayment is “identified;” or (2) the date any corresponding cost report is due, if applicable, or face reverse false claims liability under the FCA. Although the duty to report and return an overpayment is triggered, in the alternative, from the date the overpayment is “identified,” Congress did not define “identified.” The Proposed Rule defines the term by reference to the FCA’s scienter provisions. Specifically, the Proposed Rule would deem an overpayment to be “identified” when the person has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the overpayment, which is how the FCA defines a “knowing” violation of the Act. This standard mirrors that provided in the CMS’ Physician Payment Sunshine Act proposed rule whereby an applicable manufacturer must report payments or transfers of value to a covered recipient when the applicable manufacturer has actual knowledge of or acts in reckless disregard or deliberate ignorance of the identity of the covered recipient.

According to CMS, it incorporated the FCA’s mens rea standard to incentivize providers and suppliers “to exercise reasonable diligence to determine whether an overpayment exists.” In particular, CMS stated that the provision is designed to prevent providers and suppliers from avoiding their obligation to identify potential billing issues through, e.g., self-audits or compliance checks. The Proposed Rule does not otherwise provide guidance as to what steps providers should take to uncover potential billing issues, beyond the requirement to exercise “reasonable diligence,” and that investigations, once initiated, should be conducted “with all deliberate speed.” As evidenced by the case law interpreting the FCA’s “knowingly” standard , there is ample room for CMS and providers and suppliers to disagree regarding whether providers and suppliers have exercised “reasonable diligence” to identify potential overpayments.

Increasing the stakes for providers and suppliers in the event that they fail properly to “identify” an overpayment is the Proposed Rule’s adoption of an FCA-like 10-year “look-back” period. This provision requires providers and suppliers (and allows CMS and qui tam relators) to review any potential overpayments in the prior 10-year period (in contrast to the existing four year CMS reopening period and the three year Recovery Audit Contractor “look back” period). The 10 year look-back period obviously raises the spectre of significant financial liability for providers and suppliers.

As for how overpayments are to be reported, the Proposed Rule adopts CMS’ existing process for voluntary refunds, renamed the “self-reported overpayment refund process” set forth in Publication 100-06, Chapter 4 of the Medicare Financial Management Manual. CMS states that it intends to publish a new form specifically for reporting overpayments under PPACA.

The Proposed Rule also clarifies the relationship between the government’s various self-reporting mechanisms. First, if a provider or supplier reports a violation of the Stark Law through the Medicare Self-Referral Disclosure Protocol, this suspends the obligation to return overpayments, but not to report. In contrast, a provider’s or supplier’s report of potential fraud through the OIG Self-Disclosure Protocol1 both suspends the obligation to return overpayments once the OIG has acknowledged receipt of the submission,2 and constitutes a report for purposes of the Proposed Rule, provided such notification is consistent with the proposed deadlines.

CMS also offers guidance on what constitutes “overpayments” in the context of an alleged violation of the Federal Anti-Kickback Statute (“AKS”). The Proposed Rule notes that that while some overpayments may arise from potential violations of the AKS, third parties to the kickback arrangement do not have a duty to report or return such overpayments unless they have “sufficient knowledge of the arrangement to have identified the resulting overpayment.” In that case, the third party must report the overpayment to CMS, but only the parties to the kickback scheme would be expected to return the overpayment and not the innocent third-party provider or supplier, “except in the most extraordinary circumstances.” While the rule does not expressly apply to manufacturers, this proposed interpretation seems to establish a clear link between claims “tainted” by manufacturer kickbacks and “overpayment” liability. A separate post on this topic will be forthcoming.

While the Proposed Rule expressly applies only to Medicare Part A and B providers and suppliers, and is not final, CMS “remind[s] all stakeholders that even without a final regulation,” they “could face potential False Claims Act liability . . . for failure to report and return an overpayment.”

Comments on the Proposed Rule are due by April 16, 2012.


1 Id. at 9,182.

2 Id. at 9,183.

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Supreme Court’s Ruling On The Affordable Care Act Could Undo Key FCA Amendments

Posted by Ellyce Cooper and Stephanie Hales

On March 26–28, 2012, the Supreme Court will hear oral argument on various challenges to the Affordable Care Act (ACA), the federal health reform legislation enacted in March 2010. Two laws comprise the ACA: the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010. While the vast bulk of the political debate surrounding the ACA involves the individual health insurance mandate and Medicaid expansion provisions, these are only two components of a law that the Eleventh Circuit Court of Appeals described in its underlying opinion as “contain[ing] hundreds of new laws about hundreds of different areas of health insurance and health care.” Florida v. DHHS, Nos. 11-11021 & 11-11067, Slip Op. at 22 (11th Cir. Aug. 12, 2011). In this light, one of the most significant issues before the Supreme Court is whether the remainder of the ACA’s provisions are severable from any provisions that may be deemed unconstitutional.

Of particular import to companies affected by the False Claims Act (FCA) and the Anti-Kickback Statute (AKS), among the ACA’s hundreds of provisions are amendments to the FCA and the AKS that expand the scope of liability and restrict the “public disclosure” defense under the FCA. For example, the ACA:

  • Amends the AKS to provide that any claim submitted to a federal healthcare program for items or services “resulting from” a violation of the AKS constitutes a “false or fraudulent claim” under the FCA. PPACA § 6402(f)(1) (adding a new subsection (g) to 42 U.S.C. § 1320a-7b).
  • Eliminates the need to prove specific intent and actual knowledge to establish an AKS violation. PPACA § 6402(f)(2) (adding a new subsection (h) to 42 U.S.C. § 1320a-7b).
  • Limits the public disclosure bar by (a) restricting the scope of materials that qualify as public disclosure, (b) making it easier for relators to qualify as an “original source,” and (c) eliminating public disclosure as a subject-matter-jurisdictional bar and instead giving the Government veto power over any motion to dismiss based on public disclosure. PPACA § 10104(j)(2) (amending 31 U.S.C. § 3730(e)).
  • Imposes an affirmative obligation on recipients of overpayments to report and return those overpayments or face liability for “reverse false claims.” PPACA § 6402(a) (adding 42 U.S.C. § 1320a-7k, including subsection (d) regarding overpayments).
  • Establishes new civil monetary penalties of up to $50,000 per violation for conduct that is also actionable under the FCA. PPACA §§ 6402(d)(2) and 6408(a) (adding new CMPs under 42 U.S.C. § 1320a-7a(a)).

In the Eleventh Circuit’s 2-1 decision, the appeals court ruled that the ACA’s individual mandate is unconstitutional. Crucially, however, the court found this provision severable from the rest of the law. In so ruling, the Eleventh Circuit stated that “the lion’s share of the [ACA] has nothing to do with private insurance, much less the mandate that individuals buy insurance.” See Slip Op. at 192. Accordingly, under the Eleventh Circuit’s analysis, the rest of the ACA’s provisions could remain intact even if the individual mandate component falls.

The law’s challengers, including 26 states, do not agree; they have told the Supreme Court that the entire law must be struck if the individual mandate is held unconstitutional. Likewise, the federal government does not completely agree with the Eleventh Circuit’s view of severability, either. In its Supreme Court brief responding to the severability question, filed January 27, 2012, the federal government makes two arguments—neither of which asserts that the individual mandate provision is severable from all of the ACA’s other provisions. First, the federal government argues that the Supreme Court should not address the merits of the severability issue in this case, because the petitioners lack standing to challenge the validity of most of the law’s provisions. Should the Justices reach the merits of this issue, however, the federal government further argues that, if the individual mandate falls, so must two particular insurance reform provisions: (1) guaranteed issue, which requires insurers to provide coverage to all comers and prohibits discrimination based on preexisting medical conditions; and (2) community rating, which prohibits plans from charging higher premiums based on applicants’ experiences or characteristics, except for limited variances based on the applicant’s age, where the applicant resides, whether the applicant uses tobacco, and whether the policy covers individuals or families. Under the federal government’s position, only these two provisions—not the entire law—should be struck if the individual mandate is found unconstitutional.

To ensure that the arguments in favor of “full” severability get a full hearing, the Supreme Court appointed an attorney, who does not represent either of the parties to the case, to argue the position that the rest the ACA provisions (including guaranteed issue and community rating) can survive even if the individual mandate does not. (Another appointed attorney will address yet another question: whether the entire case is premature for judicial consideration under the Anti-Injunction Act (26 U.S.C. § 7421(a)).)

If the Supreme Court ultimately agrees with the Eleventh Circuit that the individual mandate is unconstitutional, but holds that the provision is not severable, the entire law would be struck down as unconstitutional. Such a ruling would “undo” the multitude of corollary provisions, which have received less public attention. While it also is possible that the Supreme Court will not reach the severability question in its decision later this year on the fate of the ACA, entities subject to the FCA—and, indeed, anyone affected by the ACA’s “hundreds of provisions”—should appreciate just how much is at stake in the pending decision beyond the provisions at focus in current media coverage.

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Fraud and Abuse Changes in the New Laws Enhance Government Enforcement Power and Heighten Industry Transparency Obligations

President Obama recently signed into law two pieces of legislation that, together, represent the most comprehensive reform that the U.S. healthcare system has seen in decades.1 In addition to providing for sweeping changes to health insurance coverage, healthcare delivery, and healthcare funding mechanisms, these laws substantially expand the government’s investigative and enforcement authority in connection with healthcare fraud and abuse. Additionally, the new laws include increased penalties for fraud and abuse in several contexts, as well as heightened disclosure and compliance obligations for providers, manufacturers, and other entities as part of government efforts to reduce fraud and to increase transparency.

This update highlights the key provisions of the new laws pertaining to anti-fraud and pro-transparency initiatives. Several of these new enforcement risks and compliance obligations take effect immediately or within one year, so affected entities will need to familiarize themselves with these provisions and plan for their implementation accordingly.

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