Settlement Highlights Ongoing Interest in Kickbacks Affecting Non-Federal Healthcare Programs

Earlier this week, two laboratory testing companies paid $42.25 million to resolve allegations that they violated the California and federal FCAs, as well as the California Insurance Frauds Prevention Act (“CIFPA”), by paying kickbacks to induce physicians to order a specialized lab test for auto-immune and inflammatory diseases. The kickbacks allegedly took the form of inflated processing fees and caps on patient cost-sharing obligations.  See United States ex rel. STF, LLC v. Crescendo Bioscience, Inc., No. 16-cv-2043 (N.D. Cal.). DOJ and the State of California declined to intervene, and the laboratory testing companies entered into this settlement with the relator to resolve ongoing litigation. The settlement highlights increasing enforcement risk arising from kickback allegations affecting non-federal healthcare programs, which are not directly subject to the Anti-Kickback Statute or the FCA. (more…)

Court Walks Back Ruling That Would Require Laboratories to Independently Verify Medical Necessity

Clinical laboratories stand in a position of tension: although laboratory tests must be medically necessary to be reimbursable by federal healthcare programs, laboratories often do not directly engage with patients in a way that would permit them to assess medical necessity.  A district court recently corrected its ruling regarding the extent to which laboratories can be held liable under the FCA when the tests for which they submit claims are not medically necessary.  United States ex rel. Groat v. Boston Heart Diagnostics Corp., No. 15-cv-487 (D.D.C. Dec. 11, 2017). (more…)

Court Finds Kickback Allegations Against Clinical Laboratory Not Adequately Pled

Posted by Scott Stein and Bevin Seifert

On May 19, 2015, a federal district court in the Northern District of Georgia dismissed kickback allegations against Laboratory Corporation of America and Laboratory Corporation of America Holdings (“LabCorp”), holding that the allegations fell short of the particularity required by Rule 9(b). The relators—competitors of LabCorp—alleged that LabCorp’s pricing practices violated Georgia’s state false claims act and were independently unlawful under the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(2)(A). Relators alleged that LabCorp violated the AKS by providing “deeply discounted” prices to customers to induce them to refer (or “pull-through”) large volumes of Medicaid and other business. The court found, however, that relators failed to allege those claims with particularity because they did not identify a single improper referral to a physician, nor a specific Medicaid claim resulting from such referral. Moreover, the court held that relators failed to identify a specific kickback, finding that allegations of specific discounts alone were insufficient to establish a referral or claim resulting from such referral. Having disposed of the federal AKS claims, the court declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and, therefore, remanded the remaining claims to the State Court of Fulton County, Georgia. A copy of the court’s decision can be found here.

DOJ Files Amicus Brief in Private Litigation Premised on Alleged Stark/AKS Violations

Posted by Scott Stein and Brenna Jenny

DOJ recently took the unusual step of filing an amicus brief in a private lawsuit alleging violations of the Lanham Act and various state laws, which resulted from violations of the Stark Law and the Anti-Kickback Statute (“AKS”). See Brief for the United States Supporting Appellee, Ameritox, Ltd. v. Millennium Labs., Inc., No. 14-14281 (11th Cir. Jan. 21, 2015). DOJ explained that it was filing an amicus brief to correct what it views as Millennium’s mischaracterizations of how CMS and the OIG interpret exceptions to the statutory definitions of remuneration under the Stark Law and the AKS. It emphasized the importance of a “proper interpretation” of these statutes, both because the laws independently are key mechanisms for preventing fraud and abuse, and because they serve as predicates for FCA liability.

By way of background, Ameritox filed suit against a competing clinical laboratory, Millennium, in April 2011, alleging that Millennium violated both the Stark Law and the AKS by providing free point-of-care testing cups (“POCT cups”) to physicians. POCT cups contain embedded immunoassay testing strips, which allow physicians to test urine samples and receive drug test results within minutes. Millennium entered into so-called “cup agreements” with physicians, whereby the company provided POCT cups free of charge, in exchange for the physician contractually agreeing not to bill any insurer (private or government) for the testing and to return the cups to Millennium for laboratory testing. Failure to uphold either obligation required a physician to remit the otherwise applicable price of the cup. Millennium argued that it had not provided any remuneration because physicians certified they were not billing for the testing, and therefore they received nothing of value from the cups. Ameritox, however, alleged that physicians were removing the test strips, batch testing them at the end of the day using a chemical analysis, and then submitting bills to insurers.

In May 2014, the district court ruled that the free POCT cups were remuneration where physicians could not otherwise bill for them, and that Millennium violated the Stark Law and the AKS by providing free POCT cups in these circumstances. However, the court determined it was a question of fact whether Millennium violated the law by providing POCT cups to physicians who could bill for them but contractually opted out of the opportunity to do so, in exchange for receiving the cup at no cost. Following the trial a month later, the jury found that Millennium had in fact violated the AKS and the Stark Law.

Millennium appealed to the Eleventh Circuit, arguing that provision of the free POCT cups did not constitute remuneration under either the Stark Law or the AKS. The crux of Millennium’s defense under the Stark law was that the POCT cups fell within a statutory exception to the definition of remuneration for laboratory supplies, i.e., “[t]he provision of items, devices, or supplies that are used solely to (I) collect, transport, process or store specimens for the entity providing the item, device, or supply.” 42 U.S.C. § 1395nn(h)(1)(C)(ii); 42 C.F.R. § 411.351.

<p&ggt;DOJ pointed out that the test strips served the purposes of the physicians testing the specimens, and therefore even if the rest of the cup did transport specimens to Millennium—the entity providing the item—the POCT cups were not solely used for Millennium’s purposes. Likening the insertion of the immunoassay strips into the POCT cups to taping five-dollar bills to the inside of test cups, DOJ reiterated that under CMS’ guidance, benefits conferred on physicians that fail to meet a Stark Law exception can still be remuneration, even if the value is small and cannot be separately billed.

As to whether the POCT cups constituted remuneration under the AKS, Millennium cited recurrent OIG guidance that “free items and services that are integrally related” to the offering supplier’s services are not considered remuneration. See, e.g., OIG, Adv. Op. No. 12-10 (Aug. 23, 2012). However, DOJ averred that from the OIG’s perspective, “integrally related” means that the item is so intertwined with the underlying service that it can only be used as part of that service and as such has no independent value apart from the service. DOJ did acknowledge that the OIG has recognized the potential permissibility of incidental benefits to physicians, so long as they are narrowly linked to the provision of the services. Yet DOJ insisted that the free POCT cups in fact conferred substantial benefits distinct from Millennium’s laboratory testing services, and therefore rose to the level of remuneration.

A copy of DOJ’s amicus brief can be found here.

OIG Issues Special Fraud Alert Regarding Laboratory Relationships with Physicians

On June 25, 2014, the U.S. Department of Health and Human Services’ Office of Inspector General (“OIG”) released a Special Fraud Alert addressing two increasingly common relationships between clinical laboratories and physicians that may raise fraud and abuse concerns—payments to referring physicians for (i) specimen collection and (ii) data submission/review for laboratory registries. This Special Fraud Alert is likely a response to the increasingly competitive nature of the clinical laboratory industry as a result of downward pressure on reimbursement, new health reform delivery structures and the influx of small esoteric laboratories offering limited, specialized test menus. In this environment the OIG is concerned that some laboratories may be taking steps to win business from referring physicians in potential violation of the Federal Anti-Kickback Statute. Arrangements that are the focus of Special Fraud Alerts are common targets for FCA claims.

District Court Dismisses Virginia FCA Claim Against Clinical Laboratory Based on Alleged Violation of “Usual and Customary Charge” Requirement

Posted by Ellyce Cooper and Collin Wedel

On May 13, a district court in the Eastern District of Virginia dismissed a healthcare fraud action under the Virginia Fraud Against Taxpayers Act (“VFATA”) against Laboratory Corporation of America (“LabCorp”) alleging that LabCorp routinely charged Medicaid more than its “usual and customary charge” for laboratory services. The district court held that the relators’ allegations about Medicaid overcharges and improper kickbacks for Medicaid referrals could not proceed because relators (i) failed to specify the particulars of a single false claim under Rule 9(b), and (ii) failed to articulate any particular certification defendants made that was false, in violation of Rule 8(a).

The relators—competitors of LabCorp—alleged that each of LabCorp’s Medicaid reimbursement claims was actionably “false” in two ways. First, LabCorp’s charges to Medicaid prices for laboratory services were higher than the lower prices that LabCorp routinely negotiated with individual insurers and physicians, which relators alleged violated Virginia regulations requiring LabCorp to charge Medicaid its “usual and customary” rates. Second, relators alleged that these lower charges offered to individual physicians constituted impermissible kickbacks meant to induce referral of Medicaid business. Relators alleged that these violations had rendered 2,730,814 claims submitted by LabCorp “false.”

With regard to Rule 9(b), the court acknowledged a split between the circuits about whether relators must identify all of the particulars—e.g., the who, what, when, where, how—of at least one representative claim, and noted that the Fourth Circuit had not addressed that issue. Nonetheless, relying heavily on the Fourth Circuit’s decision in U.S. ex rel. Nathan v. Takeda Pharm. N. Am., 707 F.3d 451, 456 (4th Cir. 2013), cert. denied, 134 S. Ct. 1759 (2014) (a decision we previously wrote about here), the court held that relators must allege with particularity the submission of at least one specific claim for payment. The court found that the relators failed to do so.

On an alternative but related ground, the court also dismissed the complaint under Rule 8(a), relying heavily on the difference between certifying legal compliance in order to participate in a program versus to be paid under that program. The court, distinguishing between legal and factual falsity, held that, in this complaint alleging factual falsity, no liability for fraud under a false certification theory can exist unless relators plead the details of what statement defendants made that was actually false. In Hunter, the relators argued that LabCorp could not have participated in the Medicaid program without agreeing to be bound by Virginia regulations, which mandate that providers cannot charge higher prices for Medicaid patients than for non-Medicaid patients. Under this theory, each overpriced claim was made false because LabCorp would not have been able to submit those overpriced claims were it not for its prior agreement to abide by the regulations. The court, however, held that LabCorp’s general agreement to abide by the law in exchange for participating in Medicaid was not an agreement in exchange for Medicaid payment; its agreement was not false when it was made; and, most notably, “a general representation of compliance with all laws lacks the requisite nexus between the subject matter of the certification and the event triggering the loss—i.e., the kickback and overcharge schemes.”

Although this case arose under the VFATA, rather than the federal False Claims Act, the court’s grounding of its opinion in Rules 8(a) and 9(b) offers guidance to companies seeking to defend against similarly allegations of fraud in the Fourth Circuit. This ruling further strengthens the Fourth Circuit’s already stringent pleading standards under Rules 8(a) and 9(b).