An April 14 article on Reuters.com titled “Lawyers start mining the Medicare data for clues to fraud” explains how plaintiffs’ lawyers are eagerly mining newly-released Medicare data showing provider-specific billings to support existing FCA claims and identify new ones. The article describes one example of how the data is being used to support healthcare cases based on violations of the Anti-Kickback Statute:
For example, if a lawyer were representing a pharmaceutical sales manager accusing his company of paying kickbacks to certain doctors, the data could point to other providers using the company’s products who could serve as witnesses or be added as defendants if the billings suggest wrongdoing.
“It could expand the case beyond a certain institution or provider to multiple institutions or providers,” said Chris Coffin, a Louisiana lawyer who represents whistleblowers.
Other lawyers said the data could produce leads for new lawsuits. When red flags emerge – a doctor bills Medicare an unusually high amount for a particular drug, say – lawyers could investigate what might explain the aberrant figure. That could turn up a possible fraud.
While the data may help relators add details to their pleadings, a strong argument can be made that claims based on the new Medicare data implicate the public disclosure bar. Thus, whether the release of this data ultimately helps or harms defendants remains to be seen, and is likely to depend on the stage of a particular case and the manner in which the information is being used.
Posted by Scott Stein and Allison Reimann
On October 25, 2013, the Second Circuit affirmed the dismissal of United States ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated (No. 11-1565-cv), in a case that confronts head-on the tension between whistleblower incentives and the professional obligations of lawyers—and concludes that an attorney’s ethical obligations trump. Peter Keisler, Richard Raskin, Scott Stein, and Allison Reimann of Sidley Austin represented the defendants in this victory.
Relator Fair Laboratory Practices Associates (“FLPA”) filed the suit in 2005 in the Southern District of New York against the clinical laboratory company Quest Diagnostics Incorporated and its subsidiary Unilab Corporation. FLPA’s claim related to the defendants’ contracting practices. FLPA is a general partnership formed by three former Unilab executives, including Mark Bibi, who was Unilab’s general counsel from 1993-2000. As general counsel, Bibi advised the company on a variety of matters, including its contracts, and handled all of the company’s litigation.
After the defendants learned that one of FLPA’s members was Unilab’s former general counsel, the district court permitted limited discovery to determine whether Bibi and FLPA had improperly used or disclosed Unilab’s confidences in bringing the lawsuit. Following discovery, the defendants moved to dismiss on grounds that Bibi had breached his ethical obligations to his former client by using and disclosing Unilab’s client confidences for his own financial benefit, thereby tainting the entire proceeding. The district court agreed and dismissed FLPA’s action. A few months later, the United States gave notice that it was declining to intervene.
In the Second Circuit, FLPA contended that the district court erred in dismissing the case, arguing that deference to state ethical rules would undermine federal policy that uses whistleblower rewards as a vehicle for rooting out fraud. FLPA also disputed that Bibi violated New York’s ethical rules, maintaining that Bibi was permitted to disclose Unilab’s confidences because he reasonably believed that the defendants were committing a crime.
A unanimous three-judge panel affirmed the district court’s decision. Writing for the court, Judge Cabranes explained that, first, the FCA does not preempt state ethical rules. He wrote that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidences.” Slip Op. at 15. Furthermore, although the FCA permits relators to bring qui tam suits, “it does not authorize that person to violate state laws in the process.” Id. (quoting United States ex rel. Doe v. X. Corp., 862 F. Supp. 1502, 1507 (E.D. Va. 1994)).
The court also agreed that Bibi violated New York’s ethical rules by disclosing confidential information beyond what was “necessary,” as required by those rules. While FLPA claimed that the disclosures were necessary because the FCA requires relators to provide a “written disclosure of substantially all material evidence and information the person possesses to the government,” 31 U.S.C. § 3730(b)(2), the court agreed that Bibi had means of exposing the alleged fraud other than using client confidences in an FCA suit against his former client.
The Second Circuit’s decision has significant implications, particularly in the health care industry where companies rely heavily on their counsel—both in-house and external—to navigate increasingly complicated fraud and abuse laws. Had FLPA’s view of the law prevailed, such candor with counsel would come at considerable risk, because counsel would be free to parlay those confidences into a FCA suit against that client, all the while standing to collect up to 30 percent of the proceeds of a successful action. See 31 U.S.C. § 3730(d). In other words, counsel’s duty to maintain client confidences would always be in potential conflict with that lawyer’s personal financial interest. A contrary ruling also would have threatened another means of reducing government losses: encouraging clients to seek legal advice on fraud and abuse requirements and then obey that advice.
The ruling, however, shows that the federal interest in identifying fraud is not limitless, but rather gives way to ethical obligations that otherwise would prevent an attorney’s participation as an FCA relator. The decision also has implications beyond the FCA context, including the Dodd-Frank Act, which provides its own whistleblower incentives for reporting corporate wrongdoing.
In recent decisions, a federal court entered judgment under the FCA against a healthcare system that a jury had found violated the Stark Law and submitted claims for prohibited patient referrals. Among relatively few FCA cases that have proceeded to a jury verdict, this case illustrates the significant penalties defendants face.
As we previously reported, U.S. ex rel. Drakeford v. Tuomey Healthcare System involved claims that the defendant healthcare system entered into compensation arrangements with physicians that violated the Stark Law and resulted in the submission of false claims for patients who were referred in violation of Stark. In 2010, a jury concluded that the defendant violated the Stark Law but not the FCA. The district court subsequently set aside the verdict and ordered a new trial on the FCA claim, but entered a judgment on equitable claims based on the jury’s finding of a Stark Law violation. The Fourth Circuit reversed the judgment and remanded the case for a new trial.
In May 2013, the retrial concluded with the jury finding the defendant violated the Stark Law and caused the submission of 21,730 false claims, in violation of the FCA. The jury calculated the total value of false claims filed by Tuomey as $39,313,065. The court calculated the award under the FCA as including treble damages plus the statutory minimum per-claim penalty of $5,500, for a total judgment under the FCA of $237,454,195. On September 30, the court ordered the defendant to pay $276 million. The government moved to amend the judgment, noting that the court’s award appeared to include $39,313,065 above the treble damages and statutory penalties to which it was entitled under the FCA. The government noted this appeared to be a “clerical error.” The court agreed, entering an amended judgment for $237 million.
In its order entering the amended judgment, the court also disposed of the defendant’s post-trial motions. Among the arguments for setting aside the jury verdict the court rejected, it denied Tuomey’s request for judgment as a matter of law because the government “failed to prove damages.” The Court noted that although the government “received the medical services it paid for, and it paid the same amount it would have paid had the services been performed by another hospital,” the government was entitled to damages under the FCA because the Stark Law prohibits “any payment” for a claim for prohibited referrals. In addition, the court denied Tuomey’s motion to set aside the $237 million award based on the excessive fines provision of the Eighth Amendment, finding the award of treble damages plus statutory per-claim penalties not to be “grossly disproportional to the gravity of Tuomey’s offense.”
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.
Posted by Ellyce Cooper and Patrick Kennell
In May of 2009, DOJ and HHS partnered to establish the Health Care Fraud Prevention and Enforcement Action Team (HEAT) to “focus efforts to reduce and prevent Medicare and Medicaid financial fraud through enhanced cooperation.” The latest settlement to come out of this partnership was for $26 million against a network of hospitals in Florida — Shands Healthcare. (United States of America and the State of Florida ex rel. Terry L. Myers v. Shands Healthcare, et al., No. 3:08-cv-441-J-16 (M.D. Fla. Apr. 30, 2008).
Six of Shands Healthcare’s Florida hospitals were defendants in a qui tam FCA lawsuit filed by the president of a healthcare consulting firm. The crux of Relator’s fraud based claims was that the hospitals billed Medicare, Medicaid and TRICARE “for inpatient procedures that should have been billed as outpatient services.”
The settlement will be split between federal agencies and the State of Florida, with the vast majority going to federal agencies. The realtor’s portion of the recovery has yet to be determined.
DOJ and HHS took the opportunity to again emphasize their “tireless” effort to “seek justice” in healthcare fraud cases. The DOJ Press Release providing more details on the settlement is available here. Note that since January 2009, DOJ has recovered $10.8 billion from cases involving alleged fraud against federal health care programs.
Posted by Gordon Todd and Jeff Beelaert
The Fifth Circuit recently had good news for government contractors when, in Steury v. Cardinal Health, Inc., No 12-20314 (5th Cir. Aug. 20, 2013) (per curiam), it rejected the contention that an alleged false certification of merchantability, without more, does not support an FCA claim unless payment was specifically conditioned on the certification. “Not every breach of a federal contract is an FCA problem,” the Court held, because the FCA “is not a general enforcement device for federal statutes, regulations, and contract.” Slip op. at 5 (quoting U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 268 (5th Cir. 2010) (“Steury I“).
The relator alleged the defendant had sold medical devices to the federal government despite being aware of a potential defect. Moreover, she contended that the defendant had “expressly warranted that the [devices] were merchantable,” that the contracts “required the [devices] be merchantable,” and merchantability was “a martial contractual requirement.” The District Court dismissed the Complaint for failure to satisfy Rule 9(b), and the Fifth Circuit affirmed.
The court held the relator had failed to “set forth the who, what, when, where, and how of the alleged fraud.” Because the complaint did not identify how the devices deviated from any required specification or contractual obligation, the court held that the pleadings were insufficient to support an “implied false certification” theory. The Fifth Circuit refused to recognize the “implied certification of an implied contract provision that is an implied prerequisite to payment.”
Moreover, the relator failed to show that in the absence of the merchantability provision the government would not have paid for the devices. The court had previously held that the government “may accept (and pay) for noncompliant commercial items.” Steury I, 625 F.3d at 270. In stark contrast to the relator’s allegations, this analysis confirms that the government’s payment is not conditioned on a warranty of merchantability. Even if the relator sought to rely on an “implied warranty of merchantability,” her argument fails because she would be asking the court to find a knowingly false claim from an implied certification of an implied contract provision—something the court refused to “reckon actionable.”
The Fifth Circuit did not address the relator’s “worthless goods” theory because her complaint similarly failed to plead it with the requisite particularity. She did not point to a single device that was sold to the government over a period of nine years that was ever found to be deficient or worthless.
In his concurring opinion, Judge Higginson urged the court to restore Congress’s statutory distinction between falisity and fraud and apply the “common-sense” understanding of those terms. Because the relator failed to allege that an invoice presented by defendant “contained, on its face, a factual assertion capable of confirmation or contradiction that was untrue when made,” the claim was not “false” under the FCA. Nor was the claim “fraudulent” under the FCA because the relator failed to allege that the defendant knew about the device’s defects but, intending to deceive, sold them anyway.
The Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”) recently reported expected recoveries of approximately $3.8 billion for the first half of fiscal year 2013, which included last year’s $1.5 billion global settlement with pharmaceutical company Abbott Laboratories to resolve False Claims Act violations.
In its recently released Semiannual Report to Congress (“Semiannual Report”), which covered the period of October 1, 2012, through March 31, 2013, the HHS OIG touted its global settlement with Abbott as well as other settlements and criminal actions. The Semiannual Report is produced to inform Congress and the HHS Secretary of the OIG’s notable findings, recommendations, and activities over specific six-month periods.
The Semiannual Report highlighted the five-year Corporate Integrity Agreement with Abbott, described as “a global criminal, civil, and administrative settlement,” that the HHS OIG originally entered into with the pharmaceutical company in May 2012 “to resolve allegations that it violated the False Claims Act by improperly marketing and promoting the drug Depakote for uses not approved by the Food and Drug Administration (FDA), including the treatment of aggression and agitation in elderly dementia patients and the treatment of schizophrenia.”
Of the $3.8 billion that the HHS OIG expected to recover, over $521 million was from audit receivables and approximately $3.28 billion was from investigative receivables. Other activity highlighted in the Semiannual Report included:
- The exclusions of 1,661 individuals and entities from participation in federal health care programs;
- The filing of 484 criminal actions against individuals or entities that engaged in crimes against HHS programs;
- And 240 civil actions, including false claims and unjust-enrichment lawsuits filed in federal district court, civil monetary penalties settlements, and administrative recoveries related to provider self-disclosure matters.
The HHS OIG has said that historically, approximately 80 percent of its resources have been directed to Medicare and Medicaid-related work. In the Semiannual Report, it reported that efforts by the government’s Medicare Fraud Strike Force teams led to charges against 148 individuals or entities, 139 criminal actions, and $193.7 million in investigative receivables.
On March 28, 2013, in a reverse False Claims Act case, the United States District Court for the Eastern District of Wisconsin denied Lakeshore Medical Clinic’s motion to dismiss and allowed the relator’s claim to go forward. U.S. ex rel. Keltner v. Lakeshore Med. Clinic, Ltd., No. 11-CV-00892 (E.D. Wis. Mar. 28, 2013). This case shows the increased risk the Fraud Enforcement Recovery Act of 2009 (“FERA”) presents for government contractors, particularly Medicare and Medicaid providers.
Among other changes to the FCA, FERA broadened the scope of the FCA’s reverse false claims provision to encompass retained overpayments. The FCA, as amended by FERA, prohibits “knowingly and improperly avoid[ing] . . . an obligation to pay” the government even without a false statement to conceal the obligation, 31 U.S.C. §372(a)(1)(G), and expansively defines “obligation” to include a duty to pay the government arising “from the retention of any overpayment.” 31 U.S.C. § 3729(b)(3). Knowledge under the FCA is defined broadly as “actual knowledge . . . deliberate ignorance of the truth [or] reckless disregard of the truth.” 31 U.S.C. 3729(b). Thus, government contractors face FCA liability for knowingly or recklessly failing to return a government overpayment of funds.
In Keltner, the relator, a former billing department employee, brought a qui tam suit alleging that the defendant medical group violated the FCA by knowingly submitting false claims to the government and failing to repay government overpayments. The relator claimed that Lakeshore in its annual audits found that two doctors had an upcoding error rate greater than 10%. She further alleged that even though Lakeshore repaid the specific overpayments identified in the sample audits, it did not go back and review other claims by those doctors to repay additional upcoded claims, and Lakeshore later ceased auditing the doctors.
Lakeshore moved to dismiss the complaint arguing that the realtor failed to plead fraud with the particularity required by Rule 9(b). The district court denied this motion and held that the relator “plausibly suggest[ed] that [Lakeshore] acted with reckless disregard for the truth and submitted some false claims.” As to the retained overpayment theory, the court held that the relator sufficiently pled this claim because Lakeshore failed to review additional claims after the audit and by discontinuing the audits going forward. Thus, the court found that Lakeshore “intentionally refused to investigate the possibility that it was overpaid,” and “may have unlawfully avoided an obligation to pay money to the government.”
This case potentially represents an expanded area of liability for healthcare providers and other government contractors under FERA and the FCA. Because knowledge is defined broadly to include reckless disregard, contractors must act quickly if they discover any evidence of government overpayment. Government contractors must be aware of their affirmative burden, follow up on any evidence of overpayment, and repay to the government any overpayments.
Posted by Scott Stein and Brad Robertson
A recent decision by a federal district court clarifies the Rule 9(b) standard for pleading violations of other laws that underlie false certification FCA claims. Readers of this blog may recall our previous post on an earlier decision in United States ex rel. Osheroff v. Tenet Healthcare Corporation, No. 09-cv-22253 (S.D. Fla.), in which the Court dismissed the Relator’s first amended complaint for failure to plead the alleged violations of the Anti-Kickback Statute and Stark law with particularity. The Court has now ruled on the motion to dismiss Relator’s second amended complaint and found that Relator’s newly pled facts pass muster.
In its previous decision, the Court provided specific guidance on what a Relator must allege for a claim of unlawful remuneration. Relator alleged that Tenet Healthcare Corporation and its affiliated companies leased office space to physicians at below-market rates in violation of AKS and Stark and had falsely certified compliance with those statutes in violation of FCA. The Court found Relator’s allegations too conclusory and held that an allegation of improper remuneration based on below-market-value pricing must also “allege a benchmark of fair market value” and “particular examples of rent being charged . . . in a comparable unit.”
With its second amended complaint, the Court found that Relator sufficiently pled the Stark and AKS violations to satisfy Rule 9(b), although Relator did not literally “allege a benchmark of fair market value” as the Court directed. Instead, Relator alleged details of Tenet “systematically misrepresent[ing] the square footage of the office space” so that referring physicians paid for less square footage than they actually received. In addition, Relator provided examples of “non-standard lease benefits” that Tenet allegedly provided to referring physicians, including excessive allowances for improving the rental space. The Court found that the additional factual allegations could enable someone to reasonably infer that Tenet used below-market-rate leases with referring physicians.
In its motion, Tenet attacked Relator’s assessment of the proper measure and valuation of square footage, which Relator had supported in part by its own empirical analysis of rental rates in various markets around the United States. But the Court made clear that it would not assess the methodology of Relator’s calculations at the motion to dismiss stage, stating “[T]he Court’s role is only to determine whether Relator plausibly alleges that Tenet was charging its physician-tenants rent that was inconsistent with fair market value—not to determine definitively whether the figure Relator advances, in fact, represents fair market value.”
The Court similarly found that Relator pled the Anti-Kickback Statute’s scienter requirement with the proper particularity. In its previous decision, the Court found Relator’s allegations deficient in part 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.” (emphasis added). However, in its latest opinion, the Court held that “Relator need not allege that Tenet’s physician-tenants referred Medicaid or Medicare patients to Tenet on account of Tenet’s offer or payment of remuneration.” Instead, the Court found scienter satisfied by the inference that Tenet knowingly sought to induce referrals, as it could “reasonably infer that a landlord would not enter into a lease agreement for a price that fell below the fair market rate if some other consideration [(here, patient referrals)] were not involved.”
This decision also joins the body of caselaw holding that representations made in hospital cost reports and Medicare provider applications may form the basis of false certification claim under the FCA. In deciding that the cost report certification of compliance “easily qualif[ies] as a misrepresentation of material fact,” the Court elected not to decide whether statements in Tenet’s Corporate Integrity Agreements could form the basis of a false certification FCA claim.
While the Court may have clarified aspects of the pleading standard it set in its first opinion, it continues to hold that violations of other laws underlying FCA claims must be pled with Rule 9(b) particularity. There may be no bright line rule for pleading the facts constituting fraud in a false certification FCA case, but Relators must nonetheless plead sufficient facts to demonstrate that inferences of violations of the underlying laws are warranted.
Posted by Kristin Graham Koehler and HL Rogers
The False Claims Act (FCA) provides that “no other person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). This so-called first-to-file rule “bar[s] a later allegation if it states all the essential facts of a previously-filed claim or the same elements of a fraud described in an earlier suit.” United States ex. Rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 32 (1st Cir. 2009). On this, there is no disagreement among the courts of appeal. However, the question arises as to what form the first filed complaint must take to trigger the rule. The Sixth Circuit has held that in order to qualify as a first filed complaint, the complaint “must not itself be jurisdictionally or otherwise barred.” United States ex rel. Poteet v. Medtronic, Inc., 552 F.3d 503, 516-17 (6th Cir. 2009). Considering the same issue, and looking at the Sixth Circuit’s prior holding, the D.C. Circuit held “a complaint may provide the government sufficient information to launch an investigation of a fraudulent scheme even if the complaint” is not jurisdictionally sound, thereby meeting the first-to-file rule. United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204, 1210 (D.C. Cir. 2011). Judge Stearns, in the U.S. District Court for the District of Massachusetts, ruled on this issue over the summer and sided with the D.C. Circuit, dismissing the plaintiffs’ complaint. United States ex rel. Heineman-Guta v. Guidant Corp., 09-11927 (D.Mass. July 5, 2012). On November 6, 2012, the plaintiff filed an appeal with the First Circuit squarely raising this issue of the first-to-file rule.
In the Guidant case, the plaintiff alleged in the District of Massachusetts that the Company was involved in a scheme to induce doctors to use Guidant pace makers. Because of the product at issue, the allegations largely relate to senior citizens and, therefore, involve Medicare. Guidant argued that plaintiff’s FCA claim was precluded because of two previously filed lawsuits that Guidant argued alleged a similar scheme. The District Court found, and plaintiff conceded, that one of the two complaints did, in fact, allege a scheme nearly identical to that alleged by plaintiff. But the complaint was voluntarily dismissed and plaintiff argued lacked the particularity required by Federal Rule of Civil Procedure 9(b). Plaintiff further argued that, for this reason, the complaint could not serve as a jurisdictional bar to her complaint under the principles espoused by the Sixth Circuit in Poteet. The District Court found this argument unpersuasive.
The District Court began by explaining the reason that underlies the first-to-file rule. “The first-to-file rule is intended to provide incentives to relators to promptly alert the government to the essential facts of a fraudulent scheme.” Guidant Corp., 09-11927 at 5 (quotation omitted). Once the government has been put on notice of a fraudulent scheme, there is little benefit to allowing another relator to come later and allege the same scheme. The District Court examined both the Sixth Circuit’s argument that if a complaint is “jurisdictionally or otherwise barred” it does not qualify as an action that would initiate the first-to-file rule, Medtronic, Inc., 552 F.3d 516-17, and the D.C. Circuit’s argument that as long as the previous filing provides notice, whether the actual action is barred in some way or not, the first-to-file rule is triggered. SLM Corp., 659 F.3d 1210. The District Court sided with the D.C. Circuit’s reasoning arguing that the “purpose of a qui tam action is to provide the government with sufficient notice that it is the potential victim of a fraud worthy of investigation.” Guidant Corp., 09-11927 at 10. The District Court saw no reason why the government would be on notice after a filing that was not jurisdictionally or otherwise barred but not on notice following a filing that included the essential elements of the fraud but was somehow barred. Because the government would be on notice regardless, the District Court could find no reason to bar an action in the first instance and not the second.
The plaintiff recently appealed this ruling to the First Circuit. She places squarely at issue the District Court’s decision to side with the D.C. Circuit and reject the reasoning and holding of the Sixth Circuit. Regardless of the way the First Circuit rules on this issue, it will deepen this circuit split. None of us should be surprised to see this decision make its way to the Supreme Court in the next several years. Stay tuned.