Posted by Scott Stein and Nirav Shah
A recurring issue in FCA cases based on alleged violations of complex statutory or regulatory requirements is the extent to which, as a practical matter, “regulatory ambiguity” is a viable response to the argument that defendants knowingly submitted false claims to the government. We were encouraged when, this past summer, a Pennsylvania district court dismissed FCA claims against a variety of pharmaceutical manufacturers because the relator failed to show that the defendants acted knowingly or recklessly in light of regulatory ambiguity on a complicated price reporting issue. See U.S. ex rel. Streck v. Allergan, et al., No. 08-5135, 2012 WL 259379 (E.D. Pa. Jul. 3, 2012).
A recent decision from the Sixth Circuit provides additional support for this argument. In United States ex rel. Williams v. Renal Care Group, Inc., No. 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012), the Court reversed a district court’s grant of summary judgment in favor of the government and ordered summary judgment in favor of the defendant, concluding that the defendants’ good-faith efforts to “sort through ambiguous regulations” precluded the government from meeting the knowledge requirement of the FCA.
The United States alleged that defendant, Renal Care Group, Inc. (“RCG”), formed a wholly-owned subsidiary, Renal Care Group Supply Company (“RCGSC”), for the sole purpose of taking advantage of a higher Medicare payment rate. This rate was available only to certain patients and payable only to specific entities—namely, those that were not “renal dialysis facilities.” Op. at 15. The government alleged that in light of overlapping officers, shared office space, and, concurrent financial management, RCGSC was a sham alter-ego of RCG, making claims submitted by RCGSC ineligible for payment and therefore false. Op. at 6.
The core issue on which liability turned was “the degree of ‘separateness’ demanded under the pertinent Medicare statutory provisions and regulations in order for a supplier to be deemed ‘not a provider of services [or] a renal dialysis facility.'” Op. at 23. The Court first addressed this question in the context of whether the claims submitted were “false.” The government contended that the regulations at issue prohibited a subsidiary (here, RCGSC) from receiving Medicare reimbursement, meaning that claims for services that it rendered were false. The Court disagreed with the Government’s position, concluding that the neither the statute nor regulations was clear on this issue. Given that regulatory scheme was intended “to ensure that home dialysis patients could engage in cost comparisons,” there was no reason that Congress would have barred a wholly-owned subsidiary from being eligible for reimbursement. Op. at 15.
But turning to the issue of “knowledge,” the Court concluded that given the complex regulatory backdrop and the defendants’ diligence in attempting to comply with the letter of the law, the defendants could not possibly be deemed to have “knowingly” violated the FCA. The Court credited the defendants’ diligence in attempting to determine whether its reimbursement arrangement passed legal muster. Op. at 18. Indeed, defendants engaged legal counsel had attempted to obtain some degree of assurance from the government by submitting a letter requesting confirmation of the legality of the defendants’ corporate arrangement (though no response to the letter was received). Defendants also openly disclosed the corporate structure to the government in various regulatory filings. Taken together, these factors showed that the defendants did not act in “reckless disregard” of the truth of falsity of their claims, but rather made, transparent, good-faith efforts to ensure their approach was lawful.
Another aspect of the Court’s opinion is worth noting. As in many FCA cases, the plaintiff(here, the United States) sought to cast aspersions on the defendants by emphasizing that RGC created RCGSC solely out of a desire to increase profits by taking advantage of certain reimbursement advantages. The opinion noted that the government “focuse[d], somewhat obsessively,” on this assertion to argue that claims submitted by RCGSC were ipso facto false. The Court properly rejected the government’s attempt to suggest that a defendant’s desire to generate profit from participating in federal healthcare programs is, in and of itself, an indicator of fraud, stating “Why a business ought to be punished solely for seeking to maximize profits escapes us.” Op. at 9. As the Court’s comment recognizes, the desire of a for-profit company to maximize profits is irrelevant to the question of whether the means it uses to generate profits is lawful. The fact that the defendants set up a separate corporation in which to enroll certain dialysis patients to garner more Medicare revenue could not, without more, establish any intent or knowledge to commit fraud.
One theory of FCA liability that we are seeing with increasing frequency in the healthcare context is that suppliers have offered discounted bids for goods or services that are “below cost” in an effort to “pull through,” or induce the purchasing entity to refer, more lucrative business that is reimbursable by federal healthcare programs. The offering of such discounts is alleged to constitute unlawful remuneration under the Anti-Kickback Statute. Plaintiffs claim to find support for these claims in advisory opinions and other sub-regulatory guidance issued by the Department of Health & Human Services suggesting that discounts that are below cost or below fair market value (which may or may not be below cost) implicate the AKS. Until recently, there has been relatively little judicial guidance on important issues raised by this theory, such as whether cost or fair market value is the appropriate benchmark for evaluating prices, and what measure of cost is potentially relevant. But in a case with potentially far-reaching implications, a federal judge recently entered judgment against the United States on the theory that the provision of discounts that were “below cost” or for less than fair market value violated the Anti-Kickback Statute.
The case arose out of the negotiation of contracts for durable medical equipment (DME) and related contract billing services between DME providers (the “McKesson defendants”) and CSMS, an institutional provider whose facilities included a nursing home for which DME services were being bid. The government alleged that CSMS sought to induce the McKesson defendants to offer contract billing services for DME “below fair market value, below actual costs, or at a discounted price” by “dangling” the prospect of McKesson receiving other, more lucrative business in exchange. Following a 14-day bench trial, Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi entered judgment for the defendants, finding that the United States failed to prove either a violation of the Anti-Kickback Statute or the False Claims Act, finding that the Government failed to prove either the remuneration or intent elements of the predicate AKS violation.
The Court began its analysis by noting that “[i]n the context of the AKS, courts use ‘fair market value’ as the gauge of value when assessing the remuneration element of the offense.” However, the Court noted, the Government did not define fair market value, and therefore failed to identify a reliable benchmark against which the court could determine whether the discounts constituted “remuneration” under the AKS. Moreover, the defendants presented evidence that their contract bids were not the lowest bids, and were not unreasonable when viewed alongside the other bids. The fact that one competitor’s bid was three times higher than defendants’ was not significant, the Court concluded, in light of the absence of any evidence that the bidding process was not competitive or was tainted in some way.
Having found that the McKesson defendants’ bids were consistent with fair market value, the Court then considered and rejected the Government’s claim that defendants priced their services “below cost.” The court agreed with the defendants that the use of models of incremental cost – “costs expected to increase solely because of that business” — to project profitability, was appropriate, rather than alternative measures of cost (e.g. including some fixed costs) advanced by the Government. The court noted that defendants had prepared almost 50 profitability models over the years, and that none of them projected that incremental costs would exceed incremental expenses. While the Government argued that incremental cost was not the appropriate measure, it “failed to present evidence that such analysis was either illegal under the AKS or improper under standard accounting principles,” noting testimony that “incremental cost analysis is a well-accepted method of analyzing opportunities and profitability.”
The significance of this opinion cannot be overstated, as it strongly supports defense arguments in “below cost discount” cases that (a) fair market value, not “cost,” is the appropriate benchmark for evaluating whether a discount constitutes unlawful remuneration, and (b) if cost is relevant at all, it is appropriate to evaluate profitability using incremental cost, rather than total cost, “direct cost,” or other measures of cost that are advanced by plaintiffs in order to try to characterize a supplier’s bid as below cost.
A copy of the Court’s opinion can be accessed here.
A federal district court in Ohio recently grappled with an issue that arises frequently in healthcare qui tam cases: what happens when a relator steals confidential health information to file an FCA action? The relator in Cabotage v. Ohio Hospital for Psychiatry, No. 11-cv-50 (S.D. Ohio), a nurse, suspected that the hospital’s Medical Director was engaged in fraudulent activity. Cabotage gathered evidence, including the Medical Director’s patient notes and other patient-identifying information, and provided it to an agent for HHS. After HHS declined to pursue a claim against the facility for misconduct, Cabotage filed a qui tam. When the defendant hospital learned that Cabotage had taken confidential patient information, it filed a motion to compel the return of the information pursuant to HIPAA.
The Court concluded that it lacked authority under HIPAA to order the return of the purloined information, and that only the Secretary of HHS could act to enforce that statute. However, exercising its “inherent authority,” the Court entered an order precluding the relator from utilizing in the lawsuit any of the documents she removed from the hospital in connection with her investigation. The Court did not preclude relator from seeking the documents through the discovery process in the qui tam.
A copy of the court’s opinion can be found here.
In Sandoz v. Alabama, the Supreme Court of Alabama extended its earlier opinion in AstraZeneca v. Alabama (2009) and overturned a jury verdict, holding that the State could not prevail on a fraud theory where it had actual knowledge that the defendant’s reported list prices did not reflect actual transaction prices.
Proceeding under various state law fraud theories, Alabama alleged that Sandoz had provided false “Wholesale Acquisition Cost” (“WAC”) and Average Wholesale Price (“AWP”) information to national price compendia, such as First Databank, leading Alabama’s Medicaid program to over-reimburse generic drug purchases. Specifically, Alabama alleged that Sandoz reported its list price without accounting for discounts, rebates, and other inducements, which had the effect of lowering the actual transaction prices to customers.
At trial, Alabama put on evidence that WAC data should reflect a drug manufacturer’s net price, that is the price ultimately charged to wholesalers. By reporting only its list price, exclusive of rebates, discounts, and the like, Sandoz led the compendia to overstate its prices. Alabama, in turn, relied on these allegedly inflated prices in reimbursing drug purchases covered by its Medicaid program, which, it alleges, resulted in over-reimbursements. Sandoz presented contrary evidence showing that WAC is commonly understood to reflect list, not net, prices. The jury disagreed, and found Sandoz liable for hundreds of millions of dollars in compensatory and punitive damages.
On appeal, Sandoz argued that regardless of whether WAC and AWP reflect list or net prices, Alabama could not reasonably have relied on the data it received from the compendia because it had actual knowledge that WAC and AWP pricing data routinely overstates manufacturers actual prices to wholesalers. Applying AstraZeneca, the Court agreed. “To claim reliance upon a misrepresentation, the allegedly deceived party must have believed it to be true. If it appears that he was in fact so skeptical as to its truth that he placed no confidence in it, it cannot be viewed as a substantial cause of his conduct.” Moreover, “plaintiffs alleging fraud cannot be said to have reasonably relied on alleged misrepresentations when they have been presented with information that would either alert them to any alleged fraud or would provoke inquiry that would uncover such alleged fraud.”
The Court pointed to evidence in the record showing that both federal and state officials had long been aware that AWPs routinely exceed actual transaction prices. The record also showed that Sandoz had voluntarily submitted Average Manufacturer Price (“AMP”) data to the state Medicaid agency, which should have put the agency on notice that its WAC and AWP data did not reflect its actual prices.
Although not an FCA case, this decision reflects similar considerations as the District of Massachusetts’ recent decision in United States ex rel Banigan v. Organon USA, which rejected FCA claims predicated on alleged off label promotion where the State knowingly reimbursed purchases of drugs for off label uses.
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.
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
On June 18, the Department of Health and Human Services Office of the Inspector General (“OIG”) announced plans to revise its Provider Self-Disclosure Protocol (“SDP”) and asked for public comment and recommendations on potential changes. The SDP, originally adopted in 1998, allows healthcare providers to disclose actual or potential fraud to the OIG in effort to expedite the resolution of any potential claims and conserve the OIG’s limited investigative resources. The SDP provides healthcare entities with guidance not only on the proper disclosure procedure, but on conducting an internal investigation, estimating the financial impact and liability, and cooperating with the OIG throughout the process.
According to the OIG, it has settled over 800 matters in the past 14 years through the SDP process, resulting in more than $280 million in recovery to the federal healthcare programs. These matters often involved healthcare entities reporting the employment of individuals excluded from the federal healthcare programs or disclosing potential kickbacks. For healthcare entities, the possible benefits of the SDP include avoiding an enforcement action under the False Claims Act, the Anti-Kickback Statute, or other relevant law; the presumption against Corporate Integrity Agreements that accompanies the SDP; and settling claims for less than may otherwise occur through civil litigation.
The OIG now hopes to revise the SDP to “address relevant issues” and “provide useful guidance to the healthcare industry.” To similar ends, the OIG previously issued three open letters in 2006, 2008, and 2009 to encourage use of the SDP, clarify its requirements, and expedite the process. This, however, will be the first revision to the SDP itself.
A copy of the OIG’s announcement can be found here. Comments are due by August 17, 2012.
Posted by Jaime L.M. Jones and Nirav Shah
In a report released last month, the federal government announced that it had recovered nearly $4.1 billion last fiscal year as a result of its escalated fight against health care fraud. Spearheaded by the Department of Health and Human Services and the Department of Justice, the government recouped approximately $2.4 billion in civil health care fraud via the False Claims Act as well as $1.3 billion in criminal fines and forfeitures under the Federal Food, Drug and Cosmetic Act. The number of new cases also rose, with the DOJ opening more than 1,100 new criminal health care fraud cases in addition to the more than 1,800 already pending. The number of civil cases is growing, too, with nearly 1,000 new cases being filed on top of over 1,000 existing actions.
In a blog post announcing the report, HHS Secretary Kathleen Sebelius credits recent tools, including the Affordable Care Act’s $350 million funding of the Health Care Fraud and Abuse Control Program, to help in the fight against fraud. A government fact sheet released on the same day also highlights these efforts, with particular focus on Health Care Fraud Prevention and Enforcement Action Teams (“HEAT”). These teams, created in 2009, are designed to encourage coordination and intelligence sharing among HHS and DOJ. The report also praises the work of the Medicare Strike Force, an “interagency team of analysts, investigators, and prosecutors who can target emerging or migrating fraud schemes, including fraud by criminals masquerading as health care providers or suppliers.” Secretary Sebelius cites these specialized anti-fraud teams and notes that, before their creation, “a fraudster could swindle Medicare for millions of dollars in Florida, close up shop, move to Detroit, and attempt to reestablish the same scheme without ever being noticed. Now, CMS and Department of Justice officials are tracking fraud scams as they move across the country, so that criminals are spotted when they try to re-enroll into Medicare or Medicaid.”
Administration officials noted that the recovery figures are nearly double the $2.14 billion recouped in 2008. Likewise, the number of fraud prosecutions increased 75 percent during the same period. Secretary Sebelius and Attorney General Holder both credited the Obama Administration’s revamped efforts at fighting fraud for these statistics.
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.
Posted by Scott Stein and Allison Reimann
On December 6, 2011, the Department of Justice intervened in an FCA suit against AseraCare Hospice, a hospice provider with facilities in nineteen states. The lawsuit, filed in 2009 by two former AseraCare employees, alleges that AseraCare knowingly filed false claims to Medicare for hospice care for patients who were not terminally ill. The DOJ’s complaint alleges that AseraCare, by pressuring employees to reach aggressive Medicare targets, admitted and retained individuals who were ineligible for Medicare hospice benefits—even after being alerted to problems by an internal auditor.
The case is United States ex rel. Richardson v. Golden Gate Ancillary LLC d/b/a AseraCare Hospice, No. 09-CV-00627, and is pending before Judge Abdul Kallon in the Northern District of Alabama. As reported by Bloomberg News, the DOJ’s complaint in intervention is part of a wider federal crackdown of suspected fraud by hospice providers.