The question of when an overpayment becomes “identified” for purposes of False Claims Act liability has generated significant uncertainty, and one district court just added more fodder for debate. See UnitedHealthcare Ins. Co. v. Price, No. 16-cv-157 (D.D.C. Mar. 31, 2017). The Affordable Care Act (“ACA”) requires persons to report and return overpayments from Medicare or Medicaid within 60 days of identification, and the failure to do so can trigger FCA liability. The ACA delegated to CMS the task of defining when an entity has “identified” an overpayment. CMS promulgated two rules (in May 2014 for Medicare Advantage (“MA”) plans and Part D Sponsors and in February 2016 for Medicare Part A/B providers), which equate “identification” to circumstances in which a person “has, or should have through the exercise of reasonable diligence, determined that the person has received an overpayment.” The “should have identified” standard generated concerns that CMS was using a simple negligence standard. The FCA, however, requires proof of at least “reckless disregard,” which courts have equated to gross (not merely simple) negligence.
In a recent opinion, the First Circuit significantly constrained the scope of the fraud-on-the-FDA theory of liability, which posits that had the FDA known of the defendant’s alleged violation of the Food, Drug, and Cosmetic Act (“FDCA”), it would not have approved the defendant’s product, such that no claims for that product would have been covered by federal healthcare programs. See United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. Dec. 23, 2016). The court imposed a rigorous causation standard on fraud-on-the-FDA claims, requiring relators to show that FDA took “official action” after discovering that a manufacturer had submitted fraudulent information to the agency. This standard mirrors the new materiality standard set forth by the Supreme Court in Escobar, in that both require relators to ground their allegations in how the government reacted to learning of the alleged fraud.
DOJ recently filed an amicus brief urging the First Circuit to revive a suit premised on the contention that an agency would have acted differently had it known of defendant’s fraud. See Brief for the United States as Amicus Curiae Supporting Neither Party, United States ex rel. D’Agostino v. ev3, Inc., No. 16-1126 (1st Cir. 2016). The government warns the First Circuit that adopting the district court’s reasoning in dismissing a “fraud-on-the-FDA” theory of liability would have wide-ranging consequences and “categorically foreclose claims that involve federal agency oversight of a defendant’s conduct.” Although courts generally agree that mere regulatory violations, standing alone, cannot serve as the predicate for FCA liability, relators often try to leverage so-called “fraud-in-the-inducement” theories (discussed further here) to repackage regulatory violations into ostensibly valid FCA claims. DOJ has so far suffered losses when advocating for a similar theory of liability in the context of FCA claims based on violations of current Good Manufacturing Practices (“cGMP”) (as discussed here and here), and DOJ’s latest effort to protect FCA liability where it touches on FDA’s discretionary decisions could have broad impact on cases alleging fraud within the context of agency enforcement. In addition, the effort by DOJ here to recast off-label promotion as a “fraud-on-the-FDA” also appears part of an evolving effort to maintain the viability of off-label claims in the face of growing judicial refusal to sanction off-label promotion as the predicate for FCA liability.
If Medicare pays a flat rate for a patient to purchase a medical device regardless of how long the patient uses the item, any false statement to Medicare regarding the length of time the patient needs that device is not an FCA violation because it is not material to Medicare’s payment decision. That was the holding recently by a federal district court in Massachusetts, granting summary judgment to device manufacturer DJO, Inc. and ending its role in a decade-long qui tam litigation against numerous manufacturers of bone-growth stimulators. United States ex rel. Bierman v. Orthofix Int’l, N.V. 05-10557-RWZ (D. Mass. Apr. 11, 2016).
A judge in the Western District of Texas recently departed from a magistrate judge’s recommendation, ruling that the novelty of the relator’s FCA claims – which are based on allegations that the defendant medical device manufacturer committed “fraud on the FDA” by seeking clearance for its stent devices based on substantial equivalence with a predicate device, when the defendant allegedly had no intention of marketing its device for the predicate device’s use – could not overcome the failure to otherwise meet all of the requisite criteria for interlocutory appeal. See United States ex rel. Sullivan v. Atrium Med. Corp., No. SA-13-CA-244-OLG (W.D. Tex. Oct. 1, 2015). This suit involves a continued, but as yet unsuccessful, effort to expand the potential basis for FCA liability to fraudulent conduct directed to one government agency separate from the payor agency.