Posted by Scott Stein and Brenna Jenny
On June 27, 2014, the Department of Justice (“DOJ”) elected to intervene in a FCA suit based solely on an alleged failure to timely refund overpayments to the government. The failure to refund provision was one of the significant changes to the FCA wrought by the Affordable Care Act, and this suit is believed to be the first one in which DOJ has intervened based solely on allegations of a failure to refund.
The ACA amended the FCA by defining “obligation” as it is used in the “reverse false claims” provision to include retention of an overpayment from Medicare or Medicaid. Failure to report and return such overpayment within 60 days from the date on which the overpayment is “identified” creates potential liability under the FCA. The ACA left many open questions regarding the mechanics of the overpayment provision.
The relator is a former employee of Continuum Health Partners (now part of Mount Sinai Health System), who conducted an internal audit of Continuum’s claims after the New York Office of the State Comptroller notified Continuum in September 2010 that it had wrongly billed Medicaid as a secondary payor on certain claims. After concluding that a computer programming glitch was responsible for the error, relator emailed his managers on February 4, 2011, enclosing a spreadsheet indicating what he believed to be approximately 900 erroneous claims from three hospitals. Relator’s employment was terminated four days later. However, Continuum began refunding the claims at issue “in small batches,” such that 600 of the approximately 900 claims had been repaid as of June 2012, when Continuum received a subsequent Civil Investigative Demand. The remaining 300 claims were refunded by March 2013.
DOJ’s intervention in this case is notable in several respects. First, as we previously reported here, in February 2012, the Centers for Medicare and Medicaid Services (“CMS”) published a proposed rule to implement the ACA’s overpayment provision, as applicable to providers and suppliers under Medicare Parts A and B. Over two years later, CMS still has not published a final rule. Yet DOJ has apparently chosen this case as a vehicle to litigate the scope of the overpayment rule, notwithstanding that CMS has yet to issue final guidance. (While CMS has issued final guidance as to the meaning of “identified overpayment” for MA organizations and Part D Plan sponsors, it does not appear that this guidance applies to the claims at issue in this case).
DOJ’s complaint indicates that it believes that the defendants “identified” the overpayments on February 4, 2011, when relator provided the spreadsheet of claims at issue to his superiors. Relator also apparently shares that view, as the docket reflects that he filed his complaint under seal on April 5, 2011, exactly 60 days after writing the email to his managers detailing what he believed to be erroneous claims. Relator did so, even though (according to the complaint in intervention) his email to his superiors “indicated that further analysis was needed to corroborate his findings.” Thus, this lawsuit (and DOJ’s intervention, in particular) suggests that even preliminary, uncorroborated results from internal compliance activities may be sufficient to reach the point at which a company becomes sufficiently aware of an overpayment to trigger the countdown to FCA liability.
This suit also highlights the significant financial stakes at issue even in a case based solely on failure to timely refund overpayments. While the complaint contains the standard plea for treble damages, it appears from the allegations that Continuum already refunded the claims at issue, which would all but eliminate the prospect of damages. However, the defendants remain exposed to the possibility of civil penalties ranging from $5,500 to $11,000 for each claim that the government contends was not timely refunded. Through his initial review, relator believed 900 claims contained overpayments, which would yield damages totaling anywhere from $4,950,000 to $9,900,000. Yet the magnitude of the potential civil penalties remains an open issue. Relator’s amended complaint alleges that, if his initial calculations are extrapolated from the claims of the three hospitals he reviewed to all hospitals at issue, the number of claims tainted by overpayments would be much higher (although he does not provide an estimate of the number of claims). Additionally, the State of New York has elected to intervene, based on violations of the New York State False Claims Act. Violations of this state law carry a civil penalty of between $6,000 to $12,000 per false claim.
Had the government chosen to pursue enforcement under the Civil Monetary Penalties (“CMP”) Law instead of the FCA, the financial consequences could potentially have been catastrophic. Under the Department of Health and Human Services, Office of Inspector General’s (“OIG”) recently proposed approach to implementing the parallel overpayments provision of the CMP Law, OIG may impose fines of $10,000 per claim for each day an identified overpayment is not returned. 79 Fed. Reg. 27,080, 27,086 (May 12, 2014). Whereas even a belated but eventual cure mitigates financial penalties for overpayments under the FCA, under the CMP Law this may not be the case.
DOJ’s intervention in this case heightens the necessity of a timely internal assessment and response to complaints regarding overpayments. Given this relator’s filing on the first possible day that FCA liability could be incurred, companies may have little leeway in determining whether they have identified an overpayment.
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 Carol Lynn Thompson and Emily Caveness
On March 14, 2013, U.S. Magistrate Judge Frank J. Lynch, Jr. issued a discovery order which may effectively foreclose defendants’ use of an advice of counsel defense in a FCA suit currently pending in the U.S. District Court for the Southern District of Florida. United States ex rel. Matheny v. Medco Health Solutions, Inc., 2:08-cv-14201-DLG, Dkt. # 258 (S.D. Fla. Mar. 14, 2013). The order prohibits defendants from using an email and meeting minutes supporting an advice of counsel defense because defendants’ production of these materials was untimely. Slip op. at 12-13. The court noted that it was “limit[ing] its ruling to the discovery context since that is the scope of its Order of Reference.” Id. at 13. However, the court went on to note that except for the email and the meeting minutes, “the Defendants produced no other documentary, testimonial, or other evidence of legal advice upon which they relied,” thereby indicating that the order likely will foreclose defendants’ use of an advice of counsel defense as a practical matter. Id.
The key document at issue in the opinion is a September 22, 2006 email from William Eck, former general counsel of Medco subsidiary PolyMedica, in which Mr. Eck opined that Medicare Part D overpayments, which the plaintiffs allege were fraudulently hidden to avoid paying government refunds, do not count as “overpayments” under the governing contracts. Id. at 4-5. The document was produced to the plaintiffs at the deposition of a corporate representative on February 6, 2013, three business days before the February 11 discovery deadline in the case. See id. at 7. At that deposition, defendants also produced a heavily redacted set of meeting minutes relevant to the advice of counsel defense. Id. at 7. Additionally, on February 8, defendants provided plaintiffs their Second Amended Initial Disclosures, in which defendants for the first time, listed Mr. Eck as an individual likely to have discoverable information, and an updated privilege log, which listed the Eck email. Id. at 8.
Defendants argued that their invocation of the attorney-client privilege at an October 2012 deposition put plaintiffs on notice that Mr. Eck had rendered legal advice and thus that defendants might raise an advice of counsel defense. See id. at 9. Judge Lynch disagreed, finding that defendants’ invocation of the privilege signaled that defendants intended to maintain the privilege, not to raise an advice of counsel defense. Id. at 9-10. Judge Lynch also found that defendants produced the email and minutes “too late to be of any use to the Plaintiffs, and the late production [of the email and minutes] fell short of the Defendants’ general obligation to produce relevant discovery in a timely fashion.” Id. at 10-11. As a result, the court granted plaintiffs relief under Rule 37(c) and ordered that defendants are foreclosed from using the email and minutes. Id. at 12-13.
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.
Last week, the U.S. Court of Appeals for the Eleventh Circuit reinstated two relators’ $69 million claims against Medco Health Solutions, Inc. (“Medco”) and several of its subsidiaries and officers, holding that the claims were alleged with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Among other things, this decision confirms the significant implications of the recent expansion of FCA liability to require that any “overpayments” be returned to the government within 60 days of the date they are “identified.” 42 U.S.C. § 1320a-7k(d).
In United States ex rel. Matheny v. Medco Health Solutions, Inc., No. 10-15406 (11th Cir. Feb. 22, 2012), the relators were former employees of Medco subsidiaries who alleged that Defendants had knowingly concealed overpayments from Medicare, Medicaid, and other federal healthcare programs. The root of the allegations was a 2004 Corporate Integrity Agreement (“CIA”) with HHS’s Office of the Inspector General (“OIG”), pursuant to which Defendants were required to remit any payments from the government that “lacked sufficient documentation or were received in duplicate or in error.” Slip Op. 3-5. The CIA dubbed these “Overpayments” and, critically, required that they be returned within 30 days of their identification. Id. at 4.
Rather than return such funds as was required, the complaint alleged, Defendants engaged in various schemes to conceal and retain them. Id. at 5. Relators claimed, for example, that Defendants transferred the Overpayments to unrelated or fictitious patient accounts or eliminated them altogether through a “datafix” computer program. Id. Count I was premised on the CIA’s certificate of compliance requirement; according to the relators, when Defendants swore to the government that they were in compliance with the agreement, such certification was knowingly false and intended to avoid remitting the Overpayments. Id. at 5-6. Count II was based on a separate obligation under the CIA requiring Defendants to submit to the government so-called Discovery Samples, which were supposed to be random samples of patient accounts that could be checked for compliance with the CIA. If five percent or more of the accounts were in violation, then a full audit was required; otherwise, that was the end of the matter. Id. at 6. The relators alleged that Defendants rigged the deck by removing any accounts containing evidence of Overpayments from the samples in order to generate a perfect error rate of 0%, thereby avoiding an audit that would have uncovered the hidden Overpayments. Id. at 6-7.
Suit was brought under the FCA’s reverse false claim provision, 31 U.S.C. § 3729(a)(7), and the Eleventh Circuit held that both counts were sufficiently pled for purposes of Rule 9(b). Generally speaking, the Court found that the CIA imposed an obligation to pay money to the government and that the relators had sufficiently pled the requisite who, what, when, where, and why of the suspected fraud. In that regard, the relators benefited from their alleged personal awareness because the court is “more tolerant toward complaints that leave out some particulars of the submissions of a false claim if the complaint also alleges personal knowledge or participation in the fraudulent conduct.” Id. at 17, 27.
Particularly noteworthy, the court held that it was enough to plead that the CIA required remittance of all Overpayments within 30 days and that Defendants did not do so. Id. at 17-23. The Eleventh Circuit rejected the district court’s ruling that the relators’ failure to demonstrate that the money was not eventually repaid was fatal to their complaint. Id. at 17-18 n.13. Instead, the court held that all that mattered was that the CIA had been violated at the time of the certification: “The failure to [remit Overpayments] within the thirty day deadline is itself a violation of the CIA, regardless of whether the Overpayments were eventually repaid.” Id. Given that recent FCA amendments also require the return of overpayments to the government shortly after their identification at the risk of FCA liability, the Eleventh Circuit’s decision confirms the significant implications of this expansion of liability.
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.