On November 15, 2019, Sutter Health (“Sutter”) and Sacramento Cardiovascular Surgeons Medical Group Inc. (“Sacramento”) agreed to pay a total of $46 million to resolve FCA claims based on whistleblower allegations made by a former Sutter compliance officer that Sutter provided kickbacks to Sacramento physicians in exchange for referring patients to Sutter. The settlement also resolved Stark Law allegations relating to above fair market value payments made by certain of Sutter’s hospitals to Sacramento physicians. The underlying FCA complaint was filed in 2014 by a former Sutter compliance officer. The settlement only resolves some of the fraud allegations included in the former compliance officer’s complaint.
Last week, the Eleventh Circuit issued an opinion holding that a Relator bringing an FCA claim premised on an AKS violation – at least when relating to lease arrangements – must show that the financial arrangements were not at fair market value. See Bingham v. HCA, Inc., Case No. 1:13-cv-23671 (11th Cir. 2019). Significantly, this ruling provides that proving fair market value (or lack thereof) is not a burden imposed solely on defendants as part of a safe harbor defense, but is instead an essential element to establishing the existence of remuneration in the first instance. In the same opinion, the court also held that a Relator cannot rely upon information gleaned in discovery to satisfy Rule 9(b)’s pleading requirements.
Last week, the United States Department of Justice and Tuomey Healthcare System announced a settlement of the $237 million verdict against Tuomey. As we previously reported (see here, here, and here), the suit involved allegations that Tuomey violated the Stark Law and, after a trial by jury, the district court entered judgment in October 2013 for $237,454,195 plus post-judgment interest. The Fourth Circuit affirmed the judgment in July 2015. According to DOJ’s and Tuomey’s press releases last week, Tuomey will pay the United States $72.4 million and will become part of Palmetto Health, which is a multi-hospital healthcare system based in Columbia, South Carolina.
It appears from related court filings that, absent a settlement involving a substantial reduction in the award, Tuomey was prepared to file for bankruptcy. The United States had recently requested a delay in payment of the $40 million appeal bond posted by Tuomey, stating that “Tuomey has informed the United States that if a settlement is not reached, it intends to file for protection in the Bankruptcy Court.”
The DOJ press release can be found here.
On July 2, 2015, the Fourth Circuit affirmed a $237 million verdict against Tuomey Hospital following a retrial in the government’s long-running effort to pursue alleged violations of the Stark law. (See our previous posts on the case here and here). As we previously reported, in 2013 in U.S. ex rel. Gosselin v. Bunk, the Fourth Circuit acknowledged that FCA awards are subject to Eighth Amendment scrutiny, but it rejected the constitutional challenge in that case without providing any concrete standards against which the constitutionality of an award in any particular case could be measured. In the more recent Tuomey opinion, the Fourth Circuit again rejected Eighth Amendment and Due Process challenges to the constitutionality of the award. However, the opinion provides a roadmap for future challengers that suggests that constitutional challenges could find traction in cases in which there is a significant discrepancy between per-claim damages and penalties.
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.
Posted by Scott Stein and Brenna Jenny
On December 8, 2014, a district court in the Southern District of Georgia dismissed FCA claims brought against the corporate parent and affiliates of a hospital, rejecting the government’s attempt to hold these associated corporations liable for the hospital’s alleged reverse false claims violations. See U.S. ex rel. Schaengold v. Mem’l Health, Inc., No. 11-cv-0058 (S.D. Ga. Dec. 8, 2014).
The government intervened as to one count of the relator’s qui tam action, which alleged that defendant Memorial Health, Inc., its wholly-owned subsidiary Memorial Hospital, and a physician group (“MHUP”) wholly-owned by another Memorial Health subsidiary, violated the FCA by failing to timely return overpayments received by Memorial Hospital. According to the relator (the former CEO of Memorial Health and Memorial Hospital), Memorial Health and affiliated entities (collectively, “Memorial System”) employed the physicians of MHUP and paid compensation at levels above fair market value rates. As a result, these compensation arrangements between referring physicians and healthcare entities could not meet the Stark Law’s exception for “bona fide employment relationships,” which requires fair market value compensation. The Stark Law requires any funds received in violation of the law to be refunded within sixty days of collection. Under this theory, by submitting a cost report including services obtained in violation of the Stark Law, yet certifying that the services identified in the report complied with all applicable laws, the hospital concealed an obligation to refund overpayments to the government.
Although this theory of FCA liability is premised on the submission of cost reports, the government and the relator attempted to impute liability on additional corporate entities that did not submit any cost reports for these physicians’ services. Memorial System’s Board of Directors had previously discussed potential fair market value concerns with their compensation arrangements with MHUP. The government argued that because Memorial Health and all other relevant subsidiaries operated as a unitary health system controlled by a centralized management team, which was aware of the alleged Stark Law violations, all of the related entities were liable for the hospital’s submitted claims.
The court rejected the proposition that “merely being a parent, or an associated corporation, of a subsidiary that commits an FCA violation” can be sufficient to support FCA liability for a subsidiary’s violations. Instead, related entities can only be liable if they were directly involved in the submission of claims, or if veil-piercing is appropriate. The court quickly concluded that, although the other entities were involved in arrangements that ultimately culminated in the submission of allegedly false claims to the government, the absence of any allegations that they were directly involved in causing the submission of falsely certified cost reports warranted dismissal. The court also concluded that veil-piercing was inappropriate. Noting that overlapping management generally does not merit veil-piercing, the court ruled that even if all entities could be considered “alter egos,” there as no allegation that failure to pierce the corporate veil would result in injustice. The government was granted twenty days to amend its complaints and replead its claims against the hospital’s affiliated entities.
A copy of the court’s decision is available here.
On October 30, 2014, the Eleventh Circuit issued a 41-page unpublished opinion affirming in part the dismissal of an FCA complaint under Rule 9(b), holding that the relator failed to plead sufficient “indicia of reliability” with respect to his claims based on conduct allegedly occurring after his employment by the defendants ended.
The relator, Mastej, was the former CEO of defendant Naples Hospital, which was owned by defendant Health Management Associates. Mastej alleged that the defendants had improper financial relationships with ten physicians, and as a result falsely certified their compliance with the Stark and Anti-Kickback Statutes on interim claim forms for patients of the physicians, and in the hospitals’ cost reports. While the relator alleged the details of the alleged payments with detail, he did not allege details of specific false claims. In evaluating the relator’s allegations, the Eleventh Circuit began by reciting certain established principles: that the submission of a false claim must be pleaded with particularity, that “Rule 9(b) ‘does not permit a False Claims Act plaintiff merely to describe a private scheme in detail but then to allege simply and without any stated reason for his belief that claims requesting illegal payments must have been submitted, were likely submitted or should have been submitted to the Government,’ and that “some indicia of reliability must be given in the complaint to support the allegation of an actual false claim for payment being made to the Government.” “[W]hether the allegations of a complaint contain sufficient indicia of reliability to satisfy Rule 9(b)” is evaluated “on a case-by-case basis.” Furthermore, the court explained, “[p]roviding exact billing data—name, date, amount, and services rendered—or attaching a representative sample claim is one way a complaint can establish the necessary indicia of reliability that a false claim was actually submitted,” but “there is no per se rule that an FCA complaint must provide exact billing data or attach a representative sample claim.” With regard to the “other means” of showing the required indicia of reliability, the court noted that while “there are no bright-line rules. . . a relator with direct, first-hand knowledge of the defendants’ submission of false claims gained through her employment with the defendants may have a sufficient basis for asserting that the defendants actually submitted false claims.” “By contrast,” the court continued, “a plaintiff-relator without first-hand knowledge of the defendants’ billing practices is unlikely to have a sufficient basis for such an allegation.”
Turning to the specific allegations of this case, the court acknowledged that Mastej had not alleged details concerning even a single specific “false claim” relating to any patient treated by one of the physicians alleged to have had an improper financial relationship with the defendants. “Rather than submit examples or a representative false interim claim,” the panel noted, “Mastej’s complaint focuses on his personal knowledge gained in his roles and duties as Vice President of Defendant HMA for six years until February 2007 and as CEO of the Collier Boulevard campus from February 2007 until October 2007. Mastej states that his personal ‘knowledge of Defendants’ practices and actions [was] gained by his own efforts as an employee of Defendants and their affiliates, including serving as Chief Executive Officer for a hospital owned by [Defendant] Naples HMA.'” The court held that taking all of the allegations into account, “Mastej’s complaint contains sufficient indicia of reliability for his personal knowledge that the Defendants actually submitted interim claims to Medicare for patients referred to the Medical Center as part of the on-call incentive scheme during 2007.” Given his position at the time and his alleged participation in meetings in which the illegal conduct was discussed, the panel concluded that Mastej “has sufficiently articulated how he allegedly gained his direct, first-hand knowledge of the Defendants’ submission of false interim claims to the government and the government’s payment of such claims.”
In addition to relying on Mastej’s “insider” status, the court also pointed to the nature of the fraud allegations at issue. “[T]he type of fraud alleged here does not depend as much on the particularized medical or billing content of any given claim form. In other FCA cases, the allegation is that a defendant’s Medicare claim contained a false statement because the claim sought reimbursement for particular medical services never rendered to the patient, or for medical services that were unnecessary, overcharged, or miscoded, or for improper prescriptions, or for services not covered by Medicare. In those types of cases, representative claims with particularized medical and billing content matter more, because the falsity of the claim depends largely on the details contained within the claim form—such as the type of medical services rendered, the billing code or codes used on the claim form, and what amount was charged on the claim form for the medical services.” In this case, by contrast, the falsity of the claims turned upon referral activity with which Mastej claimed personally to be familiar.
Nevertheless, the Court concluded that Mastej’s complaint failed to satisfy Rule 9(b) with respect to allegations of illegal conduct after his employment ended in October 2007. “After his employment ended, Mastej was no longer privy to information about the Defendants’ business practices, Medicare patients, referrals of patients, the billing of services to Medicare, or revenue from Medicare reimbursements. The indicia of reliability that existed while Mastej served as Vice President and then CEO disappeared when he left the Defendants’ employment in October 2007.” The panel specifically stated that this holding did “not suggest, much less hold, that a qui tam plaintiff-relator can never base his case on false claims submitted after he left a defendant’s employ.” Rather, the court simply concluded that in the particular context of this case, Mastej’s allegations failed to provide “the required indicia of reliability for his general allegation” that false claims were submitted after his employment ended “because the reliability of Mastej’s general allegation derives from his highly significant employment roles and duties during 2007.” “Removed from this vantage point and from his access to critical billing and revenue information, Mastej has articulated no factual basis for his assertion that the particular doctors continued to refer patients or that the Defendants submitted interim claims for such patients after Mastej left—other than speculation that claims ‘must have been submitted, were likely submitted or should have been submitted to the Government.'”
A copy of the court’s opinion in U.S. ex rel. Mastej v. Health Management Associates, Inc., can be found here. While – as the court expressly notes – the case does not stand for the blanket proposition that relators cannot plead claims based on post-employment conduct, it does provide support for the view that such allegations must be based on more than simply an argument that conduct that occurred at one point in time likely continued indefinitely into the future.
Posted by Jonathan F. Cohn and Brian P. Morrissey
A federal district court in Georgia has ordered a defendant in a False Claims Act case to produce attorney-client privileged communications to the qui tam relator. See United States ex rel. Barker v. Columbus Regional Healthcare System, Inc., No. 4:12-cv-108 (CDL), 2014 WL 4287744 (M.D. Ga. Aug. 29, 2014). The court ruled that the defendant, Columbus Regional Healthcare System, impliedly waived the privilege by pleading in its answer that it did not knowingly violate the FCA and indicating that it would offer evidence at trial that it believed its conduct was lawful.
The relator alleged that Columbus Regional violated the FCA, the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, and the Stark Law, 42 U.S.C. § 1395nn, when it purchased a cancer treatment center for more than fair market value and, separately, when it entered into remuneration agreements with another cancer treatment center that were not commercially reasonable. The relator alleged that all of these transactions were unlawfully designed to induce the treatment centers to refer patients to Columbus Regional.
In response, Columbus Regional argued that “it believed its conduct was lawful,” and that it planned to “offer evidence at trial” establishing that good faith belief. Columbus Regional, 2014 WL 4287744, *2.
Relying on the Eleventh Circuit’s decision in Cox v. Administrator U.S. Steel & Carnegie, et al., 17 F.3d 1386 (11th Cir. 1994), the district court held that Columbus Regional’s defense waived privilege over communications between Columbus Regional and its attorneys regarding the transactions, Columbus Regional, 2014 WL 4287744, *2. The court reasoned that “when a defendant affirmatively asserts a good faith belief that its conduct was lawful, it injects the issue of its knowledge of the law into the case and thereby waives the attorney-client privilege.” Id. The court reached this conclusion despite acknowledging that Columbus Regional had not asserted an “advice-of-counsel” defense—i.e., Columbus Regional did not argue that legally-privileged advice was the basis for its good-faith belief that its transactions were lawful. Id.
Notably, the district court suggested that Columbus Regional could have preserved the privilege if it had merely “denied” the allegations of wrongful intent “‘without affirmatively asserting that it believed its [conduct] was legal.'” Id. *4. But, since Columbus Regional “intend[ed] to explain fully why its conduct was not knowingly and intentionally unlawful,” the court determined that the privilege had been waived. Id.
It remains to be seen whether other courts will find the district court’s ruling persuasive. In the meantime, however, FCA defendants should be aware that specifically pleading a belief that challenged conduct was lawful may trigger a dispute over whether such a defense waives privilege. Defendants seeking to protect themselves from such an attack should note that, even under the Columbus Regional rationale, defendants who merely deny wrongful intent—without “affirmatively” asserting a good-faith belief that their conduct was lawful—do not waive the privilege.
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.
On August 1, the Third Circuit affirmed the dismissal of the long-running Repko litigation. Repko, the former General Counsel of Guthrie Clinic and Guthrie Healthcare System in Pennsylvania, stole two million dollars and ultimately pleaded guilty to bank fraud. The plea agreement required Repko to cooperate by “providing information concerning the unlawful activities of others.” Pursuant to that agreement, Repko provided information to the government alleging fraud by his former employer. After the Government determined that Repko’s claims were “baseless,” Repko filed a qui tam in which the government declined to intervene.
The Third Circuit held that the district court correctly determined that Repko’s allegations that Guthrie violated Stark and the Anti-Kickback Statute were based on information that was publicly disclosed on websites and in prior litigation. Moreover, the Third Circuit held, Repko could not qualify as an original source because he did not “voluntarily provide[ ] the information” he had “to the Government before filing” the qui tam, as required to qualify for original source status. See 31 U.S.C. sec. 3730(e)(4)(B) (2008). Repko “gave this information only after he pleaded guilty to bank fraud, faced a substantial sentence, and bargained for a lower sentence.” Because “the plea agreement compelled Repko’s disclosures,” the Third Circuit concluded that “he could not be regarded as an ‘original source.'” A copy of the Third Circuit’s opinion can be found here.