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.
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.
Posted by Matthew Solomson and Donielle McCutcheon
The Federal Physician Self-Referral Law, commonly referred to as the Stark Law, rarely forms the basis of a False Claims Act (“FCA”) action, and FCA actions almost never go to trial. Last week, however, the Fourth Circuit reviewed such a case when the court vacated and remanded a district court judgment, predicated on alleged Stark Law violations, in favor of the government. The Fourth Circuit held that the judgment violated the defendant’s Seventh Amendment right to a jury trial. U.S. ex rel. Drakeford v. Tuomey Healthcare System, Inc., No. 10-1819, 2012 U.S. App. LEXIS 6444, at *3 (4th Cir. Mar. 30, 2012).
The qui tam action, in which the government subsequently intervened, was originally filed in September 2007, and alleged that the defendant healthcare system, Tuomey, entered into compensation arrangements with certain physicians that violated the Stark Law because the compensation paid to the physicians “took into account the volume or value of the physicians’ referrals to Tuomey.” The government further alleged that Tuomey knowingly presented false claims for payment to Medicare and Medicaid that arose out of these prohibited referrals, in violation of the FCA. In addition to the FCA claims, the government asserted claims for equitable relief.
In March 2010, a jury returned a verdict finding that Tuomey did not violate the FCA, but responded affirmatively to a special interrogatory asking whether Tuomey violated the Stark Law. Ruling on post-trial motions, the district court judge granted a motion filed by the United States and: (i) set aside the jury verdict; (ii) ordered a new trial on the FCA claim; and (iii) based on the jury’s response to the special interrogatory finding a Stark Law violation, entered a $44.9 million judgment (plus interest) in favor of the government on its equitable claims.
On appeal, the Fourth Circuit held that, because the FCA claim was based on an alleged violation of the Stark Law, the district court’s decision to grant a new trial “on the whole issue of the [FCA],” rendered the jury’s special interrogatory on the Stark Law issue a legal nullity because the court had set aside the original jury verdict, which included the special interrogatory response. As a result, when the district court granted the government equitable relief, the district court impermissibly resolved an issue on which Tuomey was entitled to (another) jury trial, thereby effectively depriving Tuomey of its Seventh Amendment right to a jury trial.
The Court of Appeals further instructed that, if on remand, the jury finds that the contracts at issue violated the Stark Law, the jury must determine the number and value of the claims Tuomey presented to Medicare for payment of the facility fee, or technical component, for the services. Notably, this instruction diverges from the Stark Law guidance which disallows payment for all services furnished pursuant to a prohibited referral.
The Fourth Circuit also addressed several issues regarding the underlying Stark Law allegations that it deemed “legal” and likely to be an issue on remand, while one judge, in a concurring opinion, criticized the court’s decision as advisory in nature. Specifically, the majority concluded that (i) there were “referrals,” as such term is defined under the Stark Law, by the physicians to Tuomey; and (ii) the Stark Law guidance clearly contemplates arrangements such as those at issue in this litigation, and, as a result, the jury must decide whether the contracts, on their face, took into account the value or volume of anticipated referrals in violation of the Stark Law fair market value standard.
From a Stark Law perspective, the “advisory” portions of this opinion provide important insight into the Fourth Circuit’s views on Stark Law violations. More broadly, the ongoing litigation may yet provide further legal developments regarding FCA liability, particularly in the context of the Stark Law.