A district court recently denied a relator’s efforts to translate alleged manipulation of skilled nursing facility (“SNF”) CMS Star Ratings into a claim under the FCA, while allowing the relator to proceed with allegations that the CEO of a SNF chain oversaw a kickback scheme designed to churn business. See U.S. ex rel. Orten v. North Amer. Health Care, Inc., No. 14-cv-02401 (N.D. Cal. Nov. 9, 2015). The case reinforces well-established precedent that FCA suits alleging regulatory violations cannot proceed where the government does not condition payment on complete regulatory compliance. The government’s Statement of Interest arguing that the public disclosure bar was triggered as to certain claims demonstrates the DOJ’s growing wariness of opportunistic behavior by relators seeking to capitalize on pre-existing government investigations to which they did not contribute.
The relator, a former employee at the defendant SNF chain, primarily alleged three categories of misconduct against the SNF and its CEO : 1) Defendants engaged in conduct designed to inflate their facilities’ CMS Star Ratings, 2) Defendants paid kickbacks to physicians to refer federal healthcare program (“FHCP”) patients to their facilities, and 3) Defendants overbilled the FHCPs by upcoding. As to the first allegation, CMS derives Star Ratings from on-site inspections and survey data supplied by SNFs. According to the relator, the CEO encouraged employees to bribe physicians to submit letters contesting deficiencies identified by state inspectors, in order to improve Star Ratings. The facilities also allegedly manipulated the data included in their survey responses. The CEO filed a motion to dismiss, arguing that the relator failed to connect the Star Rating fraud to any federal payments. The relator argued that because the applicable regulations permit the survey results to serve as the basis for termination of payment, the SNF Star Ratings are ultimately tied to payment. In support, the relator relied on an earlier Ninth Circuit case, United States ex rel. Hendow v. University of Phoenix, in which claims based on a regulatory violation were allowed to proceed because the defendant’s eligibility for federal funds was expressly conditioned on compliance with that regulation. However, the Orten court noted that multiple district courts in the Ninth Circuit have subsequently declined to extend the rationale of Hendow to the Medicare context unless regulatory compliance is a condition of payment. Indeed, as discussed here, another court in the Northern District of California earlier this year similarly refused to extend Hendow to permit FCA liability based on violations of current Good Manufacturing Practices regulations.
The Orten court concluded that the regulations governing SNF Star Ratings do not require compliance as a condition for payment. Instead, they merely design a system for state agencies “to determine whether [SNFs] are compliant or non-compliant with Medicare and Medicaid requirements.” Critical to the court’s ruling was the fact that non-compliance with these regulations could lead to a variety of other alternative remedies in place of a discretionary denial of payment. Therefore the court ruled that the relator had “at most” alleged fraud connected to participation in the FHCPs, “depending on the remedy the government decides on to address instances of non-compliance.” Nonetheless, the court granted the relator leave to amend and identify “true conditions of payment.” Even if the relator cannot articulate a viable claim under this regulatory framework, his theory further opens the door to FCA liability for other providers operating under Star Rating regimes that can affect FHCP payments, such as Medicare Advantage providers.
The CEO argued the kickback claims should be dismissed as to him because the relator made no allegations that he personally “submitted or caused to be submitted any claim that was tainted by the ‘kickback’ arrangement.” The court agreed but explained that such allegations were not necessary, because the relator articulated specific examples of kickbacks given by others and presented reliable indicia supporting the defendant’s role in the kickback scheme and the eventual submission of false claims.
The relator added brief upcoding allegations to his second amended complaint in October 2014. The DOJ—which did not intervene in this case—filed a Statement of Interest siding with the CEO’s arguments that the public disclosure bar foreclosed these upcoding allegations (similar to the DOJ’s efforts discussed here and here, which were ultimately successful in excluding the relator from any share in the recoveries). In March 2010, the Washington Post published an article describing an ongoing investigation by the Department of Health and Human Services, Office of Inspector General (“OIG”) into alleged upcoding by the defendant SNF. In November 2012 the relator sent a letter to the OIG referencing the investigation and describing “additional categories of fraud” relating to inflated Star Ratings and kickbacks. The relator was interviewed by the OIG in April 2013. He filed his qui tam suit in early 2014, but it was not until after the filing, during a July 2014 meeting with the government, that the relator first mentioned allegations of upcoding. Even then, the DOJ argued that he did not provide “any new or meaningful information to the government’s existing investigation” and therefore could not meet the original source exception to the public disclosure bar. The court ruled that the second amended complaint failed directly to link the CEO to the upcoding allegations. As a result, the court granted leave to amend and deferred ruling on the public disclosure question. Notably, the relator’s own disclosures to the government are not a public disclosure in the Ninth Circuit. Most circuit courts have held that disclosures to the government during audits or investigations do not trigger the public disclosure bar (as discussed here). The Seventh Circuit is the lone dissenter, but last month, the Supreme Court denied a petition seeking review of this question.