EDITOR’S NOTE

The second quarter of 2013 has, not surprisingly, seen a continuation of significant enforcement action under the False Claims Act (“FCA”) across various industries, including the financial services industry, procurement, energy and of course health care.  Although the last few months have shown the government continuing to pursue cases aggressively, court decisions also have reflected that the courts are unwilling to allow the United States unbridled discretion to use the statute to address each and every perceived injustice or regulatory shortcoming.

In the energy industry, an Illinois district court recently expanded the public disclosure bar to effectively add the requirement that to establish herself as an original source and thus avoid dismissal, the relator filed her complaint prior to the public disclosure.  In procurement, a proposed change to the Federal Acquisition Regulation (“FAR”) that requires more disclosures regarding corporate structure and other information poses a risk to unwary contractors of being accused of submitting false certifications in violation of the FCA. 

In the banking sector, in a closely-watched case, the Southern District of New York dismissed the government and relators’ FCA allegations relating to the mortgage meltdown, allowing only non-FCA claims to proceed.  The Sixth Circuit similarly construed very narrowly the conduct proscribed by the FCA and held that the FCA was inapplicable to Medicare regulatory violations committed by an imaging center.  Nevertheless, at least in health care, the government continues to aggressively pursue FCA claims based on alleged violations of other statutes and regulations, particularly the Antikickback Statute and Stark Law, both of which govern financial relationships between health care providers and referral sources.  And look out for state governments, which are getting involved in federal cases and even are bringing their own, particularly in the Medicaid sector.

Finally, we focus our Practice Tip on the potential collateral consequence of exclusion or debarment by the relevant government agency at the conclusion of a FCA investigation, and how best to achieve total peace when settling such cases regardless of the industry sector.


RECENT DEVELOPMENTS

Energy Sector: Is There a Timing Requirement Inherent in the Public Disclosure Bar?

The False Claims Act’s (“FCA”) public disclosure bar requires dismissals of action based on publicly disclosed information unless the person bringing suit is an original source of the information.  31 U.S.C. § 3730(e)(4)(A).  A recent district court decision appears to add a timing requirement to the public disclosure jurisdictional bar.

In United States ex rel. Pishghadamian v. Nicor Gas, Inc., No. 09-cv-298 (N.D. Ill., April 23, 2013), relator alleged that Nicor Gas purposefully underestimated customers’ energy usage during times when gas prices were low, and then “corrected” and increased the usage amounts when gas prices increased.  Because Nicor’s customers included participants in the federal Low Income Home Energy Assistance Program (“LIHEAP”), relator claimed that Nicor’s claimed practice defrauded the federal government.  After the government declined to intervene in the suit, Nicor moved to dismiss under the public disclosure bar, arguing that  a prior class action seeking recovery of overpayments made by the class members to Nicor constituted a public disclosure of the allegations and transactions underlying the relator’s complaint.

The district court began by recognizing a three-part test governing the public disclosure bar: A court must determine: (i) whether there has been a public disclosure; (ii) whether the relator’s lawsuit is based on the publicly-disclosed allegations; and (iii) if so, whether the relator is an original source of the information on which his or her law suit is based.  Nicor Gas, at 3.  The court found that the class action lawsuit constituted a public disclosure and that the allegations and transactions in that suit shared a common basis with the relator’s suit.  In its evaluation of whether the relator was an original source, however, the court focused less on how the relator acquired her knowledge and more on when she acquired it.  Relator claimed she initially learned of Nicor’s alleged fraudulent billing practices from customer complaint calls, which she followed up by reviewing Nicor’s billing records.  The court focused on the fact that the class action had been filed right round the same time as relator’s investigation.  Given the close timing of the two events, the court dismissed the case, holding that relator could not establish that she did not first learn of the alleged fraud through the class action.

If upheld, the Nicor decision expands the original source bar. The statutory language requires an original source to have knowledge that is independent of the public disclosure; Nicor suggests that an element of independence is temporal. In other words, even if the relator has knowledge of the alleged fraud that was acquired independently of the public disclosure, if the relator cannot establish that he or she was not aware of the public disclosure, the case may be barred.

For additional information, please contact Mary Beth Bosco.

Procurement Sector: ADMINISTRATIVE CHANGES CONTAIN IMPORTANT NEW REQUIREMENTS FOR FEDERAL CONTRACTORS

A proposed change to the Federal Acquisition Regulation (“FAR”) that is administrative in nature could have potentially serious consequences for government contractors with respect to potential False Claims Act (“FCA”) liability if not properly considered.  Last month, a proposed rule was issued that requires all contractors to provide Commercial and Government Entity (“CAGE”) codes to contracting officers prior to the award of a federal contract greater than $3,000.  (78 FR 23194, April 18, 2013)  A CAGE code is a five-digit identifier assigned by the Defense Logistics Agency.  More importantly, the proposed rule also includes a new disclosure requirement concerning corporate structure.  The proposed rule would require offerors, if owned or controlled by another business entity, to identify that entity during System for Award Management (“SAM”) registration prior to award.  The rule contains three new definitions related to ownership – Owner, Highest-level owner, and Intermediate owner – and will be made applicable to new contracts or implemented through amendments to existing contracts.   

While citing the Federal Funding Accountability and Transparency Act of 2006, the reasoning behind the new rule includes increased transparency and accuracy of procurement data and prevention and mitigation of fraud, waste, and abuse of taxpayer dollars.  The stated purpose for identification of ownership is “only in order to determine how entities relate to one another in terms of hierarchical relationship(s)”.  Whatever the basis or reasoning for implementation, this proposed rule carries with it the potential for civil, criminal and/or administrative penalties implicated by inaccurate certifications.  While the new certification clause “Ownership or Control of Offeror” appears to simply request names and CAGE codes of other entities, many offerors must take into consideration more complex business analyses such as whether another business concern or a “third party” directly or indirectly “controls or has the power to control” the certifying company.  Indicators of control include, but are not limited to, interlocking management or ownership, identity of interests, shared facilities and equipment, and common use of employees. 

Whether or not this rule becomes final, it is yet another example for contractors to be on notice that the government seeks “transparency” and “accountability” through myriad  additional regulations.  These proposed regulations carry with them increased risk for allegations of improper or inaccurate certifications.  The inclusion or exclusion of data related to ownership is necessarily a subjective analysis that could be challenged by the government or by a qui tam relator as the SAM data is publicly available. If a contract is awarded and payments are predicated in compliance with all contract requirements, an incorrect certification in SAM as to ownership required by these proposed regulations could lead to costly and time-consuming FCA allegations.

For additional information, please contact Elizabeth Gill.

Health Care Sector: FCA Health Care Enforcement is White Hot  

As of mid-2013, health care enforcement under the False Claims Act (“FCA”) is marked by vigorous enforcement theories, important decisions, and notable settlements. A hotly contested expansion of FCA liability, pushed by the United States and whistleblowers, has been the theory of “implied certification,” which premises FCA liability on an underlying violation of a federal statute or regulation.  While some Circuits have adopted this theory, others have pushed back and declined to adopt the context of health care’s complex regulatory scheme.  As discussed below in greater detail, the Sixth Circuit in April issued a notable decision, United States ex rel. Hobbs v. MedQuest Assocs., Inc., which reversed a district court decision on summary judgment against a medical diagnostic testing company for submitting nearly 1,300 claims allegedly in violation of various Medicare regulations regarding physicians involved in imaging services. The Sixth Circuit held that the complex Medicare regulations were “conditions of participation” in Medicare but were not “conditions of payment,” and thus could not give rise to false claims.

In May 2013, following a month-long retrial, a South Carolina jury found that Tuomey Healthcare System Inc. (“Tuomey”) violated the Stark Law and the FCA.  The jury found that Tuomey’s part-time employment agreements with 19 referring physicians were impermissible under the Stark Law, resulting in almost 21,730 false claims and more than $39 million in overpayments, subject to trebling and penalties under the FCA, raising the U.S. demand for a judgment of $237 million.  Tuomey, a 242-bed hospital located in Sumter, South Carolina, had received advice of counsel that these agreements were permissible under the Stark Law, and advocated that the agreements did not violate the Stark Law.  No judgment has been entered, and post-trial motions are pending.  At the initial trial in 2010, the jury found that Tuomey did not violate the FCA, but the District Court on post-trial motions entered a judgment against Tuomey for more than $44 million (the alleged value of the hospital claims paid that were referred by these physicians) and ordered a new trial.  On appeal, however, the Fourth Circuit vacated the District Court’s $44 million judgment against Tuomey on Seventh Amendment and other grounds and remanded for a new trial on the Stark Law and FCA issues.  In related developments, the Department of Justice (“DOJ”) is slated to go to trial in November against 582-bed Halifax Health Hospital in Florida, alleging that it compensated six oncologists based on the operating margin of the system’s cancer program, in violation of the Stark Law, and seeking a $352 million judgment. On July 8, DOJ announced it had intervened in a FCA suit in Mobile, Alabama, against the Infirmary Health System and related entities, alleging that its medical clinic and diagnostic company billed Medicare and Medicaid in violation of the Stark Law and Anti-Kickback Statute, U.S.ex re. Heesch v. Diagnostic Physicians Group.

Notable recent settlements include C.R. Bard’s agreement in May 2013 to pay $48.26 million to settle allegations that from 1998 to 2006 it provided illegal remuneration to hospital customers and/or physicians to induce them to purchase medical devices including brachytherapy seeds manufactured by Bard; Intermountain Health Care’s agreement in April 2013 to pay $25.5 million to resolve FCA allegations of unlawful financial relationships between Intermountain and physicians in violation of the Stark Laws (initially disclosed by Intermountain in 2009); and a settlement with an individual dermatologist in April 2013 for $26.1 million to resolve allegations under the FCA and the Anti-Kickback Statute.

For additional information, please contact Larry Freedman.

Financial Services Sector: JUDGE TRIMS FALSE CLAIMS ACT COUNTS IN BANK OF AMERICA CASE

In the financial services sector, the government has applied the False Claims Act (“FCA”) to prosecute claims against financial institutions arising out of the mortgage meltdown.  Partially in response to the financial and mortgage meltdown in 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which amended the FCA by redefining “claim” very broadly to include “any request or demand, whether under a contract or otherwise, for money or property . . . . made to a contractor, grantee, or other recipient, if the money or property is spent or used  . . . to advance a Government program or interest, and if the United States Government (i) provides or has provided any portion of the money or property requested or demanded; or (ii) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded. . . . ”  31 U.S.C. § 3729(b)(2).  This amendment to the FCA seemingly closed a loophole needed to make that statute applicable to claims arising out of the mortgage meltdown:  while the government surely paid out billions of dollars resulting from defaulting mortgages, those payments were not made pursuant to a “false or fraudulent claim for payment or approval” that was presented to the federal government by those responsible for the defaulting mortgages. See 31 U.S.C. § 3729(a)(1)(A)-(B) (imposing liability under the FCA for any person (i) who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;” or (ii) who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”

One of the most widely followed cases applying the FERA modification to the FCA has been the action filed against Bank of America and Countrywide arising out of the origination of mortgages through the use of practices claimed by the government to have been fraudulent.   The case, United States ex rel. O’Donnell v. Bank of America, was filed in the Southern District of New York by a former executive vice president of Countrywide.   The government’s complaint in intervention alleged three causes of action, one based on violations of the Financial Institutions, Reform, Recovery and Enforcement Act (“FIRREA”), a second under the FCA, and a third for civil money penalties for violations of FIRREA.

The gist of the claim under the FCA was deceptively simple and revolved around the acquisition of Countrywide loans by Government Sponsored Enterprises Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corp. (“Freddie Mac”) (“GSE”).   The Complaint alleged that Countrywide and its affiliates had, either “knowingly, or acting in deliberate ignorance and/or with reckless disregard for the truth, made false representations about the quality of their loans at the time of their sale of the loans to the GSEs, including that the loans were of investment quality and complied with the GSE selling guides and purchase contracts.”   Because the loans failed to live up to the representations made to the GSEs when they were acquired from Countrywide, those GSEs were required to pay out substantially more than anticipated on guarantees provided by those GSEs.  The federal government, in turn, suffered losses when it was required to either purchase the loans or make substantial payments to the GSEs, who suffered substantial losses when the loans acquired from Countrywide defaulted.  These payments, the Complaint alleged, were used to “advance a Government program or interest” under the FCA, and therefore were alleged to support the claim for relief under the FCA’s prohibitions against the submission of false statements. See 31 U.S.C. § 3729(b)(2).

The allegations supporting that conclusion, however, were far more complex.   The Complaint focused on a program styled the “Hustle,” or “High Speed Swim Lane,” which allowed those at Countrywide to pursue a streamlined approach that eliminated checks on loan quality, while at the same time rewarding individuals with monetary incentives for increasing loan origination.  The key components of the Hustle according to the Complaint included (l) eliminating underwriter review for high risk loans, (2) giving loan processors critical tasks in connection with underwriting even though they were deemed unqualified for such tasks, (3) eliminating mandatory checklists required for those loan processors to perform their jobs, and (4) eliminating also the position required to provide a final, independent check on loans.  The Complaint further alleged that all of this occurred without knowledge of the GSEs acquiring the loans, and on the contrary, Countrywide actually misled those purchasers of the mortgages by failing to disclose the Hustle, and continuing to represent that the mortgages being acquired met the GSE’s underwriting guidelines, and were investment grade.  Countrywide, the Complaint alleged, was fully aware that the Hustle program was likely to have “catastrophic consequences.”

Use of the FCA and FERA’s amendment to that Act to seek damages for Countrywide’s Hustle program suffered a serious setback when the District Court dismissed the FCA count.    Judge Rakoff in the Southern District of New York issued a terse two-page  opinion on May 18, 2013, concluding that while claims based on FIRREA survived, the FCA counts seeking damages and civil money penalties were deficient and required dismissal with prejudice.  (The defendants previously had moved to dismiss the government’s initial complaint in intervention, and the government had responded by filing an Amended Complaint.  This Amended Complaint was at issue here.)  Judge Rakoff’s reasons for this decision were not disclosed in the order, which reported that the court intended to issue a more expansive opinion in the future, detailing the reasoning behind this decision.  

While the court has yet to explain its reasoning, the point stressed in the briefs submitted in support of the motion to dismiss by the defendants was that the FCA allegations were deficient as they were based on the existence merely of a scheme to defraud, when the government was required under Rule 9(b) to allege with specificity that, in connection with the Hustle loans, (1) fraudulent loans were presented to the GSEs for payment after FERA was enacted May 20, 2009, and (2) that the government either paid for such a loan or would reimburse the GSEs for such a loan.  While a scheme to defraud may normally be assumed to require a false statement, in the Bank of America case the government had to plead around the fact that FERA had been passed after many of the actionable loans had already been originated and sold.  As the Defendants argued in their briefing, “The Amended Complaint pleads no facts at all about the [post-May 20, 2009] loans  . . .  except to state in conclusory terms that they defaulted after being sold to the GSEs. That a loan ultimately defaulted does not mean it was fraudulent, let alone knowingly so, at the time it was presented for sale to the GSEs.”  The problem for the Government was that Countrywide did not sell any loans to the GSEs after that date, leaving the Bank of America liable, if at all, on the theory that it engaged in a scheme to defraud when the government was required to make payments on the defaulting loans.  The Bank of America argued that without evidence that the Bank of America actually engaged in a false statement regarding the loans or that the government actually paid for specific loans after May 2009 (as opposed to providing generic funding to the GSEs), there was no basis for holding it liable under the FCA.

Many other FCA complaints have been dismissed by district courts for alleging only a general scheme to defraud rather than alleging the submission of actual false claims or false statements in support of false claims.  In nearly all such situations, though, the complaint at issue was brought by the relator alone, in situations in which the relator had no way of knowing about actual claims submitted or statements submitted in support of those claims.  This case stands in contrast because the court dismissed the United States’ own FCA allegations with prejudice, albeit after the government had the opportunity to amend its complaint once.  As such, the court’s decision appears to be a determination that the alleged misconduct by Countrywide simply was not actionable under the FCA, a ruling with significant implications for future FCA matters in the financial services industry.

For additional information, please contact Sam Rosenthal.


PRACTICE ANALYSIS: The Anticipated Impact of the Growing State FCA Trend on Businesses

Over the last decade, the number of states becoming involved in qui tam actions has increased dramatically, particularly in the health care context. This increase has resulted largely from the sudden increase in the number of states that have enacted their own False Claims Acts (“FCA”) modeled after the federal FCA statute.  At last count, 32 states have enacted some version of an FCA, although about half of these statutes focus exclusively on claims submitted to the state’s Medicaid programs.

Although California enacted its own FCA, Cal. Gov. Code §§ 12650-56, in 1987, and Texas, Tennessee, and a few others enacted their provisions in the 1990s, the overwhelming majority of states enacted their provisions in the late 2000s.  Many did so in response to the passage of §1909 of the Social Security Act (42 U.S.C. §1396h), which was enacted in 2006 as part of the Deficit Reduction Act of 2005.  Under this federal provision, states that have adopted FCAs that meet the requirements set forth by the Department of Health and Human Services Office of Inspector General (“HHS-OIG”) in consultation with the Department of Justice (“DOJ”), become entitled to receive more funds in the event of a recovery of Medicaid funds under those state laws than they otherwise would be entitled to.  When a state recovers money under its Medicaid program, it is required to pay back to the federal government a portion of the recovery commensurate with the federal share of the Medicaid program (which varies from 50-83 percent).  Under this provision, so long as the state has enacted an HHS-OIG-approved state FCA, the amount it is required to pay back to the federal government is reduced by 10 percentage points.

In August 2006, HHS-OIG published guidelines in the Federal Register intended to clarify what it required from the states in order to qualify for approval under §1909.  In essence, the state statutes were required to be equally effective at prohibiting the same types of misconduct as the federal statute,  encouraging and rewarding qui tam actions, providing for new actions to be filed under seal, and imposing civil penalties at least equivalent to those under the federal statute.  More than a dozen states enacted laws that HHS-OIG reviewed and approved in the next few years.

Shortly after HHS-OIG approved many of these state laws, though, Congress made changes to the federal FCA.  In 2009, Congress enacted the Fraud Enforcement and Recovery Act; and in 2010, Congress enacted both the Patient Protection and Affordable Care Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Among other things, these laws expanded the bases for liability under the FCA, expanded the rights of qui tam relators, and expressly required that the civil penalties be subject to adjustment under the Federal Civil Penalties Inflation Adjustment Act of 1990. 

As a result of these federal statutory changes, most or all of the state statutes approved for purposes by HHS-OIG of §1909 incentives are no longer equivalent to the federal FCA. HHS-OIG therefore issued letters to those states whose statutes it had reviewed and approved, informing them that HHS-OIG would provide a two-year grace period during which the states would be deemed to remain compliant and would continue to qualify for the incentive.  By the end of the two-year grace period, however, each state must amend its state FCA law and resubmit it for HHS-OIG review.  After the two-year grace period expires, the state would continue receiving the financial incentive only if HHS-OIG had approved the new law or its review was still pending.  HHS-OIG also issued new guidance to the states, OIG Guidelines for Evaluating State False Claims Acts, available on its website, effective March 15, 2013, to clarify what changes were needed in order to qualify for approval.  We anticipate that at least the states that previously were approved by HHS-OIG will be revising their state FCAs over the coming months in order to continue to qualify for the additional 10 percentage points in Medicaid recoveries. 

The increase in the number of state FCAs has resulted in many states becoming much more active in pursuing potential Medicaid fraud matters.  Many such cases still are filed by relators in federal court under the federal FCA as well as the state FCA, and the affected states’ Medicaid Fraud Control Units (“MFCUs”) now often assist DOJ in investigating these cases.  Some such cases involve allegations of fraud across a number of states, and in those cases the National Association of Medicaid Fraud Control Units (“NAMFCU”) typically gets involved to coordinate the efforts of all the states with the federal investigative authorities as well as ultimately to settle the cases. 

A number of state-only FCA cases also are being filed in state courts, particularly in combined state FCA and consumer protection actions against large pharmaceutical companies. In a trend that should be concerning to businesses (as well as perhaps taxpayers), some states are contracting with plaintiffs firms to prosecute such cases on a contingency basis.  As a result, plaintiffs lawyers with a significant financial interest in the outcome of the case, and potentially appointed by an attorney general to whom the lawyers have contributed significant campaign funds, are leading the litigation.  This can result in the litigation focusing solely on extracting the highest dollar amount possible as opposed to the equities of a given case or the state government’s non-monetary interests, and at the very least it results in a significant decrease in funds to the state treasury upon recovery.  Although some states have enacted legislation proscribing such delegation of the Attorney General’s litigation authority, other states’ legislatures fully support it.

As a result of the increased state FCA focus, the landscape of FCA cases is just beginning to shift away from relatively coordinated and organized matters filed, investigated, and litigated in federal courts, by career attorneys at DOJ and local U.S. Attorney Offices who stand to gain no financial benefit from any particular case.  Even where relator’s counsel litigate those cases after DOJ declines to intervene, DOJ attorneys keep abreast of developments in those cases and must approve any settlement.  These federally-led cases will be replaced to some extent, and supplemented to a larger extent, by numerous matters filed in state courts all around the country, often even by plaintiffs lawyers who have contracted on a contingency basis to represent the state in the litigation. 

The impact of the state FCAs likely will hit health care providers as well as pharmaceutical and medical device manufacturers hardest, as they provide items and services that are reimbursable under Medicaid and, as indicated above, many of the states that adopted their own FCAs limited their reach to Medicaid. (Section 1909 requires only that the state FCAs apply to Medicaid programs.)  But approximately half the states have not limited their FCA statutes to Medicaid claims.  Thus, even if the initial wave of cases focus on Medicaid, as practitioners within the states become more familiar with the statute, they likely will begin to see more and more opportunities to bring qui tam actions on behalf of relators and/or to represent the state attorney general more directly under contract, in connection with other matters involving state funding.  Businesses that not only provide health care items or services to state Medicaid beneficiaries, but also that provide any item or service for which state funding is involved, should beware of this new landscape.

For additional information, please contact Laura Laemmle-Weidenfeld.


CASE ANALYSIS: The Sixth Circuit Reinforces the Holding that Only Violations of Conditions of Payment, Not Merely Conditions of Participation, Can be the Basis of a False Claims Act Action

On April 1, 2013, the Sixth Circuit issued an important ruling for health care providers seeking to defend against False Claims Act (“FCA”) cases based on false certification theories.  See United States ex rel. Hobbs v. MedQuest Assocs., Inc., 711 F.3d 707 (6th Cir. 2013).  In MedQuest, the Sixth Circuit reversed the district court’s entry of summary judgment and overturned a more than $11 million judgment against defendants MedQuest Associates, Inc. and its three subsidiaries (together, “MedQuest”) in a case that alleged that (1) claims were false because the defendants used physician supervisors not approved by the local Medicare carrier, and (2) claims were false because they were submitted by an independent diagnostic testing facility (“IDTF”) that was not properly enrolled in Medicare and were filed under a billing number of a physician who sold his practice to MedQuest.  Id. at 709.  The theories set forth by the government were that the claims were “legally false” as opposed to “factually false” as there was no allegation that the services were not provided.

Key to the appellate decision was the determination of whether the requirements that were allegedly violated were conditions of participation in the Medicare program or conditions of payment because, as the Sixth Circuit noted, only violations of conditions of payment can constitute a basis of a FCA action.  Id. at 710.  In this case, the Sixth Circuit stated that while MedQuest appeared to have often ignored applicable Medicare regulations, “because these regulations are not conditions of payment, they do not mandate the extraordinary remedies of the FCA and are instead addressable by the administrative sanctions available, including suspension and expulsion from the Medicare program.”  Id. at 713.

Allegations Involving Supervision by Approved Physicians

An enrollment application for an IDTF, called a CMS-855B Application, requires IDTFs to have one or more supervising physicians responsible for general supervision at the facility.  Id.  The application requires the IDTF to identify supervising physicians and requires the IDTF to notify CMS of changes, including changes to the list of identified physicians.  Id. at 710-11.  Once enrolled, an IDTF submits a CMS-1500 form to obtain payment.  Id. at 711.  That CMS-1500 form contains a certification that listed services were “medically indicated and necessary to the health of this patient and were personally furnished by me or my employee under my personal direction.”  Id.

As one basis of FCA liability, the government alleged that MedQuest used physicians other than those approved by the Medicare carrier to provide direct supervision for certain radiology procedures.  Id. at 711.  MedQuest conceded that some procedures were not supervised by approved personnel, but asserted that all procedures were supervised by a physician.  Id.  

The Sixth Circuit determined that the alleged use of non-approved supervising physicians for certain diagnostic procedures was not an adequate basis for a FCA claim because it violated only conditions of participation, not conditions of payment.  Id. at 713-14.  The appellate court found that the government failed to identify any express certification made by MedQuest that it was in compliance with the supervising physician requirements.  Id. at 714-15.  The court rejected the government’s reliance on the enrollment application as a basis for the FCA action, noting that the falsity of a claim is determined at the time of submission and the government did not allege that MedQuest intended to violate Medicare regulations at the time it applied to be an IDTF.  Nor, as the court noted, does the enrollment application contain language conditioning payment on compliance with any particular law or regulation.  Id. at 715.  Additionally, the court stated that the CMS-1500 form only certifies that the services were medically necessary, which was not a contested issue in the litigation.  Id.

Further, the Sixth Circuit rejected that the government’s theory that MedQuest implicitly certified compliance with the supervising physician requirements and therefore was liable under the FCA, because the Sixth Circuit held that the supervising physician requirements were not conditions of payment.  Id. at 715.  The appellate court stated that the government used a “cut-and-paste approach,” “weaving together isolated phrases from several sections in the complex scheme of Medicare regulations,” and it was not reasonable to expect Medicare providers to apply this approach to statutory interpretation in order to comply with the FCA.  Id.  The Sixth Court found that because MedQuest provided the required level of supervision under the regulations, it did not violate the condition of payment that diagnostic test be “reasonable and necessary.”  Id. 715-16, citing 42 U.S.C. § 1395y.  The court found other CMS regulations specifying supervisory procedures specific to IDTFs to be conditions of participation, punishable by administrative remedies.  Id. at 716-17.

Billing Number Allegations

For 18 months, MedQuest submitted certain claims using the billing number of a physician after it bought all the shares of that physician’s practice.  MedQuest argued that the physician practice became a MedQuest subsidiary.  MedQuest eventually re-enrolled the location as an IDTF.  Id. at 713. 

The Sixth Circuit held that MedQuest did not violate conditions of payment when it used the physician’s billing number after a transfer of stock ownership.  Id. at 717-18.  As one basis for liability under the FCA, the government identified a provision stating that carriers will only pay for diagnostics procedures performed by an IDTF.  Id.  But the court said that the government never alleged that MedQuest was not operating as an IDFT and that enrollment and approval are not required for an entity to be an IDTF.  Id. at 717.  The Sixth Circuit stated that these allegations amounted to a failure to update enrollment information which is not a violation of a condition of payment.  Id.  

How Does the Sixth Circuit Compare with Other Circuits?

In holding as it did in MedQuest, the Sixth Circuit reaffirmed its prior holdings and aligned itself with other circuits that require a violation of a condition of payment for liability under the FCA in a false certification theory case.  Id. at 717; see also United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518, 532 (6th Cir. 2012); United States ex rel. Chesbrough v. VPA, PC, 655 F.3d 561 (6th Cir. 2011). The Sixth Circuit commented that the FCA “is not a vehicle to police technical compliance with complex federal regulations.”  Id. at 717, citing Williams, 696 F.3d at 532.  While the Sixth Circuit recognized the important role of the FCA in the Medicare context, the court did not find the FCA to be an appropriate “tool for ensuring compliance with technical and local program requirements,” violations of which would not tend to influence CMS’s decision to pay the claims.  Id. at 717, citing United States ex rel. Mikes v. Straus, 274 F.3d 687, 699 (2d Cir. 2001).

Other circuits that also require a violation of a Medicare condition of payment in a false certification case include the Second Circuit, Third Circuit and Tenth Circuit.  See United States ex rel. Mikes v. Straus, 274 F.3d 687, 701-02 (2d Cir. 2001); United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 305 (3d Cir. 2011); and United States ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1220 (10th Cir. 2008).

However, other circuits, such as the First Circuit and D.C. Circuit, have allowed for a more expansive view of potential liability under the false certification theories.  For example, in United States v. Science Applications International Corp. (SAIC), 626 F.3d 1257, 1261 (D.C. Cir. 2010), the D.C. Circuit stated that “requests for payment can be ‘false or fraudulent’ under the FCA when submitted by a contractor that has violated contractual requirements material to the government’s decision to pay regardless of when the contract expressly designates those requirements as conditions of payment.”  

About six months later, in United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377, 386 (1st Cir. 2011), the First Circuit rejected a district court’s holdings that “implied conditions of payment can only be found in statutes and regulations, and that these sources must expressly state the obligation.”  In its analysis, the First Circuit noted that other courts have attempted to categorize between factually and legally false or fraudulent claims and between express certification and implied certification.  Id. at 385.  Then, the court rejected those categorizations, stating that the district court had “erroneously adopted a categorical rule … and appeared to reason within the confines of an erroneous categorical rule” with respect to two purely legal issues presented by the parties.  Id. at 386. 

The First Circuit found that the relator’s allegations based on violations of certifications in a Provider Agreement and cost report sufficiently supported a claim under the FCA.  Id. at 392.  The First Circuit said such a holding was consistent with courts that have found claims false or fraudulent for non-compliance with a contract, but that the appellate court was “not creating a rule that non-compliance with a contractual condition is any more necessary to establish that a claim is false or fraudulent than non-compliance with an express statute or regulation, or an express misrepresentation on a form submitted with payment.”  Id. at 394.

The distinction between whether a requirement is a condition of payment or condition of participation continues to be an important one for courts’ analysis of FCA cases, certainly as relators and the government continue to set forth expansive theories of liability for violations of statutory, regulatory and contractual requirements that may be only tangentially related to the government’s decision to pay a claim.

For questions regarding this article, contact Susan Baldwin Hendrix.


PRACTICE TIP

Allegations of misconduct that can give rise to False Claims Act (“FCA”) liability also can give rise to exclusion from participation in federal health care programs and/or debarment from participation in other federal procurement activity.  In most circumstances, settling defendants want total peace with the government and a global resolution of the allegations against them.  In the health care context, when a defendant is resolving allegations implicating claims submitted to federal health care programs, the Department of Health and Human Services Office of Counsel to the Inspector General (“HHS-OCIG”) gets involved in settlements as a matter of course. The Department of Justice (“DOJ”) attorneys in those cases typically put defense counsel in touch with HHS-OCIG when the settlement process is well underway.  Often (and, until recently, nearly always) HHS-OCIG will expect the defendant to enter into a Corporate Integrity Agreement (“CIA”) with HHS-OCIG, in exchange for which the defendant will be given a release under HHS’s exclusion authorities.  In other matters, HHS-OCIG will not require a CIA but also will not provide a release; HHS-OCIG will offer the defendant only an assurance that HHS-OCIG has no present intention of seeking to exclude the provider.

Similarly, defense industry companies that have undergone DOJ scrutiny on fraud matters understand that a criminal or civil settlement with that department will not be the end of the matter with the Department of Defense (“DOD”).  A DOJ settlement will not preclude possible suspension or debarment action by relevant agencies and departments within the DOD. 

Clients express understandable surprise – if not shock – when they learn that after years of negotiations with DOJ requiring significant corrective action, a defense agency or department may – and frequently will – require further action to accommodate their own particular interests.  Companies most routinely are required to enter into an Administrative Agreement with the interested defense department or agency to memorialize obligations that generally require further corrective action and reporting requirements for a period of at least three years.

How may a company most efficiently deal with such circumstances?  One option is engage early with the interested defense agency or department, contemporaneous with the DOJ negotiations to the extent possible.  While neither DOJ nor the defense agencies or departments will be bound to accept the other’s requirements as final for their respective purposes, early engagement will at least provide an opportunity to harmonize the requirements to avoid unnecessary duplication and loss of time later.  The Federal Acquisition Regulation mandatory reporting requirement for government contractors regarding fraud matters will drive the process in this direction in any event.  That is, the defense agency or department will need to be notified in a timely way of the underlying issues that are the subject of DOJ scrutiny.  The additional affirmative step of initiating a parallel effort with the defense department or agency to coordinate future requirements will be time well spent.

For additional information, please contact Laura Laemmle-Weidenfeld (health care) or Michael Nardotti  (procurement). 

Topics:  Compliance, DOJ, Employer Liability Issues, Employer Mandates, Enforcement Actions, False Claims Act, Healthcare, New Regulations, Public Disclosure

Published In: Civil Procedure Updates, Energy & Utilities Updates, Finance & Banking Updates, Government Contracting Updates, Health Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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