Sixth Circuit Rebukes Government’s Reliance on Profit Motive to Prove False Claim


On October 5, 2012, the Sixth Circuit reversed an $82.6 million award in a False Claims Act (FCA) lawsuit against Fresenius Medical Care Holdings (Fresenius) and granted partial summary judgment in favor of the defendants.  U.S. v. Renal Care Group, Inc. et al., No. 11-5779, -- F.3d -- (6th Cir. Oct. 5, 2012).  The appellate court’s decision expressly recognized the right of healthcare providers to lawfully seek Medicare reimbursement that maximizes profits, and confirmed the principle that “False Claims Act cases are exceedingly fact-determinative and technical, and mistakes of law should not warrant the use of a tool that should be wielded with ‘the greatest reluctance.’”

In the underlying case, the United States intervened in an FCA whistleblower action against renal-dialysis provider Fresenius, the successor-in-interest to Renal Care Group, Inc. (RSG) and its wholly owned subsidiary Renal Care Group Supply Company (RCGSC), alleging that RCGSC was a sham corporation created for the express purpose of increasing Medicare reimbursement. At the time, an independent company could bill Medicare for dialysis services and supplies provided to home-dialysis patients at a higher fee-for-service rate (referred to as Method II reimbursement) than the composite rate applicable to most dialysis services.  The government alleged that the relevant statutes and regulations actually did not permit Method II reimbursement and that the defendants acted in reckless disregard of these laws and rules. 

The federal district court granted the United States’ motion for summary judgment on its FCA and unjust enrichment claims based on its “sham corporation” (alter-ego) theory and awarded $43.8 million in statutory penalties and $38.8 million in damages against Fresenius. On appeal, Fresenius argued that RCG did not violate the FCA because it did not present a false claim, and if it did present a false claim, it did not have the knowledge of the false claims to be liable under the FCA. 

The Sixth Circuit first addressed Fresenius’ falsity argument.  The court questioned the government’s “obsessive” focus on the fact that RCG sought Method II payments solely to increase profits, responding: “Why a business ought to be punished solely for seeking to maximize profits escapes us.”  It went on to reject the district court’s application of the alter-ego doctrine, noting that the district court failed to identify any clear legislative purpose from the laws creating Method II reimbursement that would explain why RCG’s “creation, operation and control of RCGSC . . . to receive the higher Method II payments” was inherently improper.  The appellate court concluded “that the structure of RCG and RCGSC is not obviously inconsistent with Congress’s goals” for Method II reimbursement, and therefore RCG did not submit false claims.

The Sixth Circuit then focused on whether RCG knew that RCGSC was not a valid entity for purposes of receiving Method II reimbursement.  The Sixth Circuit gave a defense-friendly explanation of the FCA’s definition of “knowledge,” which by statute includes “reckless disregard” of the truth or falsity of the claim submitted.  The court found that the “reckless disregard” provision was meant to target the “defendant who has ‘buried his head in the sand’ and failed to make some inquiry in the claim’s validity.”  The court recognized that the defendant’s inquiry into the truth of the claim need only be “reasonable and prudent under the circumstances,” which imposes “a limited duty to inquire as opposed to a burdensome allegation.”  In this case, the court found that the defendants could not be found reckless where they “consistently sought clarification of this issue, followed industry practice in trying to sort through ambiguous regulations, and were forthright with government officials over RCGSC’s structure.”  Importantly, when RSG created RCGSC, it obtained an opinion from outside counsel that found that there were no laws addressing whether a wholly owned subsidiary was eligible for Method II reimbursement.  Counsel also sent a letter to a government official confirming a conversation in which the official expressed his view that a wholly owned supply company could be eligible for Method II reimbursement so long as the company had its own supply number and was a separate legal entity.   Counsel asked the official to confirm that her understanding of his position was correct, but she did not receive a response.  The court held that these facts indicated that RCG was not reckless and reversed the district court’s grant of summary judgment for the United States and granted partial summary judgment in favor of defendants.

The Sixth Circuit’s opinion provides welcome news to Medicare providers in rejecting the notion that profit motive is sufficient to prove a false claim. In cases in which the government relies heavily on profit motive as evidence of a false claim, the Sixth Circuit’s opinion serves as powerful ammunition to fight back by recognizing the basic financial imperatives under which all healthcare providers operate.  The case also underscores the importance of seeking counsel to provide opinions and engage government officials on issues of legal or regulatory complexity.  In rejecting the government’s “reckless disregard” theory of culpability, the company’s reliance on legal counsel and effort to get clarification were critical factors that demonstrated the company’s good faith.

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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