The FCA and Medical Necessity: An Increasingly Tenuous Relationship

On January 19, 2017, another district court ruled that a mere difference of opinion between physicians is not enough to establish falsity under the False Claims Act.  In US ex rel. Polukoff v. St. Mark’s et al., No. 16-cv-00304 (Jan. 17, 2017 D. Utah), the district court dismissed relator’s non-intervened qui tam complaint with prejudice based on a combination of Rule 9(b) and 12(b)(6) deficiencies.  In so doing, the Polukoff court joined US v. AseraCare, Inc., 176 F. Supp. 3d 1282, 1283 (N.D. Ala. 2016) and a variety of other courts in rejecting False Claims Act claims premised on lack of medical necessity or other matters of scientific judgment.  This decision came just days before statements by Tom Price, President Trump’s pick for Secretary of Health and Human Services (HHS), before the Senate Finance Committee in which he suggested that CMS should focus less on reviewing questions medical necessity and more on ferreting out true fraud.  Price’s statements, as well as decisions like Polukoff, are welcome developments for providers, who often confront both audits and FCA actions premised on alleged lack of medical necessity, even in situations where physicians vigorously disagree about the appropriate course of treatment.

In Polukoff, the relator alleged that the defendant physician, Dr. Sorensen, performed and billed the government for unnecessary medical procedures (patent formen ovale (PFO) closures). The relator also alleged that two defendant hospitals had billed the government for associated costs.  Specifically, the relator alleged that PFO closures were reasonable and medically necessary only in highly limited circumstances, such as where there was a history of stroke.  Medicare had not issued a National Coverage Determination (NCD) for PFO closures or otherwise indicated circumstances under which it would pay for such procedures.  However, the relator held up medical guidelines issued by the American Heart Association/American Stroke Association (AHA), which, essentially, stated that PFO closures could be considered for patients with “recurring cryptogenic stroke despite taking optimal medical therapy” or other particularized conditions.

The relator alleged that Dr. Sorensen performed more PFO closures than other physicians throughout the country and that part of the reason for this outlier status was that Dr. Sorensen believed that PFO closures could be used as a “preventative measure for patients who had not yet suffered a stroke, but who had an elevated risk of a stroke.”  Dr. Sorensen was also alleged to perform the procedures to treat chronic migraines. Notably, one defendant hospital (where relator had performed these procedures) was alleged to have disciplined and ultimately revoked the physician’s privileges.

The defendants moved to dismiss on various grounds, including failure to satisfy Rule 9(b), as well as Rule 12(b)(6) for failure to plead an objectively false claim submitted to the government.  For Rule 9(b), the court ruled that in US ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163 (10th Cir. 2010), the Tenth Circuit had stepped away from the more stringent pleading standards in US ex rel. Sikkenga v. Regence Bluecross Blueshield of Utah, 472 F.3d 702 (10th Cir. 2006), and no longer required specific allegations regarding the bills submitted to the government, so long as there was an otherwise “adequate basis for a reasonable inference that false claims were submitted.”  The court then held that relator had met the specificity requirements as to Dr. Sorensen and for one of the defendant hospitals.

Significantly, however, Court ruled that relator had not adequately alleged a fraudulent scheme against the second hospital. Relator alleged that the hospital had conducted an internal investigation and took action to stop Dr. Sorensen from performing the procedure on pre-stroke patients, which ultimately led to Dr. Sorensen relinquishing his privileges.  In language that will ring true to compliance officers everywhere, the court observed that the hospital’s “efforts to curb Dr. Sorensen’s use of PFO closures is not evidence of a fraudulent scheme.” In addition, the court ruled that the relator had otherwise failed to provide sufficiently individualized details regarding “who, what, when, where” about the hospital’s knowledge to survive Rule 9(b).

With respect to Rule 12(b)(6), the court dismissed the remainder of the case on the ground that the relator could not establish that an objectively false claim had been submitted to the government.  The court further denied a request to amend on the ground that “in the absence of an objective standard created by the government,” FCA claims premised on a medical necessity standard must fail.

The court noted that the relator’s claim was based on two closely related requirements: (1) that providers must submit a certification with any request for payment from Medicare stating that the “services shown on this form were medically indicated and necessary for the health of the patient” and (2) the Medicare statute provides that “no payment may be made…for any expenses incurred for items or services …which…are not reasonable and necessary” for diagnosis or treatment.  The court succinctly boiled this down, stating “Thus Dr. Polukoff’s FCA causes of action rest upon his contention that the defendants represented (either explicitly or implicitly) that the PFO closures performed… were medically reasonable and necessary and that this representation was false.”

Noting that the FCA requires “proof of an objective falsehood” and that FCA liability “must be predicated on an objectively verifiable fact,” the court pointed to the reasoning of AseraCare, that a “mere difference of opinion between physicians, without more, is not enough to show falsity.”  The court went on to hold that the relator could not demonstrate that defendants’ representations regarding the reasonability and necessity of the PFO closures could “be proven to be objectively false”: “Opinions, medical judgments, and ‘conclusions about which reasonable minds may differ cannot be false’ for the purposes of an FCA claim.” The court further held that the relator’s assertion that some of the procedures were not reasonable or necessary because they were performed on patients who had not suffered a stroke was a subjective medical opinion that could not be proven objectively.

Significantly, the court expressly found that the AHA medical guidelines proffered by the relator could not be equated with the “medical necessity standard imposed by Medicare,” observing that Medicare “does not require compliance with an industry standard as a prerequisite to payment” and thus failure to comply with those standard does not support a claim that the certification of medical necessity is objectively false.  Finally, the court observed that the government was free to clarify the conditions under which it will or will not pay for a procedure, but “in the absence of an objective standard created by the government,” attempts to prove a violation of the “reasonable and necessary” standard would necessarily rest on evidence of “medical opinions and subjective standards of care rather than objectively false representations.”

Polukoff is welcome news for health care providers.  In cases where the FCA is used by the government and relators to monitor and attempt to punish allegedly “fraudulent” conduct that, in reality, involves questions of physician judgment, Polukoff’s adoption of AseraCare’s logic gives added weight to arguments against liability premised on disagreements over clinical decision-making.

Court Rejects Criminal Defendant’s Attempt to Dismiss Indictment Based on Favorable Defense Verdict in Non-Intervened FCA Case

On January 26, 2017, the US District Court for the Western District of Virginia rejected a defendant’s attempt to invoke collateral estoppel principles to dismiss an indictment for fraud.  In United States v. Whyte, the defendant, Whyte, argued that the indictment should be thrown out because a jury had previously found in his favor after trial of a relator’s civil qui tam claims under the False Claims Act (U.S. ex rel. Skinner v. Armet Armored Vehicles and William Whyte, W.D. Va. June 4, 2015), based on allegations of fraud that overlapped with those in the indictment.  Whyte argued that the jury’s verdict established that no fraud was committed, and that the government, as real party in interest in the qui tam case, had the full opportunity to litigate the issues.  Accordingly, Whyte contended that collateral estoppel mandated dismissal.

The district court disagreed, and its opinion rested on the fact that the government did not intervene in the qui tam action.  The court found that the government’s declination meant that the collateral estoppel doctrine’s requirement that the parties to the prior case and the case at bar be identical was absent.  The court acknowledged that party identicality for estoppel purposes can exist where there where “there is such a degree of affinity of interests of the person who was not a formal party to the prior proceeding, as to render the doctrine of collateral estoppel applicable.”  In re Goldschein, 241 B.R. 370, 374 (D. Md. 1999) (citing Va. Hosp. Assoc. v. Baliles, 830 F.2d 1308, 1312 (4th Cir. 1967)).  But it held that in such cases, the non-party must have had the ability to control the prior proceedings.  While the government is a “real party in interest” in a declined qui tam, the court determined that it lacks the ability to control the litigation.  The court reasoned:

By statute, if the government elects not to intervene, it retains no right to control the litigation in any meaningful way.  It may not issues subpoenas, conduct depositions, propound discovery, call witnesses, or cross-examine the defendant’s witnesses. It is entitled to receive pleadings and deposition transcripts, but no more. In instances in which the government elects not to intervene, it cannot reasonably be argued that the government had a ‘full and fair opportunity to litigate’ the issues.

The court further opined that any contrary holding would render meaningless the government’s statutory election decision.  “If the government were bound by private actors prosecuting FCA cases in its name, there would be no purpose to Congress’s decision to permit the government to elect to intervene, or to decline to intervene.  Under Whyte’s proposed interpretation, the government would be forced to be a party regardless of its intervention decision.”

The court’s characterization of the government’s lack of control over a declined qui tam case fails to address the  statutory tools available to the government. Among other things, the government can seek a stay of discovery if the discovery being conducted by the relator is interfering with a parallel criminal investigation or prosecution; it frequently files statements of interest in declined qui tams espousing its views on the legal issues in play in the case; it can object to a settlement between the relator and the defendant and must consent to any dismissal of the action by the relator; the government can settle a case over the objection of the relator and has a broad right to dismiss any FCA case.  Further, a declination decision is not final–the government can later seek to intervene for “good cause” as the case progresses.  Whether these examples suffice to establish “control” for collateral estoppel principles is a question that the Whyte court would presumably answer in the negative, but the notion that the government lacks any control over an FCA case in which it has declined to intervene ignores the many avenues pursuant to which the government can (and does) exert control.  And the irony here is that while the defendant escaped civil fraud liability notwithstanding the lower preponderance of the evidence standard of proof applicable to such claims, he now must face criminal fraud charges which the government must prove beyond a reasonable doubt.

Federal Health Care Fraud and Abuse Enforcement Made a Strong Showing in FY 2016

According to a report released last week, the Health Care Fraud and Abuse Control Program (HCFAC) returned over $3.3 billion to the federal government or private individuals as a result of its health care enforcement efforts in fiscal year (FY) 2016, its 20th year in operation. Established by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) under the authority of the Department of Justice (DOJ) and the Department of Health and Human Services (HHS), HCFAC was designed to combat fraud and abuse in health care. The total FY 2016 return represents an increase over the $2.4 billion amount reported by the agencies for FY 2015.

The report serves as a useful resource to understand the federal health care fraud enforcement environment. It highlights costs and returns of federal health care fraud enforcement, providing not only amounts recovered from settlements and awards related to civil and criminal investigations but also outlining funds allocated for each departmental function covered by the HCFAC appropriation. Total HCFAC allocations to HHS for 2016 totaled $836 million (approximately $255 million of which was allocated to the HHS Office of Inspector General (OIG)) and allocations to DOJ totaled $119 million. The report touts a return on investment of $5 for every dollar expended over the last three years.

The report also includes summaries of high-profile criminal and civil cases involving claims of violations of the False Claims Act (FCA), among other claims. The cases include OIG and HHS enforcement actions as well as some of those pursued by the Medicare Fraud Strike Force, which is an interagency task force composed of OIG and DOJ analysts, investigators, and prosecutors. Successful criminal and civil investigations touch virtually all areas of the health care industry from various health care providers to pharmaceutical companies, device manufacturers and health maintenance organizations, among others.

The report follows an announcement by the DOJ last December declaring FY 2016’s recovery of more than $4.7 billion in settlements and judgments from civil cases involving fraud and false claims in all industry sectors to be its third highest annual recovery, the bulk of which, $2.5 billion, resulted from enforcement in the health care industry.

First Circuit Deems Request for Leave to File Fourth Amended Complaint Futile

On December 23, 2016, the US Court of Appeals for the First Circuit issued an opinion in United States ex rel. D’Agostino v. ev3, Inc. (Case No. 16-1126), affirming the US District Court for the District of Massachusetts’s denial of a relator’s motion for leave to file a fourth amended complaint under the False Claims Act (FCA).

The relator, a former sales representative at ev3, a medical device developer and manufacturer, alleged that his former employer and its subsidiary, Micro Therapeutics, Inc., violated provisions of the FCA by selling two products, the Onyx Liquid Embolic System (Onyx) and the Axium Detachable Coil System (Axium), to hospitals seeking reimbursements by the government through the Centers for Medicare & Medicaid Services (CMS).

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Relying on Escobar, Ninth Circuit Tosses Implied Certification Case

On January 12, 2017, the US Court of Appeals for the Ninth Circuit affirmed a district court’s grant of summary judgment in favor of a government contractor, where a relator had asserted that the contractor had violated material contractual requirements.

In United States ex rel. Kelly v. SERCO, Inc., defendant SERCO provided project management, engineering design and installation support services for a range of government projects to the US Department of Defense, Navy Space and Naval Warfare Systems Command (SPAWAR). The Federal Acquisition Regulation (FAR) requires that government contracts of this nature contain a clause requiring the contractor to implement a cost and progress tracking tool called an “earned value management system” (EVMS), which is “a project management tool that effectively integrates the project scope of work with cost, schedule and performance elements for optimum project planning and control,” 48 C.F.R. § 2.101, and that this EVMS comply with ANSI-748, a national standard for EVMS. SECRO’s monthly cost reports allegedly did not comply with this standard. After the government declined to intervene, the relator pursued a claim against SERCO arguing that its failure to comply with ANSI-748 amounted to a fraud against the government. Continue Reading

OIG Issues Report on Medicare’s ‘2-Midnight Hospital Rule’

On December 19, 2016, the US Department of Health and Human Services Office of Inspector General (OIG) posted a report examining the Centers for Medicare & Medicaid Services’ (CMS’s) “2-Midnight Rule.” The OIG concluded that although the number of inpatient stays decreased and the number of outpatient stays increased under the 2-Midnight Rule, Medicare paid nearly $2.9 billion in fiscal year 2014 for potentially inappropriate short inpatient stays. The OIG recommended that CMS improve oversight of hospital billing.

Read the full article.

First Circuit Affirms Dismissal of Former Sales Representative’s False Claims Act Claims Against Medical Device Manufacturer

On December 16, 2016, the US Court of Appeals for the First Circuit issued an opinion in United States ex rel. Hagerty v. Cyberonics, Inc. (Case No. 16-1304) affirming the US District Court for the District of Massachusetts’ dismissal of a relator’s False Claims Act (FCA) claims for failure to plead the alleged fraudulent scheme with the level of particularity required by Federal Rule of Civil Procedure 9(b).

The relator, a former sales representative of medical device manufacturer Cyberonics, Inc., alleged that his former employer had engaged in a scheme to overbill the government by encouraging unnecessary, untimely surgical procedures to prematurely replace batteries in patients’ Vagus Nerve Stimulator (VNS) devices. The relator alleged that while VNS devices, implanted to treat patients with refractory epilepsy, have battery lives of eight to nine years, Cyberonics adopted a sales strategy designed to result in battery replacements after four to five years.

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OIG Revises Safe Harbors under the Anti-Kickback Statute and Civil Monetary Penalty Rules Regarding Beneficiary Inducements

On December 7, 2016, the Office of Inspector General of the US Department of Health and Human Services published a final rule containing revisions to both the federal Anti-Kickback Statute safe harbors and the beneficiary inducement prohibition in the civil monetary penalty rules. Effective January 6, 2017, the Final Rule modifies certain existing safe harbors and adds additional safe harbors to the Anti-Kickback Statute and incorporates Affordable Care Act-mandated exceptions into the definition of remuneration under the civil monetary penalty rules.

Read the full article here.

A Closer Look at Rigsby and the Supreme Court’s Rejection of Mandatory Dismissal for Seal Violations

In light of the rising civil monetary penalties under the False Claims Act (FCA) and the looming threat of bank-breaking treble damages, avenues to dismissal are paramount to defendants operating in industries vulnerable to FCA claims, including health care. The United States Supreme Court’s unanimous decision in State Farm Fire & Casualty Co. v. United States ex rel. Rigsby, issued on December 6, 2016, narrows the path for one such avenue.

In Rigsby, the Supreme Court closed the door on what would have been a powerful tool for defendants facing qui tam complaints brought under the FCA: mandatory dismissal based on a relator’s violation of the 60-day seal requirement. The Court did not, however, foreclose dismissal as a possible sanction against relators who violate the seal‑requirements.

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‘Tis the Season for Giving: OIG Updates Policy on Gifts of Nominal Value to Medicare and Medicaid Beneficiaries

On December 7, 2016, the Office of the Inspector General (OIG) of the US Department of Health and Human Services (HHS) issued a policy statement increasing its thresholds for gifts that are considered “nominal” for purposes of the patient inducement provisions of the civil monetary penalties law (section 1128A(a)(5) of the Social Security Act) (CMP Law). HHS also announced the new thresholds in the preamble to a final rule issued on December 7, 2016, revising safe harbors under the Anti-Kickback Statute and rules under the CMP Law. 81 Fed. Reg. 88368, 88394 (Dec. 7, 2016).  The previous thresholds for gifts to Medicare and Medicaid beneficiaries were $10 per item or $50 in the aggregate annually per patient. The new thresholds are $15 per item or $75 in the aggregate annually per patient.

Under the CMP Law, a person who offers or provides any remuneration to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for civil money penalties, subject to a limited number of exceptions. The OIG has indicated that gifts of “nominal value” are not required to meet an exception. However, the OIG has not changed its thresholds for what constitutes “nominal value” since issuing its 2002 Special Advisory Bulletin: Offering Gifts and Other Inducements to Beneficiaries, which included thresholds of no more than $10 in value individually or $50 in value in the aggregate annually per patient. To account for inflation, the OIG has now increased its interpretation of “nominal value,” permitting inexpensive gifts (other than cash or cash equivalents) of no more than $15 per item or $75 in the aggregate per patient annually, effective immediately.

The OIG’s policy statement provides that violations of the CMP Law could result in penalties of up to $10,000 per wrongful act; however, HHS increased the penalty to $15,024 per violation in an interim final rule issued earlier this year. 81 Fed. Reg. 61538, 61543 (Sept. 6, 2016). While the new thresholds are still fairly low, they are a welcome update to the longstanding $10/$50 thresholds.

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