District Court Lets Insurer off the Hook from Defending FCA Suit

On November 15, the US District Court for the Northern District of California granted Scottsdale Insurance Company’s motion for judgment on the pleadings in Hotchalk, Inc. v. Scottsdale Insurance Co. (Case No. 4:16-CV-03883), ruling that Scottsdale is not required to defend or indemnify Hotchalk from a 2014 False Claims Act (FCA) suit (and subsequent settlement). Hotchalk, an education technology company, was a Scottsdale policyholder and sought coverage related to a qui tam suit that alleged improper employee incentives for student recruitment. The court ultimately found that the underlying allegations related directly to the company’s professional services, and thus were barred from coverage based on a professional services exclusion in Hotchalk’s policy.

Continue Reading

Supreme Court Determines that Seal Violation Does Not Mandate Dismissal

On December 6, 2016, the Supreme Court of the United States decided State Farm Fire and Casualty Co. v. United States ex rel. Cori Rigsby and Kerri Rigsby. At issue was whether a qui tam relator’s violation of the seal requirement, 31 U.S.C. § 3730(b)(2), requires a court to dismiss the suit. In a unanimous decision, the Court concluded that violation of the seal does not mandate dismissal, affirming a lower court decision to deny the defendant’s motion to dismiss.

Section 3730(b)(2) requires qui tam complaints to be filed under seal for at least 60 days and provides that they shall not be served on the defendants until the court so orders. The purpose of the seal is to give the government time to investigate. In practice, the government often seeks numerous extensions while it investigates the conduct alleged in the relator’s complaint.

Justice Kennedy, writing for the Court, reasoned that the text of the False Claims Act (FCA) makes no mention of a remedy as harsh as dismissal. The Court also noted that the FCA was intended to protect the government’s interests, whereas mandatory dismissal would run contrary to those interests, as it would put an end to potentially meritorious qui tam suits. Although the Court made no definitive ruling as to what sanction would have been appropriate, it did note that dismissal “remains a possible form of relief,” while “[r]emedial tools like monetary penalties or attorney discipline remain available to punish and deter seal violations even when dismissal is not appropriate.”

We previously wrote about this matter, here.

Split Sixth Circuit Panel Affirms Dismissal of Reverse False Claims Case Involving Fracking Leases

Last week, a 2-1 split panel on the US Court of Appeals for the Sixth Circuit affirmed the lower court’s dismissal of U.S. ex rel. Harper, et al. v. Muskingum Watershed Conservancy District, Case No. 15-4406 (6th Cir. Nov. 21, 2016). The Sixth Circuit’s decision comes nearly eleven months after the US District Court, Northern District of Ohio dismissed the relators’ False Claims Act (FCA) complaint, which alleged reverse false claims arising from hydraulic fracturing (“fracking”) leases executed by the Muskingum Watershed Conservancy District (MWCD). In this case, the Sixth Circuit became the first appellate court to address the requisite mental state for the so-called “reverse false claims” theory of liability, 31 U.S.C. § 3729(a)(1)(G), under which a defendant is liable if it “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”

The case involves a 1949 land grant from the United States to MWCD, a political subdivision of the state of Ohio responsible for developing reservoirs and dams to control flooding. The 1949 deed included a provision reverting the land to the United States if MWCD “alienated or attempted to alienate it, or if MWCD stopped using the land for recreation, conservation, or reservoir-development purposes.” Starting in 2011, MWCD began selling rights to conduct fracking on the land. Opposed to fracking, the three relators filed this FCA action based on a theory that the 1949 deed’s reversion clause was triggered by MWCD’s sale of fracking rights, thereby resulting in reverse false claims and conversion when MWCD “knowingly withholding United States property from the federal government.” The United States declined to intervene in the case.

The Sixth Circuit concluded that “knowingly” in the context of § 3729(a)(1)(G) applies “both the existence of a relevant obligation and the defendant’s own avoidance of that obligation.” In other words, to be liable, the defendant must have known it had (or have acted in deliberate ignorance or reckless disregard of) an obligation to the United States and known that it was avoiding (or have acted in deliberate ignorance or reckless disregard of) that obligation. Continue Reading

Predictions on False Claims Act Enforcement in the Trump Administration

While there are a number of executive policies that will be affected by the presidential election, there are several reasons to expect modest change in the government’s approach to False Claims Act (FCA) actions. The most significant reason for this expectation is that the vast majority of FCA cases are filed by relators on behalf of the government and the Department of Justice (DOJ) has historically viewed itself as obligated to conduct an investigation into those cases. There is little reason to suspect the financial motivations that encourage relators and relators’ counsel to continue to bring cases under the FCA will diminish. That said, the possibility of repeal of the Affordable Care Act (ACA) could remove or change some of the ACA’s FCA amendments that enhanced the ability of certain individuals to qualify as a relator. The composition of the Supreme Court may have the most significant impact on the FCA given the Court’s increasing interest in this area.

Continue Reading

Eleventh Circuit Says Whistleblower’s Suit Should Never Have Been Heard

On November 8, 2016, the US Court of Appeals for the Eleventh Circuit issued a decision in U.S. ex rel. Saldivar v. Fresenius Medical Care Holdings, Inc., remanding the case for entry of an order dismissing the case for lack of subject matter jurisdiction based on the False Claims Act’s (FCA) pre-2010 public disclosure bar.

We previously posted about the US District Court for the Northern District of Georgia’s October 30, 2015, decision granting Fresenius’ motion for summary judgment. As a reminder, relator Chester Saldivar alleged that Fresenius violated the FCA by billing the government for the “overfill” in medication vials, which is the extra medication included to facilitate the extraction of the amount labeled on the vial.

Fresenius maintained that the action should be dismissed for lack of subject matter jurisdiction due to the pre-2010 version of the public disclosure bar in the FCA, which prevents qui tam actions if the allegations in question were publicly disclosed and the relator is not an original source. The district court concluded that Saldivar’s allegations of overfill billing were publicly disclosed to the government in communications between Fresenius and the Centers for Medicare and Medicaid Services (CMS) as well as publicly in a complaint in another matter. But, the district court held that Saldivar was an “original source” and not barred from bringing the action because of his experience in managing the inventory of the medication and his discussions with supervisors and coworkers about overfill use and billing.

On the merits of Saldivar’s allegations, the district court then held that Saldivar could not prove that Fresenius knew that billing for overfill was impermissible. On that basis, the district court granted Fresenius’ motion for summary judgment and Saldivar appealed.

Continue Reading

CMS Reissues Stark Rules Restricting Certain Unit-based Rental Rate Arrangements and Issues Two Stark Updates

On November 15, 2016, as part of its 2017 Medicare Physician Fee Schedule update, the Center for Medicare and Medicaid Services reissued its prohibition on certain unit-based rental arrangements with referring physicians, adopted updates to the list of CPT/HCPCS codes defining certain of the Stark Law’s designated health services and implemented a minor technical change to its instructions for submitting a request for an Stark advisory opinion. These revisions can be found at 81 Fed. Reg. 80170, 80524-36.

Read the full article.

Fifth Circuit Upholds Omnicare Decision for Lack of Supporting Evidence of Kickback Violation

On October 28, 2016 in an unpublished opinion, the Fifth Circuit Court of Appeals affirmed the decision of the US District Court for the Southern District of Texas that granted summary judgment to Omnicare, Inc. in a qui tam action. We discussed the decision of the district court here.

The relator alleged, among other claims, that Omnicare violated the False Claims Act (FCA) by writing off debt owed by skilled nursing facilities (SNFs) and offering prompt-payment discounts in exchange for referrals to Omnicare’s pharmacy business, in violation of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b)(2) (AKS).

The Fifth Circuit agreed with the district court that the evidence offered by the relator regarding the debt write-off practices did not support a finding that Omnicare offered benefits to SNFs that were designed to induce Medicare and Medicaid referrals. The court found that, at best, the evidence, which consisted primarily of company emails, supported a finding that “Omnicare did not want unresolved settlement negotiations to negatively impact its contract negotiations with SNF clients” and was “avoiding confrontational collection practices that might discourage SNFs from continuing to do business with Omnicare.” In addtion, the court found no evidence that the SNFs were told that they were receiving special benefits, noting that if the “purported benefits were designed to encourage SNFs to refer Medicare and Medicaid patients to Omnicare, one might expect to find evidence showing that the SNFs at least knew about the benefits.”Moreover, the court found that the relator offered no evidence that prompt-payment discounts were offered to the SNFs for the “illegitimate purpose of inducing referrals rather than the legitimate purpose of inducing payments.”

The court invoked the principle that there is no AKS violation where “the defendant merely hopes or expects referrals from benefits that were designed for other purposes” and noted that “although Omnicare may have hoped for Medicare and Medicaid referrals, absent any evidence that Omnicare designed its settlement negotiations and debt collection practices to induce such referral, Relator cannot show an AKS violation.”

Although the Fifth Circuit’s decision was not published, it stands as an affirmation of the district court’s admonition that “an accusation of a multimillion-dollar fraud must be supported by more than a few ambiguous e-mails.”

Old Dog, New Tricks: Fraud and Abuse in the Age of Payment Reform

The good, reassuring news about that “old dog” fraud and abuse as it enters an age of payment reform is that criminal liability for fraud still requires a specific intent to defraud the federal health care programs, anti-kickback liability still requires actual knowledge of at least the wrongfulness, if not the illegality, of the financial transaction with a referral source, and civil False Claims Act liability for Stark Law violations still requires actual knowledge, a reckless disregard for, or deliberate ignorance of the Stark Law violation. This should mean that good faith and diligent efforts to comply with law, including seeking and following legal counsel, still go a long way in managing an organization’s and individual executive’s risk under the fraud and abuse laws. The bad, unsettling news about fraud and abuse in an age of payment reform, however, is that (1) anxiety about reform and stagnating and declining physician incomes are propelling a spike in transactions between health systems and physicians at a time when qui tam plaintiffs and the law firms that represent them are aggressively challenging the legitimacy and common structures for these transactions; and (2) the Stark Law is largely indifferent to the good faith intentions of health systems to integrate and enter into coordinated care arrangements with physicians, and continues to impose on health systems heavy burdens of proof that the arrangements comply with ambiguous standards like fair market value, volume or value and commercial reasonableness. While financial transactions incident to the Centers for Medicare and Medicaid Services’ (CMS) innovative care delivery and payment initiatives, such as accountable care organizations (ACOs), medical homes and bundled payment arrangements can be protected by the fraud and abuse/Stark waivers discussed in Part B below, there are many other common transactions and arrangements with physicians still operating in a fee-for-service environment  (such as practice acquisitions, employment, “gainsharing,” service line co-management, pay-for-quality and non-ACO clinically integrated networks) that are not protected by the waivers. During this period of transition to transformation of the health delivery and payment system, the key areas of risk for health systems are their burdens of proof on the ‘big three” issues of:

  • Fair market value,
  • Volume or value, and
  • Commercial reasonableness.

Each is discussed separately below, and the industry practices for managing these risks. Please note that none of these practices are necessarily “best” or “normative” practices, but are what we have observed.

Read the full article here.

Oral Arguments Held In Closely Watched Agape Case

On October 26, 2016, the US Court of Appeals for the Fourth Circuit held oral arguments in United States ex rel. Michaels v. Agape Senior Community, Inc. In this case, the relators alleged that the defendants caused the submission of false claims for hospice reimbursement. The Medicare regulations governing the hospice benefit require physicians to certify that the patient seeking the benefit have a terminal illness with a prognosis of six months or fewer. The relators allege that those certifications were false.

At the district court, the relators had sought to use statistical sampling to establish liability. After the district court concluded—in the context of a discovery dispute—that it would not permit the relators to use statistical sampling to prove their case, the parties engaged in mediation efforts. The relators and defendants reached a settlement, but the government objected. The district court then certified for interlocutory appeal two issues: (1) whether the government has an unreviewable power to veto a False Claims Act settlement; and (2) whether statistical sampling can be used to establish liability.

At the oral arguments, the Fourth Circuit panel was somewhat skeptical to the notion that it could even conduct an interlocutory review the district court’s ruling on statistical sampling, noting that the district court made an evidentiary ruling that it could have revisited later in the proceedings, including at trial.

Continue Reading

Sanford-Brown on Remand: Seventh Circuit Jettisons Relator’s Case Under Escobar Standard

We previously reported on the Seventh Circuit’s decision in United States ex rel. Nelson v. Sanford-Brown Ltd.,

in which the court rejected the implied certification theory of FCA liability and granted summary judgment for the defendant.  Following the Supreme Court’s decision in the Escobar case, the Seventh Circuit revisited its decision on October 24, 2016.  Once again, the Seventh Circuit affirmed the district court’s entry of summary judgment in the defendant’s favor, this time pursuant to the standards for implied certification claims announced in Escobar.

In Escobar, the Supreme Court held that implied certification can be a basis for liability when the claim for payment makes specific representations about the goods or services provided and the defendant’s failure to disclose noncompliance with material legal obligations makes those representations “misleading half-truths.”  In Sanford-Brown, the Seventh Circuit concluded that the relator failed to demonstrate any specific representations, never mind those that were misleading.

In addition, the court applied the Escobar court’s holding that FCA plaintiffs must demonstrate materiality, holding that the relator’s claims could not survive on that additional basis.  The Seventh Circuit quoted the Supreme Court’s characterization of the materiality standard as “demanding” and “rigorous.”  The Seventh Circuit observed that, under Escobar, courts must look to the “likely or actual” payment behavior of the government payor.  The Seventh Circuit held:

Here, Nelson has offered no evidence that the government’s decision to pay SBC would likely or actually have been different had it known of SBC’s alleged noncompliance with Title IV regulations.

In fact, the court observed that the government had examined the defendant multiple times.  The court concluded:

At bottom, even assuming Nelson’s allegations are true, the most he has shown is that SBC’s supposed noncompliance and misrepresentations would have entitled the government to decline payment.  Under [Escobar], that is not enough.

This decision is consistent with what the Supreme Court held in Escobar: the government’s mere option to decline to pay claims is insufficient to establish materiality and, thus, insufficient to establish FCA liability.

LexBlog