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Chelsea M. Rutherford focuses her practice on corporate, transactional and regulatory matters affecting a wide range of clients in the health care and life sciences industries. Read Chelsea M. Rutherford's full bio.

On June 8, 2018, the US District Court for the Eastern District of Virginia granted in part a motion for summary judgement filed by a government contractor in an implied false certification case under the False Claims Act (FCA), holding that the relator failed to satisfy the Supreme Court’s materiality standard put forth in the historic Escobar case.

The defendant, Triple Canopy, is a government contractor that provides security services to government agencies overseas. As a result of its overseas services, Triple Canopy was the target of at least two qui tam complaints alleging FCA violations under an implied certification theory. As we previously reported, on May 16, 2017, after a years-long battle, the Fourth Circuit upheld FCA allegations against Triple Canopy, finding that that specific complaint met Escobar’s materiality standard (in part due to Triple Canopy’s attempts to conceal its wrongdoing and the government’s decision not to renew Triple Canopy’s contract once learning of the deficiencies).

The claims in this FCA complaint arose from a different government contract to provide security services at the US Embassy in Baghdad. While employed at Triple Canopy in 2015, the relator Bachert raised concerns about one employee’s routine weapons inspections and records related to those inspections, alleging they were falsified. An internal investigation and a State Department investigation did not substantiate all of Bachert’s claims, but Triple Canopy nevertheless cooperated in the investigation and took corrective actions in response to the allegations. The State Department did not withhold any payment or seek any repayment in connection with the relator’s allegations.

The relator then filed this qui tam action under the FCA on April 22, 2016, in which the government declined to intervene.  The relator asserted that Triple Canopy was liable under the FCA because it submitted claims for payment to federal agencies without disclosing its alleged inspection irregularities and records issues. In moving for summary judgment, Triple Canopy argued that the relator had not demonstrated these alleged issues were material to its payment under the State Department contract. The court agreed with Triple Canopy, finding that it “strains credulity to believe that those inspection reports were a factor in the government’s decision to make payment on the contract.” The court then squarely addressed the materiality standard under Escobar, holding that the “alleged falsehoods at issue . . . are the kind of ‘minor or insubstantial’ noncompliance that Escobar advises are not material.” The court went on to emphasize that the allegations were “insubstantial in relation to the overall size of the [contract],” pointing out that even if the allegations were true, the records involved accounted for only 0.3 percent of the total labor invoice to the government. Finally, the court noted that the State Department had considered the allegations raised by the relator, found them to be immaterial, and continued payment under the contract, which it described as “important factor(s)” in assessing materiality under Escobar and as “uniformly recognized” by circuit courts post-Escobar to substantially increase the relator’s burden in establishing materiality.

This court’s decision joins the litany of other cases holding, based on Escobar, that the government’s actions after learning of alleged violations are critical to the materiality analysis and the relator’s burden in establishing materiality. It is distinct from the pack, however, in that it also considered the nature and value of the breach in proportion to the total value of the contract. This additional factor in the materiality analysis may prove helpful for future litigants.

The case is United States ex rel. Bachert v. Triple Canopy, Inc., Case No. 1:16-cv-456, before the U.S. District Court for the Eastern District of Virginia.

In the fourth of a related set of qui tam False Claims Act (FCA) suits, the United States District Court for the Northern District of Illinois granted summary judgment in favor of generics manufacturer Par Pharmaceutical Companies (Par). The court’s August 17, 2017, opinion in U.S. ex rel. Lisitza et al v. Par Pharmaceutical Co, Inc. held that the relator had not presented sufficient evidence to support an implied certification theory of FCA liability.

Like its sister cases, the relator in Par Pharmaceutical alleged that the defendant caused the submission of false claims to the Medicaid program via an unlawful prescription-switching scheme. The alleged scheme involved manufacturing generic drugs in forms and dosage strengths that were atypical and not covered by existing Medicaid reimbursement limits, then marketing the drugs to pharmacies based on their higher reimbursement potential. The pharmacies would then fill the scripts with the more expensive forms and dosages manufactured by Par. The relators also alleged that the drugs were dispensed without physician approval and without meeting the medical necessity and economic requirements of governing state and federal Medicaid regulations, in violation of the FCA.

Continue Reading Par Pharmaceutical Beats FCA Prescription-Switch Allegations

On March 20, 2017, the US District Court for the Southern District of Mississippi denied a motion to permanently seal the record of previously dismissed False Claims Act (FCA) claims.  The three relators, who initially brought the claims in US v. Apothetech Rx Specialty Pharmacy Corp., claimed they would face potential reputational damage and retaliatory actions if the case was not permanently sealed. The court ultimately held, however, that such “generalized apprehensions of future retaliation” were not enough to overcome the strong public right of access to judicial proceedings.

The underlying qui tam complaint was initially filed on August 14, 2015, and alleged the defendants engaged in a fraudulent scheme of improperly compensating independently contracted sales representatives for referrals. The relators voluntarily dismissed the complaint a year later in August 2016. Upon dismissal, however, the court temporarily sealed all case records related to the case to permit the relators time to file the present motion to seal.  Continue Reading Relators Denied Permanent Seal on FCA Case Record after Voluntary Dismissal

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 District Court Lets Insurer off the Hook from Defending FCA Suit

As part of a settlement agreement reached on August 23, three hospitals and their former parent system agreed to pay $2.95 million to resolve state and federal False Claims Act (FCA) allegations that they failed to investigate and repay overpayments from the New York Medicaid program in a timely manner under the so-called “60 Day Rule.” The allegations were originally made by a former employee via a 2011 qui tam suit, United States of America ex rel. Kane v. Continuum Health Partners, Inc.

Under the 60 Day Rule, enacted as part of the Affordable Care Act in 2010, providers are required to report and return overpayments within 60 days of identification. When “identification” happens has been the subject of much debate, and was one of the main issues in the decision issued by the US District Court in the Southern District of New York last year, which denied Continuum’s motion to dismiss the government’s complaint. Despite repaying all of the improper claims, the government alleged in Kane that Continuum and the hospitals “fraudulently delay[ed] repayments” for up to two years after it had identified them. As has become the custom in the Southern District of New York, the settlement agreement contains certain admissions by Continuum concerning the covered conduct, including that beginning in 2009, a software compatibility issue caused them to mistakenly submit improper claims to the New York Medicaid program, the billing errors were brought to their attention over the course of late 2010 and early 2011, and that Continuum began to reimburse Medicaid for the 444 improper claims in February 2011 and concluded repayment in March 2013.

While Kane was the first court to directly grapple with the issue of when a provider had “identified” an overpayment, the Kane court’s interpretation of “identify” has been essentially supplanted by the final rule released by Medicare in February 2016. The final rule makes clear that a provider can conduct “reasonable diligence” into whether it has received an overpayment and can quantify the amount of such overpayment without triggering the 60-day clock. Even with the final rule, there continue to be significant questions about what constitutes “reasonable diligence” and how the rule intersects with the FCA’s reverse false claims cause of action, which only is triggered by knowingly concealing or knowingly and improperly avoiding or decreasing an overpayment retained in violation of the rule.

The Kane case and settlement confirm the interest of the government and relators in examining overpayment and 60 Day Rule issues under the FCA. The potential ramifications can be significant — the settlement amount is more than triple the $844,000 in overpayments Continuum originally received from (and repaid to) Medicaid. It may be advisable for providers to review their policies and procedures for addressing and resolving potential overpayment issues and maintaining documentation of those efforts to defend their actions if questioned by the government.

On April 28, 2016, the House Judiciary Committee’s Subcommittee on the Constitution and Civil Justice (Subcommittee) held a hearing on the False Claims Act (FCA). According to a statement of the Subcommittee chair, the hearing was called to examine FCA oversight and “what more can be done to prevent, detect, and eliminate false claims costing taxpayer dollars, while ensuring fair and just results.” The Subcommittee invited two health care lawyers, a professor and a hospital CEO to testify during the hearing. Several other individuals also submitted written statements to the Subcommittee, most notably Senator Chuck Grassley (R-IA), chairman of the Senate Judiciary Committee and long-time FCA proponent.

While the Subcommittee heard a variety of unique perspectives during the hearing, the oral testimonies generally spoke to two primary proposals. The first proposal would require corporate whistleblowers to report frauds internally before filing FCA actions. The second would eliminate or narrow FCA liability for corporations that adopt a so-called “gold standard” corporate compliance program. Both proposals appear to stem from a 2013 US Chamber of Commerce report, which asserted that the FCA as currently written and implemented “incentivize[s] the filing of frivolous lawsuits and impose[s] irrationally excessive penalties for technical violations that occur despite businesses’ good faith efforts to comply . . . .” Continue Reading Congressional Hearing Explores FCA Oversight and Reform

The past three months have seen a flurry of advisory opinion activity from the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG). The majority of this activity focuses on patient assistance programs (PAPs) as donors and organizations continue to have questions about OIG’s most recent PAP guidance. While none of these opinions or modifications are dramatically new on their face, together they provide valuable insight into the types of facts that can mitigate the OIG’s general concerns with tailored disease funds.

Typically, sponsored by pharmaceutical manufacturers and/or independent charity organizations with industry donors, PAPs provide financial assistance or free prescription drugs to low income individuals. Some PAPs are also structured to provide assistance to patients with a specific disease, like cancer or Crohn’s disease. As PAPs have the potential to be used by manufacturers to subsidize the purchase of their own products, or to improperly steer a patient’s drug selection, they can trigger scrutiny under the federal Anti-Kickback Statute (AKS) and Beneficiary Inducement Civil Monetary Penalty (CMP), among other laws. Not surprisingly, the OIG is more comfortable with bona fide charitable programs that are not drug-specific and that reflect other characteristics demonstrating a broad patient focus, rather than those reflecting a drug or pharmaceutical manufacturer focus.

Historically, the OIG has treated PAPs as important safety nets for patients who face chronic illnesses and high drug costs. The OIG issued a special advisory bulletin (SAB) in 2005 confirming that PAPs could help ensure patients had access to and could afford their medically necessary drugs. The OIG’s guidance evolved with its May 2014 SAB, which addressed the growing trend of independent charity PAPs establishing or operating specific disease funds that limit assistance to a subset of available products. The OIG articulated a concern with such PAPs, and indicated that it would view such programs as having a higher baseline risk of abuse when their assistance was limited to only a subset of available FDA-approved products for treatment of the disease. The OIG advised PAPs to define disease funds in accordance with widely recognized clinical standards and in a manner that covered a broad spectrum of products and manifestations of the disease (e.g., without reference to specific symptoms, drug stages, treatment types, severity of symptoms or other “narrowing” factors).

Consistent with this guidance, the OIG began issuing new advisory opinions and modifications of previous opinions in January 2015. The OIG’s opinions and modifications posted in the past three months are also consistent with this standard, but importantly add nuanced factors and exceptions that appear to show a more refined stance on specific disease funds. In December, the OIG posted a modification of Advisory Opinion 07-11, concerning a PAP that provided support for patients experiencing a specific symptom of cancer. In January, the OIG posted two new advisory opinions that addressed a PAP tailored to support patients with two specific diseases (a type of cancer and a type of chronic kidney disease) and a PAP providing support to needy patients with Stage 3 or Stage 4 of a specific disease, respectively. Also in January, the OIG posted a modification of Advisory Opinion 04-15, which addressed a PAP that maintained a disease fund limited to patients with certain metastatic cancers. While all of these specific disease funds may appear inconsistent with the OIG’s 2014 SAB, in each instance the OIG found that the tailored funds presented a low risk of abuse and merited a favorable opinion given the safeguards each employed.

In its Modification of Advisory Opinion 04-15, the OIG noted two factors that minimized the risk that the tailored disease fund could be leveraged by donors. First, the specific symptom of cancer was treatable by 62 different drugs made by 26 different manufacturers, so the program would not be supporting only one specific manufacturer or drug by tailoring its assistance to patients with the symptom. Second, and most importantly to the OIG, the PAP would not limit assistance through the fund just to drugs to treat that symptom; instead, the PAP would provide assistance for all medications prescribed for the qualifying patient’s underlying cancer and related symptoms. By certifying that the PAP would extend its support to underlying and related medical needs of patients with this symptom, the disease fund essentially agreed to expand the practical impact of the fund.

This “broadening” of support from otherwise narrowly defined disease funds can also be seen in the OIG’s other recent advisory opinions on the subject. In Opinions 15-16 and 15-17, for example, the OIG noted its favorable opinion was based in part on the PAPs’ representations that there were several different drugs made by various manufacturers currently available to treat each of the specific diseases and that the PAPs would, at a minimum, assist patients with all FDA-approved drugs to treat each disease (and, for the fund supporting patients with Stages 3 or 4 of the disease, would not limit the financial assistance to drugs expressly approved for advanced stages of the disease). In its Modification of Opinion 07-11, the PAP also noted that its support would not be limited to drugs expressly approved for the metastatic stage of the cancer. These opinions also include PAP certifications that if any of the PAP’s future disease funds would result in supporting only one FDA-approved drug treatment or one manufacturer, the PAP will also support the other medical needs of patients with the disease, including co-payment support for all prescription medication prescribed for the management and treatment of the patient’s disease (like pain and anti-nausea medications).

While the OIG continues to reiterate the potential risks posed by disease funds that are tailored to specific symptoms, severity of symptoms, method of drug administration, stages of a disease, or types of drug treatment, its recent opinions and modifications illustrate several exceptions to this general position. This recent flurry of OIG activity may be a good prompt for organizations with PAPs to review any specific disease funds in light of these most recent opinions.

Last week, the Department of Justice (DOJ) announced charges against a former hospital CFO, two orthopedic surgeons, a chiropractor, and a health care marketer for their alleged roles in a series of fraudulent referral and billing schemes.  According to the DOJ, these referral schemes paid illegal kickbacks to physicians for spinal surgery referrals and caused “nearly $600 million in fraudulent billings over an eight-year period.”  These charges underscore the federal government’s recent emphasis on greater individual accountability for fraudulent healthcare schemes and the potential for those involved to face significant liability.

According to a statement from the U.S. Attorney’s Office, the schemes generally involved paying tens of millions of dollars in kickbacks for referrals to two California hospitals, Pacific Hospital in Long Beach and Tri-City Regional Medical Center in Hawaiian Gardens, for spinal surgeries.  Those hospitals then billed those surgeries to California’s workers’ compensation system, the U.S. Department of Labor, and workers’ compensation insurers.  The schemes implicated dozens of surgeons, orthopedic specialists, chiropractors, marketers, and other medical professionals.

These charges are the latest development in an ongoing coordinated government investigation dubbed “Operation Spinal Cap.”   The investigation is specifically focused on providers and other individuals who may have been involved in these spinal surgery-related schemes.

In early 2014, the ex-CEO of Pacific Hospital was indicted and pleaded guilty to paying illegal kickbacks and federal conspiracy charges.  He was also the subject of a qui tam suit and a suit by the County of Los Angeles on state false claims grounds.  According to those cases, the CEO used a network of shell corporations, physician-owned distributorships, and sham contracts to facilitate the referral and billing schemes.

Notably, not all improper kickback payments are clear-cut cash transactions.  The schemes described above are alleged to have used multiple vehicles for providing and concealing kickback payments. For example, the U.S. Attorney’s Office statement described several “bogus contracts” deployed as part of the Pacific Hospital referral scheme.  These included agreements where physicians were paid for a “right to purchase” their medical practices, but the option was never exercised; operations-based agreements that compensated physicians at rates above fair market value; agreements for consulting or directorship work that was never performed; and even lease agreements that paid doctors for space that was never or rarely used.  Corporations should be mindful of these improper arrangements when structuring their compliance programs and evaluating their financial relationships with physicians.

Pacific Hospital’s former CFO, whose case was unsealed last Tuesday, was allegedly responsible for, among other things, tracking the referrals from and payments to physicians.  He pleaded guilty to participating in a conspiracy that engaged in paying kickbacks in connection with a federal healthcare program and in mail fraud, among other charges.  The charges brought against the individuals are varied.  For example, one orthopedic surgeon was charged with filing a false tax return; his plea agreement admits he did not report his kickback payments as income on his taxes.  Additionally, a health care marketer who admitted to recruiting doctors to make referrals pled guilty to conspiring to commit mail fraud.

While the crimes charged vary, they are consistent with the federal government’s recent enhanced focus on individual actors and their roles in health care fraud schemes.  The government’s focus on individuals was notably described in Deputy Attorney General Sally Quillian Yates’ recent memo, which focused on themes of cooperation and individual accountability for involvement in corporate crimes (see our former pieces on the Yates memo here and here.

A copy of the DOJ’s Press Release on these charges can be found here.

On July 20, the Office of Inspector General of the Department of Health and Human Services (OIG) posted a new Advisory Opinion (the Opinion) addressing a health system’s restructured arrangement to lease employees, and provide other operational and management services, to a related psychiatric hospital (the Arrangement). The Opinion is a notable departure from other recent statements and enforcement actions, and signals a greater flexibility in how related entities may share non-clinical employees and operational expenses. It also shows the OIG’s willingness to consider more practical factors, such as cost reporting requirements and the systemic benefits from integrated entities behaving in cost-efficient ways, when determining the risk presented by an arrangement.

The Opinion concerns a nonprofit health system (System) with a membership interest in the psychiatric hospital (Center). The Center is also part of the System’s integrated health network.  The System and the Center are potential referral sources to each other. Currently, both parties have an existing arrangement, whereby the Center leases non-clinician employees and obtains certain other operational and management services from the System, paying the System’s fully loaded costs (e.g., salary, benefits, overhead expenses) plus a two percent administration fee. The Arrangement would continue the same relationship, but the Center would no longer pay the System the administration fee. The parties have asserted, and OIG verified, that the administrative fee is an unallowable cost under applicable Medicare cost-reporting rules, and would not be reimbursable by the Medicare program.

The OIG noted that the new Arrangement, where the System would provide the same services for less aggregate compensation, could raise fair market value (FMV) issues. Such a discount could be considered remuneration in exchange for the Center’s referrals. In addition, the aggregate compensation under the Arrangement can’t be set in advance as the System’s costs, and Center’s needs, may change during the term. Given these issues, the Arrangement would not meet the requirements of the Anti-Kickback Statute (AKS) safe harbor for personal services and management contracts. Nonetheless, given the totality of the circumstances, the OIG concluded that the Arrangement would present a low risk of fraud and abuse and thus OIG would not impose sanctions.

The Opinion described several mitigating factors that, from OIG’s perspective, decreased the Arrangement’s risk of fraud and abuse. Not only did the parties attempt to structure the Arrangement to be in compliance with Medicare cost-reporting rules for related parties, there was also no evidence that the Arrangement was structured to, or actually would, induce referrals. Moreover, the parties pointed to the cost efficiencies of health system integration that would be promoted by the Arrangement, and to the potential indirect benefits (by way of cost savings) to federal health care programs.

The Opinion’s more flexible approach to analyzing the Arrangement stands in contrast to the OIG’s other recent activities, all of which express a consistent concern with payments between independent actors that are not consistent with FMV. For example, the OIG issued a fraud alert focusing on improper physician financial arrangements on June 9, 2015 (previously discussed here. The alert encourages physicians to “ensure that [their] arrangements reflect fair market value for bona fide services.” Similarly, the OIG has recently settled with several leased-employee physicians compensated by Fairmont Diagnostic Center and Open MRI Inc. (Fairmont) following Fairmont’s False Claims Act settlement concerning these arrangements. The OIG alleged that full time Fairmont employees, placed in certain physicians’ offices for study-related tasks, were actually performing office functions on the physician’s behalf, which constituted improper remuneration intended to induce referrals. Given this sustained regulatory focus on FMV compensation, health care entities should pay particular attention to the business justifications of their arrangements.

On Tuesday, June 23, the U.S. Department of Health & Human Services Office of Inspector General (OIG) released two reports that hone in on data patterns showing potential fraud and abuse in the Medicare Part D program.  These reports were released less than a week after a coordinated national Medicare fraud takedown that included a significant number of Part D-related targets.

Medicare Part D is the optional prescription drug benefit for Medicare beneficiaries that went into effect in 2006.  In 2013, over 39 million beneficiaries were enrolled in the program.  The Centers for Medicare & Medicaid Services (CMS) relies on Part D plan sponsors and the Medicare Drug Integrity Contractor (MEDIC) to help CMS detect and prevent fraud, waste and abuse in the Part D program.

The OIG utilized Part D data analytics to identify three main trends that it sees as potential indicators of Part D fraud: increased spending for commonly abused opioids, over 1,400 pharmacies with questionable Part D billing patterns and specific geographic “hotspots” for specific non-controlled drugs.  The OIG provided five examples of hotspots around the country and compared per-beneficiary payment rates in the hotspots to the national averages.

The OIG issued this report in tandem with another document summarizing the work that  has been done thus far by OIG and CMS in identifying and addressing Part D program integrity weaknesses.  It also touched on MEDIC’s increased authority to access claims data from Medicare Parts A and B in its efforts to combat fraud.  This document emphasized that CMS, MEDIC, and Part D sponsors need to increase their efforts to address Part D fraud and abuse.  OIG also pushed for increased data collection, including expanded reporting requirements and drug utilization review programs, and for the implementation of even more robust oversight efforts, including mechanisms to recover payments from Part D sponsors.

Part D sponsors, pharmacies and providers should be keenly aware of the OIG’s continuous efforts to identify and combat against potential areas of fraud in the Part D program.  Active prescribers located in the OIG’s current hotspots should also prepare for increased scrutiny and continue their efforts to maintain compliance programs that can resolve any statistical issues the OIG may identify.

Read the full reports at http://oig.hhs.gov/oei/reports/oei-02-15-00190.pdf and http://oig.hhs.gov/oei/reports/oei-03-15-00180.pdf.