Corporate Integrity Agreement

On May 31, 2017, the US Department of Justice announced a Settlement Agreement under which eClinicalWorks, a vendor of electronic health record software, agreed to pay $155 million and enter into a five-year Corporate Integrity Agreement to resolve allegations that it caused its customers to submit false claims for Medicare and Medicaid meaningful use payments in violation of the False Claims Act.

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In U.S. ex rel. Boise v. Cephalon, Inc. (July 21, 2015), the U.S. District Court for the Eastern District of Pennsylvania held that relators stated a claim under the 31 U.S.C. 3729(a)(1)(G)—otherwise known as the “reverse false claims” provision of the False Claims Act (FCA)—based on alleged violations of a Corporate Integrity Agreement (CIA).

Cephalon’s CIA provided that failure to comply with its obligations “may” lead to monetary penalties, and that the Office of the Inspector General (OIG) could demand penalties (which were stipulated at various dollar amounts in the CIA) after determining that penalties were appropriate. The relators alleged that Cephalon promoted medications off-label and paid unlawful kickbacks in violation of the CIA, entitling the OIG to stipulated penalties. They further claimed that by failing to report the violations and making false certifications of compliance, Cephalon improperly avoided its obligation to pay penalties in violation of § 3729(a)(1)(G).

The court denied Cephalon’s motion to dismiss, in which it argued that the penalty obligations in the CIA were contingent, inasmuch as the OIG could choose whether or not to demand payment of penalties. As such, Cephalon argued they could not give rise to reverse false claims because, absent a demand from OIG, there was no “obligation” to avoid within the statute’s meaning. After comparing other district courts’ treatment of this issue, the court concluded that Cephalon’s obligation to pay stipulated penalties was not contingent, and instead existed regardless of OIG’s payment demand. In reaching this conclusion, the court emphasized that in stipulating penalties, “Cephalon and the government have already negotiated and contracted for the remedies that arise upon a breach of the CIA.”

The result in this case is unsound, as it sets up a potentially endless cycle of FCA liability. Defendants often must enter into CIAs with the OIG in connection with settling FCA claims.  CIAs impose onerous and expensive obligations, typically for five years, as part of the price of resolution and avoiding exclusion.  Under the reasoning of Cephalon, a CIA serves not just as a compliance mechanism but is itself a potential source of new FCA allegations by enterprising relators. Thus, a defendant may close one FCA door while at the same time opening another.

Moreover, in Cephalon, the alleged off-label promotion and kickbacks that the relators say give rise to the CIA violations are, according to the relators’ complaint, also a basis for “non-reverse” false claims under other provisions under the FCA (e.g., presentment, false records, conspiracy). In these circumstances, expanding the scope of potential FCA liability based on the same underlying conduct through a CIA-based reverse false claims theory is unduly expansive and at the same time unnecessarily duplicative. Indeed, to prevail on whether Cephalon failed to properly report or certify compliance under the CIA, the relator still needs to prevail on whether the off-label promotion or kickbacks occurred in the first place.

Cephalon is by no means the only, or the last, word on this issue. In U.S. ex rel. Booker v. Pfizer, Inc., 9 F. Supp. 3d 34 (D. Mass. 2014), the U.S. District Court for the District of Massachusetts came to the opposite conclusion in a case involving similar allegations and a similarly worded CIA. The Booker court focused on the discretionary nature of the language in the CIA—i.e., the fact that violations “may” lead to penalties if the OIG demands them—and held that the CIA did not give rise to an obligation under the FCA’s reverse false claims provision. The court concluded that “[t]he discretion retained by the OIG here is thus the discretion whether to impose a penalty and thereby create an obligation to pay, rather than the discretion whether to enforce and existing obligation to pay.”

The result in Booker prevents CIAs from creating a new set of FCA landmines for providers who are seeking to resolve FCA claims. But as Cephalon demonstrates, the issue is far from settled.

Barely a week after the U.S. Department of Health & Human Services Office of Inspector General (OIG) issued a new fraud alert about Anti-Kickback Statute compliance risks with medical director arrangements, the U.S. Department of Justice (DOJ) announced a $17 million False Claims Act settlement with a nursing home for alleged kickback violations concerning medical director arrangements.

Hebrew Homes Health Network, Inc., a Miami-Dade County nursing home network, and its former president and executive director, William Zubkoff, agreed on June 16, 2015, to settle the qui tam suit brought by Hebrew Homes’ former CFO. According to DOJ, this is the largest False Claims Act settlement for a nursing home allegedly violating the Anti-Kickback Statute.

In the settlement agreement, the government alleged that Zubkoff and Hebrew Homes devised a scheme that, from 2006 to 2013, involved hiring numerous physicians as “sham” medical directors who performed few or no actual services as a way to compensate the physicians for their Medicare referrals.

The government contended in the settlement that the following alleged facts served as “evidence proving” the alleged violations:

  • Hebrew Homes drafted and provided the medical directors with uniform contracts that detailed numerous job duties for the medical director position.
  • As corroborated by statements made by certain of the medical directors to the United States, the medical directors performed none, or almost none, of the job duties listed in their contracts, but nonetheless were paid the salaries provided in their contracts.
  • The medical directors’ patient referrals, without exception, increased exponentially once the medical director contract and payments began.
  • Hebrew Home employees recommended via e-mail increasing the salary of various medical directors because of their high number of patient referrals, and recommended decreasing the salary of, or terminating, medical directors for their lack of patient referrals.

The relator makes other allegations in the complaint to support his case, such as facilities having multiple medical directors simultaneously, the failure to require or request time records of performing services, and examples of internal communications to support the theory that directorships were used as a way to increase referrals.

As part of the settlement, Zubkoff agreed to resign as an employee of Hebrew Homes on March 23, 2015. OIG expressly reserved its exclusion rights against Zubkoff, which is an indication that OIG is considering pursuing an exclusion case against him. Hebrew Homes also agreed to enter into a five-year Corporate Integrity Agreement (CIA) with OIG, which involves OIG monitoring Hebrew Homes’ arrangements with referral sources. The CIA also requires the board of directors to hire a compliance expert to review and report on the compliance program.

The physicians who had the medical directorships were not a party to the settlement, and their potential liability was not released by the settlement. In light of OIG’s fraud alert, it remains to be seen whether OIG will pursue spin-off investigations of some physicians.

In a rare motion to dismiss ruling, a Pennsylvania federal judge rejected as “implausible” a theory that a hospital entered into on-call contracts with a physician with an illicit intent that was so covert that even the physician himself did not understand that the contracts were designed to induce him to refer Medicare patients in violation of the Anti-Kickback Statute (AKS).  Although the relator in Cooper v. Pottstown Hospital Co., LLC, No. 13-01137, 2015 WL 1137664 (E.D. Penn. Mar. 12, 2015) alleged that the on-call contracts were improper inducements based upon the later efforts of the hospital to pressure the physician to end his financial relationship with a competitor, the court found that the relator failed to plead enough facts to show that the hospital entered into the contracts with the intent to induce referrals.  This case is unusual because most AKS cases that turn on issues of the defendant’s intent involve factual disputes that survive motions practice and are slated for resolution at trial.

This case highlights how allegations of AKS violations can intermingle with the “economic credentialing” policies of hospitals who have a legitimate interest in preserving their ability to choose who to contract with and under what restrictions.  One takeaway from this case is the importance of hospitals having clear policies concerning competitive restrictions in its physician contracts and medical privileges.  Misunderstandings on this issue can result in unnecessary litigation.  While clear policies may decrease some misunderstandings, non-competes and other economic credentialing practices carry inherent risk under various laws, including the AKS.

The relator, an orthopedic surgeon, was employed by Pottstown Medical Specialists, Inc. (PMSI) and had privileges at Pottstown Memorial Medical Center (Pottstown) since 1999.  In 2005, Community Health Systems, Inc. acquired Pottstown and purchased a minority interest in PMSI.  In February 2010,  the relator entered into an on-call contract with Pottstown compensating him a fixed fee for any day he provided on-call coverage for the ER.  The on-call contract allowed either party to terminate without cause by providing 60 days’ written notice.  The relator alleged that in October 2010, Pottstown’s management learned that he had a financial interest in a new hospital opening a few miles away and pressured him to divest his interest in this new competitor and refer his patients to Pottstown.  After the relator refused, Pottstown exercised its right to terminate his on-call contract without cause.

The following year, the parties entered into a new on-call contract, which allowed the relator to continue his affiliation with the competitor, but added a restrictive covenant preventing the relator from entering into any agreement to provide services to any other facility within 30 miles without Pottstown’s prior written consent.  The relator alleged that while his second on-call agreement was in effect, his employment contract with PMSI was not renewed because of his financial interest in the competitor.  The relator then entered into employment with another hospital and, as a result of that new employment agreement, Pottstown invoked the restrictive covenant to terminate his second on-call contract.  The relator brought a qui tam complaint alleging that Pottstown’s on-call contracts, and the payments made under them, violated the AKS because Pottstown’s intended purpose behind the on-call contracts was to induce him to refer patients (particularly his Medicare patients) to Pottstown.  The United States declined to intervene.

The key weakness in this complaint was the absence of any classic hallmark of illegal intent by the hospital during the negotiation of the on-call contracts; instead the relator relied solely on the hospital’s behavior after the agreements were in place for several months.  Most significantly to the court, the relator failed to plead facts showing that (a) the on-call contract negotiations were not at arms-length, (b) the hospital lacked a business need for on-call coverage by orthopedic surgeons and (c) his compensation exceeded fair market value.  Combined with other more plausible explanations for the hospital’s behavior and the relator’s proclaimed ignorance of the hospital’s alleged illicit intent to induce referrals until after his employment and on-call contracts ended, the court concluded that the relator had not alleged sufficient facts showing that the on-call contracts were meant to induce referrals, reasoning that “[a]ny practicable scheme to induce referrals would not have left him [Relator] ignorant of its true purpose.”

Notwithstanding this decision, providers should proceed cautiously and seek legal advice related to arrangements with physicians based upon economic credentialing.  Courts, and regulatory agencies, may interpret tying certain contracts for physician services to economic criteria as giving a physician an opportunity to earn money, which may constitute an improper inducement if the requisite intent exists.  For instance in United States ex rel. Fry v. Health Alliance of Greater Cincinnati, No. 1:03-CV-00167 (S.D. Ohio Dec. 10, 2008), a federal trial judge denied a motion to dismiss a complaint alleging that defendants engaged in a “pay to play” scheme by assigning time to cardiologists in their hospital’s heart station in proportion to the volume of referrals of cardiac procedures made by the cardiologists to the hospital.  Ultimately, those defendants paid $108 million to the government in an FCA settlement.  And, while initially rejecting a Corporate Integrity Agreement as part of the resolution, the hospital entered into one after receiving a rare notice proposing exclusion of the hospital from the Office of Inspector (OIG) General following the settlement.  The significant payment and the very rare action by OIG to begin potential exclusion proceedings against a large hospital show the gravity of the possible risks of getting on the wrong side of the government on these thorny issues.