Over the last several months, a handful of federal court decisions—including two rulings this summer on challenges to the admissibility of proposed expert testimony—serve as reminders of the importance of (and parameters around) fair market value (FMV) issues in the context of the Anti-Kickback Statute (AKS) and the False Claims Act (FCA).

First, a quick level-set.  The AKS, codified at 42 U.S.C. § 1320a-7b(b), is a criminal statute that has long formed the basis of FCA litigation—a connection Congress made explicit in 2010 by adding to the AKS language that renders any claim for federal health care program reimbursement resulting from an AKS violation automatically false/fraudulent for purposes of the FCA.  42 U.S.C. § 1320a-7b(g).  Broadly, the AKS prohibits the knowing and willful offer/payment/solicitation/receipt of “remuneration” in return for, or to induce, the referral of federal health care program-reimbursed business.  Remuneration can be anything of value and can be direct or indirect.  In interpreting the “in return for/to induce” element, a number of federal courts across the country have adopted the “One Purpose Test,” in which an AKS violation can be found if even just one purpose (among many) of a payment or other transfer of value to a potential referral source is to induce or reward referrals—even if that clearly was not the primary purpose of the remuneration. Continue Reading Recent Developments on the Fair Market Value Front – Part 1

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 Relying on Escobar, Ninth Circuit Tosses Implied Certification Case

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 May 17, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a relator’s False Claims Act (FCA) claims predicated on allegations that Pfizer “improperly marketed Lipitor, a popular statin, as appropriate for patients whose risk factors and cholesterol levels fall outside the National Cholesterol Education Program (NCEP) Guidelines.”  In United States ex rel. Polansky v. Pfizer, Inc. the relator, Polansky, claimed that the Guidelines were incorporated into the drug’s FDA label and were thus mandatory.  He further alleged that Pfizer induced doctors to prescribe the drug outside the Guidelines, and induced pharmacists to fill such “off-label” prescriptions that were, in turn, reimbursed by government payors.  Polansky claimed that requests for reimbursement for these prescriptions impliedly, but falsely, certified that the prescriptions were for on-label uses.

The Second Circuit rejected the relator’s theory at its most basic level, finding that the Lipitor label did not mandate compliance with the NCEP Guidelines, which were clearly advisory in nature.  The fact that the Guidelines were mentioned in the label did not render them mandatory.  Quoting the district court, the Second Circuit wrote, “we cannot accept plaintiff’s theory that what scientists at the National Cholesterol Education Program clearly intended to be advisory guidance is transformed into a legal restriction simply because the FDA has determined to pass along that advice through the label.”  In short, the Second Circuit held that prescribing outside of the Guidelines was not an off-label use.

Because the fundamental premise of the relator’s claims disintegrated, the court did not need to wade into other challenges Pfizer had raised to the relator’s claims.  However, the court noted that it was “skeptical” of relator’s theory of liability as a broader legal matter, observing that “it is unclear just whom Pfizer could have caused to submit a ‘false or fraudulent’ claim: The physician is permitted to issue off-label prescriptions; the patient follows the physician’s advice, and likely does not know whether the use is off-label; and the script does not inform the pharmacy at which the prescription will be filled whether the use is on-label or off.  We do not decide the case on this ground, but we are dubious of Polanky’s assumption that any one of these participants in the relevant transactions would have knowingly, impliedly certificated that any prescription for Lipitor was an on-label use.”

The Polansky case is not the first time the Second Circuit has rejected an off-label marketing theory as a basis for liability.  In December 2012, in the case of United States v. Coronia, the court overturned, on First Amendment grounds, the criminal conviction (under the Food, Drug & Cosmetic Act) of a pharmaceutical sales representative for promoting off-label use of a drug.

The Polansky court concluded its May 17 opinion by signaling that future FCA claims predicated on purported off-label marketing theories would receive serious scrutiny:

“The False Claims Act, even in its broadest application, was never intended to be used as a back-door regulatory regime to restrict practices that the relevant federal and state agencies have chosen not to prohibit through their regulatory authority. (quoting the district court).  It is the FDA’s role to decide what ought to go into a label, and to say what the label means, and to regulate compliance.  We agree with [the district court] that there is an important distinction between marketing a drug for a purpose obviously not contemplated by the label . . . and marketing a drug for its FDA-approved purpose to a patient population that is neither specified nor excluded in the label.”

RehabCare, the nation’s largest provider of nursing home rehabilitation services, agreed to pay $125 million on January 12 to settle claims under the False Claims Act (FCA) in connection with allegations that it caused its skilled nursing facility customers to submit false claims to Medicare for therapy services. In connection with the settlement, RehabCare entered into a corporate integrity agreement (CIA) with the Office of Inspector General (OIG). The provider’s companies, RehabCare Group, Inc. and RehabCare Group East, Inc. (RehabCare), have been subsidiaries of Kindred Healthcare, Inc. (Kindred) since their merger in 2011 with a Kindred subsidiary. In a press release, Kindred stated that it agreed to the settlement without any admission of wrongdoing in order to provide clarity for contract customers, shareholders and government oversight entities.

The government’s unsealed Complaint in Intervention alleged that RehabCare manipulated the amount and type of patient therapy to achieve a higher Medicare reimbursement level than was warranted for the patient. Skilled nursing facilities are reimbursed by Medicare by resource utility groups (RUGs), which reflect the anticipated costs associated with providing nursing and rehabilitation services to beneficiaries with similar characteristics or resource needs. A patient’s RUG is assigned based upon the time and type of therapy provided to the patient during a seven-day reference period, and the amount of reimbursement is tied to the RUG level that is determined during that reference period.

The CIA, which applies to both RehabCare and Kindred, has a five-year term and, among other requirements, provides for the development of staff training regarding the accurate use of RUGs, documentation of therapy services, coordination of care and other requirements for the provision of therapy. In addition, Kindred must engage an independent review organization to conduct annual medical necessity and appropriateness reviews related to contracted rehabilitation services. The CIA also requires the submission of annual reports that include certifications as to compliance with applicable federal health care program requirements and with the CIA from several executives of RehabCare and with executives of Kindred who have direct oversight responsibilities for RehabCare, including the compliance officer, CEO and CFO of Kindred.

The case was originally brought via a qui tam lawsuit filed by two former employees of RehabCare.  These individuals will receive approximately $24 million as their share of the recovery.

A copy of the DOJ press release is available here.

On October 30, 2015, the United States District Court for the Northern District of Georgia granted Fresenius Medical Care Holdings, Inc.’s (Fresenius’s) motion for summary judgment in United States ex rel. Saldivar v. Fresenius Medical Care Holdings, Inc., No. 1:10-CV-1614-AT. The district court, in a 108-page decision, found that the undisputed evidence showed that no reasonable jury could find that that Fresenius acted “knowingly.” Thus, the relator could not prevail on his claims.

The relator had alleged that Fresenius violated the False Claims Act (FCA) by billing Medicare for the overfill in medication vials, which is included to facilitate the extraction of the amount labeled on the vial. While the district court did find that billing for the overfill was impermissible, it determined that the relator could not prove that Fresenius either knew it was impermissible, or “acted with deliberate ignorance or reckless disregard as to the impermissibility of billing for administered overfill.”

The district court analyzed whether Fresenius knew that “the overfill was not reimbursable under the Medicare rules and regulations.” The court discussed actual knowledge, finding that the relator presented no evidence that Fresenius actually knew it should not have sought Medicare reimbursement for overfill. The court also held that the evidence presented by the relator would not support a finding that Fresenius recklessly disregarded the statutory or regulatory requirements because Fresenius’s interpretation of the statutory and regulatory scheme was reasonable. In reaching its decision, the court pointed to the following facts:

  • During the relevant time, the law was silent on the issue of billing for overfill;
  • Fresenius relied on counsel in determining that Medicare would reimburse overfill;
  • Fresenius and its counsel made this decision partly based on the belief that many companies had billed overfill for years, and the government knew about it but took no action;
  • Fresenius had disclosed its overfill billing to the government on multiple occasions in previous years, but the government never warned Fresenius that such billing was impermissible;
  • Fresenius was very serious in its efforts to comply with Medicare rules and regulations; and
  • The relator had no evidence to counter any of the above.

The district court rejected the relator’s argument that Fresenius had the necessary pieces to conclude that overfill billing was impermissible, finding that the relator nonetheless could not establish that Fresenius was reckless.

The court’s decision in this case shows the importance of thoughtful decision-making and appropriate disclosures in the face of a frequently cloudy regulatory scheme. While relators will continue to stretch facts to try to prove knowledge or intent, a number of recent decisions, including this one and others on which we previously reported (Issues of Fact Must Really Be Genuine: Another District Court Ends a Relator’s FCA Suit on Scienter Grounds, Omnicare Decision Demonstrates that Relators Cannot Rely on Ambiguous Evidence of Intent to Survive Summary Judgment, and Should Exercise Caution and Recent Decisions Serve as Reminder that Scienter is a Fertile Ground for Pre-Trial Disposition), demonstrate that a pattern of commitment to compliance, and good faith disclosure of relevant facts to the government, can help preserve the argument that even conduct later determined to be contrary to regulation was conducted in good faith and without any knowledge or reckless disregard of potentially false claims.

Overruling its 23-year precedent, the Ninth Circuit, sitting en banc, held that to avoid dismissal under the False Claims Act’s (FCA) public disclosure bar, relators need not have participated in the public disclosure of alleged fraud to qualify as an “original source.” Although the court’s decision concerned the pre-2010 version of that bar, it is likely that its reasoning will also apply to the post-2010 version, given that the issue before the Ninth Circuit did not turn on the 2010 amendments.

U.S. ex rel. Hartpence v. Kinetic Concepts, Inc. consolidated two FCA complaints brought by former employees against Kinetic Concepts.  The complaints alleged that the company improperly submitted reimbursement claims using an automatic payment modifier code for medical devices that improve wound healing, even though the claims required individual review.  The alleged fraud was already publicly disclosed.  Thus, the FCA’s public disclosure bar precluded the suits unless the relators qualified as original sources of the information.

The pre-2010 FCA statutory language included two requirements for a relator to qualify as an original source: (1) that the relator have direct and independent knowledge of the publicly-disclosed information, and (2) that the relator provide that information to the government before filing suit.  Yet, Ninth Circuit precedent in Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, added a third requirement not apparent on the face of the statute: the relator had to have had a hand in the public disclosure of the alleged fraud.  Based on Wang, the lower court dismissed the complaints against Kinetic Concepts, finding that the relators had not had a hand in the public disclosure.

In overturning Wang, the Ninth Circuit noted that a number of other circuits had declined to adopt Wang’s third prong, including the Fourth and Eighth Circuits.  The Ninth Circuit re-construed the statutory text and found that facially, the original source provision only had two requirements: (1) direct and independent knowledge of the information on which the allegations are based and (2) voluntary provision of the information to the government before filing an action based on the information.  The appellate court remanded the case to determine if the relators were original sources based on the other two prongs found in the FCA text.

On June 12, 2015, the U.S. District Court for the Northern District of California granted Gilead Science’s second motion to dismiss Relators’ False Claims Act (FCA) claims premised on Gilead’s alleged failure to obtain timely supplemental approval from the U.S. Food and Drug Administration (FDA) for use of a new unapproved manufacturing source. See U.S. ex rel. Campie v. Gilead Sciences, Inc., No. 11-cv-00941 (N.D. Cal. June 12, 2015). In doing so, the court reiterated its unwillingness to allow an FCA claim “to be based on misrepresentations and omissions made to the FDA during the FDA approval process.” The court’s reasoning is noteworthy not only for FCA cases premised on alleged violations of FDA regulations, but for a much broader range of FCA claims based on alleged regulatory non-compliance.

In 2011, Relators filed an FCA action based on various alleged violations by Gilead of the FDA’s Current Good Manufacturing Practices requirements. The government declined to intervene. The court dismissed Relators’ first amended complaint (FAC) in its entirety in January of 2015 in part because Gilead’s alleged fraud in obtaining FDA approval “did not negate the fact that the condition for payment—approval by the FDA—had in fact been obtained.” Relators’ second amended complaint (SAC) largely reiterated the already-rejected factual allegations of the FAC, and more specifically alleged that “even though Gilead got approval through the NDA [new drug application] process for the drugs in question, there was, subsequently, a major change to the drug products which, under the FDCA [Federal Food, Drug, and Cosmetic Act] required Gilead to submit a PAS [prior approval supplement] to the FDA to obtain new approval for the changes. . . The major change that Relators point[ed] to concerned Gilead’s use of an unapproved manufacturing source: Synthetics China.” Relators argued that “because of Gilead’s failure to get supplemental approval…the drug products were not approved drugs under the FDCA, and therefore the drug products were not eligible for payment under the government payment programs.”

The court rejected this argument and concluded that Relators again failed to plead an implied false certification claim under the FCA, because they “failed to cite to, e.g., a statute, rule or regulation that makes payment conditioned on supplemental approval by the FDA (as opposed to NDA approval).” The court emphasized that “the statute makes clear that such payment is conditioned on NDA approval, not PAS approval.”

The court again noted that from a policy perspective it would be “problematic” to permit an FCA cause of action based on a fraud-on-the-FDA theory:

[W]ere the FCA [False Claims Act] construed to allow an FCA claim to be based on misrepresentation and omissions made to the FDA during the FDA approval process, the Court sitting on an FCA case would have to delve deeply into the complexities, subtleties and variabilities of the FDA approval process . . . [T]he Court would be tasked not only with determining whether a falsity was presented to the FDA, but also predicting the institutional response of the FDA and the ultimate outcome of a specialized and complex administrative proceeding…The Court is ill-equipped to make that kind of prediction. Such an inquiry stands in contrast to the inquiry in a more typical FCA case – determining whether a particular statement or certification made to the payor agency is in fact false and material to the decision to pay. Absent a clear directive from Congress, the Court is unwilling to read into the FCA such an expansive sweep.

This decision is important for any implied certification case involving violation of a regulation promulgated by an agency other than a government payor. Regulatory non-compliance can lead to a number of consequences, but if it does not violate a condition of payment, there can be no FCA liability.

The case was dismissed with prejudice, though Relator’s counsel has said she plans on appealing the dismissal. We will continue to monitor any developments in this case.

Two Circuit Courts of Appeals recently came out on opposite ends of the False Claim Act’s (FCA’s) public disclosure bar.  On February 19, 2015, the United States Court of Appeals for the Third Circuit affirmed the district court’s dismissal of claims related to allegations of fraudulently inflated pharmaceutical prices, holding that the information underlying the suit had been publicly disclosed in the media and elsewhere and that the relator failed to qualify as an original source.  U.S. ex rel. Morgan v. Express Scripts, Inc., No. 14-1029, 2015 WL 728029 (3rd Cir. Feb. 19, 2015) (unpublished).  On February 25, 2015, the United States Court of Appeals for the Sixth Circuit reinstated a claim against a hospital related to allegedly fraudulent Medicaid and Medicare charges, holding that the allegations, though previously known to government auditors, had not been publicly disclosed.  U.S. ex rel. Whipple v. Chattanooga-Hamilton County Hospital Authority, No. 13-6645, 2015 WL 774887 (6th Cir. Feb. 25, 2015).  These different outcomes demonstrate the fact-intensive nature of the inquiry under the public disclosure bar.

In Express Scripts, the pharmacist-relator alleged that certain pharmaceutical industry defendants profited from artificially inflated Average Wholesale Prices (AWPs).  In affirming dismissal, the Third Circuit agreed with the district court’s finding that the allegations underlying the case had been widely disclosed, including by the news media and in previously-filed lawsuits (including one in which the relator served as an expert).  Thus, the relator needed to be an “original source” of the information for his suit to proceed.  The Third Circuit held that the relator could not meet this standard.  The relator, who was never an employee of any of the defendants, purportedly identified the alleged fraud by performing an “eyeball” comparison of two publicly available price lists.  Moreover:

The mere fact that Morgan quantified the AWP differential does not remove his allegations from the public disclosure realm.  Morgan’s 4.16 percent differential simply indicates an AWP based on a 25 percent markup over wholesale acquisition cost, a markup disclosed in a Congressional report predating Morgan’s complaint.  The report’s disclosure of a specific, industry-wide markup shift provided Morgan with all the “essential elements” needed to arrive at a 4.16 percent price differential.

In Whipple, the Sixth Circuit confronted a different and more thorny public disclosure issue.  The court, applying the pre-Patient Protection and Affordable Care Act version of the public disclosure bar, determined that the information underlying the complaint’s allegations had not been publicly disclosed, even though the allegations of improper billing had already been the subject of an audit and investigation conducted by the United States Department of Health and Human Services Office of Inspector General (OIG) and Centers for Medicare & Medicaid Services’ contractor charged with investigating fraud and waste.  The defendant hospital had also conducted an internal investigation through its own outside counsel and auditors.  The hospital had submitted a voluntary refund check as a result of these audits, and the OIG had administratively closed its investigation before the relator brought suit.

Nonetheless, distinguishing between disclosure to the “government” and disclosure to the “public,” the Sixth Circuit held that the prior investigations and audits did not bar the relator’s suit under the public disclosure bar: “The public-disclosure bar ‘clearly contemplates that the information be in the public domain in some capacity and the Government is not the equivalent of the public domain.’”  The court also rejected the defendant’s argument that the disclosure to the OIG’s auditor separately qualified as a public disclosure, noting the auditor was acting as an agent of the government and had an obligation to keep the underlying information confidential.

While the Sixth Circuit states that its opinion in Whipple follows the majority view of whether disclosures to the government qualify as public disclosures, critics argue that a defendant’s disclosure to the government on whose behalf a relator attempts to bring suit should be sufficient to invoke the bar, particularly where the government has already resolved the issue that is the subject of the disclosure.  However, the Whipple court may have come to the opposite conclusion had the post-2010 FCA applied.  Now, relators are barred from bringing an action if substantially the same allegations or transactions were “publicly disclosed in a congressional, GAO, or other Federal report, hearing, audit, or investigation” unless an original source (emphasis added).  Federal audits and investigations are often not publicized to the general public, especially if the audit or investigation is closed.  Of course, regardless of where a court comes out on the applicability of the public disclosure bar in a given case, evidence of disclosures to the government can, and should, still be used to defeat essential elements of a relator’s FCA claim.