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 October 5, 2016, the Court of Appeals for the Third Circuit remanded a “reverse” False Claims Act (FCA) case to the District Court for the Eastern District of Pennsylvania for further proceedings. The court’s decision in United States ex rel. Custom Fraud Investigations, LLC v. Victaulic Company, Case No. 15-2169 (3d Cir., Oct. 5, 2016), breathes new life into a case that was previously dismissed by the district court in September 2014, and provides extensive discussion about how reverse claims operate in the era of the 2009 Fraud Enforcement and Recovery Act (FERA) amendments.

The case involves nondiscretionary import regulations—set forth in the Tariff Act of 1930—that apply to the pipe fitting industry. These regulations mandate that pipe fittings manufactured outside the United States must be marked with the country of origin; in contrast, pipe fittings manufactured in the United States are typically unmarked. Failure to properly mark foreign-manufactured pipe fittings results in a 10 percent ad valorem that accrues from the time of importation. Furthermore, if improperly marked goods are discovered by customs officials, the importer has three options: (1) re-export the goods; (2) destroy the goods; or (3) mark them properly to be released for sale in the United States. Since customs officials largely rely on importers to self-report any duties that are owed at the time of import, it is possible for improperly marked pipe fittings to enter the United States’ stream of commerce. To the extent that improperly marked pipe fittings are discovered after they have entered the market, the 10 percent ad valorem is due immediately, retroactive to the date of importation.

Continue Reading Third Circuit Revives Reverse False Claims Act Case but Acknowledges Burden on Defendants

On August 25, 2015, the Fifth Circuit vacated and remanded a district court’s order denying a relator’s Rule 60(b) motion for relief from dismissal based upon new evidence in the False Claims Act (FCA) case of United States ex rel. Gage v. Davis S.R. Aviation, LLC, No. 15-50141 (on appeal from Case No. 1:12-cv-00904-SS in the Western District of Texas). The district court had denied the Rule 60(b) motion because its underlying dismissal of the complaint was on appeal to the Fifth Circuit. In remanding, the Fifth Circuit held that the district court was required to consider the Rule 60(b) motion on its merits prior to denying it, and that not doing so was an abuse of discretion.   Because the district court failed to consider the merits of the Rule 60(b)  motion, it must now address that motion on remand even though, as a review of the pleadings demonstrates, there is little basis for relief.

The relator brought a complaint “concerning the salvaging of aircraft parts for resale to the Government,” alleging that the defendants violated the FCA by improperly repairing airplane parts from a crash prior to selling them to the government for use in military aircraft.  The district court allowed the relator two amendments to his complaint, but even with those amendments, the relator could not present a viable false claims action. The district court stated that “[i]f there is a legitimate False Claims Act case buried underneath this mess, the Court cannot find it,” and  dismissed the action based upon both the public disclosure bar and Rule 9(b) lack of particularity. The relator appealed the district court’s decision.

In addition to appealing the court’s decision, the relator filed a Rule 60(b) motion alleging he had new evidence, and thus the court should reconsider its decision dismissing the case. In that motion, the relator alleged that he had new information proving he was an original source, and that the public disclosure bar therefore did not preclude his claims. The relator did not address the district court’s dismissal based on lack of particularity, a fact which itself likely dooms the Rule 60(b) motion.  Moreover, it is doubtful that the relator’s “new evidence” that he is an original source will survive scrutiny on the merits. The district court previously held that the relator’s claims substantially overlapped with claims from a previous case in which the relator served as an expert (and that relator learned the facts in his complaints through his work on that case). Relator’s Rule 60(b) motion did not address that holding at all.  Instead, the relator alleged that his third amended complaint contained new facts about which the government was not previously aware.  But these “new facts” were not new at all—they were information covered by a protective order from the previous case in which the relator served as an expert.

Although the relator’s Rule 60(b) motion is substantively deficient, the district court must  now address its merits, including the “new” evidence purportedly precluding dismissal – all while the dismissal itself is on appeal at the Fifth Circuit. The result is additional expense, complexity, and delay in resolving this case.

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.