STRATEGIC PERSPECTIVES: False Claims Act Issues in 2014 Have Implications for 2015 and Beyond

Executive Summary

In 2014, Wolters Kluwer’s Health Law Daily reported over 170 False Claims Act (FCA) cases involving health care entities. Most cases were filed under the qui tam provisions of the FCA. A great number of the cases were dismissed based on insufficient pleadings, the public disclosure bar, and first to file. Health care providers defending themselves against allegations of violations of the FCA included pharmaceutical companies, skilled nursing facilities (SNFs), hospices, home health agencies, and durable medical equipment companies. 

Allegations included improper billing such as billing for medically unnecessary inpatient services, fraudulent promotion of drugs such as off-label marketing drug safety issues such as concealment of evidence regarding the effectiveness of the drug, breach of Corporate Integrity Agreement (CIA) provisions such as failure to report an audit finding, lack of documentation for submitted claims, and false certification such as certifying that the provider was in compliance with regulations in a cost report. A number of courts considered whether the alleged violation was a condition of participation or a condition of payment; if the allegation related to a condition of participation, the claim was dismissed.

This White Paper first provides background on the FCA’s enforcement provisions, explains the role the Department of Justice (DOJ) plays in bringing FCA lawsuits and lists settlements obtained in 2014. The White Paper then addresses issues that were presented in cases litigated in 2014 and trends that health care providers should consider in 2015 as identified by attorneys specializing in health law. Specifically, the White Paper discusses cases brought under reverse FCA actions, including failure to timely return overpayments; the worthless services theory of liability; and financial arrangements with physicians. Trends discussed include the use of data collected by the government to support FCA investigations and bolster qui tam complaints; the split among circuit courts’ pleading standard for FCA claims under Rule 9(b) of the Rules of Civil Procedure; and the change in the litigation landscape, specifically the appearance of sophisticated trial attorneys with experience in complex business litigation and the FCA on behalf of relators. In addition, the challenges defendants likely will face in FCA cases in 2015 and beyond are examined, including more criminal investigations in qui tam cases, increased focus on executives, increased civil money penalties (CMPs) against physicians who engaged in fraud and abuse, and the use of providers’ self-audits to establish evidence of systemic submission of false claims. Finally, the attorneys shared their thoughts on how the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) amendments to the FCA and the Anti-Kickback Statute (AKS) (Soc. Sec. Act Sec. 1128B(b)) have strengthened government enforcement activities and impacted providers’ reactions to allegations of violations of the FCA.

The Department of Justice 

The False Claims Act (FCA) is the government’s primary civil remedy to address false claims for government funds and property. Most false claims actions are filed under the Act’s whistleblower, or qui tam, provisions that allow individuals to file lawsuits alleging false claims on behalf of the government. The highest percentage of recoveries filed under the qui tam provisions are health care cases.

The amendments Congress has made to the FCA have strengthened the statute and increased the incentives for whistleblowers to file suit, the DOJ noted in a November 20, 2014, news release. Specifically, in 1986, Congress amended the FCA to encourage whistleblowers to come forward with allegations of fraud. In 2009, Congress passed the Fraud Enforcement and Recovery Act of 2009 (FERA) (P.L. 111-21), which clarified the intent of the FCA, including liability provisions, and enhanced other federal fraud laws. In 2010, the ACA provided additional inducements and protections for whistleblowers and strengthened the provisions of the federal health care AKS. In addition, the creation of the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an interagency task force, to increase coordination and optimize criminal and civil enforcement has resulted in historic recoveries, the DOJ said. These amendments have led to the government opening more investigations and more whistleblowers coming forward, resulting in the surge in recoveries described below.

From 2009 through 2014, the DOJ used the FCA to recover $14.5 billion in federal health care dollars. In fiscal year 2014, the DOJ collected $2.3 billion in settlements and judgments from civil cases involving fraud and false claims submitted to federal health care programs, most often the Medicare and Medicaid Programs. Most of the recoveries came from the pharmaceutical industry; however, cases involving hospitals resulted in $333 million in 2014 settlements and judgments. The DOJ noted that the amounts reported “reflect federal losses only. In many of these cases, the Department was instrumental in recovering additional billions of dollars for consumers and state treasuries.” The settlements in 2014 involved pharmaceutical companies, hospitals, pharmacy providers, SNFs, home health agencies, and medical device companies. 

The largest settlements include the following.

Johnson & Johnson (J&J) entered into one of the largest health care fraud settlements with the government in U.S. history. J&J and its subsidiaries paid more than $1.1 billion to resolve allegations that they marketed the prescription drugs Risperdal™, Invega™, and Natrecor™, for uses not approved as safe and effective by the Food and Drug Administration (FDA), resulting in physicians and other health care providers submitting hundreds of millions of dollars in alleged false claims against federal health care programs. In addition, the government alleged that J&J paid kickbacks to physicians and a provider of pharmaceuticals to nursing homes and long-term care facilities. J&J additionally paid more than $600 million in civil claims for state Medicaid programs and $485 million in criminal fines and forfeitures. 

Omnicare, Inc., a provider of pharmaceuticals, paid more than $124 million to resolve allegations that it had engaged in a kickback arrangement with SNFs. Allegedly, Omnicare submitted false claims by entering into below-cost contracts to supply prescription medication and other pharmaceutical drugs to SNFs and their resident patients to induce the facilities to select Omnicare as their pharmacy provider in violation of the AKS. 

Community Health Systems Inc. (CHS) paid $98.15 million in settlement to resolve multiple lawsuits alleging that the company, which operates acute care hospitals, knowingly billed government health care programs for inpatient services that should have been provided in a less costly outpatient or observation setting. CHS agreed to pay $89.15 million to resolve these allegations. In addition, the government alleged that from 2005 through 2010, one of CHS’s affiliated hospitals, Laredo Medical Center (LMC), presented false claims to the Medicare program for cardiac and hemodialysis procedures performed on a higher cost inpatient basis that should have been performed on a lower cost outpatient basis. The government also alleged that from 2007 through 2012, LMC improperly billed Medicare for services referred to the hospital by a physician who was offered a medical directorship at LMC, in violation of the Limitation on Physician Self-Referral Law (Soc. Sec. Act Sec. 1877), commonly referred to as the Stark Law. CHS agreed to pay $9 million to resolve the allegations involving LMC.

Ashland Hospital Corp. d/b/a King’s Daughters Medical Center (KDMC) agreed to pay almost $41 million to resolve allegations that it submitted false claims to the Medicare and Kentucky Medicaid programs for medically unnecessary coronary stents and diagnostic catheterizations and that it had prohibited financial relationships with physicians referring patients to the hospital. The settlement also resolves allegations that KDMC violated the Stark Law by paying certain cardiologists salaries that were unreasonably high and in excess of fair market value. 

St. Joseph’s Health System paid over $16 million to settle allegations that doctors working at St. Joseph Hospital performed numerous invasive cardiac procedures, including coronary stents, pacemakers, coronary artery bypass graft surgeries, and diagnostic catheterizations on Medicare and Medicaid patients who did not need them, and the hospital was aware of these unnecessary procedures and bills were submitted to Medicare and Medicaid for these procedures. The settlement also resolves allegations that the hospital violated the federal Stark Law and AKS by entering into sham management agreements that financially benefitted two doctors as an inducement for the doctors to direct more Cumberland Clinic patients to the hospital. 

Amedisys Inc., a provider of home health services, paid $150 million to resolve allegations that it improperly billed Medicare for medically unnecessary nursing and therapy services, services to patients who were not homebound and violations of the AKS. These billing violations were the alleged result of management pressure on nurses and therapists to provide care based on the financial benefits to Amedisys rather than the needs of patients. Additionally, the settlement resolved certain allegations that Amedisys maintained improper financial relationships with referring physicians; specifically, Amedisys employees provided patient care coordination services to the oncology practice at below-market prices.

Boston Scientific Corp. paid $30 million to settle claims that its company Guidant sold defective heart devices (implantable defibrillators) to health care facilities that implanted them into Medicare patients. The government alleged that although Guidant took corrective action to fix the defects, it continued to sell its remaining stock of the old, defective versions of the devices and instead of disclosing the problem, it issued a misleading communication to doctors regarding the nature of the defect and did not fully disclose the problem with the devices to doctors and the FDA until May 2005. 

Which False Claims Act cases were the most significant in 2014 and why?

The cases that attorneys identified as most significant in 2014 involved reverse FCA actions, sampling and extrapolation, worthless services in relation to SNFs, and financial relationships with physicians.

Reverse FCA actions. Under 31 U.S.C. §3729(a)(1)(G) of the FCA, any person who knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government, is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, plus three times the amount of damages which the government sustains because of the act of that person. 

False certification. An example of a reverse FCA action is a case that was based upon allegations of false certification of compliance with the obligations of a CIA. Allegations that executives of Omnicare, Inc. falsely certified that the company was in compliance with a 2006 CIA were sufficient to state a “reverse” claim under Section 3729(a)(1)(G) because the CIA imposed additional obligations. The breaches of the CIA triggered logging and reporting requirements and an obligation to pay stipulated penalties to the government. False certifications of compliance made to avoid payment of the stipulated penalties constituted a separate violation of the statute. The court found that Omnicare’s CIA imposed additional contractual obligations upon Omnicare and failure to comply with those obligations triggered obligations to report and disclose. Because Omnicare failed to carry out the obligations and report and disclose those failures, the Office of Inspector General (OIG) did not have the opportunity to impose the stipulated penalties. The false certifications of compliance were made to avoid the payment of the stipulated penalties under the contract. The court rejected Omnicare’s argument that the motion to reconsider was not proper under the Rules of Civil Procedure because it had specifically reserved ruling on the issue and invited the relator to bring the motion (Ruscher v Omnicare, Inc., (S.D. Tex., September. 5, 2014)).

Return of overpayments. Section 3729(b)(3) defines “obligation” as an established duty, whether or not fixed,….arising from the retention of any overpayment. Under Soc. Sec. Act Section 1128(J)(d), an overpayment must be reported and returned 60 days after the date on which the overpayment was identified; or the date any corresponding cost report is due, if applicable. In an interview with Wolters Kluwer, Sara Kay Wheeler, Partner, King & Spaulding, LLP explained that “compliance professionals in the health care industry continue to analyze and refine proactive protocols to address ACA’s ‘60-day rule’ [see ACA sec. 6205].” Although CMS issued a Proposed rule (77 FR 91790) on February 16, 2012, Wheeler advised that CMS has yet to implement a final rule interpreting the overpayment requirement for Medicare Part A/B providers. CMS adopted regulations governing overpayments (see 79 FR 29843) for Medicare Advantage (MA) and Medicare Part D sponsors, however, on May 23, 2014. Wheeler noted that the Final rule defined “identification of an overpayment as when the MA organization or Part D Sponsor ‘has determined, or should have determined through the exercise of reasonable diligence’ that it received an overpayment.” In addition, the Final rule indicated that, in certain circumstances, “reasonable diligence might require an investigation conducted in good faith and in a timely manner by qualified individuals in response to credible information of a potential overpayment.” According to Wheeler, “[t]his finalized language places an ambiguous, undefined obligation on providers to investigate potential overpayments.” 

When asked about significant cases in 2014, Michael E. Clark, Special Counsel, Duane Morris LLP, Houston pointed to the government’s intervention in a FCA case, Kane ex rel. New York v. Healthfirst, Inc., which he said was “built on the theory of false claims arising from a provider’s failure to notify the government of its retention of ‘known overpayments’ from federal health care programs (based on Congressional modifications to the FCA in FERA and the ACA)” (see Complaint Intervention, Kane ex rel. New York v. Healthfirst, Inc., (S.D.N.Y., June 27, 2014)). 

Wheeler further noted that in Kane, “which is currently pending in the Southern District of New York, the government seizes on the MA/Part D final rule language and argues for its application in other contexts. In a brief filed in the Kane case, the government recognizes the MA/Part D final rule is not directly applicable to the hospitals and Medicaid claims at issue in Kane. Nevertheless, the government relies on the MA/Part D final rule’s language to bolster its position that a preliminary analysis of claims impacted by a software glitch could constitute identification of an overpayment and, accordingly, trigger the 60-day clock.” 

Wheeler stated that “given that proactive compliance audits are an essential component of effective health care compliance programs, the government’s position could significantly impact a provider’s approach to the pursuit of thorough and comprehensive internal investigations and other reviews. Specifically, if the 60-day clock begins when a provider receives even a preliminary analysis, providers may not have adequate time to sufficiently investigate and analyze complex compliance issues.” She stressed how important it is “for the health care community to follow this case and others like it to effectively assess the appropriateness and effectiveness of strategies and protocols relating to internal investigations, audits and other proactive reviews.” 

Sampling and extrapolation. Sampling and extrapolation in FCA litigation has arrived, according to Sara Kay Wheeler. “In U.S. ex rel. Martin v. Life Care Centers of America, a federal district court ruled that, in complex health care FCA cases involving a large number of claims, the government is permitted to extrapolate the results of a statistically valid sample of claims to a larger universe to prove: (1) the number of claims that the defendant submitted to the government, (2) whether those claims were false, and (3) whether the claims were material to the government’s decision to pay.” According to Wheeler, “[t]he court’s ruling seems driven by a policy rationale, which the court repeated several times: If the government is required to prove up each false claim one-by-one, then health care providers who submit large numbers of false claims may be able to sidestep liability due to the time and expense that would be required to meet this burden” (United States ex rel. Martin v. Life Care Centers of America, (E.D. Tenn., September 29, 2014)).

Worthless services. Michael E. Paulhus, Partner, King & Spaulding, LLP pointed out that “many of the FCA cases addressing a “worthless services” theory of liability have been resolved on procedural grounds, or other technical pleading requirements, and courts have dealt infrequently with the more difficult questions of what deficiencies in care, aside from total omission of care at all, are actionable under the FCA.” In 2014, however, the U.S. Court of Appeals for the Seventh Circuit and Eleventh Circuit confronted the issue of worthless services in two separate cases in the context of SNFs and came to different conclusions, Michael R. Crowe, Partner, Husch Blackwell LLP, explained in his article in the Journal of Health Care Compliance, titled “The Road to Momence and Houser: When Are Services “Worthless” in Skilled Nursing Facilities?”

In United States ex rel. Absher v Momence Meadows Nursing Center, Inc. (Momence), “providers obtained an unequivocal FCA win in a federal court of appeals in 2014 placing limits on the ‘worthless services’ theory of liability,” Paulus said. The U.S. Court of Appeals for the Seventh Circuit concluded that “the plaintiffs’ argument related to the nursing home’s noncompliant care was an incorrect application of the FCA ‘worthless services’ theory.” As the court explained in no uncertain terms, ‘worthless services’ theory of liability failed as a matter of law because to be worthless under the FCA, “the performance of the service (must be) so deficient that for all practical purposes, it is the equivalent of no performance at all.” The circuit court vacated the district court’s judgment against the Illinois-based nursing home. Paulus noted that “the Momence decision has given new support to the position that diminished services—as opposed to nonexistent services—should be carefully considered before finding a violation of the FCA and implicating significant financial damages and penalties” (see United States ex rel. Absher v Momence Meadows Nursing Center, Inc., (7th Cir., August 20, 2014)).

Crowe explained that while the Seventh Circuit found that because “Momence had provided some care to residents, FCA liability could not attach under a ‘worthless service’ theory, even in the face of evidence suggesting some services were not delivered,” the Eleventh Circuit in United States v. Houser upheld “a district court’s conviction of a nursing home operator for criminal health care fraud based on finding that the operator had delivered and billed Medicare and Medicaid for worthless services.” The record in Houser indicated that the physical condition of all of the facilities and the provision of services were “barbaric” and “uncivilized,” in a large part due to unpaid bills putting patients at risk and the homes in jeopardy of closure. The district court detailed the extremely neglected state of the nursing facilities’ physical properties; deficient, inadequate, and substandard services to residents; and appropriation of Medicare and Medicaid payments for Houser’s personal use (United States v. Houser, (11th Cir., June 19, 2014)). According to Crowe, “the court noted that the failure to provide certain services among a bundle of services offered to nursing home residents was sufficient for a finding that the services provided overall were worthless.” Crowe noted that “compared to Momence, Houser appears to set a lower bar for what constitutes a worthless service in Medicare FCA cases.” Crowe predicted that this “might be indicative of how the Eleventh Circuit would define ‘worthless services’ in future FCA cases.” 

Financial relationships with referring physicians. Michael E. Clark focused on a case that received a lot of attention in 2013, and finally settled in 2014. In United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center (Halifax), the whistleblower, who was the former director of physician services at Halifax Hospital Medical Center, claimed that the medical center structured a referral arrangement with oncologists that violated the Stark Law (see United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center, (M.D. Fla., November 13, 2013)). After losing its challenges at the district court level, the health system decided to settle with the government for $85 million to resolve allegations that it violated the FCA by submitting claims to the Medicare program that knowingly violated the Stark Law by (1) executing contracts with six medical oncologists that provided an incentive bonus that improperly included the value of prescription drugs and tests that the oncologists ordered and Halifax billed to Medicare, and (2) paying three neurosurgeons more than the fair market value of their work, according to a DOJ news release. 

According to Clark, “Halifax illustrates some important things in FCA litigation: (1) the willingness of federal courts to allow plaintiffs to bootstrap strict liability Stark law violations (which do not provide a private cause of action) into FCA violations, and (2) the inherent dangers of not seeking a settlement when faced with such allegations (and why most defendants will settle when the government intervenes in these cases), in light of the threat of treble damages from being found liable, the threat of permissive exclusion, and the impact on the entity’s reputation.”

What were the major trends in the FCA cases in 2014? 

Among the major issues and trends of note in 2014 is the split in circuit courts’ pleading standard for FCA claims under Rule 9(b) of the Rules of Civil Procedure with some circuits maintaining a heightened standard for FCA cases, while other circuits are applying a more relaxed standard. Additionally, Sara Kay Wheeler saw more full blown litigation as more sophisticated trial attorneys take on qui tam cases, and increased use of big data, such as data collected under the Physician Payment Sunshine Act (Sunshine Act) (as added by section 6002 of the ACA and codified at Soc. Sec. Act Sec. 1128G) to support FCA investigations as the major trends in 2014. Michael E. Clark noted that the government continued to collect the largest settlements from pharmaceutical and medical device companies under allegations of off-labeling marketing and illegal referrals. 

Rule 9(b) pleading standard. A trend that continued in 2014, which stood out for Jack Wenik, Member, Sills, Cummis, & Gross, PC, is the split in the circuits as to the proper pleading standard under Rule 9(b) in FCA qui tam cases. Wenik referred specifically to Foglia v. Renal Ventures Management LLC, 3rd Cir., June 6, 2014) in which the Third Circuit applied the relaxed standard and U.S. ex rel Thayer v. Planned Parenthood, where the Eighth Circuit also appeared to take a less restrictive view on the pleading standard. 

In Foglia, the dismissal of a qui tam action against a dialysis care company for failure to plead with a heightened level of particularity was reversed on appeal. The relator alleged that his former employer charged Medicare for the full contents of drug vials even though it only used a portion of the vial on each patient and re-harvested the unused portion for use in other patients. The Third Circuit rejected the heightened pleading standard of the Fourth, Sixth, and Eleventh Circuits, which require “representative samples” of the alleged fraudulent conduct, specifying the time, place, and content of the acts and the identity of the actors. Instead, the Third Circuit applied the relaxed standard of the First, Fifth, and Ninth Circuits, which have held that it is sufficient to allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” The Third Circuit concluded that at the pleading stage it must assume that Foglia is correct in alleging that Renal did not follow the HHS procedures that it should have followed if it was to harvest the “extra” content from the used vials. The court recognized that while this hypothesis may ultimately be proved incorrect, it gave Renal notice of the charges against it as required by Rule 9(b). The court believed that its decision was further supported by the fact that only Renal has access to the billing records that could prove the claim one way or another (see False Claims Act pleading with “particularity” standard relaxed, June 9, 2014).

In Thayer, the Eighth Circuit concluded that the allegations of Susan Thayer (Thayer), the qui tam relator, claiming that Planned Parenthood of the Heartland (Planned Parenthood) violated the FCA were pleaded with sufficient particularity. “Thayer conceded that she did not provide any representative examples of the false claims in the complaint;” she argued, however, that “Rule 9(b) itself does not require that representative examples be pleaded in every FCA complaint that alleges a systematic practice or scheme of submitting false claims.” The court stated the particularity requirement was met, “if the relator can otherwise provide the ‘particular details’ of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.’” Thayer had specific knowledge about some of the fraudulent activities in which Planned Parenthood was allegedly engaged in her position of center manager in which she oversaw billing and claims submission, but she may not have identified the regulations allegedly violated. The circuit court reversed the district court’s dismissal in part, and remanded the case to the district court to determine if the qui tam relator had identified regulations that were violated (see United States of America ex rel. Thayer v. Planned Parenthood of the Heartland, (8th Cir. August 29, 2014)). 

In the Mintz Levin blog, Health Law & Policy Matters, Thomas S. Crane, Member; Brian P. Dunphy, Associate; and Laurence J. Freedman, Member, addressed the circuit court split in applying Rule 9(b) in its post noting that on March 31, 2014, the U.S. Supreme Court declined to resolve the circuit split over the rule’s requirements (see petition for certiorari United States ex rel. Nathan v. Takeda Pharmaceuticals). According to the authors, the United States’ view is that a “qui tam complaint satisfies Rule 9(b) if it contains detailed allegations supporting a plausible inference that false claims were submitted to the government, even if the complaint does not identify specific false claims.” They stressed, however, that “from a litigation standpoint and, in fairness to those accused of violating the FCA, Rule 9(b) serves an important gatekeeping function intended to ensure that only viable claims are permitted to reach discovery.”

Changing litigation landscape. “Events in 2014 removed any doubt that government declination sounds the death knell for qui tam lawsuits. Indeed, 2014 witnessed an increasing number of declined FCA cases entering intensive fact discovery. At the same time, however, new relator’s counsel have arrived on the scene at a rapid pace. Many of these attorneys are highly sophisticated in complex business litigation and have extensive experience with the FCA,” Sara Kay Wheeler said, adding that “[t]his was an unwelcome trend for providers.” According to Wheeler, “In the past, although providers had to devote significant resources to conducting internal investigations and making presentations regarding declination to the government, that strategy would often staunch further expense if successful because relator’s counsel often voluntarily dismissed the case.” Wheeler stressed that “With the changing litigation landscape, providers are now being forced to expend substantially more resources in defending litigation in addition to a parallel government investigation. Given this new reality, it is important for providers to engage counsel who bring to the table a combination of government investigation, civil litigation, and health care regulatory expertise to be able to fight on all fronts.” 

Use of “big data” to support FCA investigations. “The use of ‘big data’ to support FCA investigations and litigations grew in 2014. For example, the Sunshine Act brought more comprehensive disclosure of payments by industry to certain providers,” Michael E. Paulus told Wolters Kluwer. “Under the Sunshine Act, manufacturers of drugs, devices, biologicals, and medical supplies, and some group purchasing organizations (GPOs) must report payments and other transfers of value to ‘covered recipients,’ which are defined as ‘teaching hospitals’ and ‘physicians’ (except physicians who are employees of the applicable manufacturer), Paulus explained. The Act requires CMS to make information submitted in transparency reports and physician ownership reports publicly available on a searchable website; the first round of Open Payments data became available on September 30, 2014. Paulus noted that “[t]he continued rise of big data in 2014 had significant implications for providers and payers. Indeed, increased data mining by government agencies, private companies, and media brought additional scrutiny and negative publicity. Additionally, there are indications that relator’s counsel began using the Sunshine Act data to bolster qui tam complaints in an effort to plead sufficient facts to survive dismissal under the FCA.” 

Other trends in 2014. “In the health care sector, the largest FCA settlements continued to come from pharmaceutical and medical device companies in the life sciences sector, which is not that surprising in light of the huge amounts of federal monies involved now with Medicare Part D benefits and the arcane rules for measuring and reporting costs associated with payment of these benefits,” Michael E. Clark explained. For the most part, these cases are based on violations of the federal AKS arising from allegations of off-label marketing activities, coupled with illegal payments being made to induce referrals based on violations of the federal AKS, Clark said. 

What do you predict the government will focus on in terms of the FCA in 2015?

King & Spalding, LLP attorneys predicted increased criminal investigations in qui tam cases, increased focus on executive accountability, increased civil money penalties (CMPs) against individual physicians, and self-audits conducted by health care providers as part of compliance programs being used to impose liability under the FCA. Michael E. Clark noted the possibility of growth in lawsuits against relators who file frivolous lawsuits, and Jack Wenik predicted that the government will be focusing on cardiac procedures performed by electro physiologists and interventional cardiologists involving medically unnecessary defibrillators and stents. Wenik believes that the DOJ will be focusing on both physicians and hospitals.

Increased criminal investigations in qui tam cases. On September 17, 2014, the Assistant Attorney General (AAG) for the Criminal Division of the DOJ announced that DOJ’s criminal prosecutors will automatically review all new qui tam complaints filed under the FCA, Michael E. Paulhus reported. All qui tam complaints will be shared by DOJ’s Civil Division with the Criminal Division as soon as the cases are filed to allow prosecutors to determine whether to open a parallel criminal investigation, he added. According to the AAG, Criminal Division attorneys are reviewing qui tamcomplaints “immediately” upon their receipt (see Leslie R. Caldwell, Assistant Attorney General for the Criminal Division, U.S. Department of Justice, Remarks at the Taxpayers against Fraud Education Fund Conference, September 17, 2014). 

“The AAG’s announcement means that there will now be criminal review of qui tam complaints by prosecutors in Washington as well as potential review by Assistant U.S. Attorneys in the district where the action was filed. Moreover, criminal review of the FCAallegations is expected to take place at the early stages of a case,” Paulus explained. “In sum, providers should expect to face heightened criminal scrutiny when under investigation for potential FCA violations,” Paulus cautioned. 

Increased focus on executive accountability. When asked about the government focus for 2015, Sara Kay Wheeler noted that HHS and the DOJ have placed increasing emphasis on executive accountability for some time. She explained that the former Chief Counsel to the Inspector General for HHS, Lewis Morris, in his 2011 testimony before the House Ways and Means Committee, stated that his office intended to use its exclusion authority “to alter the cost-benefit calculus of [c]orporate executives” by “excluding the individuals who are responsible for [f]raud, either directly or because of their positions of responsibility in [a] company that engaged in fraud” (see Testimony of Lewis Morris, Chief Counsel, Office of Inspector General, before the House Ways and Means Committee, Oversight Subcommittee, Hearing on Improving Efforts to Combat Health Care Fraud, March 2, 2011). “Since then, there have been several high profile actions by HHS and DOJ against corporate executives,” Wheeler said, adding that in 2014, for example, DOJ and HHS reached an approximately $1 million settlement with two former executives of HealthEssentials Solutions Inc. for their role in causing the company to bill Medicare for services that were inflated or not medically necessary (see Former HealthEssentials Solutions Inc. Executives to Pay More Than $1 Million to Resolve Allegations of Submitting False Claims to Federal Health Care Program, January 10, 2014). “Going into 2015, senior health care executives should be prepared for the possibility that they may be named as individual defendants in FCA actions,” Wheeler advised. 

Increased CMPs against individual physicians. “The OIG is authorized to impose CMPs against individuals and entities who engaged in certain wrongful conduct, including knowingly submitting a false or fraudulent claim to a federal health care program Historically, OIG rarely has exercised its CMP authority against individual physicians in connection with the settlement of FCA investigations. One recent case, however, shows that OIG may be changing course. In January 2014, OIG announced the settlement of a CMP enforcement action against a physician who allegedly submitted claims to Medicare for services that were never provided or were otherwise false or fraudulent (see Physician Agrees to $1.5 Million Payment and 15-Year Exclusion To Settle Civil Monetary Penalty Case, March 12, 2014).” The settlement is particularly notable because of the amount of CMPs imposed, $1.5 million. King & Spaulding attorneys commented that their “discussions with regulators confirm an increased interest in using CMPs to target physicians in addition to health care institutions” and warned that “providers can reasonably anticipate increased CMP enforcement actions against physicians who engaged in fraud and abuse.” 

Self-audits used as evidence in FCA cases. The concerns over a possible emerging trend in new aggressive methods that relators and their counsel are employing to impose liability under the FCA were addressed in an article titled From Carrot to Stick?: Use of Self-Audits as Evidence against Health Care Entities in False Claims Act Cases, in the December 2014 issue of the American Health Lawyers’ Association’s AHLA Connections. Paul B. Murphy, Partner, and Amelia R. Medina, Associate, King & Spaulding LLP, Atlanta, Georgia, warned health care entities that while the DOJ and other agencies take into consideration good faith compliance efforts “as a favorable indicator of [an entity’s] commitment to ethical business practices, entities “may need to use caution” with one key element of their compliance programs, self-audits. The authors explained that “at least three FCA actions have been filed in the past two-and-a-half years against health care entities whose self-audits not only failed to mitigate their FCA exposure, […] they were offered as evidence probative of their alleged knowledge of the submission of false claims.” Although the entities self-audits seemed to “constitute good faith efforts at self-policing,” the authors explained that in these three cases, the areas an entity identified for improvement as a result of the self-audits (1) were used to show shortcomings in the entity’s documentation, (2) were used to show a company’s knowledge of specific false claims, and (3) were considered insufficiently comprehensive and were used to extrapolate and establish knowledge of alleged systemic types of false claims. The authors noted that the DOJ, which did not intervene in the first two cases, may join in the third of the action (see United States ex rel. Stone v. OmniCare, Inc. (N.D. Ill., July 7, 2011), United States v. Vitas Hospice Services (W.D. Mo., May 2, 2013), and United States ex rel. Kelner v. Lakeshore Medical Clinic, Ltd (E.D. Wis., March 28, 2013).

Frivolous claims. On the other side of the growing sophistication of relator’s counsel, Michael E. Clark noted that the defense bar is getting more aggressive with plaintiffs’ counsel when they can do so. United States ex rel. Fox, Rx, Inc. v. Omnicare, Inc. demonstrates that when a frivolous qui tam lawsuit is filed, defense counsel can file for and obtain sanctions against the relator’s counsel for filing a frivolous qui tam, Clark told Wolters Kluwer. Section 3730 of the FCA permits such an award “upon a finding that the . . . claims were objectively frivolous, irrespective of plaintiff’s subjective intent.” 

In a January 12, 2015, article posted on the Duane Morris blog, Seth Goldberg, Partner at Duane Morris, reported that Managed Health Care Associates, Inc. (MHA), a health care services and technology company that contracts with independent long-term care pharmacies to negotiate reimbursement rates on their behalf and manage Medicare Part D claims, was awarded attorneys’ fees and expenses. According to Goldberg, “the relator’s—Fox Rx, Inc. (Fox)—claim that MHA allegedly (1) failed to substitute generic drugs for named brand drugs, and (2) dispensed drugs beyond their termination date, was objectively frivolous given that the plain language of the very agreement Fox attached to its second amended complaint demonstrated that MHA did not itself dispense drugs and exercised no control or supervision of its network pharmacies’ dispensing.” Although MHA presented information at a meeting prior to Fox filing a second amended complaint that demonstrated that “Fox’s claims were erroneous and provided Fox with a draft motion for sanctions that would be filed if the claims were not withdrawn. Fox, which the Court referred to as a “serial qui tam relator,” persisted nonetheless, including by filing its second amended complaint,” Goldberg explained (see United States ex rel. Fox Rx, Inc. v. Dr. Reddy, (S.D.N.Y., August 8, 2014)).

When asked about what the government would focus on in 2015, Clark said that he anticipates that “the government will continue to focus heavily on pharmaceutical and medical device companies engaging in off-label marketing violations, and it will be looking for more cases in which to intervene involving an entity’s failure to report and return ‘known overpayments,’ but it also appears that the government will be more willing than ever to challenge medical necessity and other issues related to elderly care (which is also where a great amount of the expenditures of federal funds happens) as seen by its focusing on claims that hospice providers have improperly billed for medically unnecessary services and companies have enrolled ineligible beneficiaries in long term care plans.”

What Is the Role of the Affordable Care Act’s Enforcement Rules in Incentivizing Providers to Settle Rather Than Litigate?

Almost five years after enactment, the effect of the ACA provisions that have strengthened enforcement rules and provided additional funds to contain fraud and abuse activities is reflected in the increased numbers of cases being brought under the FCA as well as the multifold increase in the numbers and amounts of settlements. Over the years, the DOJ has progressively settled more cases that alleged health care provider violations of the FCA. These recent enforcement rules have had an impact on providers to settle rather than pursuing claims against them, according to Jack Wenik.

Michael E. Paulhus pointed out that “the ACA revised several elements of the FCA and the federal AKS. Most notably, Section 10104(j)(2) of the ACA narrowed what constitutes a ‘public disclosure’ that can trigger the FCA’s ‘public disclosure bar’ while broadening the definition of ‘original source.’” Also noteworthy is the ACA Section 6402(f) amendment to the AKS, which provides that “a claim that includes items or services resulting from a violation [of the AKS] constitutes a false or fraudulent claim for purposes of [the FCA]. It remains to be seen how courts will interpret these provisions, but taken together, these changes have the potential to significantly strengthen the government’s leverage in FCA cases.”

 The impact of the ACA is evidenced by the dramatic increase in FCA actions—particularly qui tam actions—filed since 2009 and the substantial recoveries seen during this period, Paulus noted. According to statistics published by the DOJ (See Department of Justice, Fraud Statistics — Overview, November 20, 2014), the number of new qui tam FCA cases rose from 433 in fiscal year (FY) 2009 to 754 and 713 in FY 2013 and FY 2014, respectively. The total number of FCA cases increased from 565 in FY 2009 to 804 in FY 2014. Even more striking is the increase in the amount of money recovered by the DOJ under the FCA. The DOJ obtained $5.69 billion in settlements and judgments from FCA actions in FY 2014, an increase of more than $3.2 billion over the amount recovered in FY 2009 ($2.46 billion). Importantly for health care providers, from January 2009 through the end of FY 2014, the DOJ recovered $14.5 billion for health care fraud under the FCA.

Jack Wenik explained that the exposure for health care providers that are found liable under the FCA because of treble damages greatly influences their decision to settle rather than pursue litigation. In addition, Wenik pointed out, that because CMS has not published a final rule governing the requirement that health care providers return overpayments within 60 days of discovery, the terms within the law regarding when a provider was aware or should have been aware remain ambiguous, putting a provider at risk for liability under the FCA if an overpayment is not returned timely. Wenik noted that, in the past, when allegations of fraud or false claims were brought against a health care provider, there was a stigma. With the increase in enforcement activities and the large penalties that can be imposed, settling claims of violation of the FCA rather than going through the costs of litigating such claims no longer carries the stigma of the past. 

Earlier in the White Paper, Michael E. Clark underscored “the inherent dangers of not seeking a settlement when faced with allegations ([…] when the government intervenes) in light of the threat of treble damages from being found liable, the threat of permissive exclusion, and the impact on the entity’s reputation.”

Conclusion

The False Claims Act (FCA) is the government’s primary civil remedy for recovering losses resulting from fraud. The amendments Congress made to the FCA have strengthened the statute and increased the incentives for whistleblowers to file suit. In 2014, settlements and judgments most often involved pharmaceutical companies, hospitals, pharmacy providers, SNFs, home health agencies, and medical device companies, however, physicians for providing medically unnecessary services and hospice providers for providing services to ineligible patients also found themselves entangled in false claim litigation. 

The most significant FCA claims involved reverse FCA actions, specifically related false certification and timely returning of overpayments; the provision of inherently worthless services theory of liability, especially as it relates to SNFs; and violations of the Stark Law and Anti-kickback Statute. Trends in 2014 that are likely to continue include the split in the circuit courts’ application of the Rule 9(b) pleading standard and the use of big data collected by CMS and other government agencies gathered through data mining and mandatory reporting to support FCA investigations and bolster qui tam complaints. Challenges defendants likely will face in FCA cases in 2015 and beyond include more criminal investigations in qui tam cases, increased focus on executives, increased CMPs against physicians who engaged in fraud and abuse, and the use of providers self-audits to establish evidence of systemic submission of false claims. In addition, providers are likely to see more full blown litigation as highly sophisticated trial attorneys take on qui tam cases and circuit courts apply a more relaxed pleading standard allowing more cases to proceed to trial. 

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