FCA Alert : Lawyers & Attorneys for Whistleblower, False Claims Act & Qui Tam Defense : Kelley Drye & Warren LLP

The defendants moved to dismiss the claims under Rule 12(b)(6) on the ground that the relator and the state intervenors failed to identify a false claim for Medicaid payment under the state FCAs at issue. The district court granted the motion to dismiss, employing the same traditional legal falsity analysis that the First Circuit held was inappropriate in the Blackstone case (and discussed in Part II of this post).

The First Circuit reversed the district court’s dismissal of the plaintiffs’ claims under six of seven state FCAs and affirmed the dismissal of the plaintiffs’ claims under the Georgia FCA on different grounds. Using the new falsity test announced the prior month in Blackstone, the First Circuit held that “plaintiffs have more than adequately alleged that providers submitted claims that misrepresented compliance with a precondition of Medicaid payment in New York, Massachusetts, California, Illinois, Indiana, and New Mexico,” but failed to do so for Georgia. Amgen, at *2. The First Circuit observed that its new falsity test “is a fact-intensive and context-specific inquiry” which “looks to the preconditions of payment recognized under the seven state Medicaid programs” at issue. Amgen, at *6.

The First Circuit began its falsity analysis by conducting an intensive state-by-state examination of specific statutory provisions and regulations identified by the relator concerning Medicaid payment in Illinois, Indiana, Massachusetts, and New York. The court concluded that the relevant statutes and regulations demonstrate that kickback-tainted claims are ineligible for reimbursement under the Medicaid programs of those four states. Amgen, at *7-8.

The First Circuit next turned to the issue of whether kickback-tainted claims violated preconditions of payment under the California and New Mexico Medicaid programs. The court declined to look at statutes and regulations in those two states, reviewing instead the state Medicaid provider agreements identified by the plaintiffs. The court held that the provider agreements sufficiently established that kickback-tainted claims are ineligible for payment under the California and New Mexico Medicaid programs because:

The California agreement requires providers to represent compliance with the state’s anti-kickback statute, and the New Mexico agreement requires providers to acknowledge that non-compliance with anti-kickback laws vitiates a provider’s ability to get its claims paid.

Amgen, at *9.

With respect to the Georgia claims, the First Circuit held that the relator failed to identify any sources that indicate that claims affected by kickbacks violate a precondition of payment under Georgia’s Medicaid program:

It may be that under Georgia’s Medicaid program it is a precondition of payment that claims not be affected by kickbacks like the kickbacks alleged in this case. [The relator] has not identified any authority, however, that makes this clear. It bears emphasis that Georgia, unlike the other six states involved in this litigation, does not have a state law analogue to the federal AKS.

Amgen, at *10.

Based on the above reasoning, the First Circuit reversed the district court’s Rule 12(b)(6) dismissal of the relator’s claims under the state FCAs in California, Illinois, Indiana, Massachusetts, New Mexico, and New York and affirmed the district court’s dismissal of the relator’s claims under Georgia’s FCA.

Our next post will explore the potential consequences of the First Circuit’s new falsity test and will suggest measures companies may want to consider to minimize FCA exposure.

The Massachusetts district court applied the traditional falsity analysis outlined in Part I and held that the relator’s complaint failed to identify any materially false claims. The First Circuit reversed the district court, rejecting what it deemed to be “judicially created” “categorical rules” to determine whether a claim is materially false under the FCA. According to the First Circuit, the “district court appeared to employ the concept of certification such that a claim can be false or fraudulent only if the submitting entity knew or should have known of the underlying falsehood or fraudulence.” Blackstone, at *10. The First Circuit held that this view was incorrect because “[t]he Supreme Court has long held that a non-submitting entity [such as Blackstone] may be liable under the FCA for knowingly causing a submitting entity [such as the hospitals] to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s lawful conduct.” Blackstone, at * 11. In response to Blackstone’s concerns that failing to adopt the traditional framework for analyzing falsity would overextend liability under the FCA, the First Circuit held that this concern does not “call for ‘adopting a circumscribed view of what it means for a claim to be false or fraudulent,’ but rather calls for ‘strict enforcement of the Act’s materiality and scienter requirements.’” Blackstone, at *9 (quoting United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010)).

The First Circuit held that the appropriate test for falsity is to determine, without any categorical limitations, whether the claims at issue “misrepresented compliance with a precondition of payment so as to be false or fraudulent,” and if so, “whether those misrepresentations were material.” Blackstone, at *13. The first step of this analysis is to identify a precondition of payment under the relevant government program. In Blackstone, the relator asserted that compliance with the AKS is a precondition of payment under the Medicare program and identified four potential sources to support her argument: (1) the language and legislative history of the AKS; (2) a non-retroactive 2009 amendment to the FCA which provides that violations of the AKS are also violations of the FCA; (3) the hospitals’ Medicare Cost Reports drafted by CMS; and (4) the hospitals’ and physicians’ Medicare Provider Agreements, also drafted by CMS. The First Circuit held that the Medicare Hospital Cost Reports and Provider Agreements established that AKS compliance is a precondition of Medicare payment for the hospital and physician claims at issue. The First Circuit declined to rule on whether the first and second sources established the same.

According to the First Circuit, the Medicare Provider Agreements executed by the hospitals and physicians established that compliance with the AKS is a precondition of payment under Medicare:

The Provider Agreement, drafted by CMS, requires that hospitals and physicians acknowledge that they “understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with Medicare’s laws, regulations and program instructions.” The Agreement specifically identifies “the Federal anti-kickback statute” as one of only two enumerated examples of the relevant “laws, regulations, and program instructions.” This language make clear that the federal Medicare program will not pay claims if the underlying transaction that gave rise to the claim violated the AKS. The Agreement makes no exception for instances in which that “underlying transaction” violated the AKS because of the actions of a third party like Blackstone.

Blackstone, at *13.

The First Circuit held that the Medicare Cost Reports submitted by the hospitals likewise demonstrated that AKS compliance is a precondition of Medicare payment:

The Hospital Cost Report, also drafted by CMS, further underscores that hospitals submitting claims represent compliance with the AKS. The form states that “if services identified in this report [were] provided or procured through the payment directly or indirectly of a kickback…fines and/or imprisonment may result.” It also requires that the hospital’s representative sign a statement certifying that he or she is “familiar with the laws and regulations regarding the provisions of health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations.” This makes it abundantly clear that AKS compliance is a precondition of Medicare payment and makes no exceptions for violations caused by third parties like Blackstone.

Blackstone, at *14.

The First Circuit next considered whether compliance with the AKS is a “material” precondition of payment under the Medicare program. Blackstone, at *14-15. Blackstone argued that AKS compliance is irrelevant to the payment of the Medicare claims at issue because neither hospitals nor physicians billed Medicare specifically for Blackstone’s devices. For hospital claims, Blackstone argued that hospitals classified patients within “diagnostic-related groups” (“DRGs”) and received a set payment for treating patients in a group regardless of the particular services provided. For physician claims, Blackstone contended that physicians billed Medicare for their services in performing medically necessary surgeries, not for the devices used because of the alleged kickbacks. The First Circuit declined to adopt Blackstone’s position as a matter of law, and held that the relator’s allegations were “sufficient to show, for purposes of this motion to dismiss, that the kickbacks were capable of influencing Medicare’s decision as to whether to pay the hospital and physician claims.” Blackstone, at *15. The First Circuit observed that “[e]xpress contractual language may ‘constitute dispositive evidence of materiality,’ but materiality may be established in other ways, ‘such as through testimony demonstrating that both parties to the contract understood that payment was conditional on compliance with the requirement at issue.’” Blackstone, at 15.

Based on this analysis, the First Circuit reversed the district court’s dismissal of the relator’s complaint under Rule 12(b)(6) for failing to identify a materially false claim under the federal FCA, and remanded the action.

Tomorrow, we will discuss the First Circuit’s application of its new falsity analysis to the state FCA claims at issue in New York ex rel. Westmoreland et al. v. Amgen, Inc. et al.

Rule 9(b) Analysis

According to the court, the relator “vaguely alleged” that from 2004 to present, the defendant submitted fraudulent claims for payment based upon false certifications that the defendant was in compliance with Medicare rules and regulations for quality of care. The court held that allegations of violations of federal regulations, standing alone, are insufficient to establish a claim under the FCA if the plaintiff cannot identify with any particularity the actual false claims submitted by the defendant. Accordingly, dismissal was appropriate under Rule 9(b) because:

Plaintiff’s complaint contains imprecise references to “routine and systematic” violations of Medicare regulations and while he claims that defendant “submitted thousands of claims for reimbursement of Medicare claims,” he fails to identify even one, specific fraudulent claim. Plaintiff did not annex copies of any bills, claims or other documents to the complaint, amended complaint, or second amended complaint. Moreover, plaintiff failed to provide details regarding any fraudulent claims including when the purportedly false claims were presented, which employee of defendant submitted the claim or the amount of said claim. Plaintiff provided the approximate year of alleged quality of care violations but did not provide specific dates, the names of defendant’s employees who treated the patients, what services were provided or how and by whom false claims were generated as a result of those services. Even if the Court assumes plaintiff’s allegations of compromised patient care to be true, plaintiff has not identified a single bill submitted in relation to any of the examples outlined in the second amended complaint.

Rule 12(b)(6) Analysis

Even though the court dismissed the complaint for failure to plead fraud with particularity under Rule 9(b), it held that an analysis of defendant’s Rule 12(b)(6) arguments was necessary to determine whether the dismissal would be with prejudice or not. The court then examined the viability of the relator’s FCA claims under three theories of liability: worthless services, express false certification, and implied false certification.

Factual vs. Legal Falsity Under the FCA

FCA claims generally fall into two broad categories. First, there are “factually false” claims for goods or services that were never provided or which were incorrectly described. Second, there are “legally false” claims for goods or services that were, in fact, provided, but were provided in violation of a regulation, statute, or prescribed contractual term (despite a certification by the defendant, either express or implied, to the contrary).

Worthless Services Claim

A worthless services claim is a derivative of a factually false claim and asserts that the knowing request of federal reimbursement for a procedure with no medical value violates the FCA irrespective of any certification. Mikes v. Straus, 274 F.3d 687, 702-03 (2nd Cir. 2001); United States ex rel. Lee v. Smithkline Beecham, 245 F.3d 1048, 1053-54 (9th Cir. 2001). In a worthless services claim, the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all. Mikes, 274 F.3d at 703.

In the Dialysis Clinic case, the court held that the relator failed to state a claim for worthless services because he did not allege that the clinic failed to provide any services, but rather only challenged the level of care provided:

Plaintiff does not allege that defendant failed to provide any services to their patients. Rather, plaintiff challenges the quality of care arguing that defendant’s services did not conform with the guidelines set forth in 42 C.F.R. § 494. This allegation is not the “equivalent of no performance at all” and thus, does not fit within the worthless services category.

Express False Certification Claim

An express false certification claim is a legally false claim under the FCA. It is based on a false representation of compliance with a federal statute or regulation, and in some instances, with a prescribed contractual term or specification. The majority view (which has been adopted in the Second Circuit and was applied in the Dialysis Clinic case) is that a claim is only legally false when the party certifies compliance with a statute or regulation that is a condition to government payment.

In the Dialysis Clinic case, the relator’s express false certification claim was based on the Medicare enrollment form (Form 855A) that the defendant signed, which provides, in relevant part:

“I agree to abide by the Medicare laws, regulations and program instructions that apply to this provider….I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with such laws, regulations, and program instructions (including, but not limited to, the Federal anti-kickback statute and the Stark law), and on the provider’s compliance with all application conditions of participation in Medicare.”

The relator argued that Form 855A, which defendant signed when it enrolled in Medicare, makes compliance with Medicare regulations a precondition of government payment. The relator further argued that by signing Form 855A, the defendant expressly certified that it would comply with these regulations in order to receive payment. The defendant argued that Form 855A is not a claim for payment and that the form is merely an agreement to comply in the future with all applicable laws and regulations.

The court rejected the defendant’s arguments noted above, but nevertheless held that the relator failed to state an express certification claim. In arriving at this conclusion, the court observed that the problem with the relator’s false certification claim was not necessarily the “forward-looking” language of the certification or that the certification was contained in an enrollment form instead of a claim form. Rather, the court held that the relator failed to state an express certification claim because he did not allege that the defendant made the certifications knowing that they were false when made. In other words, the relator failed to allege that the defendant knew it would violate the applicable Medicare regulations when it signed the enrollment form. Without such pleading, the court held there can be no “false claim” under an express certification theory.

Implied False Certification Claim

An implied false certification claim is also a type of legally false claim under the FCA. Not all circuits recognize implied false certification claims, and the elements of such claims differ from circuit to circuit, and even within circuits. Moreover, the law applicable to such claims has been rapidly evolving. Accordingly, when reviewing implied certification claims, it is important to know the current status of such claims in the particular jurisdiction in which the claim is asserted. For more information on recent court decisions addressing implied certification claims, see our posts here, here, and here. 

The Dialysis Clinic case was brought in the Northern District of New York, and thus Second Circuit precedent applies. In the Second Circuit, an implied certification claim “is based on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.” Mikes, 274 F.3d at 699. In Mikes v. Straus, the Second Circuit limited the use the implied certification claims against medical providers as follows:

[I]mplied false certification is appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid. Liability under the Act may properly be found therefore when a defendant submits a claim for reimbursement while knowing – as that term is defined by the Act – that payment expressly is precluded because of some noncompliance by the defendant.

In the Dialysis Clinic case, the relator alleged that the defendant was liable under the FCA for impliedly certifying compliance with the conditions set forth in 42 C.F.R. § 494 et seq. The defendant argued that § 494 provides conditions for coverage, and does not operate as a precondition for payment. The relator conceded that § 494 does not expressly condition payment on compliance with its terms, but argued instead that “nothing in Part 494 would permit a medical provider to assert a claim for money services rendered in violation of regulatory requirements.” The court disagreed with the relator and held that 42 C.F.R. § 494 “clearly establishes a condition of participation, not prerequisites to receiving reimbursement from the government.” Based on this reasoning, the court held that defendant’s alleged non-compliance with § 494 et seq. does not impose liability under an implied false certification theory.

Accordingly, the relator’s complaint was dismissed with prejudice.  A copy of the second amended complaint which was dismissed can be found here.

Tomorrow, we will discuss the court’s ruling on the defendant’s motion to dismiss the action for lack of subject matter jurisdiction under the FCA’s public disclosure bar.
 

The relator, a co-owner of a business that provides medical billing and related services to health care providers, filed a qui tam complaint under seal in the District of Massachusetts in March 2005 against four medical device companies that manufacture and supply bone growth stimulators that are reimbursed by Medicare.  The qui tam complaint was amended in December 2007, unsealed in April 2009, and amended again in June 2010.  The government did not intervene in the suit.

Bone growth stimulators are light-weight, battery-operated devices which emit weak electrical currents or ultrasonic waves to facilitate healing in patients who have undergone spinal surgery or have non-healing fractures.  The devices are coved by Medicare and classified as “inexpensive or other routinely purchased durable medical equipment” which can be reimbursed on a monthly rental or purchase basis.  The purchase price for the devices is approximately ten times more than their monthly rental price.  Thus, a device would have to be used for a period of ten months or more for the accrued rental payments to equal the purchase price.

The relator alleges that patients typically require the bone growth stimulators for a period of between three and six months and that the devices are programmed to automatically deactivate after nine months.  Thus, according to the relator, no rational patient would ever choose the purchase option and that no claim for purchase could have ever been supported by medical necessity.  The relator further alleges that, between 1993 and 2010, defendants routinely billed the devices to Medicare as purchase items, and informed customers that the devices were only available for purchase and could not be rented.

The relator contended that this conduct violated the §§ 3729(a)(1) & (2) of the FCA based on four different theories, including a theory that defendants made false express certifications of compliance with the Supplier Standard Regulation.  Defendants argued that this theory does not constitute a violation of the FCA and, even if it does, was not pled with sufficient particularity under FRCP 9(b).

When applying for Medicare billing privileges, a supplier must certify in its Medicare Enrollment Application:

I agree to abide by the Medicare laws, regulations and program instructions that apply to this supplier…I understand that payment of a claim by Medicare is conditioned upon…the supplier’s compliance with all applicable conditions of participation by  Medicare.

According to the court, one such Medicare regulation is Supplier Standard Regulation Number 5 which requires a supplier to “advise beneficiaries that they may either rent or purchase inexpensive or routinely purchased durable medical equipment.”  42 C.F.R. § 424.57(c)(5).  The court rejected the defendants’ argument that no falsity occurred because the certification contained in the Medicare Enrollment Application is too broad to constitute an express certification of compliance with Supplier Standard Regulation Number 5 and held:

[A] supplier violates the FCA if it certifies compliance with applicable conditions of participation by Medicare, knowing at the time of certification that it would not abide by Supplier Standard Regulation Number 5….[T]he allegations with respect to this theory can serve as both a violation of section 3729(a)(1) and 3729(a)(2).  The false express certification constitutes both a false claim for payment under section 3729(a)(1) and a false statement made to get a false claim paid under section 3729(a)(2). 

The court also rejected defendants’ Rule 9(b) challenge.  We will examine the court’s 9(b) analysis in a separate post tomorrow. 

Under the first theory – factual falsity – the court held that there was no evidence of any factually false statements in the Defendants’ grant application.  Notably, the court held that because there was a scientific dispute over the accuracy of “subjective measurements,” the relator did not have a claim that one set of data was “factually false” because another set of data was allegedly “more accurate.” 

The second theory, legal falsity under an express certification theory, arises when the party submits a claim that explicitly, but falsely, certifies compliance with a precondition of payment.  The allegedly false certification was Defendants’ certification in its grant application that they would “comply with Public Health Service terms and conditions if a grant is awarded.”  The relator argued that this express certification incorporated certain regulations concerning the responsibilities of applicants for funding.  The court rejected this argument for two reasons.  First, the obligation to comply with “Public Health Service terms and conditions” did not arise until after the applicant received funding; however, all of the alleged non-compliant conduct occurred prior to funding.  Second, the certification was “too vague” and “overly broad.”  The court held:

Where an express certification claim relies on failure to comply with a statute, regulation, or some other process, the certification language must explicitly require compliance with that specific statute, regulation, or process. 

Finally, the court denied the third theory – legal falsity under an implied certification theory.  The court held that a claim can be legally false under an implied certification theory “when a claimant makes no express statement about compliance with a statute or regulation, but by submitting a claim for payment implies that it has complied with any preconditions to payment.”  In support of this theory, the relator relied on allegations that would effectively amend his complaint almost four years after the original complaint.  The court held that this would be unfairly prejudicial, and in any event, there was insufficient evidence to support the theory.