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

Public Disclosure – The Audit Report

In 2008, the New York State of the Medicaid Inspector General (“OMIG”) conducted an audit of defendant and reviewed payments made from the New York Medicaid program to the defendant from January 1, 2004 through December 31, 2005. On October 23, 2008, the OMIG issued an audit report, which was publicly available after that date. The audit consisted of a review of a random sample of 200 services which were reimbursed by Medicaid. The purpose of the audit was to determine whether: Medicaid reimbursable services were rendered for the dates billed; appropriate rate or procedure codes were billed for services rendered; patient related records contained the documentation required by the regulations; and claims for payments were submitted in accordance with Department regulations and the Provider Manuals for Clinics.

The audit report contained four findings concerning the defendant’s billing practices:

• In 12 instances, certain documentation was missing for kidney dialysis services.
   
• In 11 instances, service delivery documents were not signed by a licensed health professional.
   
• In 4 instances, a threshold visit was incorrectly billed for an incomplete treatment session.
   
• In 4 instances, no Explanation of Medical Benefits was found for a Medicare eligible patient.

The relator’s employment with the clinic ended two weeks before the audit report was issued. The relator was not aware of the audit report until after the report was posted on the internet.

The Public Disclosure Bar – Pre and Post-PPACA

The FCA contains a public disclosure bar which “is intended to bar ‘parasitic lawsuits’ based upon publicly disclosed information in which would-be relators ‘seek remuneration although they contributed nothing to the exposure of the fraud.’” United States ex rel. Kreindler & Kriendler v. United Tech. Corp., 985 F.2d 1148, 1157 (2d Cir. 1993). The FCA’s public disclosure bar is codified at 31 U.S.C. § 3730(e)(4). It was amended effective March 23, 2010, by the Patient Protection and Affordable Care Act (“PPACA”), Pub. L. No. 111-148, § 10104(j)(2), 124 Stat. 119, 901-02 (2010). For cases filed prior to March 23, 2010, the public disclosure bar operates as a jurisdictional defense. For those cases filed on or after March 23, 2010, the public disclosure bar can be asserted as a substantive defense.

The old version of § 3730(e)(4) provides:

(A) No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B) For purposes of this paragraph, “original source” means an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.

The new version, effective March 23, 2010, provides:

(A) The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed-- (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B) For purposes of this paragraph, “original source” means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

The amendment is not retroactive, so it is important to note which version of § 3730(e)(4) applies in a given case. For example, in United States ex rel. Wilson v. Graham County Soil & Water Conservation District, 130 S. Ct. 1396 (2010), the Supreme Court issued a decision which expanded the scope of the public disclosure bar to disclosures made in state and local proceedings as well as those in federal hearings, reports, audits, and investigations. However, Congress effectively overrode the Graham County case in enacting the PPACA, which expressly limits the public disclosure bar to federal proceedings and reports. The amended provision is not retroactive, so the expanded public disclosure bar announced in Graham County still applies to cases filed prior to March 23, 2010.

The Application of the Pre-PPACA Public Disclosure Bar to the Dialysis Clinic Case

The court held that the pre-PPACA version of 31 U.S.C. §3730(e)(4) applied because the complaint was filed before the amendment took effect. To determine whether the public disclosure bar applied, the court engaged in a two-part analysis to determine: (1) whether the information on which the allegation of fraud rests was a “public disclosure” through one of the sources enumerated in the statute; and (2) whether the relator’s allegations are based upon “allegations or transactions” disclosed to the public. If both parts of this test are met, a relator may avoid dismissal by establishing that he was an “original source” with “direct and independent knowledge.”

With respect to the first question, the relator conceded that the audit report was publicly disclosed within the meaning of the statute. The remainder of the court’s analysis focused on the second part of the test. The court observed that circuit courts are divided over the meaning of the phrase “based upon” as it is used in the pre-PPACA version of 31 U.S.C. § 3730(e)(4). The court noted that the Second Circuit follows the majority view and has repeatedly held that the relator’s claim is “based upon” the public disclosure if the allegations in the complaint are “substantially similar” to the publicly disclosed information.

The defendant argued that the public disclosure bar warranted dismissal because the allegations in the second amended complaint were substantially similar to those previously disclosed in the OMIG’s audit report. The relator claimed that the audit report disclosed “information” but not “allegations or transactions” that are contained in the second amended complaint. In support of this position, the relator claimed that there was nothing in the audit report that pertained to the actual treatment that was provided to patients, nor was there anything in the audit report relating to patient safety issues or violations of nursing practices and Medicare health and safety regulations.

The court agreed with the relator and held that while the audit report and the second amended complaint may have overlapped with respect to the general subject matter of Medicare/Medicaid billing, the allegations in the second amended complaint were not “substantially similar” to the audit report. In arriving at this conclusion, the court observed that the audit report did not discuss any alleged violations of medical procedures or risks to patient safety. Nor did it accuse the defendant of any fraudulent conduct. At best, the audit report revealed errors and irregularities in defendant’s billing practices. Based on this analysis, the court held that public disclosure bar did not apply, and an examination of whether the relator was an “original source” was thus unnecessary.

Conclusion

Despite the court’s denial of the defendant’s Rule 12(b)(1) motion in the Dialysis Clinic case, the defendant nevertheless received its happy ending when the court dismissed the complaint with prejudice under Rules 9(b) and 12(b)(6). Moreover, even though the defendant did not succeed on the basis of the public disclosure bar, many qui tam cases are dismissed at the pleading stage because of the public disclosure bar, so it is an important tool to understand and know how to effectively use. Accordingly, when faced with a qui tam complaint, and considering the weapons available for early dismissal, it is worth bearing in mind the potential 1-2-3 punch of filing motions to dismiss based on failure to plead fraud with particularity under Rule 9(b); failure to state a claim under Rule 12(b)(6); and the public disclosure bar contained in 31 U.S.C. 3730(e)(4). For pre-PPACA cases (i.e., those filed prior to March 23, 2010), the public disclosure bar can be asserted as a jurisdictional defense under Rule 12(b)(1), and for post-PPACA cases, the defense can be asserted as a substantive defense under Rule 12(b)(6).
 

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.
 

In 2002, in United States ex rel. Swan et al. v. Covenant Care, Inc., 279 F. Supp.2d 1212, a court in the Eastern District of California issued a summary judgment opinion that cast serious doubt on the viability of quality of care claims under the FCA. In Swan, the relators, both of whom were advocates for nursing home reform, alleged they personally witnessed multiple instances of substandard patient care at various nursing homes operated by the defendant in California and Illinois. The relators further alleged that the defendant nursing homes falsified forms to indicate that patients received care, including bathing, feeding, and wound treatment, that was never provided. The relators alleged this conduct violated the FCA under worthless services and false certification theories. The court held that the relators failed to state a claim under the FCA under any of the theories they alleged. The court held there was no worthless services claim because the relators did not allege that the nursing homes’ care was so poor that it was the equivalent of no performance at all. The court observed that payment by the government to the nursing homes was based on a per diem rate that included a bundle of services, including room, board, and patient care. Because some of these services were provided, the relator’s worthless services claim could not survive. The court also held there was no false certification claim because the relator introduced no evidence to demonstrate that the nursing homes certified compliance with the applicable Medicare regulations as a prerequisite to receiving federal payment. The court granted the nursing homes’ motion for summary judgment and dismissed the action.

Since the Swan decision, a number of other courts have followed suit and dismissed quality of care cases for failure to state a claim under worthless services and/or false certification theories of FCA liability. See, e.g., United States ex rel. Landers v. Baptist Memorial Health Care Corp., 525 F. Supp.2d 972 (W.D. Tenn. 2007) (granting defendants’ summary judgment in qui tam action); United States ex rel. Lockyer v. Hawaii Pacific Health, 490 F. Supp.2d 1062 (D. Haw. 2007) (granting defendants’ motion for summary judgment in action in which government intervened); United States ex rel. Sweeney v. Manorcare Health Services, Inc., 2005 WL 4030950 (W.D. Wash. 2005) (granting defendants’ motion to dismiss in qui tam action).

With that background in mind, let’s turn our attention back to the Dialysis Clinic case. The relator filed a qui tam complaint under seal in June 2009 and filed an amended complaint under seal several weeks later. Seven months later, in February 2010, the government informed the court that it had declined to intervene in the action, and the complaint was unsealed. The defendant moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6); failure to plead fraud with particularity under Rule 9(b); and lack of subject matter jurisdiction under Rule 12(b)(1). The relator sought leave to file a second amended complaint. The court granted the relator’s motion to amend, and then dismissed the second amended complaint with prejudice under Rules 9(b) and 12(b)(6).

The Dialysis Clinic case is a good example for FCA defendants of the grounds that can be successfully asserted in a motion to dismiss a qui tam case in which the government does not intervene. In such cases, Rules 12(b)(1), 9(b), and 12(b)(6) are powerful weapons for the defense. Of the 4,628 relator-only FCA cases that were unsealed between 1987 and 2010, 3,962 (or 86%) of those cases have been dismissed.

Part II of this post will examine the court’s decision on the Rule 9(b) and 12(b)(6) motions, and Part III will discuss the court’s decision on the Rule 12(b)(1) motion based on the FCA’s public disclosure bar.

Applying Fourth Circuit precedent, the court found that relators’ allegations had been based on prior public disclosures by then-New York Attorney General Andrew Cuomo, the defendants’ own SEC filings, and newspaper articles. The court also found that relators were not original sources of the information based on their failure to demonstrate how they could have learned of this alleged conduct from their roles as telemarketers at defendants. Interestingly, the court noted relators’ attorney’s history of recruiting former employees of student lenders to serve as qui tam relators.

Next, relators alleged that defendants paid illegal bonus payments to employees based on the number of student-loan applications initiated daily and engaged in marketing tactics designed to mislead borrowers into believing defendants’ direct mailings were from the federal government. According to relators, this alleged conduct rendered false the certifications of compliance prepared in connection with such loans in the event that the loan went into default and resulted in the submission of a claim for payment to the government.

The court found subject matter jurisdiction to be proper as to these allegations, but dismissed the claims for failure to plead with particularity as required under Fed. R. Civ. Proc. 9(b). The court held that relators failed to provide facts showing that any claims were submitted to the government or that the purportedly false certifications were made to get a false claim paid by the government. The court denied leave to amend.

The Relator asserted four counts in his complaint, but really asserted only two FCA violations -- one for false claims and one for false statements. Because the FCA was amended in 2009 by FERA, the relator included two counts for each statutory violation, alleging one count each under the current statute as well as its prior version. The court observed that it was unnecessary for the Relator to assert claims under the pre and post FERA versions of the FCA because the FERA changes to §3729(a)(1) (applicable to false claims) and (a)(2) (applicable to false statements) are not material to a presentment claim to the United States government.

The court then dismissed the entire complaint under Rule 9(b) because the complaint failed to identify (1) any false claims submitted to the United States by HP; (2) the date of any such claims; (3) the content of any such claims; (4) the products for which the government was actually billed; (5) any individuals involved in the alleged fraud; and (6) the length of time between the alleged fraudulent practice and submission of claim for payment. In arriving at this conclusion, the court observed that the complaint consisted of little more than a list of 38 HP products available for sale on the government contract website that mistakenly identify the country of origin. The Relator did not provide any information as to whether any of these products were, in fact, purchased by the United States and instead speculated that because at least some of the products with similar item number suffixes are commonly used and purchased, it was therefore highly likely that at least some of the products were purchased by the government. A copy of the complaint that was dismissed can be found here and a copy of the court's decision can be found here.