Update: Iowa District Court Holds FERA Is Not Retroactive in U.S. v. Hawley

Posted on August 24, 2011 by Cliff Katz

In two prior posts, we reported on a case which an insurance company was deemed subject to liability under the False Claims Act even when it did not directly submit claims to the federal government.  See United States v. Hawley, No. 08-2992, 2010 WL 3292710 (8th Cir. Aug. 23, 2010) and click here and here for the prior posts.  In the most recent opinion in the Hawley case, the District Court held that the Fraud Enforcement and Recovery Act (FERA) amendments did not apply retroactively in Hawley, and such retroactive application would violate the Ex Post Facto clause of the United States Constitution.  See United States v. Hawley, No. C 06–4087–MWB, 2011 WL 3295419 (N.D.Iowa Aug. 1, 2011). 

Hawley, an insurance agent, was alleged to have caused farmers to submit false claims to North Central Crop Insurance, Inc., a private insurance company, which then submitted claims for reimbursement to the Federal Crop Insurance Corporation (FCIC), established pursuant to federal statute.  The Government argued that, since the FCIC was approving and paying claims, the FCA reached Hawley’s conduct.  The Eighth Circuit held that there was a genuine issue of material fact as to whether the Government had claims under Sections 3729(a)(2) and (a)(3) of the FCA prior to the 2009 amendments of the Fraud Enforcement and Recovery Act (FERA).  Prior to FERA, these provisions provided for liability where the defendant “intended that the false record or statement be material to the Government’s decision to pay or approve the false claim.”  See Allison Engine co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  The Eighth Circuit did not decide whether FERA, which modified these provisions of the FCA, was retroactive to the claims in Hawley. 

FERA eliminated the requirement that a false statement be made “to get a false or fraudulent claim paid or approved by the Government.”  See 31 U.S.C. § 3729(a)(1)(B).  FERA provides for liability where the false statement is material to a false or fraudulent claim.  FERA further states that these amendments “shall take effect as if enacted on June 7, 2008, and apply to all claims under the False Claims Act (31 U.S.C. 3729 et seq.) that are pending on or after that date.”  In dispute was the meaning of the term “claims”.  Hawley argued that “claims” refers to claims submitted to the Government for payment, which in this case were prior to June 7, 2008.  The Government, by contrast, argues that “claims” refers to when the case was filed, which was subsequent to June 7, 2008.  The court agreed with Hawley, relying on United States ex rel. Burroughs v. Central Ark. Development Council, 2010 WL 1542532 (E.D.Ark.2010).  Additionally, the District Court held that application of FERA retroactively would violate the Ex Post Facto clause of the United States Constitution because, though the FCA is a civil statute, the sanctions (treble damages and penalties) make the statute punitive in nature. 

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Federal District Court Dismisses State of Indiana's FCA Complaint Alleging Medicaid Fraud

Posted on May 24, 2011 by Sung W. Kim

On May 9, 2011, a federal district court in the Northern District Court of Indiana in the case of United States ex rel. McCoy v. Madison Center, No. 3:10-CV-259-RM (N.D. Ind. May 9, 2011) , dismissed as untimely the State of Indiana’s complaint-in-intervention in its entirety and the relators’ state law claim brought under the Indiana False Claims and Whistleblower Protection Act (“IFCWA”).  In 2005, the relators filed a qui tam complaint in federal court in Indiana on behalf of the federal government and the State of Indiana, alleging violations of both the federal False Claims Act and IFCWA by the defendant, Madison Center, and sought recovery for injuries suffered by both the federal government and the State. Defendant is a non-profit psychiatric hospital serving Medicaid-eligible patients, including children.

The relators alleged that, from May 2002 to the time of the complaint in 2005, the defendant routinely submitted Medicaid reimbursement claims for psychiatric treatment of children without maintaining adequate documentation of medical necessity or treatment plans, fabricated medical records to justify reimbursement claims for the children, and improperly billed for non-reimbursable services or for services not provided. In June 2003, the relators warned the State that the defendant was trying to fabricate or “doctor” medical records in anticipation of an upcoming Medicaid audit, which prompted Indiana Medicaid auditors to raid the defendant’s office and initiate an immediate audit. The audit eventually estimated Medicaid overpayments to defendant between 2001 to 2002 of about $11 million.

The federal government declined to intervene in 2009. However, the State of Indiana filed a notice of intervention and a separate complaint in 2010 asserting state law claims for Medicaid fraud against the defendant under the IFCWA, common law fraud, breach of contract and unjust enrichment. The State’s complaint alleged, among other things, that the defendant failed to document its billings correctly, failed to maintain adequate documentation to support reimbursement claims, utilized incorrect units of service and lacked patient treatment plans.

Indiana’s complaint-in-intervention was held to be untimely because the court found that it sought to assert new claims and legal theories that did not arise from the same transaction or occurrence as the qui tam complaint. Although the court acknowledged that the State’s complaint covered the same time period and was based on findings from the June 2003 audit, which was prompted by the relators, the court also found that the relators’ complaint was limited to claims submitted on behalf of children and to claims of retaliation. Thus, the 6-year limitations period under the IFCWA barred the State’s claims, which effectively arose in June 2003 when the audit was completed.

The court also held that while the federal FCA claims may be preserved, the relators could not pursue any state law claims under the IFCWA because the statute was not enacted until 2005 and did not permit retroactive application. The court rejected arguments from both the relators and the State that the continuing nature of the defendant’s conduct mooted any retroactivity or statute of limitations defenses, because the complaints in question contained only generalized accusations and failed to allege any specific examples of fraud after June 2003, as required to sustain a continuing violations theory.

In reaching this decision, the court observed that 31 U.S.C. §3732(b) permits states to intervene and join state law claims for the recovery of state funds with federal FCA claims seeking the recovery of federal funds, as long as the state claims arise from the same transaction or occurrence as the federal claims. On the other hand, the state’s right to intervene under this section is permissive only and subject to the discretion of the court. Because Indiana had waited at least 7 years since its discovery of the fraud and more than 4 years since the relators’ original complaint to file its own complaint, the court found the State’s intervention to be untimely.
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Quality Of Care Cases Under The False Claims Act: Pointers For The Defense (Part III Of III)

Posted on February 18, 2011 by Antonia F. Giuliana

This is our final post on United States ex rel. Blundell v. Dialysis Clinic, Inc., No. 5:09-cv-00710 (N.D.N.Y. Jan. 19, 2011), a qui tam action against a dialysis treatment center based on alleged quality of care issues that was recently dismissed pursuant to Rules 9(b) and 12(b)(6).  In the Dialysis Clinic case, the relator, a nurse who had been employed by the center from August 2007 until October 2008, alleged that the center violated certain state and federal standards and regulatory requirements by, e.g., failing to provide adequate staffing, using unqualified personnel, permitting personal care technicians to perform nursing functions, and failing to adequately train employees to handle emergency situations. The relator further claimed that these alleged deficiencies compromised patient care for beneficiaries under the Medicare, Medicaid, and Veterans’ Administration programs. The relator alleged violations of the False Claims Act based on worthless services and false certification theories of liability. The government declined to intervene in the action.

Today, we discuss the court’s ruling on the defendant’s Rule 12(b)(1) motion to dismiss the action for lack of subject matter jurisdiction under the False Claims Act’s public disclosure bar.

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).
 
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