On April 18, 2017, the U.S. District Court for the Middle District of Florida adopted a magistrate judge’s recommendation to grant summary judgment in favor of defendant BayCare Health System (“BayCare”) in a False Claims Act whistleblower suit that focused on physician lease agreements in a hospital-owned medical office building, thereby dismissing the whistleblower’s suit.

The whistleblower, a local real-estate appraiser, alleged that BayCare improperly induced Medicare referrals in violation of the federal Anti-Kickback Statute and the Stark Law because the lease agreements with its physician tenants included free use of the hospital parking garage and free valet parking for the physician tenants and their patients, as well as certain benefits related to the tax-exempt classification of the building. The brief ruling affirms the magistrate judge’s determination that the whistleblower failed to present sufficient evidence to establish either the existence of an improper financial relationship under the Stark Law or the requisite remuneration intended to induce referrals under the Anti-Kickback Statute.

The alleged violation under both the Anti-Kickback Statute and the Stark Law centered on the whistleblower’s argument that the lease agreements conferred a financial benefit on physician tenants – primarily, because they were not required to reimburse BayCare for garage or valet parking that was available to the tenants, their staff and their patients.  However, the whistleblower presented no evidence to show that the parking was provided for free or based on the physician tenants’ referrals.  To the contrary, BayCare presented evidence stating that the garage parking benefits (and their related costs) were factored into the leases and corresponding rental payments for each tenant.  Further, BayCare presented evidence to support that the valet services were not provided to, or used by, the physician tenants or their staff, but were offered only to patients and visitors to “protect their health and safety.”

In light of the evidence presented by BayCare, and the failure of the whistleblower to present any evidence that contradicted or otherwise undermined BayCare’s position, the magistrate judge found that: (i) no direct or indirect compensation arrangement existed between BayCare and the physician tenants that would implicate the Stark Law, and (ii) BayCare did not intend for the parking benefits to induce the physician tenants’ referrals in violation of the Anti-Kickback Statute.

Continue Reading New Ruling on Hospital-Physician Real Estate/Leasing Compliance

A recent settlement demonstrates the importance of compliant structuring of lending arrangements in the health care industry. The failure to consider health care fraud and abuse risks in connection with lending arrangements can lead to extremely costly consequences.

On April 27, 2017, the Department of Justice (“DOJ”) announced that it reached an $18 Million settlement with a hospital operated by Indiana University Health and a federally qualified health center (“FQHC”) operated by HealthNet. United States et al. ex rel. Robinson v. Indiana University Health, Inc. et al., Case No. 1:13-cv-2009-TWP-MJD (S.D. Ind.).  As alleged by Judith Robinson, the qui tam relator (“Relator”), from May 1, 2013 through Aug. 30, 2016, Indiana University Health provided HealthNet with an interest free line of credit, which consistently exceeded $10 million.  It was further alleged that HealthNet was not expected to repay a substantial portion of the loan and that the transaction was intended to induce HealthNet to refer its OB/GYN patients to Indiana University.

While neither Indiana University Health nor HealthNet have made any admissions of wrongdoing, each will pay approximately $5.1 million to the United States and $3.9 million to the State of Indiana. According to the DOJ and the Relator, the alleged conduct violated the Federal Anti-Kickback Statute and the Federal False Claims Act.

For more details on the underlying arrangement and practical takeaways . . .

Continue Reading Avoiding Fraud and Abuse in Health Care Lending Arrangements

Both the Department of Justice and the Department of Health and Human Services Inspector General have long urged (and in many cases, mandated through settlements that include Corporate Integrity Agreements and through court judgments) that health care organizations have “top-down” compliance programs with vigorous board of directors implementation and oversight. Governmental reach only increased with the publication by DoJ of the so-called Yates Memorandum, which focused government enforcers on potential individual liability for corporate management and directors in fraud cases. Thus, if it isn’t the case already, compliance officers should assure that senior management and directors are aware of their oversight responsibilities and the possible consequences if they are found not to have fulfilled them.

The OIG’s views regarding board oversight and accountability are discussed in white papers issued by the OIG and also the American Health Lawyers Association. See: “An Integrated Approach to Corporate Compliance: A Resource for Health Care Organization Boards of Directors“; “Corporate Responsibility and Corporate Compliance: A Resource for Health Care Boards of Directors“; and “Practical Guidance for Health Care Governing Boards on Compliance Oversight.”

Directors are not only subject to government actions, but to private ones as well. For example, several months ago, a pension system shareholder in Tenet Healthcare Corp. filed a derivative suit claiming that Tenet’s board members shirked their fiduciary duties by not stopping a kickback scheme that led to a $513 million False Claims Act settlement.  The City of Warren Police and Fire Retirement System is seeking to impose a constructive trust on all salaries, bonuses, fees and insider sales proceeds paid to eight of Tenet’s fourteen board members, along with damages for alleged corporate waste and gross mismanagement of the company. It’s also seeking uncapped punitive damages for what it says was Tenet’s act of securing the execution of documents by deception and the misapplication of fiduciary property.  The Michigan-based pension system says Tenet and its board breached their fiduciary duties by failing to adopt internal policies and controls to detect, deter and prevent illegal kickbacks and bribes. And the board participated in efforts to conceal or disguise those wrongs from Tenet’s shareholders, it said.

Cases like this, both private and public (in the wake of the Yates memorandum), likely will proliferate. Indeed, notwithstanding the transition to a new Presidential administration that many hoped would lessen the intensity of its enforcement actions, the current leaders of the DoJ and various U.S. Attorneys’ offices as well as the OIG have signaled their intention to keep the pressure on.

A significant compliance resource of value to health care organizations’ boards recently was issued by the Baldrige Performance Excellence Program of The National Institute of Standards and Technology. The Baldrige Excellence Framework for health care organizations which sets out seven criteria for performance excellence and the means for success. A copy of the document is available for purchase here.

Frequently, parties in both civil and criminal cases where fraud or corporate misconduct is being alleged attempt to defend themselves by arguing that they lacked unlawful intent because they relied upon the advice of counsel. Such an assertion instantly raises two fundamental questions:  1) what advice did the party’s attorney actually give?;  and 2) what facts and circumstances did the party disclose, or fail to disclose, in order to obtain that opinion?  It is well understood that raising an advice of counsel defense consequently waives attorney/client privilege.  Moreover, because a limited waiver of the privilege is rarely recognized, the door likely will open to an examination of any relevant communication between the party and the attorney, even beyond the area that encompasses the particular alleged advice of counsel at issue. But what about the so-called “attorney work product” doctrine?  While attorney/client privilege protects confidential communications between clients and their lawyers related to seeking or obtaining legal advice, attorney work product is protected because it includes, among other things, the sense impressions, analyses and strategies prepared and recorded by and for the attorneys themselves in anticipation of litigation or other adversarial engagements. To what extent, if any, does assertion of advice of counsel expose the attorney’s work product to discovery?

An interesting and cautionary analysis of that question was provided recently by the United States District Court for the District of South Carolina, where the defendants in a False Claims Act lawsuit who asserted an advice of counsel defense were ordered to hand over to government prosecutors all attorney communications related to an alleged Medicare kickback scheme. United States ex reI. Lutz v. Berkeley Heartlab, Inc., 2017 BL 111755, D.S.C., No. 9:14-cv-230, April 5, 2017).

While the court did not explain its thinking in great depth, particularly with regard to the facts of the case itself, one suggests that it still reached a respectable decision. The court readily acknowledged that there is a difference between attorney/client privilege and the work product doctrine (though I note, in some contexts like that presented in Upjohn Co. v. United States, 449 U.S. 383 (1981) concerning corporate internal investigations, the difference can be immaterial) but it went on to hold that, in the case at bar, work-product protection was waived.  As noted, it is unexceptionable that, when a party relies upon an advice of counsel defense, attorney/client privilege necessarily is waived.  After all, one of the determinative issues – what advice did the attorneys actually give – necessarily depends upon getting past the privilege, which is not absolute in any event. The Lutz court recognized that the same rationale logically applies to any work-product materials that actually were shared with the client as part of the advice process. Thus, there is little exception to be taken with the court’s extension of the waiver to such materials. Accordingly, the point of controversy comes down to whether work product protection is to be held waived as to materials prepared by the lawyers that never were shared with the client.  Here, the court recognizes that there is competing authority on the subject

Ultimately, the court relies upon a line of cases holding that, when a party asserts an advice of counsel defense, the waiver of the work product protection extends to “uncommunicated work product.”  In the case at bar the court concluded that to rebut the defense, the government was entitled to  discover ” what facts were provided by [Defendants] to [their counsel]; discover what facts [Defendants’ counsel] may have obtained from any other sources other than Defendants; discover the legal research conducted by and considered by [Defendants’ counsel]; discover the opinions that [Defendants’ counsel] gave [Defendants] and discover whether [Defendants] selectively ignored any of the facts and opinions given [them] by [their counsel] in reaching a decision …”   While a defense lawyer would be unlikely to express any agreement with this if he or she were representing a client who was asserting an advice of counsel defense, one recognizes that an experienced judge is logically dealing with the reality of litigating the frequent situation where the client might have given the lawyer incomplete or misleading information about the facts, and the lawyer’s opinion very well would not have been given, or would have been different, if a more complete rendition of what was to be relied on in opining had been made. Indeed, adversaries frequently ask opinion witnesses – both lawyers and acknowledged experts —  that very question:  “If you had known X which had not been revealed to you by your client, your opinion would not have been the same; isn’t  that right.” Attorney notes very well may contain narrative information from client interviews that usefully addresses the issue of what the client actually disclosed when asking for advice.

In sum, while less scholarly and comprehensive than it might have been, the Lutz opinion did appropriately enunciate the issues, distinguish the two doctrines and reached a supportable conclusion.  One could, however, envision a case in which a trial court would be upheld for not ordering disclosed work product materials that had not been shared with the client.  But as Lutz warns:  don’t count on it.  Advice of counsel is a risky defense that must be approached carefully.  Problems are best avoided by attorneys asking searching questions and assuring that all relevant matters have been disclosed before opining.

As discussed previously in this blog, efforts to curb fraud, waste and abuse are generally “bi-partisan.” Given the significant monetary recoveries the Government enjoys through enforcement of the federal False Claims Act (“FCA”), we have predicted that efforts in this arena will continue under a Trump administration. However, this is dependent, in part, on the priorities of the new administration and the resources it devotes in this arena. To this end, the testimony of Attorney General nominee Sessions during his confirmation hearing on January 10th may have given us some insight into how he views the FCA.

Notably, as part of his opening testimony, Attorney General nominee Sessions said:

“Further, this government must improve its ability to protect the United States Treasury from waste, fraud, and abuse. This is a federal responsibility. We cannot afford to lose a single dollar to corruption and you can be sure that if I am confirmed, I will make it a high priority of the Department to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims.”

During questioning by Senate Judiciary Committee Chairman Charles Grassley (R. IA.), Sessions elaborated on his intent to focus on the FCA. When asked whether he would “pledge to vigorously enforce the False Claims Act and devote adequate resources to investigating and prosecuting False Claims Act cases,” Sessions testified:

“In the qui tam provisions and the part of that, I’m aware of those. I think they are valid and an effective method of rooting out fraud and abuse. I even filed one myself one time as a private lawyer…. It has saved this country lots of money and probably has caused companies to be more cautious because they can have a whistleblower that would blow the whistle on them if they try to do something that’s improper. So, I think it’s been a very healthy thing…”

In addition, after commenting that, in his opinion, some qui tam cases remain under seal for an “awfully long time,” Sessions testified that, if confirmed, he would provide Congress with “regular timely updates on the status of…. False Claims Act cases including statistics as to how many are under seal and the average length of seal time.”

Sessions’ testimony seems to have offered something to those on “both sides” of the FCA. His statements suggest that he recognizes the value of the FCA and its qui tam provisions; indeed, we learned that he even brought a qui tam case when he was in private practice. However, his testimony also reflects concern about unreasonably long seal periods, which are a significant problem for defendants in FCA cases. Extended seal periods plainly provide a unilateral litigation advantage to the Government and qui tam Relators by allowing extensive time to investigate while providing defendants no corresponding opportunity. Instead, extended seal periods often force defendants to be relegated to face aged claims once they are finally able to defend themselves. (Most FCA actions are filed under whistleblower, or qui tam, provisions. According to the Department of Justice, whistleblowers filed 702 qui tam suits in fiscal year 2016—an average of 13.5 new cases every week.) Only time will tell if a Justice Department under Attorney General Sessions will press to expedite consideration of FCA cases and improve the “playing field” in the process.

The federal government continues to secure significant recoveries through settlements and court awards related to its enforcement of the False Claims Act (FCA), particularly resulting from actions brought by qui tam relators. In fiscal year (FY) 2016, the federal government reported that it recovered $2.5 billion from the health care industry. Of that $2.5 billion, $1.2 billion was recovered from the drug and medical device industry.  Another $360 million was recovered from hospitals and outpatient clinics.

Government Intervention Drives Recoveries

The FY 2016 FCA statistics reflect that more than 97% of the recoveries from qui tam cases resulted from matters in which the government elected to intervene and pursue directly. Government intervention remains a real danger to health care entities.

However, more than 80% of new FCA matters were filed by qui tam relators; relator share awards reached almost $520 million in FY 2016. The financial incentives to pursue these matters are significant and well recognized; last year, the number of new qui tam FCA cases was the second highest since 1987.

Enforcement Climate Became Worse for Individuals in FY 2016—and Will Likely Continue

The government’s focus on individual liability, as reflected in the “Yates Memo,” is expected to continue. This focus on individual accountability has recently resulted in substantial FCA recoveries from physicians, a former hospital CEO, a nursing home CFO, and even the Chair of a board of directors.[1]  On the administrative side, such focus has resulted in the 20-year exclusion of a physician specializing in urogynecology whom the government alleged billed for services not performed or not medically necessary. Indeed, this focus continues: just last week, the government filed a FCA complaint against a mental health and substance abuse clinic and its owner in his individual capacity.

Regulatory Changes in 2016 Created More Financial Exposure

The monetary exposure faced by health care industry participants under the FCA is increasing. In June, the Department of Justice released an interim final rule increasing the minimum per-claim penalty under Section 3729(a)(1) of the FCA from $5,500 to $10,781 and increasing the maximum per-claim penalty from $11,000 to $21,563.

The Government’s Use of Technology

The use of technology has markedly enhanced the government’s recovery efforts. Federal and state governments, along with some commercial insurers, are investing in the use of predictive analytics that can analyze large volumes of health care data to identify fraud, waste, and abuse. Notably, the government reportedly enjoyed an $11.60 return for each dollar it spent on its investment in these technologies in 2015.  The use of such technology is expected to continue under the new administration.

The Risk of Enforcement Is Real

The FY 2016 FCA statistics reflect the government’s belief that devoting time and resources to FCA cases makes “good business sense.” This realization is very unlikely to change. Health care entities—as well as individuals—must be alert to potential violations and have strong compliance functions to deal with compliance-related matters in a way that prevents claims and litigation.

Enforcement in a Trump Administration and Opportunities to Reshape the Landscape

Enthusiasm for efforts to curb fraud, waste, and abuse is bipartisan. As a result, government enforcement is likely to stay on its present course with the incoming administration, in good part due to the high return on investment in government fraud investigations and no public policy outcry to reduce such enforcement efforts.

While the growth of the federal government’s investment in enforcement efforts might slow due to both the anticipated federal worker hiring freeze and President-elect Trump’s pledge to reduce regulations, health care entities should not ignore the real risk that they face in this area.

A new administration, however, may bring opportunities to reshape part of the enforcement landscape. President-elect Trump promised to repeal and replace the Affordable Care Act (“ACA”). Included within the ACA were several provisions that made it easier for qui tam relators to bring FCA cases.[2] While it is likely that such provisions—which plainly benefit the government—would be pressed for exemption from any repeal, this does present the potential for legislative changes beneficial to potential FCA defendants. Additionally, given the real likelihood of multiple U.S. Supreme Court appointments, along with the need to fill the more than 100 current federal district court vacancies, more legal challenges to efforts to expand the reach of the FCA can be anticipated.

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[1] See Press Release, Department of Justice, North American Health Care Inc. to Pay $28.5 Million to Settle Claims for Medically Unnecessary Rehabilitation Therapy Services (Sept. 19, 2016), https://www.justice.gov/opa/pr/north-american-health-care-inc-pay-285-million-settle-claims-medically-unnecessary; Press Release, Department of Justice, Former Chief Executive of South Carolina Hospital Pays $1 Million and Agrees to Exclusion to Settle Claims Related to Illegal Payments to Referring Physicians (Sept. 27, 2016), https://www.justice.gov/opa/pr/former-chief-executive-south-carolina-hospital-pays-1-million-and-agrees-exclusion-settle.

[2] The ACA impacted the FCA by narrowing the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(A)), expanding the scope of the “original source” exception for the Public Disclosure Bar (31 U.S.C. § 3730(e)(4)(B)), relaxing intent requirement for violations of the Anti-Kickback Statute (42 U.S.C. § 1320a-7b(h)), and providing that claims resulting from Anti-Kickback Statute violations would also be considered false claims (42 U.S.C. § 1320a-7b(g)).

As many pundits speculate regarding the future of the Yates Memo[1] in a Trump administration, on Wednesday, November 30, 2016, Department of Justice (“DOJ”) Deputy Attorney General, Sally Q. Yates, provided her first comments since the election.  The namesake of the well-known, “Yates Memo,” Yates spoke at the 33rd Annual International Conference on Foreign Corrupt Practices Act in Washington, D.C. and provided her perspective on the future of DOJ’s current focus on individual misconduct.

Yates, who has served at the DOJ for over twenty-seven years, stated that while the DOJ has endured many transitions in leadership during her tenure, the ideology of the DOJ with respect to general deterrence as well as enforcement of corporate misconduct has remained unchanged. Thus, Yates predicted that the incoming administration under President-elect Donald Trump will maintain the DOJ’s current commitment to pursing potential individuals while combating alleged cases of corporate fraud and wrongdoing, proclaiming:

In 51 days, a new team will be running the department, and it will be up to them to decide whether they want to continue the policies that we’ve implemented in recent years. But I’m optimistic. Holding individuals accountable for corporate wrongdoing isn’t ideological; it’s good law enforcement.[2]

Given the length of time that white collar investigations typically take, Yates noted there are a significant number of corporate investigations that began after the issuance of the Yates Memo in September 2015 that will not resolve until well after the new administration takes control. Yates also stated that she expects that the cases already in the pipeline will continue being pursued, and as a result, she anticipates that “higher percentage of those cases [will be] accompanied by criminal or civil actions against the responsible individuals.”[3]

In recent years, the Department of Justice has accelerated its emphasis on the investigation and prosecution of healthcare-related cases.[4]  In the civil realm, since release of the Yates Memo in September 2015, there has been a significant increase in False Claims Act[5] settlements containing cooperation provisions.[6] In the criminal side of the house, since the release of the Yates Memo, DOJ has brought high-profile indictments alleging violations of federal law including conspiracy to commit health care fraud, violations of the anti-kickback statute, money laundering, and aggravated identity theft, and involving a variety of health care-related services such as home health care, psychotherapy, physical and occupational therapy, durable medical equipment, and compounding prescription drugs schemes.  Most recently, on December 1, 2016, an indictment was unsealed in the Northern District of Texas charging 21 people, including the founders and investors of the physician-owned Forest Park Medical Center (“FPMC”) in Dallas, other executives at the hospital, and physicians, surgeons, and others affiliated with the hospital,[7]  with allegedly participating in a $200 million bribery and kick-back scheme focused on inducing surgeons to use the FPMC facilities.

Even before the Yates memorandum explicitly set forth guidance regarding parallel investigations, over the past few years DOJ already was increasing coordination between civil and criminal attorneys running parallel health care-related investigations with the goal of establishing collaboration at the very inception of an investigation. One U.S. Attorney’s Office, the District of New Jersey, even has co-located criminal and civil assistants dedicated to investigating health care fraud, who are supervised by the same AUSA to facilitate civil and criminal investigations, increase coordination and “maximize appropriate deterrence.”[8]

Notably, in June 2016, DOJ and the Department of Health and Human Services (HHS) announced a nationwide sweep of health care fraud civil and criminal cases.  Billed as the largest health care-related take-down in history, and led by DOJ’s Medicare Fraud Strike Force[9] in 36 federal districts, the takedown resulted in criminal and civil charges being filed against 301 individuals, including 61 doctors, nurses, and other licensed medical professionals, for their alleged participation in health care fraud schemes involving approximately $900 million in false billings.[10] [11]

Based on Yates’s comments on November 30, 2016, it can be anticipated that there will be a continued effort by the DOJ to combat corporate misconduct by focusing on individual accountability for alleged wrongdoers. Therefore, health care companies will need to remain diligent in maintaining sufficient compliance and corporate policies, including providing adequate training for executives and employees on the Yates Memorandum, as well as conducting thorough internal investigations, and to identify potential instances of corporate misconduct.[12] Since a centerpiece of the Yates Memo is the disclosure of individual wrongdoing in order to receive credit for cooperating with an investigation, health care-related companies must develop ways to identify individuals involved in potential fraudulent schemes, and the extent of each individual’s potential involvement in wrongdoing, to ensure they receive credit for cooperation. As Yates’s concluded on November 30th, “In the days ahead, this institution – and those who lead it – will continue the hard work of rooting out corruption here and abroad. And we will remain determined to protecting and strengthening our values of justice, fairness, and the rule of law. That has always been, and will always be, at the core of the DOJ.”[13] Thus, there is no indication of a DOJ slow-down any time soon, and based on recent high-profile DOJ enforcement efforts, the health care industry will not be excluded from DOJ’s focus on individual accountability any time soon either.

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[1] Sally Quillian Yates, Deputy Attorney Gen., DOJ, “Individual Accountability for Corporate Wrongdoing,” (“Yates Memo”), (Sept. 9, 2015) The Yates Memo, released by the DOJ in September 2015, sets forth six specific steps for DOJ attorneys to focus on while assessing potential corporate wrongdoing:  (1) in order to quality for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct; (2) criminal and civil corporate investigations should focus on individuals from the inception of the investigation; (3) criminal and civil attorneys handling corporate investigations should be in routine communication with one another; (4) absent extraordinary circumstances or approved departmental policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation; (5) DOJ attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declinations as to individuals in such cases; and (6) civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

[2] Sally Quillian Yates, Deputy Attorney Gen., DOJ, Remarks at the 33rd Annual Int’l Conference on Foreign Corrupt Practices Act (Nov. 30, 2016).

[3] Id.

[4] DOJ, Facts and Statistics¸ (June 9, 2015), https://www.justice.gov/criminal-fraud/facts-statistics.

[5] The False Claims Act, 21 U.S.C. § 3729(2)(B).

[6] Eric Toper, “DOJ Increasingly Demanding Corporate Cooperation in FCA Settlements After Yates Memo,” Bloomberg BNA, (May 25, 2016), https://www.bna.com/doj-increasingly-demanding-n57982072932/.

[7] Shelby Livingston, “Execs, Physicians at Doc-Owned Luxury Hospital Chain Indicted in Alleged Kickback Scheme,” Modern Healthcare (Dec. 6, 2016), http://www.modernhealthcare.com/article/20161206/NEWS/161209950/execs-physicians-at-doc-owned-luxury-hospital-chain-indicted-in. See https://www.justice.gov/usao-ndtx/pr/executives-surgeons-physicians-and-others-affiliated-forest-park-medical-center-fpmc (press release and indictment).

[8] Gabriel Imperator, Combating Healthcare Fraud in New Jersey: An Interview with Paul J. Fishman, Compliance Today 16-22 (Oct. 2015).

[9] DOJ, June 2016 Takedown, (June 22, 2016), https://www.justice.gov/criminal-fraud/health-care-fraud-unit/june-2016-takedown (The Medicare Fraud Strike Force are part of the Health Care Fraud Prevention & Enforcement Action Team (“HEAT”), a joint initiative announced in May 2009 between the DOJ and HHS to focus their efforts to prevent and deter fraud and enforce current anti-fraud laws around the country. Since its inception in March 2007 it has charged over 2,900 defendants who have falsely billed the Medicare program over $8.9 billion).

[10] Id.

[11] Id.

[12] For more information please view: EBG’s Individual Accountability in Health Care Fraud Enforcement: Thought Leaders in Health Law.

[13] Yates, supra note 2.

Health care providers, life sciences companies and other entities subject to regulation by the Food and Drug Administration (“FDA”) or the Centers for Medicare & Medicaid Services (“CMS”) should be aware that the U.S. Department of Health and Human Services (“HHS”) is increasing the maximum civil monetary penalty amounts that may be assessed by the agency.

The new maximum adjusted penalty amounts may have a significant impact on entities that violate or fail to meet mandatory reporting requirements set by FDA or CMS. Of the 299 enumerated increased fines, 137 fines (45.8%) have increased by over 75%, 100 fines (33.4%) increased by over 97%, and 64 fines (21.4%) have doubled or more.  These increased fines affect a wide variety of activities and providers illustrated by the following examples:

Fine Previous Penalty New, Increased Penalty
Fines for failure to report drug samples required by 21 U.S.C. § 353(d)(3)(E) $100,000 per instance $197,869 per instance
Fines for participating in prohibited conduct under 21 U.S.C. § 331 (misbranding, unapproved alteration, use of counterfeits, and other conduct related to the use of drugs or devices) $1,000,000 $1,781,560
Fines for any related series of violations of requirements relating to electronic products under 21 U.S.C. § 360pp(b)(1) $375,000 $937,500
Improper billing fines for Hospitals, critical access hospitals, or skilled nursing facilities under 42 U.S.C. § 1395cc(g) $2,000 $5,000
Fines for certain biological product recall violations under 42 U.S.C. § 262(d) $100,000 $215,628
Fines to Medicaid MCOs that improperly expel or refuse to reenroll a beneficiary under 42 U.S.C. § 1396b(m)(5)(B)(i) $100,000 $197,869
Fines for failure to report medical malpractice claims, or breaching confidentiality of information within such a claim, to the National Practitioner Data Bank under 42 U.S.C. § 11131(b)(2)-(c) $10,000 $21,563
Skilled Nursing Facility fines for noncompliance under 42 U.S.C. § 1395i-3(h)(2)(B)(ii)(l) $10,000 $20,628
Fines for failure to promptly provide appropriate diagnosis codes to CMS under 42 U.S.C. § 1395u(p)(3)(A) $2,000 $3,957
Daily fines for failure by a home health agency to be in compliance with statutory requirements per 42 U.S.C. § 1395bbb(f)(2)(A)(i) $10,000 $19,787

The adjusted civil monetary penalty amounts became effective on September 6, 2016, and are applicable only to HHS civil penalties assessed after August 1, 2016 for violations that occurred after November 2, 2015.  Pursuant to the Bipartisan Budget Act of 2015 (“2015 Act”) and the Administrative Procedures Act (5 U.S.C. 553(b)(3)(B)), HHS finalized the interim rule without prior notice or comment period.  As the 2015 Act provided a straight forward formula to calculate future civil monetary penalty adjustments, HHS determined that there was good cause for immediate implementation without a notice and comment period.

While penalties that more than double their previous amounts may be alarming, a penalty increase is not surprising considering some penalties have remained unchanged since 1968.[1]  These increases represent only the initial “catch up” adjustments required by the 2015 Act.  Similar to the U.S. Department of Justice and U.S. Railroad Retirement Board penalty increase adjustments for the False Claims Act discussed previously, HHS must also make subsequent annual civil monetary penalty adjustments for inflation by January 15 each  year. These increased penalties, along with the anticipated yearly inflation adjustments, provide companies with additional incentives to increase their compliance efforts in the hope of limiting their exposure to additional penalties.

[1] For example, 21 U.S.C. 360pp(b)(1) increased the penalty for any person who violated requirements for electronic products 150% from its pre-inflation penalty, from $1,100 per unlawful act or omission pre-adjustment to $2,750 per act or omission post-adjustment.

Entities that provide goods and services to the federal government, including health care providers and life sciences companies, should take note of the new civil monetary penalty amounts applicable to False Claims Act (“FCA”) violations. After much anticipation, the U.S. Department of Justice (“DOJ”) issued an interim final rule on June 30, 2016 confirming speculation that the penalty amounts will increase twofold.

The new minimum per-claim penalty amount will increase from $5,500 to $10,781, and the maximum per-claim penalty amount will increase from $11,000 to $21,563. The DOJ penalty increase mirrors the penalty spike announced by the U.S. Railroad Retirement Board (“Railroad Board”) in May of this year and discussed in our previous blog post.

The new penalty amounts will take effect August 1, 2016 and will apply to all violations that occurred after November 2, 2015.  This November date was the date that Congress passed the Bipartisan Budget Act of 2015 (the “Act”), which is the legislation that requires federal agencies that handle FCA cases to update their penalty amounts to adjust for inflation.

After this first adjustment, the Act allows DOJ and other federal agencies to make additional annual adjustments to penalty amounts based on the Consumer Price Index for Urban Consumers (CPI-U). Guidance on these annual adjustments is slated to be issued by the Office of Management and Budget this December.

If you would like to comment on this interim final rule, you must act quickly as the deadline for comments is August 29, 2016.

This post was written with assistance from Olivia Seraphim, a 2016 Summer Associate at Epstein Becker Green.

Stuart GersonThe U.S. Supreme Court has rendered a unanimous decision in the hotly-awaited False Claims Act case of Universal Health Services v. United States ex rel. Escobar.  This case squarely presented the issue of whether liability may be based on the so-called “implied false certification” theory.  Universal Health Service’s (“UHS) problem originated when it was discovered that its contractor’s employees who were providing mental health services and medication were not actually licensed to do so. The relator and government alleged that UHS had filed false claims for payment because they did not disclose this fact and thus had impliedly certified that it was in compliance with all laws, regulations, etc.  The District Court granted UHS’s motion to dismiss because no regulation that was violated was a material condition of payment. The United States Court of Appeals for the First Circuit reversed, holding that every submission of a claim implicitly represents regulatory compliance and that the regulations themselves provided conclusive evidence that compliance was a material condition of payment because the regulations expressly required facilities to adequately supervise staff as a condition of payment.

The Supreme Court vacated and remanded the matter in a manner that represents a compromise view of implied false certification.

The Court recognized the vitality of the implied false certification theory but also held that the First Circuit erred in adopting the government’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

Instead, the Court held that the claims at issue may be actionable because they do more than merely demand payment; they fall squarely within the rule that representations that state the truth only so far as it goes, while omitting critical qualifying information, can be actionable misrepresentations.   Here, UHS and its contractor, both in fact and through the billing codes it used, represented that it had provided specific types of treatment by credentialed personnel.  These were misrepresentations and liability did not turn upon whether those requirements were expressly designated as conditions of payment.

The Court next turned to the False Claims Act’s materiality requirement, and stated that statutory, regulatory, and contractual requirements are not automatically material even if they are labeled conditions of payment. Nor is the restriction supported by the Act’s scienter requirement. A defendant can have “actual knowledge” that a condition is material even if the Government does not expressly call it a condition of payment. What matters is not the label that the Government attaches to a requirement, but whether the defendant knowingly violated a requirement that the defendant knows is material to the Government’s payment decision.

The FCA’s materiality requirement is demanding. An undisclosed fact is material if, for instance, “[n]o one can say with reason that the plaintiff would have signed this contract if informed of the likelihood” of the undisclosed fact.   When evaluating the FCA’s materiality requirement, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not automatically dispositive. A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular requirement as a condition of payment. Nor is the Government’s option to decline to pay if it knew of the defendant’s noncompliance sufficient for a finding of materiality. Materiality also cannot be found where noncompliance is minor or insubstantial.

Moreover, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. The FCA thus does not support the Government’s and First Circuit’s expansive view that any statutory, regulatory, or contractual violation is material so long as the defendant knows that the Government would be entitled to refuse payment were it aware of the violation.

The materiality requirement, stringently interpreted, and the fact that the First Circuit’s expansive view was rejected suggest that the game is far from over and that there still are viable defenses, facts allowing, to cases premised upon the implied false certification theory.