The Department of Justice (DOJ) announced this week that it has entered into a settlement agreement with Davita Medical Holdings (Davita) for $270 million dollars to resolve certain False Claims Act liability related to Medicare Advantage risk adjustment payments.

As the settlement agreement describes, Davita acquired HealthCare Partners (HCP), a large California based independent physician association in 2012. HCP, subsequently Davita Medical Group (or Davita), operated as a medical service organization (MSO) who contracted with Medicare Advantage Organizations (MAOs) to provide services and manage the care of its beneficiaries. Davita would provide beneficiary diagnostic information to its MAOs which would be used by the Centers for Medicare and Medicaid (CMS) to calculate the MAO’s risk adjusted capitated payments under the program’s risk adjustment payment methodology. Payments would then be made by MAOs to DaVita under the terms of its risk sharing arrangements.

The settlement resolved allegations raised in the qui tam action filed in District Court for the Central District of California, United States ex rel. Swoben v. Secure Horizons, et al., by James Swoben, a former employee of a MAO that contracted with HCP. Swoben alleged that HCP hired coding companies to perform “one-way” retrospective reviews of member records, whereby the MAO would submit additional diagnosis codes to CMS but not validate previously submitted codes.

The settlement further resolves allegations related to incorrect coding guidance, unsupported but un-retraced codes identified during audits, in-home assessments, incorrect diagnosis mapping to appropriate ICD-9 codes in its electronic medical record, and acute condition codes in the primary care setting.  In its press release, the DOJ emphasized that the failure by Davita to delete unsupported or undocumented diagnosis codes caused the MAOs to retain payments from CMS that they were otherwise not entitled.

Importantly, Davita as downstream provider to MAOs, did not directly submit claims to the Centers for Medicare and Medicaid. Accordingly, this settlement is extremely significant to downstream entities such as MSOs, IPAs, physician practices and risk adjustment vendors who can themselves potentially be subject to “causes to be submitted” and other theories under the FCA.

Epstein Becker Green’s Jason Christ, Teresa Mason and Tom Hutchinson served as counsel and advisor to the Member Representative of the former owners of HCP. Epstein Becker Green was actively involved in co-defending this matter.

For health care providers and other government contractors, perhaps no law causes more angst than the False Claims Act, 31 U.S.C. §§ 3729 et seq. (“FCA”).  A Civil War-era statute initially designed to prevent fraud against the government, the FCA is often leveraged by whistleblowers (also known as “relators”) and their counsel who bring actions on behalf of the government in the hope of securing a statutorily mandated share of any recovery.  These qui tam actions often can be paralyzing for health care entities, which, while committed to compliance, suddenly find themselves subject to false claims allegations that reflect a lack of understanding about the complex (and sometimes ambiguous) regulatory framework that they operate under.

Apart from the substantial costs associated with defending against qui tam allegations, the threatened financial exposure is heart-stopping: penalties under the FCA currently range from $10,957 to $21,916 per improper claim, plus three times the amount of damages sustained by the government (meaning, for example, if a health care provider is found liable for improperly submitting a level one evaluation and management (or “E/M”) code, the potential maximum exposure would be treble damages—i.e., three times the payment for the service—plus up to $21,916 in penalties per claim).  For this reason, even when facing a meritless FCA suit, a defendant often settles to avoid the cost of litigation and the unpredictability of a jury.  Indeed, very few FCA cases ever go to trial.

Until recently, health care providers facing the prospect of a qui tam suit have had little reason for optimism, particularly given the steady increase in cases being filed (674 new qui tam matters were filed in fiscal year 2017, and more than 70 percent of these related to federal health care programs) and the trend of relators continuing to pursue cases after the government declines to intervene.  However, two recent U.S. Department of Justice (“DOJ”) internal policy memoranda issued this month suggest that, at least in some circumstances, the government may be reevaluating its approach in two key areas relating to FCA enforcement: (i) the dismissal of meritless qui tam actions when the government declines to intervene, and (ii) the prohibition of DOJ attorneys relying on a party’s noncompliance with agency guidance as presumptive or conclusive evidence that the party violated the law.

The Granston Memo

Recently, Michael D. Granston, the Director of the DOJ’s Civil Fraud Section, Commercial Litigation Branch, issued an internal memorandum to all attorneys in his branch and all Assistant U.S. Attorneys handling FCA cases (the “Granston Memo”).  The Granston Memo, dated January 10, 2018, addresses “Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A)” and potentially represents a significant shift in how DOJ treats meritless FCA cases.

DOJ has long had the authority via 31 U.S.C. § 3730(c)(2)(A) to dismiss FCA actions brought by whistleblowers.  However, and as the Granston Memo acknowledges, DOJ has used this power sparingly.  Instead, even in circumstances where a relator’s claims may have no basis in fact or law, DOJ has traditionally elected not to intervene and has permitted the relator to proceed, causing health care providers to spend considerable resources defending against a meritless claim.  The Granston Memo suggests that simple declination may no longer be the status quo and provides a list of factors, not intended to be exhaustive, that DOJ attorneys should consider when evaluating whether the dismissal of a FCA claim is warranted in circumstances where DOJ declines to intervene.  These factors focus on the following areas:

  1. curbing meritless qui tams,
  2. preventing parasitic or opportunistic qui tam actions,
  3. preventing interference with agency policies and programs,
  4. controlling litigation brought on behalf of the United States,
  5. safeguarding classified information and national security interests,
  6. preserving government resources, and
  7. addressing egregious procedural errors.

The Granston Memo instructs DOJ attorneys working on FCA cases to consider alternative grounds for dismissal other than 31 U.S.C. § 3730(c)(2)(A) and to consult affected federal agencies as to whether dismissal may be warranted.

The importance of this potential shift in DOJ policy should not be understated.  While only time will tell how the Granston Memo will effect non-intervened qui tam matters, its issuance should come as a welcome sign to entities potentially subject to, or actively involved in, defending FCA cases, as well as to their defense counsel, who should view the memorandum as an opportunity to establish a dialogue—beyond pressing for declination—to pursue a wholesale dismissal of FCA allegations in a case that previously was thought likely futile.

The Brand Memo

While the Granston Memo represents a potentially significant change in DOJ’s approach to FCA litigation and role in non-intervened cases, on January 25, 2018, Associate Attorney General Rachel L. Brand issued a memorandum to the Heads of Civil Litigating Components / U.S. Attorneys and the Regulatory Reform Task Force, an internal working group within DOJ, titled “Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases” (the “Brand Memo”).

The Brand Memo provides that, “effective immediately,” DOJ (i) “may not use its enforcement authority to effectively convert agency guidance documents into binding rules”[1] (emphasis added), and (ii) “may not use noncompliance with guidance documents as the basis for proving violations of application law . . . .”  The Brand Memo goes on to state the following:

[DOJ] should not treat a party’s noncompliance with an agency guidance document as presumptively or conclusively establishing that the party violated the applicable statute or regulation.  That a party fails to comply with agency guidance expanding upon statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.

Critically, the Brand Memo explicitly provides that “this memorandum applies when [DOJ] is enforcing the False Claims Act, alleging that a party knowingly submitted a false claim for payment by falsely certifying compliance with material statutory or regulatory requirements.”

As with the Granston Memo, it is too soon to predict the impact that the Brand Memo will have on FCA litigation.  But, at least on its face, the Brand Memo could be a game-changer.  Medicare is the largest payer for health care services and the Centers for Medicare & Medicaid Services and its Medicare Administrative Contractors (“MACs”) have produced an enormous body of sub-regulatory guidance that governs health care providers.  Because this informal guidance does not go through the rigorous review of the rule-making process mandated by the Administrative Procedure Act, it often can be ambiguous both in its application and its implementation.  Such guidance also routinely results in different standards being applied to providers in different geographic regions depending upon which MAC has jurisdiction.  The Brand Memo states that in circumstances where noncompliance with guidance is alleged, DOJ litigators are not to presume FCA liability or, perhaps more importantly, not to use such guidance to support or prove FCA violations.

Moreover, to the extent that the Brand Memo prohibits reliance on agency guidance documents, it may present an opportunity to argue that such prohibition must necessarily extend to similar documents prepared by government contractors that do not have agency status.  DOJ attorneys frequently treat contractor guidance as conclusive in deciding whether there has been a violation of an underlying statute or regulation—even when guidance is released after the conduct at issue or by a government contractor in a different jurisdiction occurs.  For example, reliance by DOJ attorneys upon statements in local coverage determinations when investigating and prosecuting FCA cases is commonplace.  The Brand Memo may present an avenue for health care entities to argue that these determinations are fundamentally “guidance documents,” and, as such, DOJ should not reflexively and exclusively rely upon them when pursuing potential FCA liability.

At a minimum, the Brand Memo casts a cloud over practices that DOJ attorneys regularly employ when investigating, evaluating, and proving FCA allegations.  It could have a major impact on the way in which the government handles FCA matters and evaluates both whether to intervene in a qui tam suit or bring an affirmative civil enforcement action.

***

Much remains to be seen as to the implications of the Granston and Brand Memos in practice.  But for those individuals and entities participating in the health sector, as well as all other government contractors, these memoranda are reason for cautious optimism.

 

ENDNOTE

[1] The Brand Memo defines a “guidance document” as “any agency statement of general applicability and future effect, whether styled as ‘guidance’ or not, that is designed to advise parties outside of the federal Executive Branch about legal rights and obligations.”  This definition largely mirrors the definition set forth by Attorney General Jeff Sessions in his November 16, 2017, memorandum setting forth a prohibition on improper guidance documents.

On March 15, 2017, the United States District Court for the Western District of Pennsylvania issued an opinion that sheds insight on how courts view the “writing” requirement of various exceptions under the federal physician self-referral law (or “Stark Law”). The ruling involved the FCA qui tam case, United States ex rel. Emanuele v. Medicor Assocs., No. 1:10-cv-245, 2017 U.S. Dist. LEXIS 36593 (W.D. Pa. Mar. 15, 2017), involving a cardiology practice (Medicor Associates, Inc.) and the Hamot Medical Center. The Court’s detailed discussion of the Stark Law in its summary judgment opinion provides guidance as to what may or may not constitute a “collection of documents” for purposes of satisfying a Stark Law exception.

This opinion is of particular note because it marks the first time that a physician arrangement has been analyzed since the Stark Law was most recently amended in November 2015, at which time the Centers for Medicare and Medicaid Services (“CMS”) clarified and codified its longstanding interpretation of when the writing requirement is satisfied under various exceptions.

Arrangements Established by a “Collection of Documents”

Both the “professional services arrangement” and “fair market value” exceptions were potentially applicable, and require that the arrangement be “in writing” and signed. However, two of the medical directorships were not reduced to a formal written agreement. The Defendants identified the following collection of documents as evidence that the writing requirement was satisfied:

  • Emails regarding a general initiative between Hamot and Medicor for cardiac services, but without any specific information regarding directorship positions, duties or compensation.
  • Letter correspondence between Hamot and Medicor discussing the potential establishment of a director position for the women’s cardiac program.
  • Internal summary that identified a Medicor physician as the director of the women’s cardiac program.
  • Unsigned draft Agreement for Medical Supervision and Direction of the Women’s Cardiac Services Program.
  • A one page letter appointing a Medicor physician as the CV Chair and identifying a three-year term that expired June 30, 2008.

The Court said that although “these kinds of documents may generally be considered in determining whether the writing requirement is satisfied, it is essential that the documents outline, at an absolute minimum, identifiable services, a timeframe, and a rate of compensation.” (emphasis added). In addition, the Court noted that CMS requires that at least one of the documents in the collection be signed by each party. After confirming that these “critical” terms were missing from the documents described above, the Court concluded that no reasonable jury could find that either arrangement was set forth in writing in order to satisfy Stark’s fair market value exception or personal service arrangement exception.

Expired Arrangements

Other directorships were initially memorialized in signed, formal written contracts, but they all terminated pursuant to their terms on December 31, 2006 and were not formally extended or renewed in writing on or prior to their termination. Thereafter, Medicor continued to provide services and Hamot continued to make payments under the agreements. The parties eventually executed a series of “addendums” to extend the term of each arrangement, although these addenda had a prior effective date. During the timeframe between when the agreements expired and when the addenda were executed, invoices were continuously submitted and paid.

Plaintiff argued that the failure to execute timely written extensions in advance of renewals resulted in a failure of all six arrangements to meet the “writing” requirement under a relevant Stark Law exception. The Court disagreed, explaining that there is no requirement that the “writing” be a single formal agreement and CMS has provided guidance as to the type of collection of documents that could be considered when determining if the writing requirement is met at the time of the physician referral. In this case, the Defendants specifically relied upon the invoices from Medicor to Hamot and the checks that were sent in payment thereof.

In deciding that a reasonable jury could find that there was a sufficient collection of documents, the Court denied Plaintiff/Relator’s motion for summary judgment with respect to these six ‘expiring” directorships, and the case will proceed to trial on these claims.

Hospitals should carefully consider this opinion when auditing Stark Law compliance of their physician arrangements. A more detailed article analyzing this case will be published in the July edition of Compliance Today.