During a November 29, 2018 speech, Deputy Attorney General Rod Rosenstein announced changes to Department of Justice (“DOJ”) policy concerning individual accountability in corporate cases.  The announcement followed the DOJ’s year-long review of its individual accountability policies and the September 2015 memorandum issued by then-Deputy Attorney General Sally Yates, commonly known as the “Yates Memo.”

While making clear that pursuing individuals responsible for corporate wrongdoing remains a top priority in every investigation conducted by DOJ, Mr. Rosenstein drew a substantial distinction between the treatment of individuals in criminal investigations and civil investigations.

Criminal Matters

In criminal cases, the revised policy provides that to receive cooperation credit, a company “must identify every individual who was substantially involved in or responsible for the criminal conduct.”  Responding to concerns that it was inefficient to require companies to identify every employee involved irrespective of culpability, Mr. Rosenstein stated that DOJ’s focus will be on those who play “significant roles in setting a company on a course of criminal conduct.” He also noted that “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.”   Importantly, Mr. Rosenstein made clear that if a company fails to work in good faith to identify substantially involved or responsible individuals, it would not receive any cooperation credit.

Civil Matters

According to Mr. Rosenstein, “[c]ivil cases are different.” Recognizing that the primary purpose of civil enforcement is the recovery of money, Mr. Rosenstein noted that the “all or nothing” approach to civil cases espoused in the Yates Memo was simply not practical and, in some circumstances could be counterproductive.  In those matters where criminal culpability is not in question, the revised policy recognizes a need for flexibility.

The most significant aspect of this revision is the focus on senior officials in the company, including members of “senior management or the board of directors.”  In civil matters, entities are expected to  identify all wrongdoing by these individuals.  Indeed, Mr. Rosenstein noted that if companies make any effort to hide misconduct by senior leaders, they “will not be eligible for any [cooperation] credit.”  Companies that want to receive “maximum credit” must “identify every individual person who was substantially involved in or responsible for the misconduct.”

The revised policy also provides DOJ lawyers with the flexibility to provide “partial credit” for companies that seek to cooperate with the government.  For instance, in situations where a company “honestly” and “meaningfully” provides “valuable assistance” to the government, the revised policy envisions the ability to award at least partial credit, even if the company does not agree with the government about every employee’s individual liability.  According to Mr. Rosenstein, when credit is all or nothing, resolution of cases can be delayed without any resultant benefit.

Additionally, in settling civil cases post-Yates, the DOJ has routinely refused to include releases for individuals regardless of culpability.  The revised policy returns to the pre-Yates practice of allowing DOJ’s civil attorneys the discretion to negotiate individual releases in cases where additional investigation of those individuals is not warranted “with appropriate supervisory approval.”

Finally, the Yates Memo stated that DOJ would not consider an individual’s ability to pay a civil settlement or judgment as part of its decision whether or not to pursue that individual.  Going forward, the revised policy permits DOJ attorneys to consider “ability to pay” issues in deciding whether or not to pursue a civil judgment against an individual.  According to Mr. Rosenstein, this commonsense change has been made so that DOJ civil attorneys are not wasting valuable resources pursuing individuals from whom there is no realistic source of recovery.

Key Takeaways

While noting that it is “revising” current policy, DOJ has made clear that the pursuit of individuals, whether in criminal or civil investigations, remains a top priority.  The specific identification in civil cases of the actions of senior management, including members of a company’s board of directors, is significant and should be top of mind for entities operating in the health care arena, where enforcement efforts are so routinely focused—whether by the government directly or through the efforts of qui tam relators.  This development suggests the continued need to focus compliance efforts throughout an organization and to ensure that its most senior leaders appreciate the spotlight that will be put on their activities.

The changes referenced above can be found in the documents identified below:

https://www.justice.gov/jm/jm-1-12000-coordination-parallel-criminal-civil-regulatory-and-administrative-proceedings#1-12.000

https://www.justice.gov/jm/jm-4-3000-compromising-and-closing#4-3.100

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.210

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.300

https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.700

 

While the opioid crisis has inspired a wave of new legislation by Congress, the U.S. Department of Justice (“DOJ”) has continued to increase its own response to the prevalent rate of opioid-related drug crimes with a number of new initiatives.  On October 17th, Deputy Attorney General Rod Rosenstein recently delivered remarks at the America’s Health Insurance Plans 2018 National Conference on Medicaid and highlighted the Department’s continued determination to tackle the opioid crisis. Rosenstein’s remarks reiterated Attorney General Jeff Sessions’ recent statements on September 25th at the Office of Justice Programs’ National Institute of Justice Opioid Research where Sessions outlined the varying ways in which DOJ’s resources are being devoted to combating the “national public health emergency.” Both remarks demonstrate DOJ’s continued approach in using “every tool” available to increase prosecution of opioid-related crime – including not only traditional criminal prosecutions but also affirmative civil enforcement actions through the “first-ever civil injunctions under the Controlled Substances Act against doctors who allegedly prescribed opioids illegally” in August, while apparently diverting resources away from more traditional white-collar investigations and prosecutions. Rosenstein and Sessions both applauded the success of Operation Synthetic Opioid Surge, which focuses not on prosecuting drug users, but on “vigorously prosecuting” suppliers of synthetic opioids, such as fentanyl. Sessions in particular noted that shifting focus from users to suppliers, regardless of the quantity of drugs found at the time of arrest, has succeeded in reducing the amount of overdose deaths in Manatee County, Florida by half since last year. Hoping to replicate these results elsewhere, Sessions touted his placement of ten prosecutors who were sent to ten districts with high rates of drug-related deaths to implement the “no amount too small” strategy for prosecuting synthetic opioid trafficking. Sessions noted that this is in addition to the more than 300 new prosecutors he dispatched around the country, as well as the designation in each of the 93 U.S. Attorney’s Offices of an “Opioid Coordinator,” whose job it to “facilitate intake of cases involving prescription opioids, heroin, and fentanyl; and to convene a task force of federal, state, local, and tribal law enforcement.”

Data analytics continues to be one of the most important tools in the Department’s toolbox. In his remarks, Sessions discussed the implementation of an innovative data analytics program that identifies opioid-related health care fraud in various “hot spot districts” around the country. The “Opioid Fraud and Abuse Detection Unit” mines “federal health care databases” and will help federal prosecutors efficiently identify “suspicious outliers,” such as doctors who prescribe opioids at a higher rate than their peers, doctors whose patients have died within sixty days of receiving an opioid prescription, and pharmacies dispensing a disproportionate amount of opioids. Indeed, in August, DOJ established the nation’s first opioid–focused Medicare Strike Force in Newark/Philadelphia region.

Rosenstein and Sessions also praised the Department’s overall health care fraud enforcement efforts and accomplishments to date, focusing on their view that “we lost proper emphasis on drug cases under the previous administration.” Rosenstein noted that since January 2017, DOJ “has charged more than 200 doctors and 220 other medical personnel for opioid-related crimes. The cases involved tens of millions of pills prescribed illegally.”

In a recent case of note, in a Southern Florida takedown this summer, which was part of the DOJ annual Health Care Fraud Takedown, four individuals were prosecuted in connection with kickbacks received from Smart Lab, LLC (“Smart Lab”), a clinical laboratory in Palm Beach Gardens, Florida, which involved alcohol and drug addiction treatment centers. Last month, Smart Lab, the corporation’s Chief Executive and Chief Operating Officers, as well as the top sales representative plead guilty to a series of heath care fraud and money laundering schemes.

The charges alleged that hoping to monetize from the increased volume of opioid-related health care services, such as confirmatory urinary analysis testing, Smart Lab and its executives entered into employment agreements with “sales representatives” to solicit bodily fluid samples from various substance abuse treatment centers. Smart Lab then conducted expensive confirmatory and medically unnecessary drug testing on the samples and submitted the claim to insurance for reimbursement, including from federal health care programs. In exchange for the referrals, Smart Lab kicked back a portion of the reimbursement to the owners, operators, or clinicians of the substance abuse treatment centers. On November 1st, the two owners of Smart Lab, one of whom was a former pitcher for the Miami Marlins, were sentenced to 46 and 63 months in prison, respectively, for their involvement in the operation, repaid almost $3.8 million to defrauded insurers and received a total of $70,000 in fines. Smart Lab, as a corporation, was sentenced to three years’ probation. Smart Lab is just one example of many cases in which the Department is prosecuting both entities and individuals seeking to profit from the opioid crisis.

Beyond just prosecuting suppliers domestically, DOJ is also focusing on sending a strong warning message   to foreign synthetic opioid manufacturers. Indeed, the Department indicted two leaders of the Zheng drug trafficking organization this August, after it determined that the company was using shell companies to ship synthetic opioids and fentanyl analogues to over 25 countries and to 37 U.S. states.

In an effort to stop the supply and distribution of all kinds of opioids, DOJ is also focusing on targeting “web-based drug trafficking” of synthetic opioids. Rosenstein applauded the establishment of the Joint Criminal Opioid Darknet Enforcement Team, under which the FBI has “doubled its investment in the fight against online drug trafficking by devoting more than 50 Special Agents, Intelligence Analysts, and professional staff to help disrupt the sale of synthetic opioids.”

Overall, the message from Sessions and Rosenstein is clear: the DOJ is leveraging its resources to focus on opioid-related health care fraud and crimes. Accordingly, we can expect an increased rate of civil and criminal enforcement actions targeting opioids as DOJ continues to devote its focus towards combating the opioid crisis.

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.

On Monday, August 12, 2018, the U.S. Department of Justice (“DOJ”) announced a new addition to its regional Medicare Fraud Strike Forces: a Newark/Philadelphia Regional Medicare Strike Force that will target both healthcare fraud and opioid overprescription.[1] The newly-formed Newark/Philadelphia Strike Force joins nine existing regional Medicare Strike Forces, all of which are focused in geographical areas of high healthcare fraud risk: Miami, Florida; Los Angeles, California; Detroit, Michigan; Southern Texas; Southern Louisiana; Brooklyn, New York; Tampa, Florida; Chicago, Illinois; and Dallas, Texas.[2] The Newark/Philadelphia Strike Force will be supported by the resources of several federal agencies, including the Health Care Fraud Unit of the Justice Department’s Criminal Division’s Fraud Section, the U.S. Attorney’s Offices for the District of New Jersey and the Eastern District of Pennsylvania, the FBI, U.S. Department of Health and Human Services Office of the Inspector General (“OIG”), and the U.S. Drug Enforcement Administration.[3]

The creation of the regional Newark/Philadelphia Strike Force comes as little surprise as this heavily populated region is home to many major players in the healthcare industry, including pharmaceutical companies and healthcare facilities. Significantly, earlier this year, Maureen Dixon, the Special Agent in Charge of OIG’s Philadelphia Regional Office testified before the U.S. Senate Committee on Finance’s Health Care Subcommittee and highlighted many cases in the New Jersey/Philadelphia region as prototypical examples of patient harm and prescription and treatment fraud and addressed efforts to prevent opioid overutilization and misuse.

Enforcement in the Region: Expect More Enforcement Against Providers and Home Health Care Agencies

The new Newark/Philadelphia Strike Force is expected to usher in quickly a new wave of fraud enforcement to the region. Historically, DOJ’s Strike Forces have targeted provider activity, with enforcement often aimed at clinicians and home health care agencies. The new Strike Force’s dedicated focus on opioid overutilization is in line with the priorities of the District of New Jersey’s U.S. Attorney Craig Carpenito, who has made the abuse of opioid prescriptions a target for his district.  In February of this year, the District of New Jersey’s U.S. Attorney’s Office reorganized and announced the formation of an Opioid Abuse Prevention and Enforcement Unit to complement the existing Healthcare and Government Fraud Unit within that Office’s Criminal Division.

Notably, the addition of the new Newark/Philadelphia Strike Force demonstrates DOJ’s continued belief that behavior – both on the provider and the patient sides – can be changed through enforcement. The Strike Forces’ data-driven model of health care enforcement eschews reliance on qui tam filings and whistleblowers for investigative leads in favor of identifying and targeting health care fraud through data analytics.  Nationwide, the Strike Forces have brought a significant increase in healthcare fraud prosecutions since the concept was first introduced in 2007. Indeed, since their creation in 2007, the Strike Forces have been instrumental in obtaining nearly 2,500 indictments related to over $3 billion in fraudulent health care payments.[4]Most recently, DOJ’s Medicare Strike Forces were in part responsible for the DOJ’s July 2018 health care fraud takedown, the nation’s largest to date, resulting in 601 arrests in connection with over $2 billion of fraudulent billings.[5] 162 defendants, including 32 doctors, were charged for their roles in prescribing and distributing opioids and other narcotics.[6]

Impact on Provider Exclusion Actions

It is likely that the number of exclusion actions pursued by OIG will increase in the region because of the Newark/Philadelphia Strike Force. In the intervening year between DOJ’s June 2017 and July 2018 health care fraud takedowns, the OIG issued nearly 600 exclusion notices to individuals and entities whose conduct “contributed to opioid diversion and abuse.”[7] Among those issued exclusion notices were 67 doctors, 402 nurses, and 40 pharmacy services.[8]

Opioid Overutilization Enforcement

The Newark/Philadelphia Strike Force is the first of its kind to have a specific focus on targeting opioid overutilization. Identifying and targeting the opioid epidemic is a top priority of both DOJ and the OIG; according to Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, CDC data found that over 40 percent of all U.S. opioid overdose deaths involved a prescription opioid in 2016.[9][10] A 2018 OIG report on opioid abuse in the Medicare Part D program found that about 460,000 beneficiaries received high amounts of opioids in 2017, and about 71,000 beneficiaries are at serious risk of opioid misuse or overdose.[11]

* * *

Both the Eastern District of Pennsylvania and the District of New Jersey have developed novel, cutting-edge healthcare fraud cases time and time again over the past decade.  The addition of expertise and resources provided by the new Strike Force in these two districts demonstrate a clear intent to continue this trend. However, it remains to be seen if the new Strike Force and its opioid focus will divert resource away from other more long-term, complex investigations these Districts have traditionally concentrated on.

[1] https://www.justice.gov/opa/pr/assistant-attorney-general-benczkowski-announces-newarkphiladelphia-medicare-fraud-strike

[2] https://www.justice.gov/opa/pr/assistant-attorney-general-benczkowski-announces-newarkphiladelphia-medicare-fraud-strike

[3] Id.

[4] https://oig.hhs.gov/fraud/strike-force/

[5] https://www.justice.gov/opa/pr/national-health-care-fraud-takedown-results-charges-against-601-individuals-responsible-over

[6] https://www.fda.gov/ICECI/CriminalInvestigations/ucm612183.htm; https://oig.hhs.gov/newsroom/media-materials/2018/takedown/2018HealthCareTakedown_FactSheet.pdf; https://www.law360.com/articles/1064720/doj-s-health-care-enforcement-initiative-is-still-going-strong.

[7] https://oig.hhs.gov/newsroom/media-materials/2018/takedown/2018HealthCareTakedown_FactSheet.pdf

[8] Id.

[9] https://oig.hhs.gov/oei/reports/oei-02-18-00220.pdf; https://oig.hhs.gov/reports-and-publications/featured-topics/opioids/

[10] https://www.justice.gov/opa/pr/assistant-attorney-general-benczkowski-announces-newarkphiladelphia-medicare-fraud-strike

[11] https://oig.hhs.gov/oei/reports/oei-02-18-00220.pdf

Tuesday’s decision by Judge Richard Leon of the U.S. District Court for the District of Columbia categorically approving the merger of AT&T and Time Warner, without imposing any conditions or limitations and rejecting granting a stay for appeal purposes, will, unless blocked if there is an appeal, open the way for a series of pending vertical merger deals.

A “vertical merger” is a merger of two companies that do not compete and that are at different levels of the product or service-provision process. Such mergers do not reduce the number of competitors in a given market and, by producing efficiencies, generally have been considered productive and far less economically threatening than horizontal mergers among competitors. Indeed the Department of Justice (DoJ) had not challenged such a merger since the early 1970s. In challenging AT&T, DoJ argued that economic harm was threatened by the purported ability of the acquiring company to control downstream access to product and thus cause raised prices to consumers.  Judge Leon rejected DoJ’s arguments in all regards.

The communications industry has been patiently awaiting the outcome of the case. But that isn’t the only economic sector that is going to see energetic activity. The health care sector stands right beside it, and we expect to see vertical merger action there too.

There are many major deals in the wings and, especially in the health care space, a number of them involve potential vertical relationships. As health care costs continue to rise and both public and private payers move towards value-based and other models, vertical integration is expected to become more attractive.

We at Epstein Becker Green will be writing in greater detail in the days to come, but our antitrust team already is gearing up for counseling and litigation defense matters generated in the wake of the AT&T case. We’ll continue to report on any subsequent activity in that matter as well, with the deal set to close on June 21, unless a higher court intervenes. That team, consisting of Stuart Gerson, John Steren, Trish Wagner, and Mark Lutes, among others, scored a recent victory in an important merger case on behalf of its client Palmetto Health* in the Fourth Circuit case of SCPH Legacy Corp. v. Palmetto Health, in which the U.S. Court of Appeals rejected claims of antitrust standing and antitrust injury, two fundamental issues in merger analysis.

*Prior results are based on the merits of the case and do not guarantee a similar outcome.

Recent settlement agreements between the United States Department of Justice (the “DOJ”) and two urologist business partners suggests that the government may be focusing increased enforcement efforts on the Stark Law’s “group practice” requirements and the Stark exception for “in-office ancillary services.”  The urologists agreed to pay over $1 million to resolve the allegations.

In early January 2018, the DOJ entered into settlement agreements with Dr. Aytac Apaydin and Stephen Worsham to resolve allegations that the physicians submitted improper claims to Medicare for image-guided radiation therapy (“IGRT”) services provided between 2008 and 2014.  IGRT uses imaging to improve the accuracy of radiation therapy during cancer treatment. IGRT is reimbursable by Medicare and is considered a “designated health service” under the Stark Law.

Drs. Apaydin and Worsham jointly owned two businesses: Salinas Valley Urology Associates (“SVUA”), a California medical practice, and Advanced Radiation Oncology Center (“AROC”), a facility where IGRT services were performed.  The settlement agreements highlight two types of problematic arrangements involving these entities:

  1. SVUA, the private medical practice, billed Medicare for IGRT services performed at AROC. However, the government contends that the financial relationship between SVUA and AROC failed to comply with an applicable Stark Law exception.
  2. AROC entered into “lease arrangements” with other local urologists and urology practices (the “Lessee Urologists”) pursuant to which the Lessee Urologists billed Medicare for IGRT services performed at AROC on patients that were referred by the Lessee Urologists’ own practice.  The government contends that providing the IGRT services at AROC did not meet the Stark Law “location requirements” applicable to the Lessee Urologists’ practices, and also contends that the lease arrangements violated the Anti-Kickback Statute.

The settlement agreements provide only brief descriptions of the allegedly improper arrangements and do not specifically describe or explain the government’s theory as to why the arrangements violated the Stark Law and AKS.  However, the reference to the Stark Law “location requirements” provides a clue.

As a general matter, the Stark Law permits a physician to profit from the physician’s referral of a designated health service if the service is performed within the referring physician’s “group practice” and in a building that is used by the group practice for providing physician services or other centralized designated health services.  These services are referred to as “in-office ancillary services” and are the subject of a statutory exception to the Stark Law, as well as a more detailed exception under the Stark Law regulations.   By stating that AROC did not meet the “location requirements,” the government appears to be alleging that that the urology practices could not satisfy the requirements of the Stark “in-office ancillary services” exception, which was likely the only exception available to protect the arrangement from Stark Law liability.

Stark’s “in-office ancillary services” requires compliance with the following three requirements (codified at 42 U.S.C. § 1395nn(b)(2)):

  1. Performance. The services must be performed personally by:
    • The referring physician;
    • A physician who is a member of the same group practice as the referring physician; or
    • Individuals who are directly supervised by the referring physician or by another physician in the group practice.
  2. Location. The services must be furnished in one of the following locations:
    • In a building in which the referring physician (or another physician who is a member of the same group practice) furnishes physicians’ services unrelated to the furnishing of the designated health services; or
    • In the case of a referring physician who is a member of a group practice, in another building which is used by the group practice: (a) for the provision of some or all of the group’s clinical laboratory services, or (b) for the centralized provision of the group’s designated health services.
  3. Billing. The services must be billed by:
    • The physician performing or supervising the services;
    • A group practice of which such physician is a member under a billing number assigned to the group practice; or
    • An entity that is wholly owned by such physician or such group practice.

Before a practice can take advantage of the “in-office ancillary services” exception, it must be structured to comply with Stark’s comprehensive definition of a “group practice.” The Stark regulations at 42 C.F.R. § 411.352 set forth detailed requirements related to how the practice is owned and operated, covering topics such as:

  • Corporate structure;
  • The range of care provided by physicians within the group, as well as the amount of time such physicians spend providing services through the group;
  • Distribution of the group’s expenses and income;
  • Centralized decision-making;
  • Consolidated billing, accounting and financial reporting; and
  • Physician compensation.

This settlement is significant because there have been very few enforcement actions or settlement agreements alleging violations of the Stark Law based on a group practice’s failure to comply with the “in-office ancillary services” exception.  If you are a physician or physician group that relies on the “in-office ancillary services” exception to share profits from ancillary services that you may refer, this settlement should be a wake-up call —  make it a priority to review and confirm that: (i) your group meets the Stark definition of a “group practice” and all of its detailed requirements, and (ii) all ancillary services are provided in locations that meet the requirements of the Stark “in-office ancillary services” exception.

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 December 21, the Department of Justice (“DOJ”) reported its fraud recoveries for Fiscal Year 2017. While overall numbers were significant – $3.7 billion in settlements and judgments from civil cases involving allegations of fraud and false claims against the government – this was an approximate $1 billion drop from FY 2016. However, the statistics released by DOJ reflect themes significant to the healthcare industry.

Greatest Recoveries Come From The Healthcare Industry

As in years past, matters involving allegations of healthcare fraud were the driver, accounting for more than 66% of all fraud related recoveries in FY 2017. While the $2.47 billion was effectively constant from FY 2016, this was the fourth largest recovery in the past 30 years. It is also the eighth consecutive year that healthcare fraud recoveries exceeded $2 billion.  Largest recoveries came from settlements involving the drug and medical device sector.

Qui Tam Cases Lead Recoveries – and Healthcare Cases Dominate

Cases pursued under the False Claims Act’s qui tam provisions continue to drive matters pursued against healthcare entities. Of the 544 new matters brought in FY 2017, 491 were initiated by relators, down just slightly from 2016 but, nevertheless, the third largest annual filing since DOJ began keeping records in 1986.

Government intervention in these cases continues to generate the lions share of the recoveries. Of the $2.47 billion recovered in healthcare matters, $2.06 billion was generated from cases where the government intervened. While by contrast cases in which the government declined to intervene generated $380 million, this was the second-highest annual recovery from such cases in 30 years. Thus, while government intervention continues to be a significant concern, the reality is that more cases are being pursued by relators post declination, creating additional risk for healthcare entities.

DOJ statistics also confirm the significant financial incentives for relators to pursue these cases. In FY 2017, the government paid more than $392 million in relator share awards; more than $283 million of these payments came in connection with healthcare cases. Since 1987, almost $5 billion has been paid to realtors. These numbers suggest that the potential of a major financial reward is real and will continue to encourage the filing and pursuit of actions, particularly against those in the healthcare industry.

Individual Accountability Remains A Priority…Particularly in Healthcare
Finally, the report reflects the Department’s continued focus on individual accountability. Recoveries included individuals agreeing to hold themselves jointly and severally responsible for multimillion dollar settlements with the government, as well as individual settlements following, and separate and apart from, corporate resolutions.

Significantly, every case cited in DOJ’s press release on the issue of individual accountability was from the healthcare sector. This suggests that those employed in the healthcare industry remain key targets of both the government and qui tam relators.

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The FY 2017 DOJ statistics reflect that a change in Administration has done little to alter the government’s belief that devoting time and resources to FCA cases makes “good business sense.” Health care entities—and, as important, individuals in the healthcare industry—need to be mindful of this focus, the potential for violations and to ensure the existence of strong compliance functions to deal with compliance-related matters in a way that is intended to prevent claims and litigation, and to serve as strong defenses when matters are pursued.

Many health care providers rely on a worked relative value unit (“wRVU”) based compensation model when structuring financial relationships with physicians. While wRVUs are considered an objective and fair method to compensate physicians, payments made on a wRVU basis do not always offer a blanket protection from liability under the Federal Stark Law.  As recent settlements demonstrate, wRVU based compensation arrangements that are poorly structured or improperly implemented can result in significant liability.

The wRVU physician compensation model is particularly favored for its low level of risk under the Stark Law, which prohibits physicians from making certain financially motivated referrals. While the Stark Law prohibits physician compensation based on referrals, it does permit physicians to earn certain productivity bonuses for personally performed services.  wRVUs are an accepted method in calculating performance or productivity bonuses for services personally performed by the physician.[1]

How wRVU based compensation can become problematic is illustrated by a recent $34 million settlement between the Department of Justice (“DOJ”) and defendants Mercy Hospital Springfield (the “Hospital”) and Mercy Clinic Springfield (the “Clinic”), an oncology infusion center. After the infusion center was transferred from the Clinic to the Hospital in order to take advantage of inpatient hospital reimbursement and 340B drug pricing, the physicians allegedly wanted to be “made whole” for the compensation they previously earned at the Clinic. The resulting contractual arrangements with the physicians contemplated the provision of a productivity bonus tied to the physicians’ drug administration wRVUs.

However, according to the complaint, “the new work RVU for drug administration in the hospital department” was not calculated based on physician work, clinical expense, or malpractice overhead, but rather was “solved for” by working backwards from a desired level of overall compensation.” Moreover, according to the complaint, the compensation amount for the physician supervision work at the infusion center was approximately 500 percent of the wRVU for in-clinic work where the physician was actively involved in patient care. The DOJ contended that this was a violation of the Stark Law, as the compensation was not fair market value, nor was it commercially reasonable. Additionally, the complaint included allegations of both Stark and Anti-kickback Statute violations for the funds transferred as “management fees” from the Hospital to the Clinic to fund the higher physician compensation amounts, as the fees also allegedly were not fair market value nor commercially reasonable.

The Mercy settlement is only the most recent example of a health system incurring liability for improper wRVU-based compensation arrangements. In an analogous settlement made in 2015, Broward Health in Florida agreed to pay $70 million to resolve a whistleblower lawsuit that alleged Stark Law violations.  In part, it was alleged that Broward Hospital permitted high-volume referring physicians to artificially inflate their wRVUs and, in turn, their compensation.[2]  Allegedly, this was accomplished through unbundling procedures, not considering modifiers that would reduce the compensation for multiple procedures performed, and giving wRVU credits for unsupervised PAs and NPs.  These tactics allegedly resulted in so-called “implausible” wRVU numbers for certain physicians.

These settlements are not an expression of the government’s disapproval of wRVU based compensation arrangements. Rather, these are examples of alleged arrangements that artificially increased a physician’s compensation for referrals, in a manner that is not consistent with fair market value and commercial reasonableness.  Thus, it is important to ensure that wRVU based compensation arrangements are properly structured as well as properly implemented.

Endnotes:

[1] See 42 C.F.R. § 411.352(i)(3)(i) (permitting group practice productivity bonuses based on a per-wRVU basis).

[2] See Relator’s Compl., United States ex rel. Reilly v. N. Broward Hosp. et al., No. 10-60590, ¶ 11 (S.D. Fla. Sept. 16, 2015), ECF No. 75.

The Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“Antitrust Division”) released their respective year-end reviews highlighted by aggressive enforcement in the health care industry. The FTC, in particular, indicated that 47% of its enforcement actions during calendar year 2016 took place in the health care industry (including pharmaceuticals and medical devices). Of note were successful challenges to hospital mergers in Pennsylvania (Penn State Hershey Medical Center and Pinnacle Health System), and Illinois (Advocate Health Care Network and North Shore University Health System). In both actions, the FTC was able to convince the court that the merger would likely substantially lessen competition for the provision of general acute-care hospital services in relevant areas in violation of section 7 of the Clayton Act. See FTC v. Penn State Hershey Med. Center, 838 F. 3d 327 (3d Cir. 2016); and FTC v. Advocate Health Care Network et al No. 1:15-cv-11473, 2017 U. S. Dist. LEXIS 37707 (N.D. Ill.Mar. 16, 2017)

The Antitrust Division, in similar fashion, touted its actions to block the mergers of Aetna and Humana, and Anthem and Cigna. Complaints against both mergers were filed simultaneously in July of 2016, and tried before different judges in the Federal District Court for the District of Columbia. After extensive trials, Judge Bates blocked the Aetna/Humana deal, and Judge Amy Berman Jackson blocked the Anthem/Cigna transaction. United States v. Aetna Inc., No. 1:16-cv-1494, 2017 U.S. Dist. LEXIS 8490 (D.D.C. Jan 23, 2017) and United States v. Anthem Inc., No. 1:16-cv-01493, 2017 U.S. Dist. LEXIS 23614 (D.D.C. Feb8, 2017).

In addition to their enforcement activities, the agencies promoted jointly issued policy guidelines, including their “Antitrust Guidance for Human Resources Professionals.” Although not specific to any industry, this guidance has particular relevance to the health care industry. Among other things, this guidance makes clear that naked wage-fixing (such as the wave of wage fixing claims relating to nurses) and no-poaching agreements (that would include agreements not to hire competing physicians) are not only per se illegal, but also subject to criminal prosecution.

While a marginal enforcement shift may be in store as a result of the change in administration, most signs point to a continued focus on the health care industry. Maureen K. Ohlhausen, appointed by President Trump as acting Chair of the FTC, reiterated in a speech recently delivered at the spring meeting of the American Bar Association’s antitrust section, that “[i]t’s extremely important we continue our enforcement in the health care space.” Likewise the Acting Director of the FTC’s Bureau of Competition – Abbott (Tad) Lipsky, appointed by Chairman Ohlhausen, applauded the FTC’s success in challenging the Advocate/Northshore Hospital merger noting, in a related FTC press release, that the “merger would likely have reduced the quality, and increased the cost, of health care for residents of the North Shore area of Chicago.”

Makan Delrahim, President Trump’s selection (awaiting confirmation) to head the Antitrust Division, recently lobbied on behalf of Anthem and its efforts to acquire Cigna, and has openly stated with respect to certain announced mergers, that size alone does not create an antitrust problem. Nevertheless, given the political climate and overall impact the health care industry has on the U.S. economy, the Antitrust Division’s efforts to open markets in the health care sector, particularly to generics and new medical technologies by challenging pay for delay deals and scrutinizing unnecessarily restrictive agreements among medical device manufacturers is likely to continue.

A wild card affecting future antitrust enforcement is increasing possibility of passage of the Standard Merger and Acquisitions Review Through Equal Rights Act of 2017 (H.R. 659 a/k/a the “SMARTER ACT”). This bill, recently approved by the House Judiciary Committee, would eliminate the FTC’s administrative adjudication process as it relates to merger enforcement, forcing the FTC to bring all such actions in court. In addition, it would align current preliminary injunction standards such that both the FTC and DOJ would face the same thresholds required of the Clayton Act rather than the more lenient standard under the FTC Act. A similar bill passed the House in 2016, but was not taken up by the Senate.