FCA Now

Last week, the U.S. District Court for the District of New Jersey dismissed a qui tam action against Defendants Pioneer Education, LLC, Pioneer Education Manager, Inc., Jolie Health & Beauty Academy, and Joseph Visconti (collectively, “the Academy”) alleging violations of the False Claims Act (“FCA”), 31 U.S.C. § 3729-33. United States ex rel. Lampkin v. Pioneer Educ., LLC, No. 16-cv-1817, 2020 U.S. Dist. LEXIS 136022 (D.N.J. July 31, 2020). In doing so, the Court reiterated that the “rigorous” and “demanding” materiality principle post-Escobar that requires specific allegations of deception which, had the government been made aware of the misrepresentations, influenced the payment of allocated funds. See Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). According to Relator’s Amended Complaint, there were several instances of improper administration practices occurring at the Academy, which specializes in cosmetology education and training. Relator alleged, for example, misrepresentations or “half-truths” about student attendance violations, various code of conduct infractions, and lack of satisfactory academic performance. Relator also alleged that the Academy’s failure to disclose this information established an FCA claim because the Academy was required, as an express condition of payment, to ensure adequate and efficient administration of the funds it received from the Department of Education. These misrepresentations, Relator contended, had “a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property”—triggering a FCA violation. 31 U.S.C. § 3729(b)(4). The Court disagreed. Reiterating that the FCA is “not meant to be a vehicle for punishing garden-variety breach of contract or regulatory violations,” the Court concluded the Amended Complaint failed to demonstrate how, if at all, the Academy’s purported misrepresentations were material. In particular, the Court noted that the Relator’s Complaint was completely devoid of any, much less sufficient, allegations from which a fact finder could infer that the Department of Education would have ceased payment of Title IV funds as a result of the Academy’s conduct. Nor was it enough, the Court said, that the Relator’s complaint broadly alleged that the Academy’s conduct caused the Department of Education to pay claims under Title IV that it would not have paid but for the Academy’s fraud. Instead, the Court explained, the materiality standard demands specific allegations demonstrating the alleged misrepresentations had a tendency to influence the Department of Education’s disbursement of funds. Broad, conclusory declarations without substantive details demonstrating materiality will not do. This decision once again serves as a reminder that a conclusory declaration of materiality will not suffice for purposes of stating a FCA claim. Instead, Courts will look for particular factual allegations demonstrating that a purported misrepresentation did, or was likely to, affect the recipient’s actual behavior. Moreover, the potential increase in FCA actions as a result of the billions of dollars disbursed by the government in COVID-19 relief (and often based on certifications or representations from an individual or business that they are entitled to such relief), means that courts will likely continue to regularly confront questions of materiality in the future to determine whether any alleged misrepresentations actually affected the government’s payment decisions.

Earlier this month, the United States Department of Justice issued a press release to announce recoveries of over $3 billion from False Claims Act cases in FY2019. In making the announcement, Assistant Attorney General Jody Hunt of the Civil Division emphasized, “The significant number of settlements and judgments obtained over the past year demonstrate the high priority this administration places on deterring fraud against the government and ensuring that citizens' tax dollars are well spent.” But what do the numbers say about the administration’s reliance on qui tam actions to deter fraud? In short, qui tam actions appear to be less of a priority than they have been historically. The $3 billion in recoveries were announced in conjunction with FY2019 statistics revealing that $2.2 billion of those recoveries came from qui tam actions—lawsuits brought by whistleblowers or “relators” suing on behalf of the government under the FCA’s qui tam provisions. In addition, the FY2019 statistics showed the relators’ shares of the $2.2 billion topped $271 million. These qui tam numbers may appear robust on their own, but the following chart shows they are well below their five and ten year historical averages: Qui Tam Recoveries Total Recoveries (Qui Tam & Non-Qui Tam) % Qui Tam Recoveries to Total Recoveries Relators’ Share of Qui Tam Recoveries % of Relators’ Share to Total Recoveries FY2019 2,210,401,366 3,054,425,050 72% 271,941,791 9% 5 Yr Avg. 2,587,832,070 3,493,333,981 75% 437,397,496 13% 10 Yr Avg. 2,902,873,770 3,791,266,748 78% 489,500,130 13% The decline in qui tam recoveries to total recoveries, and the decline in the share of relators’ recoveries to total recoveries, perhaps are not that surprising. Blog readers may remember FCA Now’s earlier reports on Attorney General William Barr’s documented disdain for the FCA’s qui tam provisions in 1989 when he served in the Office of Legal Counsel to provide advice to the President and executive branch agencies. In that role, Attorney General Barr wrote a memorandum arguing that the qui tam provisions of the FCA were “patently unconstitutional” and that private qui tam actions were a “devastating threat to the Executive’s constitutional authority.” Those earlier views may have influenced the present based on the Department’s latest historical data, but there are other factors in play, too. For example, in January 2018, over a year before Barr became the Attorney General in February 2019, the Department of Justice instructed its prosecutors in what is known as the “Granston Memo” to more seriously consider dismissing meritless FCA qui tams when in the government’s best interest to do so. The Department’s announcement, in fact, emphasized that the FCA provides “authority for the government to dismiss cases that do not advance the goal of fraud prevention, and during the past year the government made increasing use of this tool to help prioritize and protect the expenditure of government resources.” In addition, the United States Supreme Court’s decision nearly four years ago in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), which required courts to apply a “rigorous” and “demanding” standard of materiality in FCA actions, may have resulted in more dismissals and smaller settlements. In other words, relators and their counsel—the ones responsible for filing qui tams—may be less willing to pursue such cases in today’s post-Granston and post-Escobar world. Time will tell of course whether the downward trend of qui tam recoveries continues, but because the Department’s announcement also revealed that new qui tam matters for FY2019 (636) are at their lowest number since 2011 (634), and are well below the five and ten year historical averages (662 and 665, respectively), lower overall qui tam and relator recoveries seem certain for FY2020.

Following the passage of the Affordable Care Act (“ACA”), which placed new limits on physician-owned hospitals, St. Luke’s Health System (“System”) took action to change one of its hospital’s ownership structures through a buy-out of the physicians’ partnership interests pursuant to the Texas Securities Act (“TSA”). The TSA allows rescission for the original price paid for a security, plus interest, in exchange for a release of potential liability under TSA. Three of the physician-owners, who resisted the System’s attempt to rescind their ownership interests, sued the System and other defendants in connection with the buy-out alleging state-law violations and violations of the Anti-Kickback Statute (“AKS”), 42 U.S.C. § 1320a-7b(b), the Stark Law, 42 U.S.C. § 1395nn, and by extension, the False Claims Act (“FCA”), 31 U.S.C. § 3729-3733. The district court dismissed the federal claims with prejudice. U.S. ex rel. Patel v. Catholic Health Initiatives, 312 F. Supp. 3d 584 (S.D. Tex. 2018). Relying heavily on the district court’s lengthy and thorough decision, the United States Court of Appeals for the Fifth Circuit affirmed in a nonprecedential decision. U.S. ex rel. Patel v. Catholic Health Initiatives, 2019 U.S. App. LEXIS 34741 (5th Cir. Nov. 20, 2019) (per curiam). The physician Relators first alleged that the process by which the physician-owners were bought out under the TSA resulted in payments to the physician-owners substantially above market value of their stakes in the hospital. According to the Relators, these high prices were set with the intent by the System of maintaining referral relationships with those physicians, in violation of the AKS and Stark Law. The Relators’ second alleged scheme concerned the System’s false representations to federal and state health care programs about the true ownership of the hospital. The Relators alleged that despite their retained ownership in the hospital after the partial buyout process, the System began representing to the government that the partnership was defunct and that a different entity owned the hospital. According to the Relators, this rendered the System’s representations factually false, leading to violations of both the FCA and the Texas Medicaid Fraud Prevention Act. Ultimately, the district court reasoned that while the Relators “might well have had legitimate grievances” and that the complaint had “an abundance of detail,” the claims “[did] not add up to liability under the [FCA]” because “the [FCA] ‘is not an all-purpose antifraud statue or a vehicle for punishing garden-variety breaches of contract or regulatory violations.’” U.S. ex rel. Patel, 312 F. Supp. 3d at 589 (quoting Univ. Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 2003 (2016)). “More is needed to establish that false or fraudulent claims have been made on the government.” Id. The Fifth Circuit affirmed, rejecting the Relators’ AKS and Stark Law claims because the System “had a reasonable basis to utilize the TSA approach” to try to comply with the ACA, “and nothing ties the allegedly high payment for physician shares to any inducement or referrals.” U.S. ex rel. Patel, 2019 U.S. App. LEXIS 34741, at *5. In affirming the dismissal of the FCA claims, and rather than relying on the district court’s analysis of whether the ownership representations were factually or legally false, the Fifth Circuit “conclude[d] that the alleged falsity, under the circumstances of this case, was not material.” Id. at *8. Because “[n]othing in Relators’ filings suggests that that the government would stop the flow of funds to this hospital if it knew the truth of its ownership,” and because “the System has continued to submit claims and receive reimbursement, even after a court determined that the entity designated as owner of the [h]ospital was not really the owner,” the Fifth Circuit found the alleged falsity immaterial. Id. at *9-10. “This suggests that the government does not care who the 'rightful' owner of the hospital is, and Relators have not alleged facts to the contrary.” Id. at *10. The case is another example of Escobar in action, and a reminder that FCA claims, even if very detailed with allegations of breaches of contract and regulatory violations, are unlikely to survive a motion to dismiss unless the materiality of the false claims can be established.

This month the Department of Justice brought a “first of its kind” action against two pharmacies, their owner, and three pharmacists for allegedly dispensing and billing Medicare for prescriptions in violation of both the Controlled Substances Act (CSA) and the False Claims Act (FCA).  See United States v. Oakley Pharmacy, Inc., et al., No. 2:19-cv-00009 (M.D. Tenn).  The action, seeking both injunctive relief and civil monetary penalties, is a coordinated effort by the Department’s Prescription Interdiction & Litigation (PIL) Task Force, which is committed to using “all available . . . tools,” including the FCA, “to reverse the tide of opioid overdoses in the United States.”  In August 2018, the Department filed its first civil action under the CSA and FCA enjoining prescribers from “recklessly and unnecessarily distribut[ing] painkillers and other drugs.”  It is now clear that the Department will also target the pharmacies that fill illegitimate prescriptions, and that pharmacists can no longer claim they are following “doctor’s orders” to avoid enforcement action. The action alleges that several pharmacies, their owner, and several pharmacists (collectively “Defendants”) knowingly dispensed controlled substances without a valid prescription in violation of 21 U.S.C. § 842(a)(1); knowingly and intentionally distributed and dispensed controlled substances outside the usual course of the professional practice of pharmacy, in violation of 21 U.S.C. § 841(a); and billed Medicare programs to pay for controlled substances that were not used for a medically accepted indication and lacked a legitimate medical purpose in violation of the FCA,  31 U.S.C. 3729, et seq.  Controlled Substances Act Violations Under the CSA and implementing regulations, a prescription is legally valid only if it is issued for “a legitimate medical purpose by an individual practitioner acting in the usual course of his professional practice.”  21 C.F.R. § 1306.04(a).  Here, the Defendants allegedly dispensed prescriptions outside the usual course of professional practice and in violation of their responsibilities to ensure that prescriptions were issued for legitimate medical purposes. The Government alleges that a “pharmacist is required to refuse to fill a prescription if he or she knows or has reason to know that the prescription was not written for a legitimate medical purpose,” and has a corresponding legal duty to recognize “red flags” that raise a reasonable suspicion that a prescription for a controlled substance is not legitimate.  Defendants allegedly ignored “red flags” and warning signs of abuse, such as prescriptions for unusually high dosages of opioids, dangerous combinations of opioids and other controlled substances, and prescriptions from patients travelling long distances to have their prescriptions filled.  According to the Complaint, of the 68,000 community pharmacies in the United States, only three bought more opioid doses per capita than defendant Dale Hollow over the last three years. False Claims Act Violations The Government appears to assert an Escobar implied false certification theory under the False Claims Act.  In submitting claims for reimbursement for drugs dispensed to Medicare beneficiaries, pharmacists must certify compliance with all federal laws, regulations, and Centers for Medicare & Medicaid Services’ instructions, including the CSA.  Further, pharmacists must certify that the data determining payment is accurate, complete, and truthful to the best of their knowledge, and this certification is material to the Government’s payment decision.  42 C.F.R. § 423.505(k).  Claims for reimbursement that do not have a medically accepted indication do not contain accurate, complete and truthful information about the request for payment. The Government alleges that Defendants dispensed “scores of controlled substance prescriptions” that did not constitute valid prescriptions complying with federal and state law, and were not issued for a legitimate medical purpose or for a medically accepted indication.  Medicare does not cover drugs unless they have a medically accepted indication, are reasonable and necessary, and/or are issued for a legitimate medical purpose.  Had Medicare known the prescriptions were illegitimate and invalid, the Government argues, it would not have paid for the controlled substances medications.  Instead, from 2012 through 2018, Medicare paid one of the pharmacies over $1.4 million for controlled substances, over $1 million of which was for opioids alone. DOJ Enforcement Trends This action is the latest in a string of enforcement efforts by the Department to leverage existing tools to combat the prescription opioid crisis, which the Trump Administration declared a national public health emergency in 2017.  Since then-Attorney General Jeff Sessions announced the PIL task force in February 2018 (which itself is an outgrowth of the Opioid Fraud and Abuse Detection Unit), the Department has prioritized enforcement actions against opioid manufacturers, distributors, and prescribers, as opposed to opioid users.  At the Department’s National Opioid Summit in October, Deputy Attorney General Rod Rosenstein stressed that the Department would use “every tool – including both criminal and civil enforcement powers – [to] cut off the supply of pills from corrupt doctors and pharmacists.”  That effort is now clearly underway.

A divided panel of the U.S. Court of Appeals for the Sixth Circuit again revived an FCA suit against home-health services providers premised on the providers’ alleged improper procurement of physician medical necessity certifications supporting Medicare claims. In United States v. Brookdale Senior Living Communities, Inc., --- F.3d ----, 2018 WL 2770598 (6th Cir. June 11, 2018), a nurse alleged she was hired by several related companies that operate senior communities, assisted living facilities, and home health care providers. She claimed these providers sought to enroll as many of their assisted living facility residents in home health care services as possible but failed to keep up with submitting Medicare claims for those services. The nurse asserted she was hired to help clear a backlog of unsubmitted Medicare claims for which the providers had not compiled the appropriate documentation. One document she said was frequently missing was a physician’s certification that the services delivered were medically necessary. Federal regulations require that these physician certifications “be obtained at the time the plan of care is established or as soon thereafter as possible and must be signed and dated by the physician who establishes the plan.” 42 C.F.R. § 424.22(a)(2). The nurse accused the providers of failing to comply with this timing requirement and instead submitting claims without a certification or paying physicians to review outstanding claims and sign certifications long after the care occurred. This dispute has stretched over several years. The nurse filed her case in 2012. After the United States declined to intervene in 2014, the providers successfully moved to dismiss, but the Sixth Circuit reversed in 2016 before the Supreme Court’s decision in Universal Health Services., Inc. v. United States ex rel. Escobar, which clarified the materiality element of an FCA claim. In its 2016 decision, the Sixth Circuit held that submitting a Medicare claim based on a late physician certification is false if the length of the delay is not justified by the reasons the home-health agency provides for it. Following remand, the district court dismissed the nurse’s complaint again, concluding she failed to adequately plead materiality. She appealed. To create FCA liability, a defendant’s false statement to the government that the defendant complied with a statutory, regulatory, or contractual requirement must be material to the government’s decision to pay the claim the statement supports. In Escobar, the Supreme Court called this materiality requirement “demanding” and necessitating a “holistic” analysis, factors relevant to which include (1) whether the government expressly identified the requirement as a condition of payment, (2) whether the government consistently refuses to pay claims based on non-compliance with the requirement, and (3) whether the noncompliance is minor or goes “to the very essence of the bargain.” These factors are neither exhaustive nor dispositive. The Sixth Circuit first held that compliance with the timing requirement for physician certifications was a condition of payment. The court held 42 C.F.R. § 409.41(b) expressly identifies the physician certification as a condition for payment by referencing 42 C.F.R. § 424.22. The preface to § 424.22 provides: “Medicare Part A or Part B pays for home health services only if a physician certifies and recertifies the content specified in paragraphs (a)(1) and (b)(2) of this section, as appropriate.” The court rejected the providers’ argument that because the timing requirement appears in paragraph (a)(2)—not (a)(1) or (b)(2)—it was not a condition of payment. The court reasoned that the use of the word “certifies” in the preface to § 424.22 requires defining “certification” by reference to all of paragraph (a), including the timing requirement in paragraph (a)(2). The Sixth Circuit then held the nurse did not need to allege in her complaint that the government had previously rejected Medicare claims that lacked a physician’s certification. The court determined that the government’s response to similar claims was not relevant because the nurse alleged that the government did not know that the providers’ claims were false. The court also held that the timing requirement went to the essence of the government’s bargain for home health services. It cited administrative guidance from HHS referencing the importance of the timing requirement in deterring fraud. Finally, the court held the nurse’s allegations that she and others raised concerns about the providers’ practices, but that those concerns were dismissed, were sufficient to plead scienter. In a long and detailed opinion, Circuit Judge David W. McKeague dissented from the majority’s conclusion. He argued the nurse should have been required to provide more detail about how and why the providers’ delay in obtaining the physician certifications deceived the government. He highlighted the practical problem for providers created by the Sixth Circuit’s 2016 decision that a physician certification can create FCA liability if the length of the delay is not justified by the reasons the home-health agency provides for it. According to Judge McKeague, the standard forms submitted during the Medicare claims process do not explicitly call for information about when the physician certification was signed. Providers are merely required to warrant that they have the physician certification on file. Thus, a provider is not prompted to explain the reasons why a certification was late, or even indicate that it was late at all. At least two lessons can be drawn from the Sixth Circuit’s decision. First, providers should take a broad view when reading regulations to determine if compliance with a requirement is a condition of payment. To borrow a phrase from the majority, “overly crabbed” interpretations of regulations are unlikely to be successful. Second, providers cannot rely on Medicare claims submission forms to ensure they have met all the requirements for submitting a claim. They need to understand the claim-submission requirements adopted through administrative guidance and court decisions in their jurisdiction and disclose required information whether or not called for explicitly in a Medicare form. The case is far from over—the nurse must now actually prove the allegations in her complaint. But the providers will at minimum face the typically expensive consequence of defending themselves against FCA claims. And if unsuccessful, they may face the draconian penalties for FCA violations. These risks should encourage all providers to proceed with caution when managing physician certifications and other Medicare claims compliance issues.

In recent weeks, the United States Department of Justice (“DOJ”) issued two memoranda that might change the calculus of False Claims Act (“FCA”) cases.  The memoranda at a minimum provide organizations with new—or at least invigorated—defenses to qui tam actions and civil enforcement matters. First, on January 10, Michael Granston, Director of DOJ’s Civil Frauds section, issued a memorandum encouraging DOJ trial attorneys to consider dismissing unmeritorious qui tam cases (even over the objection of the relator).  The DOJ’s authority to dismiss FCA cases has long been built directly into the governing statute, 31 U.S.C. § 3730(c)(2)(A), which provides that: The Government may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion. In practice, DOJ trial attorneys rarely use this power, preferring to allow qui tam cases they declined to intervene in to continue being prosecuted by the relator.  The Granston Memo encourages a shift in practice by suggesting that DOJ attorneys should dismiss qui tam cases that lack substantial merit.  Meritless qui tam cases drain limited government resources and may “generate adverse decisions that may affect the government’s ability to enforce the FCA.”  To aid in determining whether a DOJ attorney should seek dismissal of a declined qui tam action, the Granston Memo sets forth seven factors, including curbing parasitic qui tams and preserving government resources. Second, on January 25, the Associate Attorney General (“AAG”) issued a memorandum prohibiting reliance on government agency “guidance documents” as a basis for liability in DOJ affirmative civil enforcement matters—including FCA cases.  Such “guidance documents” include all non-statutory or regulatory documents that purport to advise the public of legal rights or obligations, as are commonly issued by agencies like the US Environmental Protection Agency and the Department of Health and Human Services.  The memo advises DOJ litigators that because “[g]uidance documents cannot create binding requirements that do not already exist by statute or regulation . . . [DOJ] litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law.”  The AAG's memo acknowledges that sub-regulatory guidance serves a valuable function, and does not likely presage a government-wide change in agency’s use of such documents.  But FCA matters—qui tam or otherwise—that are built on such sub-regulatory guidance are on shakier ground. These memoranda create interesting implications for FCA cases.  First, the AAG’s memo narrows potential FCA liability by excluding a wide range of agency documents from being the basis of FCA violations.  The AAG’s memo also raises interesting questions about what agency materials might be evidence of “materiality,” particularly after the Supreme Court’s recent Escobar decision.  Second, although the authority of the DOJ to dismiss qui tam actions has not changed, the government may be newly receptive to arguments for the dismissal of plainly deficient qui tam cases.  The memo thus presents an opportunity for legal counsel to affirmatively seek dismissal of a weak FCA case—a move that could potentially save the accused violator the time and expense of otherwise defending against the case. The two memoranda are available here and here.