2009 Federal False Claims Act Developments:

2009 Federal False Claims Act Developments:

Practical Implications for Healthcare Organizations

Fall Compliance ConferenceOctober 21, 2009

Vanderbilt Medical Center, Nashville, TN

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AGENDA

• Introduction: Healthcare Fraud Enforcement Landscape

• False Claims Act (“FCA”) Pre-FERA Basics

• FERA

• FCA Defenses

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Healthcare Fraud Enforcement – “You Ain’t Seen Nothing Yet”

• Dramatically Increased Funding

• Expanded Healthcare Fraud Enforcement Activities

• Enhanced Whistleblower Protection

• FERA

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Healthcare Fraud Enforcement

• Dramatically Increased Funding– Emergency Economics Stabilization Act of

2008– American Recovery and Reinvestment Act of

2009– Fraud Enforcement and Recovery Act of 2009

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Healthcare Fraud Enforcement • Expanded Healthcare Fraud Enforcement

Activities– Health Care Fraud Prevention and Enforcement

Action Team (“HEAT”)• 135 guilty pleas• 21 trial convictions• 300 indictments

– Government Contractors• RACs• MICs• PSCs/ZPICs• MEDICs

– www.StopMedicareFraud.gov

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Healthcare Fraud Enforcement

• Enhanced Whistleblower Protections– American Recovery and Reinvestment Act of

2009– FERA

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Civil False Claims Act

• Civil FCA – codified at 31 U.S.C. §§ 3729-3733

• Origins go back to Civil War – “Lincoln’s Law”

• Substantial amendments in 1943, 1986 and 2009

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Use of FCA Has Greatly Expanded in Recent Years

• DOJ’s fraud enforcement tool of choice

• FCA provides for substantial penalties with civil intent requirement (“reckless disregard” is minimum level of intent)

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Recoveries Under the FCA

• Between 10/1/86 and 9/30/08, more than $21 Billion recovered under FCA

• In recent years, “healthcare has accounted for the lion’s share of fraud settlements and judgments” under the FCA. (DOJ 11/10/08 Press Release)

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Key FCA Liability Provisions Prior to FERA

• Prior to FERA, the FCA imposed liability upon any person who, inter alia:

– (a)(1) “knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval;”

– (a)(2) “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government;”

– (a)(3) “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid;” or

– (a)(7) “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.”

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FCA: Penalties

• Under 31 U.S.C. § 3729(a), violations of the FCA are punishable by:– Statutory civil penalties of $5,500 -

$11,000 per false claim

– Treble damages

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Elements Of An FCA Claim

• There are four primary elements of an FCA violation:–knowledge

–materiality

–causation

–false claim

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FCA: Whistleblowers

• Private citizens (“relators”) may file qui tam complaints alleging violations of the FCA.

• The number of whistleblower actions has been steadily increasing in recent years.

• According to Senator Grassley, more than 1,000 qui tam cases are awaiting an intervention decision by the government.

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The Government’s Role inQui Tam Cases

• Once a whistleblower files a suit, the Department of Justice must decide whether to “intervene” (i.e., take over and prosecute the suit).

• DOJ has by statute 60 days after service to investigate the claims and decide whether to intervene, although it often requests an extension of time to reach its decision.

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Relator’s Recovery and Awardsof Attorney’s Fees

• Prevailing relator recovers between 15-30% depending on whether government intervenes– 15-25% in intervened case– 25-30% in non-intervened case

• Can be 0-10% under certain circumstances• Provisions for recovery of attorney’s fees for

both prevailing relators and prevailing defendants

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FCA: Anti-Retaliation Provision Prior to FERA

• The FCA also has a provision that punishes retaliation against certain whistleblowers.

• Codified at 31 U.S.C. § 3730(h), the provision, prior to FERA, prohibited discrimination against an employee “in the terms and conditions of employment by his or her employer because of lawful acts . . . in furtherance of an action under [the FCA].”

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Fraud Enforcement and Recovery Act of 2009 (“FERA”)

• Public Law No. 111-21 (May 20, 2009)

• The statute modifies existing federal criminal, securities, and money laundering laws and increases funding available to combat mortgage fraud and predatory lending.

• Section 4 of the Act modifies the False Claims Act .

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FERA

• FERA “clarifies” the scope of the FCA which FERA’s sponsors said had “been undermined by court decisions.”

• FERA contains sweeping changes to the scope the FCA.

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Overview of FERA’s Key Changes

• Clarification of the applicability of the FCA to claims submitted to government contractors and grantees

• Expanded definition of “claim”

• Adds explicit materiality requirement

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Overview of FERA’s Key Changes

• Expansion of false claim liability for certain retentions of overpayments

• Partially retroactive effective date

• Expansion/Modification of retaliation liability

• Procedural amendments that strengthen DOJ’s enforcement authority

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Application of the FCA to Claims Made to Contractors and Grantees

• One goal of certain members of Congress in passing FERA was to overrule Allison Engine Co., Inc. v. U.S. ex rel. Sanders, 128 S. Ct. 2123 (2008) and U.S. ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004).

• Where there is no presentment of a claim to the government, Allison Engine held that an FCA plaintiff is required to prove that “a defendant must intend that the Government itself pay the claim” for there to be a violation.

• Totten held that a claim submitted to Amtrak was not a claim presented to the government because Amtrak is a federal grantee.

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Application of the FCA to Claims Made to Contractors and Grantees

• FERA removes the prior FCA language requiring a false claim to be presented to “an officer or employee of the United States Government or a member of the Armed Forces of the United States.”

• FERA also removes the language “by the Government,” “to get,” and “getting” in response to Supreme Court’s reading of an intent requirement.

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Redline of Revisions to Sections 31 U.S.C. §§ 3729 (a)(1) and (a)(2)

• (a)(1)(A) knowingly presents, or causes to be presented, to an officer or employee of the United States Government or a member of the Armed Forces of the United States a false or fraudulent claim for payment or approval; or

• (a)(1)(B) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim to get a false or fraudulent claim paid or approved by the Government;

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Retroactive Application• FERA explicitly makes the change to Section (a)(2) (the

provision at issue in Allison Engine) retroactive to June 7, 2008, two days before the decision in Allison Engine.

• Litigation about the retroactive effect of FERA has already begun. See, e.g., United States v. Science Applications International Corp., No. 04-1543, 2009 WL 292950 (D.D.C. Sept. 14, 2009) (limits retroactive application of FERA amendment to old (a)(2) to FCA “claims,” not FCA cases); U.S. ex rel. Carter v. Halliburton Co., 2009 WL 2240331 (E.D. Va. 2009) (permits retroactive application of FERA amendment to old (a)(2) to FCA cases).

• Constitutional challenges are also likely.

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Materiality Test

• Codified “materiality” requirement that had been recognized by several courts. See 31 U.S.C. § 3729(a)(1)(B).

• Defined “material” as whether the claim was “capable of influencing” or had “natural tendency to influence” the government’s payment decision.

• Rejected the more defendant-favorable “outcome materiality” test that asked whether the government actually relied on the information.

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Expanded Definition of “Claim”• FERA modifies the definition of “claim” to include:

“any request or demand . . . for money or property and whether or not the United States has title to the money or property, that—

* * *(ii) is made to a contractor, grantee, or other recipient, if

the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, . . .”

See 31 U.S.C. § 3729(b)(1)(2).

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Expanded Definition of “Claim”

• This provision is, in part, a response to the district court decision in United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F.Supp. 2d 617 (E.D. Va. 2005), in which a jury verdict in favor of the whistleblower was overturned because the funds at issue were Iraqi funds under the control of the U.S. Government.

• The district court decision was reversed on April 10, 2009 by the Fourth Circuit -- before passage of FERA.

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Expanded Definition of “Claim”

• New definition of “claim” coupled with deletion of presentment requirement at least facially permits application of FCA to downstream vendors where there is no direct damage to the government.– e.g., vendor to a hospital

• But, must there be a “federal interest” at stake?

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Pre-FERA FCA Exposure for Retention of Overpayments

• Required an affirmative false statement or record used to conceal or avoid an obligation to refund to government.

• “Finders/Keepers” activity not expressly covered by FCA.

• Congress wanted to close what it perceived to be a “loophole.”

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Expansion of FCA Liability for Retention of Overpayments

• Under FERA FCA liability now extends to a person who “knowingly and improperly avoids or decreases an obligation” to pay or transmit money or property to the government. See 31 U.S.C. § 3729(a)(1)(G).

• There has been much discussion within the healthcare industry about this change.

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Redline of Revision to “Reverse” FCA Provision

31 U.S.C. 3729 (a)(7)(1)(G):• knowingly makes, uses, or causes to be made

or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.

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Expansion Of FCA Liability For Retention of Overpayments

• “Obligation,” which previously was undefined, is defined by FERA as:

“[A]n established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment”

See 31 U.S.C. § 3729(b)(3).

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Expansion of FCA Liability for Retention of Overpayments

• Under FERA, for retention of overpayment liability:– Is a claim required?– Is falsity required?– Is any affirmative act of any sort required?

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Expansion of FCA Liability for Retention of Overpayments

• New, untested standard: “knowingly and improperly”

• “Knowingly” is defined in FCA.

• “Improperly” is not.

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Expansion of FCA Liability for Retention of Overpayments

• Senator Kyl: “Knowingly and improperly” requires “improper motives or inherently improper means”– “Improper” means malum in se:

• Inherently improper means• Must constitute an independent tort

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Legislative History – Reconciliation Processes

• The Senate Judiciary Committee Report notes that the retention of overpayments provision is not intended to capture simple retention of an overpayment permitted by a reconciliation process so long as it is not the product of any willful act to increase payments to which the entity is not entitled.

S. Rep. No. 111-10, at 15.

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Legislative History – Reconciliation Processes

• Representative Dan Maffei (D.-N.Y.) echoed this point on the House floor during consideration of S. 386. Maffei noted:

– “[T]he drafting problem we faced was avoiding language that would impose liability on research institutions or hospitals for holding on to overpayments at a time when the applicable rules would allow them to do so pending repayment through the normal process. This would include reconciliation processes established under statutes, regulations, and rules that govern Medicare, Medicaid, and all sorts of other various research grants and programs.” 155 Cong. Rec. H 5260, 5268 (daily ed. May 6, 2009).

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Expansion of FCA Liability for Retention of Overpayments

• Difficult questions for healthcare lawyers:– When is an overpayment “discovered”?– When is an overpayment “determined”?– Whose “knowledge” binds the entity?– What is an “overpayment”?– When does statute of limitations begin to run?

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Expansion of FCA Liability for Retention of Overpayments

• What about credit balances?– Reconciliation process

• What about internal pre-RAC audits?

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Expansion of FCA Liability for Retention of Overpayments

• Other ramifications for healthcare lawyers and their clients:– Must carefully plan and execute audits and

remedial actions– When is extrapolation appropriate?– What constitutes “concealment”?

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Expansion of FCA Liability for Retention of Overpayments

• What about Stark?– Overpayment or Penalty?

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Stark

An “entity may not present or cause to be presented a claim under this subchapter or bill to any individual, third party payor, or other entity for designated health services furnished pursuant to a referral prohibited [by Stark].” 42 U.S.C. § 1395nn(a)(1)(B) (emphasis added)

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Stark

“No payment may be made under this subchapter for a designated health service which is provided in violation of subsection (a)(1) of this section [i.e., the Stark referral prohibition].” 42 U.S.C. § 1395nn(g)(1).

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Stark

“If a person collects any amounts that were billed in violation of subsection (a)(1) of this subsection [i.e., the Stark referral prohibition], the person shall be liable to the individual for, and shall refund on a timely basis to the individual, any amounts so collected.” 42 U.S.C. § 1395nn(g)(2) (emphasis added).

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Stark-CMS Regulation

CMS’ implementing regulation goes further:“An entity that collects payment for a designated health service that was performed under a prohibited referral must refund all collected amounts on a timely basis . . . .” 42 C.F.R. § 411.353(d) (emphasis added).

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Proposed Health Reform Bill

• The House version of the health reform bill, America’s Affordable Health Choices Act of 2009, provides at § 1641, if a person knows of an overpayment, that person must:

1) report and return the overpayment, and

2) provide notice in writing to the entity to which the overpayment was returned of the reason for the overpayment.

• The overpayment must be returned within 60 days “after the date the person knows of the overpayment.”

• Retention of the overpayment more than 60 days creates an “obligation” as defined in the FCA.

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Expansion of FCA Liability for Retention of Overpayments

• Underscores need for a well-functioning effective Compliance Program

• Requires appropriate discipline, sound judgment and solid execution

• Close coordination between compliance and legal is critical

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FCA Exposure fromRAC Process

• RAC Statute: “A recovery of an overpayment...under [the RAC Statute] shall not be construed to prohibit the Secretary [i.e., OIG] or the Attorney General [i.e., DOJ] from investigating and prosecuting, if appropriate, allegations of fraud or abuse arising from such overpayment.”

• RAC Statement of Work: RAC must report instances of potential fraud immediately to the CMS Project Officer.

• Enforcement agencies expect RACs to make referrals. OIG’s FY2010 Work Plan includes a review of the extent of such referrals to CMS.

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Procedural Changes:

Relation Back of Government Complaints in Intervention

• In the case of government intervention, a new or amended government complaint relates back to the filing date of the original relator complaint so long as the government claims arise out of the conduct or occurrences set forth in the initial complaint or claims the relator attempted to plead. See 31 U.S.C. § 3731(c).

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Procedural Changes:Expanded Use of Civil Investigative

Demands• FERA permits the Attorney General to delegate

authority for issuance of civil investigative demands, which allow requests for documents, interrogatories, and the taking of sworn testimony. See 31 U.S.C. § 3733(a)(1).

• Authority previously was vested solely in the Attorney General.

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Procedural Changes:

Government Permitted to Share CID Information with Relators and States

• FERA explicitly allows the Government to share information from CIDs with Relators. See 31 U.S.C. § 3733(a)(1).

• The seal does not preclude the federal government from sharing the sealed complaint, any other pleadings, or the written disclosure with any state or local government entity named as a co-plaintiff. See 31 U.S.C. § 3732(c).

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Revision to FCA Retaliation Provision

• Prior to FERA, Section 3730(h) of the FCA prohibited discrimination against an employee “in the terms and conditions of employment by his or her employer because of lawful acts . . . in furtherance of an action under [the FCA].”

• FERA amended Section 3730(h) to include retaliation against “contractors and agents” in addition to employees and changed the protected conduct to lawful acts in furtherance of “efforts to stop one or more violations” of the FCA. The word “employer” was deleted. See 31 U.S.C. § 3730(h).

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Current Focus Areas of FCA Enforcement

• Off-label cases

• Stark/Anti-Kickback Statute

• Quality of care

• Medical necessity/short stays

• Miscellaneous billing issues

• DME

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A Few Words About Whistleblowers …

• Retention, reassignment, leave of absence, suspension or termination?– Key considerations

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Key FCA Defenses: Rule 9(b)

• FCA claims must comply with the heightened pleading standard of Federal Rule of Civil Procedure 9(b), which requires plaintiffs to plead the circumstances constituting fraud with “particularity.” Fed. R. Civ. P. 9(b).

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Key FCA Defenses: Materiality

• Courts have historically implied a materiality test in reviewing FCA cases – FERA codified this requirement.– United States v. Rogan, 517 F. 3d 449 (7th Cir. 2008)

(allegedly improper kickbacks and referrals were material to a hospital’s reimbursement claims)

– United States v. Bowseau, 531 F. 3d 1159 (9th Cir. 2008) (improper expenses in a cost report were material to a hospital’s Medicare reimbursement even though the reports had never been audited)

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Key FCA Defenses:Prospective Payment System

• Several courts have dismissed FCA claims relating to goods and services reimbursed through a prospective payment system (e.g. Medicare DRG system)– U.S. ex rel. Digiovanni v. St. Joseph’s/Candler Health

Sys. (S.D. Ga. Feb. 8, 2008) (supplies and reusable equipment)

– U.S. ex rel. Magid v. Barry Wilderman, M.D., P.C., (E.D. Pa. Apr. 29, 2004) (lab tests)

– U.S. ex rel. Powell, et al. v. Tissue Science Laboratories, Inc., (N.D. Ga. Aug. 13, 2009) (porcine implantable device used in hernia repair)

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Key FCA Defenses: Conditions of Participation

• Several courts have concluded that the Medicare Conditions of Participation are not “conditions of payment” and, therefore, a violation cannot serve as the basis for a FCA claim.– U.S. ex rel. Landers v. Baptist Mem’l Health

Care Corp. (W.D. Tenn. Dec. 17, 2007) (staffing ratios and surgical quality standards)

– Woodruff V. Haw. Pac. Health, 560 F.Supp 2d 988 (D. Haw. 2008) (supervision of nurses)

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Key FCA Defenses:Regulatory Ambiguity/Intent

• The Supreme Court in Safeco Ins. Co. of Am. v. Burr, 127 S. Ct. 2201 (2007) held that “recklessness” is “conduct violating an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Safeco was not an FCA case.

• The Safeco analysis has been applied in the FCA context: K&R Ltd. P’ship v. Mass. Housing Fin. Agency, 530 F.3d 980 (D.C. Cir. 2008).

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Key FCA Defenses: Regulatory Ambiguity/Falsity

• Courts have held that claims cannot be deemed “false” under the FCA when a reasonable interpretation is applied to an ambiguous statute or regulation.– United States v. Prabhu, 442 F. Supp. 2d

1008 (D. Nev. 2006) (FCA claim dismissed where physician followed instructions he received from carrier on how to bill for pulmonary stress tests.)

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Key FCA Defenses:Public Disclosure Bar

• No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information. 31 U.S.C. § 3730(e)(4)(A).

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Public Disclosure

• Is the disclosure bar only applicable to disclosures involving Federal authorities?– Graham Co. Soil & Water Cons. Dist. v. U.S.

ex rel. Wilson, 528 F.3d 292 (4th Cir. 2008) (“only federal administrative reports, audits or investigations qualify as public disclosures under the FCA”).

– Supreme Court has accepted certiorari.

• Does a self-disclosure create the defense?

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Key FCA Defenses:Public Disclosure Bar

• An “original source” can bring an FCA case even where there has been a public disclosure.

• An “original source” is “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing” an FCA action. 31 U.S.C. § 3730(e)(4)(B).