ABA Health eSource
August 2010 PPACA Special Edition

Hanlester v. Shalala – A Victim of Health Reform?

By Claire E. Castles, Law Offices of Dennis M. Lynch, Visalia, CA

“The reports of my death have been greatly exaggerated.” - Mark Twain

A key component of the recent health care reform legislation was the implementation of additional measures to strengthen program integrity and accountability in the expanding federal healthcare programs. In establishing elements to effectively buttress the current program integrity processes, Congress sought to clarify the intent standard for criminal violations of health care fraud and expressly included, by statute, that a claim resulting from a federal health care fraud scheme constitutes a false claim. Specifically, the Patient Protection and Affordable Care Act (“PPACA”) amended the federal statute enacting criminal penalties for acts involving federal healthcare programs to include the following two (2) additional subsections that now apply to both false statements and kickbacks:

(g) In addition to the penalties provided for in this section or section 1128A, a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of subchapter III of chapter 37 of title 31, United States Code. 1

(h) With respect to violations of this section, a person need not have actual knowledge of this section or specific intent to commit a violation of this section. 2

The inclusion of subparagraph (h) articulating that a person need not have specific intent to commit federal healthcare fraud has led to considerable discussion as to the effect and impact on the Ninth Circuit’s Hanlester Network v. Shalala decision. 3 While some have argued that this provision in the PPACA is a veritable death sentence for Hanlester, others have argued, in the style of Monty Python, that this important decision may not be “quite dead yet.”

Hanlester and Specific Intent – The Debate

Whether the federal healthcare fraud statute requires proof of specific intent has been a longstanding debate among the federal circuit courts. Most notably, the Ninth Circuit held in Hanlester Network v. Shalala that the statute is not violated unless the defendant knew the law prohibited the giving or receiving of remuneration in return for referrals and acted with specific intent to violate the statute. 4 While other courts may have expressly declined to follow the Hanlester decision, such decisions do recognize the importance of some sort of heightened intent standard in assessing liability. For instance, the Eighth Circuit in United States v. Jain wrestled with distinguishing those instances where only consciousness of the act is required versus those where the defendant need know he or she is violating a known legal duty. In Jain, the Eighth Circuit ultimately recognized a midway point between general intent and specific intent and held that the antikickback statute required proof that the defendant “knew conduct was wrongful, rather than proof that he knew it violated ‘a known legal duty.’” 5 Such analysis is consistent with Congressional concern expressed contemporaneously with the 1980 amendment to the federal healthcare antikickback statute in which Congress added language that requires the government to prove the defendant acted “knowingly and willfully.” 6 The expressed reasoning for including a heightened intent standard was to foreclose the application of criminal penalties in those situations where an individual’s conduct “while improper, was inadvertent.” 7

Hanlester Lives!

Although some may argue that PPACA has rendered the Hanlester decision “dead” or, more accurately, overturned by statute, the decision remains of critical importance to the discussion and analysis of federal healthcare fraud liability in two (2) key areas: (1) administrative actions and (2) vicarious liability.

Administrative Actions

Procedurally, the Hanlester decision was an action by the Ninth Circuit overturning the decision of an Administrative Law Judge and Appeals Board to exclude a group of physician-owned joint venture laboratories and respective principals from participating in the Medicare or Medicaid programs pursuant to the permissive exclusionary authority of the Secretary of Health and Human Services (“HHS”). 8 The authority to exclude a provider from participating in federal healthcare programs was a result of just one of many amendments over the years to the federal healthcare fraud statute to further protect the federal healthcare programs. 9 In Hanlester, the court stated that the remedial purpose of permissive exclusion is to enable the Secretary of HHS “to protect federally-funded health care programs…from future conduct which is or might be harmful.” 10 As such, the court articulated that the government would need to present evidence that exclusion is necessary to protect the public trust from future harm. 11 Consequently, Hanlester will remain important as it relates to review of administrative actions, and the necessary evidence the government must introduce to establish that such action is necessary to ensure program integrity.

Throughout PPACA the Secretary of HHS is authorized to temporarily suspend a provider’s participation in federal programs as a punitive measure for failure to meet a variety of enumerated performance expectations. Given this new administrative suspension authority, the Hanlester decision may additionally provide insight into the necessary burden the government must prove if it elects to suspend a provider pursuant to this new authority and the provider challenges the suspension.

Vicarious Liability

While often cited for its “specific intent” language, the holdings of the Hanlester decision are inextricably linked to the specific facts of the case, which involved a highly technical and complex joint venture arrangement encompassing a number of different individuals and entities with varying levels of supervision and authority. The elements of remuneration, inducement and knowing and willful conduct were reviewed and applied under the doctrine of vicarious liability. The agency issues and appropriate application of these requisite elements to establish liability within a joint venture arrangement remain largely unchallenged even following the most recent PPACA amendment. As such, the holding in Hanlester that the knowing and willful standard protects partners and supervisors of an employee from individual liability where no evidence is presented that such individuals authorized the misconduct of the employee should remain unaffected by the recent legislative changes.

Conclusion

At this time, the broad consequences of the PPACA revised federal healthcare fraud statute prohibiting false statements and kickbacks to decisional law remains largely unknown. It seems likely that the clarified intent standard and the express articulation that such violations are predicate offenses for false claims actions will cause enforcement agencies to pursue more aggressively antikickback liability as a primary violation, rather than a secondary violation, as has previously been the practice. Given the administrative authority to sanction and exclude providers for antikickback violations under a preponderance of the evidence standard, Hanlester may continue to serve as an important guide for the necessary evidence the government must establish prior to issuing such sanctions. Additionally, Hanlester continues to provide valuable insight on such elements as remuneration, inducement and the application of knowing and willful intent pursuant to vicarious liability. As such, perhaps healthcare practitioners should not prepare their Hanlester eulogy just yet.

1 Section 6402(f)(1) of Patient Protection and Affordable Care Act (Pub. Law 111-148).
2 Section 6402(f)(2) of Patient Protection and Affordable Care Act (Pub. Law 111-148).
3 51 F.3d 1390 (9 th Cir. 1995).
4 51 F.3d 1390, 1400 (9 th Cir. 1995). The Hanlester Network was a joint venture arrangement where the principals of established freestanding clinical laboratories offered laboratory ownership to physicians who also referred to the Hanlester Network laboratories. The general structure of the joint venture was consistent with arrangements that were generally determined to be lawful. Yet, the Office of Inspector General maintained the position that many joint venture arrangements included “suspect” elements that resulted in relationships in violation of the Antikickback statute. Here, the investigation of the Hanlester Network began when one of its marketing representatives mistakenly contacted a competing laboratory owner for prospective physician ownership investment in the Hanlester Network. The competing laboratory owner recorded his conversation with the Hanlester Network representative and provided a copy of this recording to a congressional staff member. Eventually, the recording and other evidence regarding the Hanlester Network joint venture arrangements were forwarded to the Office of Inspector General. Consistent with its authority to bring administrative actions against health care providers, the Office of Inspector General initiated its own administrative exclusion proceeding. Under Hanlester decision, the Ninth Circuit held that in order to establish wrongful intent the standard of proof required both that the defendants knew the prohibited acts under the Antikickback statute and engaged in the prohibited acts with the specific intent to disobey the Antikickback statute.
5 United States v. Jain, 93 F.3d 436, 441 (8 th Cir. 1996).
6 Omnibus Reconciliation Act of 1980, Pub. L. No. 96-499, Section 917, 94 Stat. 2625 (Dec. 5, 1980).
7 H.R. Rep. No. 96-1167, 96 th Cong., 2d Sess. 59 (1980), reprinted in 1980 U.S. Code Cong. & Admin. News 5526, 5572.
8 51 F.3d 1390 (9th Cir. 1995).
9

The 1987 Medicare and Medicaid Patient and Program Protection Act significantly broadened the authority of the OIG to impose administrative sanctions for kickbacks regardless of criminal prosecution and enabled the OIG to move for exclusion from participating in Medicare and Medicaid if an HHS Administrative Law Judge determined by the preponderance of the evidence that a party violated the Antikickback Statute.

10 Hanlester v. Shalala, 51 F.3d 1390, 1401-1402 ( 9 th Cir. 1995).
11 Id at 1402.

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