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March 28, 2022

Top 10 False Claims Act Developments in 2021

Robert T. Rhoad, Esq., Andy Liu, Esq., and Haaleh Katouzian, Esq.

The Department of Justice (DOJ) reported more than $5.6 billion in False Claims Act (FCA) recoveries in fiscal year (FY) 2021 – the second-largest annual total in the Act’s 158-year history.   But there’s more to the story: one half (1/2) of that haul comes from a single settlement (Purdue Pharma opioid marketing), where the government’s receipt of any settlement proceeds is contingent upon uncertain bankruptcy proceedings.  When stripped away, what is left is a recovery number ($2.8 billion) more in line with the figures from recent years.

Dollars aside, FY 2021 confirms yet again that among all industries, healthcare remains responsible for the lion’s share of FCA recoveries at roughly 90 percent.  More than the numbers and statistics, however, what really merits exploration is the myriad developments related to both evolving and emerging case law and policy.  Below is a compilation of cases that highlight 10 of the most important of those developments.

1. Estate of Helmly v. Bethany Hospice & Palliative Care of Coastal Georgia, LLC: The Continuing Circuit Split Over What Rule 9(b) Requires, and SCOTUS’s Possible Interest.

This past year, several circuits have addressed pleading requirements under Federal Rule of Civil Procedure 9(b).  The Eleventh Circuit in Bethany Hospice was just one. A writ of certiorari has been filed after the Eleventh Circuit’s decision in this case and, just recently, the Supreme Court has asked the Solicitor General for the United States’ views on the issue, signaling its interest in the topic if not also a willingness to take on the issue.  With other cases last year like United States ex rel. Mamalakis v. Anesthetix Management LLC and United States ex rel. Owsley v. Fazzi Associates, Inc. in the mix, it may finally be time for the Supreme Court to resolve the competing FCA pleading standards among the circuits – namely, whether or not Rule 9(b) requires that FCA complaints identify details about specific false claims.

In Bethany Hospice, the Eleventh Circuit, ultimately affirming the district court’s dismissal of the relators’ claim, analyzed whether relators’ claim “me[t] the heightened pleading standard of Rule 9(b).”  To meet that standard, relators are required to include actual details about the “specific claims submitted to the government” and though the relators “concede[d] that their complaint did not include any details about specific claims submitted to the government,” they still argued that they met the particularity requirements under Rule 9(b) because “their complaint contains sufficient indicia of reliability to support their claim that Bethany Hospice submitted false claims to the government.”  In the complaint, the relators “argue[d] that their knowledge and access, coupled with data about Bethany Hospice’s Medicare claims submissions, lends sufficient indicia of reliability to survive Bethany Hospice’s motion to dismiss.”  The relators alleged that: (1) “they had access to and knowledge of Bethany Hospice’s billing practices”; (2) “they reviewed billing data that showed that Bethany Hospice submitted Medicare reimbursement claims for patients referred by the Bethany Hospice doctors” (and that other “employees confirmed that such claims were submitted”); and (3) “that the Bethany Hospice doctors referred significant numbers of Medicare recipients to Bethany Hospice and that ‘all or nearly all’ of Bethany Hospice's patients received coverage from Medicare.”

This wasn’t enough for the Eleventh Circuit, which determined that the relators failed to allege “particular facts” about the alleged false claims and that the allegations in the complaint did not contain any “indicia of reliability” because the relators had no “personal knowledge or level of participation” that would do so.  The Court also noted that “numerical probability is not an indicium of reliability.”  Thus, the Eleventh Circuit affirmed the dismissal.  With the possibility that the Supreme Court will grant the writ of certiorari, the circuit split over 9(b) requirements could soon be resolved.

2. United States ex rel. Integra Med Analytics LLC v. Providence Health & Services: Rule 9(b) is Not the Only Threshold Pleading Requirement – Don’t Forget About Rule 8! 

The Ninth Circuit reminded plaintiffs of the plausibility requirements under Rule 8 when it reversed a district court’s motion to dismiss last year.   Even when an FCA fraud claim satisfies the particularity requirement under Rule 9(b), the claim still must be plausible pursuant to Rule 8 to survive a defendant’s motion to dismiss. 

A data-analytics company, Integra Med Analytics LLC (Integra) brought a qui tam action against Providence Health & Services and its affiliate hospitals (Providence) and J.A. Thomas & Associates, Inc. (JATA, which Providence hired “to assist with claim documentation”).   Integra received data from the Centers for Medicare & Medicaid Services (CMS) and used its own “proprietary statistical analysis” of the data to file a complaint against Providence.   In its analysis, Integra compared Providence’s coding rates to other institutions’ coding rates, and if Providence’s rates were “coded with an [major complication or comorbidity (MCC) rate] at more than twice the national rate or were used at a rate three percentage points higher than in the other hospitals[,]” then, based on Integra’s analysis, those claims were flagged as false claims under the FCA.  The Ninth Circuit stated that all FCA allegations must meet the requirements posed by both Rules 8(a) and 9(b), and that Integra’s complaint did not even meet the requirements under Rule 8 because the Court “need not — and cannot — accept the conclusion that these allegations resulted from fraud or that doctors recorded unsupported medical conditions.”  Integra failed to “rule out an obvious alternative explanation, that Providence, with JATA’s assistance, was simply ahead of others in its industry.”  The Court concluded that Integra’s complaint did not meet the plausibility requirements under Rule 8 and thus, reversed the district court’s denial of Providence’s motion to dismiss the complaint and remanded the case to the district court “with instructions to dismiss the complaint."

3. United States ex. rel Prose v. Molina Healthcare of Illinois, Inc.:  The Seventh Circuit Reverses District Court’s Grant of Dismissal, Analyzes Materiality and Knowledge of “Highly Sophisticated” Healthcare Providers under Rule 9(b). 

The Seventh Circuit reversed a district court’s dismissal, holding that the relator met the particularity requirements under Rule 9(b) in its complaint.  The relator alleged that the Defendants Molina Healthcare of Illinois, Inc. (Molina) and Molina Healthcare, Inc. violated the FCA (and a state FCA equivalent).  The relator alleged that Molina entered into capitation payments with the Illinois Department of Healthcare and Family Services.  One of the requirements of its contract with the government required Molina to provide skilled nursing facility (SNF) services.  To provide the services, Molina subcontracted with GenMed, without which Molina would not have had the personnel to provide the SNF services.  Ultimately, Molina and GenMed’s contract was terminated, but Molina did not inform anyone that it was not delivering the SNF services and “so the Department continued to pay it the full capitation amount for SNF services — in essence, payments for nothing.”  The Seventh Circuit noted that the relator’s complaint alleged violations under a factual falsity theory, fraud in the inducement, and implied false certification.  The Seventh Circuit held that “Rule 9(b) requires specificity, but it does not insist that a plaintiff literally prove his case in the complaint.”  The Seventh Circuit analyzed the materiality and knowledge requirements under the FCA, discussing (1) the significance and strength of the arguments about government payment after discovering Molina was not providing SNF services (i.e., after it had “actual knowledge”); and (2) whether Molina knew that the “government viewed SNF services as material” to its payments.

Ultimately, the Seventh Circuit held that (1) the “argument [for materiality was] . . .  better saved for a later stage, once both sides have conducted discovery” and (2) the district court did not “give proper weight to the complaint’s description of Molina as a highly sophisticated member of the medical-services industry[,]” and Molina’s role in the industry contributed to the Seventh Circuit’s conclusion that the complaint would survive a motion to dismiss.  Thus, though the Seventh Circuit held that the relator’s allegations were enough to survive a motion to dismiss – in part because of the court’s view that the defendant was “highly sophisticated” – it was met with a strong dissent that disagreed with the majority’s decision, writing, inter alia, that the relator did not adequately allege the “who, what, when, where, and how” under the particularity requirements of Rule 9(b).

4. United States ex rel. Schutte v. SuperValu, Inc.: The Seventh Circuit Joins Other Circuits, Applies Safeco’s Scienter Standard to FCA Cases.  

In Safeco Insurance Co. of Am. v. Burr the Supreme Court, in a Fair Credit Reporting Act (FCRA) case, held that companies do not act in reckless disregard even if they are mistaken in their interpretation of a statute unless their reading of that statute is “objectively unreasonable” – regardless of whether the defendant actually held that mistaken belief.

The Seventh Circuit held that Safeco’s scienter standard applies to the FCA and the Court affirmed the district court’s grant of summary judgment for SuperValu.  Relators brought suit against SuperValu, alleging that, from 2006 to 2016, SuperValu “knowingly filed false reports of its pharmacies’ usual and customary (U&C) drug prices when it sought reimbursements under Medicare and Medicaid.”  SuperValu had a price matching policy when submitting reimbursements and relators alleged that “SuperValu price-matched to avoid losing customers to competitors with lower drug prices like Wal-Mart and made up the difference by charging government healthcare programs its higher, retail price” which they argued, “[i]n effect . . . caused the government to subsidize its market competitiveness.”  If a customer “request[ed] a price match[,]” SuperValu’s price-matching policy would allow SuperValu to match lower prices from “local pharmacies within a specific proximity to the regional store.”  SuperValu listed the retail price of prescription drugs as the U&C price, not the price matched price.

The Seventh Circuit ultimately concluded that Safeco’s scienter standard applied to the FCA and that SuperValu’s interpretation of its U&C pricing was “objectively reasonable” even if it was not correct and that CMS guidance “was not sufficiently specific to warn SuperValu that its program likely would fall within the definition of U&C price.”  Given the vagaries in both statutory and regulatory requirements in healthcare, the Safeco standard is a welcome protection against FCA liability for innocent misinterpretations.

5. UnitedHealthcare Insurance Co. v. Becerra: Overpayment Rule Reinstated, D.C. Circuit Reverses Vacatur in Closely Watched Medicare Advantage-Based FCA Case.  

The D.C. Circuit caused a stir this year when it reversed a district court ruling which had vacated the Overpayment Rule (which requires insurers to “report and return” overpayments 60 days after they have been identified).  The decision even seemed to trigger a settlement by Sutter Health and its affiliates in a case involving similar issues.  That settlement for $90 million   was announced shortly after the D.C. Circuit issued its opinion.  As the authors wrote  about in 2021, the D.C. Circuit held “that the Overpayment Rule does not violate the Medicare statute’s actuarial equivalence and same methodology requirements and is not arbitrary and capricious as an unexplained departure from prior policy.”  Though the district court’s vacatur of the Overpayment Rule was a short-term relief for Medicare Advantage providers, the D.C. Circuit concluded that the Overpayment Rule did not violate the actuarial-equivalence requirement under the Medicare Statute because “nothing in the Medicare statute’s text, structure, or logic” connected the actuarial-equivalence requirement and the Overpayment Rule.  In essence, the D.C. Circuit found the Overpayment Rule to be of no moment when considering alleged false claims based on actuarial equivalence.

6. United States ex rel. Martino-Fleming v. South Bay Mental Health Centers: Private Equity Firms Beware – Deep Pockets Are Attractive Targets.

As private equity firms increasingly invest in the healthcare industry, this case (and the district court’s reasoning) has the potential to affect the FCA landscape by exposing private equity firms to FCA liability, even if they were not the ones to actually submit the allegedly false claims.  The relator brought a qui tam action against South Bay Mental Health Center, Inc. (South Bay), but also brought suit against the private equity firm that owned South Bay, H.I.G. Capital and its subsidiary (H.I.G.).  Ultimately, the district court held that “[t]he undisputed facts in the record support the Plaintiffs’ argument that H.I.G. should have known that misrepresentations concerning compliance with the supervision and licensing requirements were material to payment” and that there was “sufficient evidence in the record that . . . H.I.G. had the power to fix the regulatory violations which caused the presentation of false claims but failed to do so.”  The private equity firm’s motion for summary judgment was thus denied in part by the district court.  With more investments in the healthcare industry, private equity firms should remain diligent when making these investments, analyzing their risk when deciding to do so.

7. Yates v. Pinellas Hematology & Oncology, P.A.: Do High Penalties Assessed in Low Damages FCA Cases Violate the Eighth Amendment?   

Perhaps more so than for other industries, healthcare FCA cases often involve large numbers of alleged false claims even when the damages for each claim is relatively small.  As such, healthcare FCA cases often yield extremely high penalties and monetary awards for relators but relatively minor injury to the public fisc.  Defendants have long sought clarity as to when these discrepancies violate constitutional protections.

In Yates, the Eleventh Circuit had to decide whether a monetary award violates the Excessive Fines Clause in the Eighth Amendment.   A relator brought suit against Pinellas Hematology & Oncology (Pinellas) and its owner for FCA violations, alleging that (1) Pinellas filed fraudulent claims for reimbursement for Medicare based on Clinical Laboratory Improvement Amendments  of 1988 (CLIA) certificates that it did not have and (2) Pinellas and its owner retaliated against the relator “for attempting to stop their fraudulent conduct.”  After a trial on the issues, a jury verdict resulted in $1,179,266 of an award for the relator (comprised of $5,500 per violation but only $2,266 in trebled damages) even though the jury also found that the government was only damaged by $755 (the amount it paid for after receiving false claims for reimbursement).  The Eleventh Circuit held that monetary awards based on FCA claims are “fines” under the Excessive Fines Clause and that the Excessive Fines Clause applies to non-intervened actions.  In the case of the relator’s monetary award, the Eleventh Circuit found that imposing over $1 million in penalties for $755 in damages did not violate the Excessive Fines Clause and affirmed the jury verdict and monetary award, stating “The district court here imposed the lowest-possible statutory penalty of $5,500 for all of the 214 violations, and treble damages are mandated by the FCA. Therefore, no matter the perspective, the monetary award imposed represents the lowest possible sanction under the FCA.”

8. United States ex rel. Dan Abrams Co. LLC v. Medtronic Inc.: Novel “Fraud-on-the-FDA” Theory Applies to FCA Cases, Devices Not Cleared for Any Use. 

As more medical devices become available in the marketplace, undoubtedly the devices will require Food and Drug Administration (FDA) approval.  Last year, the Ninth Circuit decided whether a device’s alleged use and the representations made in securing FDA approval could form the basis for a false claim or whether such representations were not “material” under Escobar.

A district court dismissed a relator’s qui tam action and the relator, Dan Abrams Company LLC, appealed to the Ninth Circuit.  The relator alleged in its complaint that, inter alia, “Medtronic Inc. and various related entities . . . fraudulently obtained Food and Drug Administration clearance for several devices used in spinal fusion surgeries (Subject Devices)[.]”  The relator alleged that by doing so, Medtronic submitted false claims to Medicare for reimbursement under a “Fraud-on-the-FDA theory” that is reminiscent of a traditional fraud-in-the-inducement theory under the FCA.  Analyzing two different types of Subject Devices – Contraindicated-only Devices and Extra-use Devices – the Ninth Circuit held that “the Contraindicated-only Devices were not properly cleared for any use: they cannot be used for their labeled intended use (and are thus not substantially similar to the predicate device), and they can only be used for their contraindicated use” and that these factors are “precisely those that the FDA considers in granting Class II certification.”  In comparison, Extra-use Devices “include[d] those that could be used for their stated intended use (i.e., use in the thoracolumbar spine) but which were contraindicated for use in the cervical spine.”  Citing Escobar, the Ninth Circuit held that “Medtronic’s alleged fraud went ‘to the very essence of the bargain’” because the relator alleged that the Contraindicated-only Devices “were not properly cleared for any use: they cannot be used for their labeled intended use (and are thus not substantially similar to the predicate device), and they can only be used for their contraindicated use.”

Although Medtronic failed to inform the FDA about “its intent to market the devices for a contraindicated use[,]” the Ninth Circuit held that Medtronic’s “alleged omission” for the Extra-use Devices “was immaterial.”  The Ninth Circuit ultimately reversed the district court’s dismissal for the claims based on Contraindicated-only Devices but affirmed the district court’s dismissal for the Extra-use Devices, the relator’s Anti-Kickback Statute claim, and the realtor’s claim based on its “Off-label/contraindicated-use theory.”

9. Polansky v. Executive Health Resources Inc.: More Circuits Weigh in on Government’s Dismissal Authority, Further Amplifying the Circuit Split. 

With the Supreme Court refusing to resolve a circuit split relating to the government’s authority to dismiss qui tam actions after United States ex rel. CIMZNHCA, LLC v. UCB, Inc., Courts of Appeals have continued to struggle with how to interpret the government’s dismissal authority under § 3730(c)(2).  The Third Circuit in Polansky was one of them.

The Third Circuit had to decide (1) whether the government was required to intervene in a qui tam action before moving to dismiss the action and (2) what standard the government had to follow for a court to grant its motion to dismiss.  The government initially declined intervention in Polansky, but seven years after the relator filed its complaint in 2012, “the case took an unexpected turn” and the government “notified the parties that it intended to dismiss the entire action pursuant to 31 U.S.C. § 3730(c).”  In answering the first question, the Third Circuit “conclude[d] Congress intended the reading adopted by the Sixth and Seventh Circuits, i.e., under § 3730(c), the government must intervene before it can move to dismiss, but it can seek leave to intervene at any point in the litigation upon a showing of good cause.”  In response to the second question, the Third Circuit held that Rule 41(a) is the appropriate standard for a court to consider when determining whether to grant or deny the government’s motion to dismiss, meaning that when moving to dismiss a qui tam action, a relator “must receive notice and an opportunity for a hearing, 31 U.S.C. § 3730(c)(2)(A), and the Government must meet whatever threshold the relevant prong of Rule 41(a) requires.”  The Third Circuit affirmed the district court’s dismissal of the qui tam action.  As more relators bring qui tam actions, and if and when the government chooses to dismiss an action, the ultimate result in the case will rely heavily on circuit-specific holdings. 

10. The Changing Use of Guidance Documents in Enforcement Actions: The Increasing Importance of Agency Guidance.  

Several years ago, the DOJ made clear that agency sub-regulatory guidance should not be the basis of FCA liability.  With the change in Administration, however, the DOJ has reversed course and reverted to its prior position ­– violating agency guidance documents can lead to FCA liability even when such guidance has not gone through notice and comment rulemaking.  

Attorney General Merrick Garland on July 1, 2021 published a memorandum “revis[ing] and clarif[ying] the principles that should govern the issuance and use of guidance documents by the Department of Justice.”  The Brand Memorandum, published on January 25, 2018, piggy-backing on the Sessions Memorandum from 2017, limited the use of agency guidance documents, stating, inter alia, that the documents “cannot create binding requirements that do not already exist by statute or regulation[,]” cannot be used by the DOJ’s “enforcement authority to effectively convert agency guidance into binding rules[,]” and cannot be used by “Department litigators . . . as a basis for proving violations of applicable law in [affirmative civil enforcement] cases” when there has been “noncompliance with [the] guidance documents[.]”

Attorney General Garland’s memorandum rescinded the prior Brand and Sessions Memoranda, stating, inter alia, that “[t]he Department’s guidance documents should be drafted with the recognition that they do not bind the public (except where binding by operation of a grant award or contract) or have the force and effect of law[,]” but that they may still “set forth the Department’s interpretation of binding regulations, statutes, and constitutional provisions.”

Additionally, Attorney General Garland made clear that “Department attorneys handling an enforcement action (or any other litigation) may rely on relevant guidance documents in any appropriate and lawful circumstances, including when a guidance document may be entitled to deference or otherwise carry persuasive weight with respect to the meaning of the applicable legal requirements.  Guidance documents may also be used by DOJ attorneys when “relevant to claims or defenses in litigation[.]”  With the reversion back to its prior position regarding agency guidance documents, time will tell how often and in what manner the DOJ will use these guidance documents.

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    Robert “Bob” T. Rhoad

    Nichols Liu LLP

    Robert “Bob” T. Rhoad is a partner at Nichols Liu LLP in Washington, DC.  Mr. Rhoad’s practice focuses on the defense of healthcare and government contractor clients in cases under the federal False Claims Act (and its state and local analogues) and all other types of fraud and abuse matters from investigation, through litigation/trial, and on appeal.  He can be reached at [email protected] or (202) 846-9807.

    Andy Liu

    Nichols Liu LLP

    Andy Liu is a partner at Nichols Liu LLP in Washington, DC.  Mr. Liu’s practice focuses on the representation of healthcare and government contractor clients in all phases of administrative, civil, and criminal disputes, including False Claims Act litigation.  He can be reached at [email protected] and (202) 846- 9802.

    Haaleh Katouzian

    Nichols Liu LLP

    Haaleh Katouzian is an associate at Nichols Liu LLP in Washington, DC.  Ms. Katouzian’s practice focuses on the representation of clients in litigation matters and internal investigations, including False Claims Act matters.  She can be reached at [email protected] or (202) 846-9842.