Since its enactment during the Civil War, the False Claims Act (FCA) has served as one of the government’s primary civil remedies for redressing false or fraudulent claims for funds allocated under federal health care programs (today most typically Medicare). In its simplest form, the FCA allows for an individual (known as a “relator”) to file suit on behalf of himself/herself and the United States. The cases are initially filed under seal while the government conducts its investigation of the alleged fraudulent activities and determines whether it will intervene on the relator’s behalf. Ultimately, if the government chooses to intervene on the relator’s behalf and proceeds successfully with the action, the relator can recover between 15 percent and 25 percent of any proceeds; if the government chooses not to proceed with the action but the relator decides to proceed independently, the relator can recover between 25 percent and 30 percent of the proceeds. 31 U.S.C. § 3730(d)(1)-(2).
The Patient Protection and Affordable Care Act (ACA) amended several key portions of the FCA and related federal fraud and abuse statutes. These amendments have minimized the effect of several formidable FCA defenses and have made it easier for relators to keep their cases alive. Although one cannot attribute the increase in the number of relator-initiated FCA cases entirely to these ACA amendments, it bears noting that there has been a dramatic increase in the number of FCA cases in the health care arena each year since the ACA’s passage and that the number of relator-initiated suits in 2013 was nearly double the number of such suits in 2009—the year before the ACA’s passage.
This article provides an overview of two of the more significant amendments to the FCA brought by the ACA: the lessening of the public disclosure bar and the creation of additional reporting obligations for overpayments from federal health care programs.
The Public Disclosure Bar
Prior to the ACA, the public disclosure bar served as one of the strongest and quickest ways to dismiss a false claims action. Broadly speaking, this defense required a court to dismiss an FCA claim where it was discovered that the underlying allegations were based on a public disclosure by someone other than the relator. The ACA drastically undercut the public disclosure bar by (1) limiting the effect of a public disclosure finding, (2) granting the government discretion over a dismissal owing to public disclosure, (3) limiting what constitutes a public source, and (4) providing a relator with a lower standard to qualify as an “original source.”
First, the public disclosure of the underlying allegations no longer serves as a jurisdictional bar to an FCA case. Prior to the ACA, the public disclosure statute provided that “[n]o court shall have jurisdiction over an action under this section based upon the public disclosure of allegations.” The impact of a public disclosure finding was clear: The court no longer had subject matter jurisdiction over the case. In its current form, however, the statute reads: “The court shall dismiss an action or claim under this section unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed.” 31 U.S.C. § 3730(e)(4)(A). Gone from the text is an indication that a public disclosure finding divests the court of jurisdiction.
The question of whether a public disclosure still serves as a jurisdictional limitation under the ACA amendments has divided courts. On the one side, the court in United States ex rel. Beauchamp and Shepherd v. Academi Training Center, Inc., 933 F. Supp. 2d (E.D. Va. 2013), found that despite the removal of the word “jurisdiction” from the statute, the public disclosure bar remains jurisdictional because courts are still commanded to dismiss actions. The majority of courts, however, have found that the ACA removed the jurisdictional bar and that a public disclosure defense is akin to dismissal for failure to state a claim. See, e.g., United States ex rel. May v. Purdue Pharma, 737 F.3d 908 (4th Cir. 2014); United States ex rel. Ping Chen v. EMSL Analytical, Inc., 966 F. Supp. 2d 282 (S.D.N.Y. Aug. 16, 2013).
The practical consequences of eliminating the jurisdictional bar from a public disclosure challenge are threefold. First, as alluded to above, whereas jurisdictional challenges can be made at any time under Federal Rule of Civil Procedure 12(b)(1), Rule 12(b)(6) is the proper vehicle for challenging non-jurisdictional issues and such motions can only be brought before or at trial. Moreover, while under Rule 12(b)(1) a court may look beyond the pleadings and review any extraneous evidence, a court’s review is generally limited to the pleadings under Rule 12(b)(6). Second, whereas under Rule 12(b)(1) the plaintiff bears the burden of demonstrating jurisdiction is proper, under Rule 12(b)(6) the plaintiff’s allegations are taken as true. Finally, defendants must now plead a public disclosure as an affirmative defense, which means that the defense is subject to waiver arguments.
Next, as indicated above, under the ACA the government is given the opportunity to oppose dismissal owing to public disclosure. Although this amendment generated substantial commentary upon its passage, it appears that it has yet to be used by the government, or at least that no court has been confronted with addressing this amendment. See United States ex rel. Sanchez v. Abuabara, No. 10-61673 (S.D. Fla. June 4, 2012) (the court noted that the government had indicated that it would not exercise its discretion and oppose dismissal on the basis of a public disclosure). Consequently, the government has not indicated what criteria or factors it will consider when deciding whether to oppose a public disclosure challenge.
Third, the ACA dramatically limited what constitutes a public disclosure. In the months prior to the passage of the ACA, the U.S. Supreme Court resolved a circuit split and held that administrative reports, hearings, audits, and investigations at the federal, state, and local levels all constituted sources for public disclosure. Graham County Soil & Water Conservation District v. United States ex rel. Wilson, 559 U.S. 280 (2010). The ACA effectively gutted the Court’s Graham County ruling, however, as the statute now clarifies that public disclosure sources are limited to federal criminal, civil, and administrative proceedings in which the government is a party; federal reports, hearings, audits, and investigations; and news media. As such, state and local proceedings and cases in which the federal government is not involved no longer qualify as public sources.
Fourth, the ACA modified the “original source” exception to the public disclosure bar. By way of background, in cases where there has been a public disclosure, the “original source” exception allows for a relator to proceed with an FCA claim where it can demonstrate that the relator had “direct” and “independent” knowledge of the information. The ACA, however, eliminated the “direct” knowledge requirement, and now a relator can qualify as an “original source” so long as a relator has independent knowledge that “materially adds” to the publicly disclosed allegations. Of significance, “materially adds” is an undefined term.
Although the “materially adds” requirement was apparently intended to ease the requirements for qualifying as an “original source,” courts thus far have imposed a somewhat heightened standard for relators. For instance, in United States ex rel. Paulos v. Stryker Corporation, 762 F.3d 688 (8th Cir. 2014), the court found that the relator could not qualify as an original source because regardless of whether the relator’s knowledge was gained independent from the publicly disclosed sources, the relator was unable to explain how this information would contribute to the government’s case. See also United States ex rel. Kraxberger v. Kansas City Power & Light Company, 756 F.3d 1075 (8th Cir. 2014) (holding that the relator’s knowledge did not materially add to what was publicly disclosed because it was similar to what had already appeared in public documents); United States ex rel. Lockey v. City of Dallas, Texas, No. 3:11-cv-354-0 (N.D. Tex. Jan. 23, 2013) (same).
Overpayment Reporting Obligations
Although the public disclosure amendments have created the most commentary among the FCA bar, the ACA’s amendment of the reporting and repayment obligations for health care providers and suppliers receiving overpayments from federal health care programs will have a significant impact in FCA litigation going forward.
By way of background, in 2009 the Fraud Enforcement and Recovery Act redefined the term “obligation” under the FCA to include “the retention of any overpayment” from one of the federal health care programs. 31 U.S.C. § 3729(b)(3). The ACA did not create new liability under the FCA for the reporting and returning of overpayment; instead, it attempted to provide guidance on the procedure for identifying an overpayment and the timetable for returning such an overpayment. Unfortunately, the ACA had the opposite effect and created confusion among health care providers and suppliers.
Under the ACA a medical provider is required to report and return any overpayment within 60 days of identification of the date any corresponding cost report is due. A provider’s failure to timely report and return any overpayment constitutes a per se FCA violation.
The ACA, however, did not explain what triggers the 60-day period; “identified” is an undefined term. As such, providers were uncertain as to whether they had an affirmative obligation to search through Medicare and Medicaid payments to determine whether there had been an overpayment or whether the statute only prohibited the knowing retention of an identified overpayment where the provider had an obligation to ensure proper payment. Additionally, providers were uncertain whether the 60-day clock started when the overpayment was first identified or whether it started on the date the erroneous data was submitted that caused the overpayment.
On May 19, 2014, more than four years after the ACA was passed, the Centers for Medicare & Medicaid Services issued a Final Rule, explaining how it plans to interpret and enforce the ACA amendment. The Final Rule clarifies that the date of identification begins when the provider “has determined or should have determined through the exercise of reasonable diligence” that it received an overpayment. (The Final Rule only applies to Medicare Part C and Part D programs; Medicare Part A and Part B providers are still awaiting a Final Rule for interpretation as to how the report and return requirements will apply to them.) Given how recently the Final Rule was issued, much uncertainty remains as to how tenacious the government will be in its enforcement of the report and return overpayment rules. Nevertheless, given the strict requirements for reporting and the short time frame a provider has to return an overpayment, it seems likely that this will be an area of increased FCA litigation in the near future.
Although the ACA was passed more than four years ago, we are still just beginning to see its impact in the FCA arena as it works its way through the courts. The changes to the public disclosure bar and the report and return obligations for providers constitute two of the more significant changes created by the ACA, and going forward we expect to see the next wave of creative defenses and recurrent litigation in these two areas.