Like years past, 2014 was a very active year for False Claims Act (FCA) litigation. During the 2014 federal fiscal year, the federal government recovered a record $5.59 billion from FCA claims. This article summarizes some of the major developments from 2014, with particular emphasis on the following topics: enforcement trends and several noteworthy settlements, important and sometimes unique case law, and federal and state legislative activity.
In years past, recoveries from the healthcare sector have usually made up a majority of the total recovered. This year, the federal government recovered $2.3 billion from the healthcare industry, second only to the financial industry, from which the government recovered $3.1 billion.
As has frequently been the case, a large portion of recoveries in the health sector came from the pharmaceutical industry. For example, in February 2014, Endo Health Solutions agreed to a settlement worth $192.7 million related to the off-label promotion of the Lidoderm pain patch.
In addition to major recoveries related to pharmaceutical fraud, this year’s settlements also demonstrated a growing trend of enforcement activity in another area of healthcare. Perhaps as a result of the country’s expanding population of people 65 years and older, there were quite a few settlements in 2014 against companies that provide various services to the elderly, such as nursing homes, dialysis centers, home healthcare providers, and rehab facilities.
On April 23, 2014, the Department of Justice announced a $150 million settlement with home health and hospice care company Amedisys Inc. This settlement resolves seven qui tam suits in which relators claimed that Amedisys billed Medicare for ineligible patients and services between 2008 and 2010. According to the complaints, Amedisys allegedly engaged in number of improper activities, including billing Medicare for medically unnecessary nursing and therapy services, providing home healthcare services to patients who were not actually homebound, and otherwise manipulating data to make patients appear sicker than they were to justify the provision of more services.
In addition, the complaints accused Amedisys of maintaining improper financial relationships with referring physicians in violation of the anti-kickback statute and the Stark law. More specifically, it is alleged that Amedisys employees provided patient care coordination services at lower cost for an oncology practice in exchange for patient referrals. The relators in the seven resolved cases will share $26 million from the settlement.
Omnicare Inc., the nation’s largest provider of pharmaceuticals and pharmacy services to nursing homes, also agreed to a major settlement with the government in 2014. In June, it was announced that Omnicare would pay $124.24 million to resolve two whistleblower cases. The relators claimed that Omnicare had offered improper financial incentives to nursing home facilities through the use of a swapping arrangement in exchange for continued use of Omnicare as the facilities’ provider of drugs and services for Medicare and Medicaid patients. The term “swapping arrangement” is used to describe a situation where a company provides discounted prescription medications to a nursing home’s Part A patients in exchange for the ability to keep the facility’s Part D business.
Swapping arrangements like this one were created to take advantage of the different reimbursement rates assigned to Part A and Part D patients. Medicare Part A applies for the first 100 days of a patient’s stay in a nursing home, paying a flat per diem rate for all treatments the patient receives—including prescription medications. On the other hand, after 100 days, a patient’s prescription medications will be paid for by other insurance (including Medicare Part D, Medicaid, or private insurance) at the drugs’ normal costs. Thus, despite the fact Omnicare was taking a loss on Part A medications, entering such an agreement allowed Omnicare to earn an overall profit by increasing business and the volume of drugs it was able to provide under the more profitable Part D reimbursement scheme.
Enforcement actions and qui tam cases are increasingly raising claims related to swapping arrangements, making this an important concept of which to take note. However, this case is also noteworthy because it provides an example of the rare instance where settlement was reached in a case pursued by relators after the government declined to intervene.
The final settlement discussed in this article is also the largest. On October 22, 2014, the Department of Justice announced it had reached a nearly $400 million settlement with DaVita Healthcare Partners, resolving allegations that one of the nation’s largest dialysis service providers had paid kickbacks to physicians in exchange for patient referrals to its dialysis clinics. According to the whistleblower’s complaint and subsequent government investigation, DaVita was accused of providing kickback payments to doctors who referred patients through various means, including by (1) selling the doctors shares in DaVita dialysis centers for prices below fair market value, (2) paying doctors prices greater than fair market value for shares in dialysis centers, (3) paying doctors “profits” from alleged joint ventures, and (4) paying doctors to encourage them not to build competing dialysis centers. The settlement negotiated by the parties gives $350 million to the federal government for civil charges, $39 million to the federal government as a civil forfeiture, and $11.5 million to the states for Medicaid claims. The DaVita whistleblower received a relator’s share worth about $65 million.
Case Law Developments
The Rule 9(b) particularity requirement. All the circuits require that qui tamcomplaints satisfy the particularity requirement in Rule 9(b) of the Federal Rules of Civil Procedure, but there is a circuit split with regard to the issue of what that requirement means.
Historically, the Fourth, Sixth, Eighth, and Eleventh Circuits have applied a strict standard, requiring the relator to identify specific false claims that were actually submitted for payment, in order to survive a motion to dismiss based on Rule 9(b). On the other hand, the First, Fifth, Seventh, and Ninth Circuits have generally applied a flexible standard, requiring only that the relator’s complaint detail the existence of a “fraudulent scheme” that supports the inference that false claims were in fact presented to the government. Decisions by several circuits in 2014 have dealt with this issue, helping to both deepen the split and adding to the confusion.
Prior to 2014, the Third Circuit had not specifically addressed the Rule 9(b) particularity requirement in the FCA context. However, that changed in June 2014, when the court considered the issue in United States ex rel. Foglia v. Renal Ventures Management, LLC, 754 F.3d 153 (3d Cir. 2014).
In this case, the relator claimed that the defendant had overbilled Medicare for five-microgram single-use vials of Zemplar, a drug used in the treatment of chronic kidney failure. When the drug was used properly, Medicare was charged for the full content of a single-use vial even if less than the full five micrograms was used in treating a particular patient and the remaining, unused Zemplar was discarded. Instead of discarding the unused medication, the relator contends, the defendant “harvested” leftover medication from previously used vials and administered it to other patients.
The defendant claimed that relator’s claims failed to meet Rule 9(b)’s particularity requirement, and the trial court agreed, dismissing the relator’s claims for failure to “identify representative examples of specific false claims. . . .” See Foglia v. Renal Ventures Mgmt., 2012 WL 4506014, at *3 (D.N.J. Sept. 26, 2012). On appeal, the Third Circuit reversed. After taking note of the circuit split, the court quickly sided with the more relaxed standard. The decision was based at least in part on a previous Third Circuit case, which the Foglia opinion cites, noting that it had never “held that a plaintiff must identify a specific claim for payment at the pleading stageof the case to state a claim for relief.” Foglia, 754 F.3d at 156 (quoting United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295, 308 (3d Cir. 2011)).
While the Third Circuit’s decision clarified its position with regard to the circuit split, other circuits issued opinions in 2014 that seemed to make their stances less clear. For example, both the Eighth and Eleventh Circuits, traditionally considered to be clearly on the strict side of the circuit split, rendered decisions that seem more lenient, at least to some.
In United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914 (8th Cir. 2014), the relator claimed that the defendant had engaged in conduct that lead to a variety of FCA violations. The relator did not specifically identify any false claims that were submitted for payment, but she did claim to have personal knowledge of the alleged misconduct acquired in her time as center manager. The district court dismissed the relator’s complaint for failure to plead fraud with the particularity required by Rule 9(b) and United States ex rel. Joshi v. St. Luke’s Hospital, Inc., 441 F.3d 552 (8th Cir. 2006).
On appeal, the relator conceded that the complaint did not include representative examples of false claims, but she argued that neither Rule 9(b) nor Eighth Circuit precedent required every FCA complaint to include such representative examples. The Eighth Circuit agreed in part, finding this case to be distinguishable from Joshi,in which the relator had no direct connection to the defendant’s billing or claims department. As a result, the court held that as other circuits have stated a relator can satisfy Rule 9(b) by “alleging particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Thayer, 765 F.3d at 918(quoting United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)).
As noted above, the Eleventh Circuit also issued an opinion adding to the confusion regarding the particularity requirement. In a lengthy unpublished opinion, the court held that including representative claims is “not the only way a relator can establish some indicia of reliability . . . to support the allegation of an actual false claim for payment being made to the Government.” United States ex rel. Mastej v. Health Mgmt. Assocs., Inc., 2014 WL 5471925, at *11 (11th Cir. Oct. 30, 2014) (citations omitted). The court went on to explain that “[a] relator can also provide the required indicia of reliability by showing that he personally was in a position to know that actual false claims were submitted to the government and had a factual basis for his alleged personal knowledge.” Id. It is not yet clear what, if any, impact this decision may have on the Eleventh Circuit’s pleading standard going forward. This deepening circuit split will be something to keep an eye on in 2015.
The Supreme Court. As noted above, there is an existing circuit split on the issue of what a plaintiff must allege at the pleading stage to satisfy the Rule 9(b) particularity requirement. There was hope that the Supreme Court would finally resolve that split this year when the Court went so far as to ask the solicitor general to weigh in on whether to grant cert on the issue in United States ex rel. Nathan v. Takeda Pharmaceuticals, 707 F.3d 451 (4th Cir. 2013).
The solicitor general accepted the Supreme Court’s invitation and filed an amicus curiae brief asking the Court to deny certiorari and instead allow the lower courts to continue considering the issue. That said, the brief does support the flexible standard, stating that “[t]he government rarely if ever needs a relator’s assistance to identify claims for payment . . . . Rather, relators typically contribute to the government’s enforcement efforts by bringing to light other information that shows those claims to be false.” As a result, “[r]equiring qui tam complaints to identify specific false claims thus would not meaningfully assist the government’s enforcement efforts.” In March 2014, the Supreme Court denied certiorari, allowing the debate to continue among the lower courts.
The Supreme Court did grant certiorari in another FCA case, Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 134 S. Ct. 2899 (2014). This case raises two important questions: (1) whether the Wartime Suspension of Limitations Act applies to FCA cases when there has not been any formal declaration of war, particularly in a case brought by private relators where the government declines to intervene; and (2) whether the FCA’s first-to-file bar should be read to preclude only actions that are simultaneously pending or to preclude all subsequent, related actions. The Court held oral arguments in this case on January 13, 2015, and the forthcoming decision in this case is expected to have a significant and long-lasting impact on the practice area.
Unique application of fraud and abuse statutes. Within the practice area, there is always a great deal of interest in and conversation about the new ways relators and the government work to try to expand the scope of the FCA and anti-kickback statute. However, in 2014, that conversation was expanded by a unique case between two clinical laboratory testing companies involving the intersection of business torts and federal and state fraud and abuse.
On June 16, 2014, a federal jury in Florida awarded a $14.75 million verdict in favor of Ameritox, Ltd., in Ameritox, Ltd. v. Millennium Laboratories, Inc., No. 8:11-CV-775 (M.D. Fla.). In this case, Ameritox accused its competitor of engaging in a course of conduct that violated the Stark and anti-kickback statutes, and claimed that these abuses had also resulted in violations of state and federal laws related to unfair business practices. This was not a qui tam case, involving a doctor or practice blowing the whistle on the other; rather, it was a business tort case based on claims of unfair competition and trade practices.
It is important to note that Millennium brought similar counterclaims against Ameritox. The result is that both parties claimed the other had engaged in conduct that violated both the Stark law and anti-kickback statute, including providing improper financial inducements to providers to encourage the use of their services, engaging in deceptive billing practices, implementing improper sales and marketing schemes, and conducting medically unnecessary testing. Following extensive litigation, a jury trial was held. As stated above, the jury found in favor of Ameritox on some of its state-law business tort claims, awarding $14,755,000 in total damages—including $12,000,000 in punitive damages.
While this is not the first time that the federal fraud and abuse statutes have been used in business litigation, it does appear to be the first case to result in a jury verdict of this magnitude. It is still unclear what impact this verdict will have on the healthcare practice area, but it is worth watching as it may open the door for similar cases in the future.
Federal legislation. The year 2014 was a fairly quiet year in Congress, at least with regard to FCA or related legislation. This may change in 2015; Senator Charles Grassley, the major driving force behind the 1986 FCA update, announced his intention to create a new Senate caucus dedicated to protecting whistleblowers in the new term.
While federal legislative activity was limited this year, there was other activity at the federal level as the Centers for Medicare and Medicaid Services (CMS) published two sets of final rules. In May 2014, CMS adopted a final rule covering Medicare overpayments under Parts C and D; and then in November, it published final rules covering the Open Payments Program. Coverage of these rules could fill its own article, but these updates are important to keep in mind.
State legislation. The Deficit Reduction Act of 2005 (DRA) added section 1909 to the Social Security Act. This update added a new financial incentive, a 10 percentage point increase to the state’s share of any Medicaid funds recovered through a state action, for states that have adopted qualifying false claims acts. The Office of Inspector General (OIG) of the Department of Health and Human Services is responsible for determining whether the state false claims laws qualify for the incentive. The grace period, during which previously approved states could continue to receive the incentive, expired in 2013. As a result, much of the activity in this area has died down as many states worked to pass appropriate laws and gain OIG approval before the deadline.
However, some states have continued to amend or update their laws and move toward DRA compliance. In 2014, the following states passed new laws or otherwise updated their false claims acts and have been deemed by the OIG to be compliant with the DRA: Connecticut (approved August 2014), Georgia (approved May 2014), Indiana (approved July 2014), New York (approved February 2014), and Virginia (approved July 2014). The Wyoming legislature approved a state FCA statute at the end of 2013, but the OIG has not publicly announced a decision with regard to its DRA compliance status. Besides working toward DRA compliance, there was limited relevant activity in state legislatures during 2014. However, we may see more activity when state assemblies reconvene in 2015.
The year 2014 provided some interesting developments, including a growing circuit split and unique applications of federal fraud and abuse laws. The cases and topics covered by this summary demonstrate that enforcement and litigation related to the FCA continue to be expanding areas of legal practice.
The year 2015 begins with the potential to be another big year for FCA attorneys and their clients. As noted above, the Supreme Court recently held oral arguments in an FCA case, and the pending decision could foreseeably have a major impact on the practice area for many years to come. In addition, the Department of Justice announced its intention in September to have all new qui tam complaints reviewed by both the civil and criminal divisions to allow the criminal division to determine at the outset whether to open a parallel criminal investigation. The government’s continued commitment to expanding enforcement could mean increased enforcement activity and changing trends in 2015.
Keywords: litigation, health law, False Claims Act, anti-kickback statute, Stark law, Medicare, Medicaid, Federal Rule of Civil Procedure 9(b)
Georgia C. Pham is an associate at Kessler Topaz Meltzer & Check LLP in Radnor, Pennsylvania.
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