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August 31, 2011 Articles

New Health Care Law Affects Medical Liabilities and Drives New Plaintiff Options

By James T. O'Reilly and Michele L. Young

The 2010 Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111-148, deepens the trench that separates injured plaintiffs from access to compensation under traditional medical malpractice law. You who defend products and hospitals are about to experience the caseload of former malpractice suits, now being recast as "negligent credentialing," "inadequate oversight," "failure to warn," "false claims for reimbursement," and "defective design" causes of action. Like squeezing a balloon at one end with so-called tort "reform" shielding errors by doctors, the balloon of needed compensation for victims is going to exert more pressure on device and drug firms as well as hospital administrators.

The PPACA is not designed as a products liability law, but its impact will be felt by defenders and plaintiffs' counsel alike. First, the new Affordable Care Organizations' members are allowed to keep savings they can negotiate from patient care, encouraging much tougher price negotiation for catheters, mammography services, pacemakers, or syringes. Next, these pricing pressures will be accompanied by new taxes on device marketers and research-driven pharmaceutical companies; some argue this will drain funds previously used for premarket safety review. Third, tougher liabilities for misconduct in pricing and promotion, and more incentives for leaks and whistleblower reports among the company's downsized former employees, will generate huge liability verdicts against the firms that more aggressively promoted "off-label" devices and drugs. The prospect of shrinking payments from Medicaid's shared state and federal funds may pressure the current allies—device maker, hospital, and surgeon—into an internecine warfare manifested in testimony or document releases during products liability litigation. And, finally, significant changes to the False Claims Act affect product makers in ways that few have foreseen.

The PPACA is controversial for its impacts on individual health insurance, but it will influence trends in products liability insurance as well. If your clients underwrite multiple lines of liability insurance, the team that writes medical liability policies will shrink in volume. So-called tort "reform" drives some plaintiffs' attorneys out of the medical malpractice arena. New barriers to lawsuits reduce the number of claims litigated, and caps hold down the insurers' need for large loss reserves or for disputes about coverage. While the malpractice team may relax more, their very busy counterparts writing coverage for hospitals and medical device makers are feeling more stress. Like squeezing the balloon, when the physicians' lobby is successful and the surgeon's mistakes with the device are shielded, the device that the doctor was using becomes the target of compensation demands. The hospital where the doctor practices will be sued for negligent credentialing and failure to staff and supervise its patient care roles adequately. Our brethren formerly engaged in medical malpractice litigation will spill over more often into our defective products litigation field.

What three federal developments are pushing these trial lawyers out of medical malpractice and into products liability, and why? First, the little noticed takeover of millions of patients by the Federal Torts Claims Act's (FTCA) remedial scheme drives most plaintiffs' lawyers away from representing these low-payout claims. Second, the Obama administration's thought leaders in the area of medical cost reduction have expressed their hostility toward the present malpractice system as they pursue a desire to promote "health courts." They seek the diversion of patient injury claims into a captive system of bland adjudication based on weighing the mechanistic performance of accepted practices. Third, the PPACA calls for states to try mechanisms other than medical malpractice, and the call will be accompanied by hundreds of millions of dollars in federal spending as an incentive for the abandonment of classical jury-derived liability verdicts in medical error claims. Let us briefly explain each phenomenon.

Millions of poor people, uninsured before the 2010 PPACA, have been carved out of the coverage of state malpractice tort systems. Those lawyers who have never filled out an SF-95 form or dealt with a non-jury federal claims trial should get ready for an unpleasant dose of administrative procedure. In the past, a client came to you with ugly injuries from a gross medical error he or she sustained at the hands of an overworked nurse trainee at a free clinic operated by a church group. If you couldn't settle with their insurer to avoid the punitive damage portion of the case, you filed the state court malpractice pleadings and began to map out discovery and plans for a jury trial. Surprise! You are stunned to learn that your case must be dismissed because the free clinic personnel, from the doctor down to the orderly, have been "deemed" federal employees and are now immune from suit. Your suit must be withdrawn, and an SF-95 notice of claim must be filed with a meticulous accounting of the amount of damages, presented in a very brief window of time. And if the claim is rejected, your case is headed to a non-jury federal district court trial, litigated by the federal government's attorneys, as you face the ultimate deep-pocket defense team, but with no possibility of punitive damages or other civil remedies. The sudden forced conversion of the client's claim from windfall dreams to bureaucratic nightmare occurs for every federally qualified (not necessarily federally operated) health clinic that merely files an annual list of persons whose acts it has "deemed" to be FTCA-protected; that filing to the Health Resources Services Administration under 42 U.S.C. § 300 cuts off state tort exposure. While few lawyers noticed, this exemption status, like that of hundreds of other clinics, was granted by Congress.

You might have expected this kind of mandatory FTCA detour for suits against a veterans hospital or a Navy dependents' clinic, but the PPACA and related laws have greatly expanded the FTCA umbrella. Health care varies greatly in quality, and in the quality of the professionals delivering that care. If some of the least effective care is given inside an overstressed urban free clinic, malpractice risk had a role; state tort law and insurance carrier pressure might have improved conditions for patients like your client. Now, even that inadequate care may be immunized from malpractice suits. A timely claim will be sent into the federal bureaucracy for the federal agency evaluation, and some fraction of claims will receive a low settlement offer. Ironically, a poor person whose injuries were greatest might need the money most, yet the FTCA may award the free clinic patient the least compensation among all of the malpractice systems.

Plaintiffs' lawyers who catch on to this new reality will therefore change their direction and will more frequently sue the device or drug maker, seeking large awards instead of small FTCA recoveries. Hospitals and groups of providers, who may be seen as having deeper pockets, are also more likely to be codefendants. A visible analogy is to the reports sent to the FDA when a device patient is harmed. In this case a block on the FDA's injury reporting form, FD-3500A, asks whether the injury was the result of a problem in the device or a problem with the user. As doctors' malpractice liability is reduced, more reports will cite the device's defects. Because the shielding from malpractice diminishes the net value of handling the claim, plaintiffs who formerly challenged the errors by a nurse or physician will now instead be critical of the device they used.

A second factor is the potential elimination of juries from medical malpractice cases entirely. The Obama administration's advocacy for "health courts" seeks to divert most malpractice cases that remain in state courts after the FTCA phenomenon. As this article goes to press, the 2012 Justice Department budget is still undecided, but the administration has sought funding for states to experiment with medical claim diversion into the alternative non-jury settlement system. In a "health court," there is no jury or judicial remedial system. A claim for compensation is filed that relates the facts, without regard to fault or blame of the individual physician. He or she is not the target. Administrative processing of the claim produces a result that can be appealed to a "health court" hearing officer who is not a judge. This would remove medical malpractice clients from civil litigation, whether they are poor persons hit by the constraint of the FTCA or the more affluent claimants detoured into the non-jury alternative.

In the "health court," standards of malpractice are quite different. Published government guidelines for "best practices" would be the baseline against which the facts of the actual care are measured. Controversy over who makes the decision about such practices and what they should be (e.g., for cardiology diagnoses) continues to boil among insiders who are attuned to the health court's development. Best practices are likely to be much more surgeon-friendly and prescriber-tolerant than the civil law standards of jury-determined reasonable care among peer physicians. The literature by Mello et al. is voluminous. Our new text, Healthcare Rulemaking Guide (West 2011), devotes a chapter to this issue.

Third, to reduce costs, the Congress and the Obama budgets have put hundreds of millions of dollars in support of alternative malpractice systems. PPACA section 10607 sets criteria for the alternative forms of medical injury dispute resolution. Section 6801 encouraged states to develop options, and it promised funding to test alternatives to the civil malpractice tort system. Plaintiffs' lawyers viewed these compromise provisions as part of the give and take that went on during the formulation of the final text of the PPACA. It seems likely that once a state launches its alternative system, others will follow, and the actual application of the new funding will be interesting for lawyers to monitor.

Assuming there will be a shift from med-mal lawsuits to product claims, which are still viable, the PPACA toughens medical product makers' burdens in another way. The False Claims Act (FCA) is a federal statute that holds companies civilly liable for knowingly submitting or causing to be submitted false claims for payment to federal programs like Medicare. 31 U.S.C. § 3729. The FCA imposes on any person or corporation who "knowingly makes, uses or causes to be made or used, a false record or statement material to a false fraudulent claim" an award of civil penalties, treble damages, and attorney fees and costs. 31 U.S.C. § 3729 (a)(1)(B).

The FCA, originally enacted in 1863 to fight fraud during the Civil War, took on a new relevance after the 1986 revisions increased financial incentives and lowered burdens for enforcement. By the 1990s, the FCA emerged as the major weapon against fraud in federal health care programs. In 2010 alone, the Department of Justice recovered $2.5 billion in health care fraud. Press Release, Department of Justice.

Pharmaceutical companies made up 8 of the 10 largest FCA settlements in 2010. Now, in the first material amendments since 1986, the PPACA removes the common obstacles to the filing of FCA suits. As the malpractice cases face new hurdles, the greater ease of bring an FCA case may make it an alternative avenue for seeking compensation. The $350 million dollar budget under the PPACA to increase prosecution of health care fraud should accelerate this trend.

The PPACA removes obstacles to FCA lawsuits by lowering the "public disclosure" standard. Before the PPACA, a "whistleblower" who was the "original source" of fraud evidence was jurisdictionally barred from pursuing the suit if the fraud by the defendant had been disclosed through the media, through federal, state, or local reports, or through criminal, civil, or administrative hearings, proceedings, and investigations. Graham Cnty. v. United States ex rel. Wilson, 559 U.S. ___, 2010 WL 1189557 (2010). Now the PPACA limits these public disclosures to those "(i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) from the news media." 31 U.S.C. § 3730(e)(4)(A).

A qui tam case can go forward only if the relator is the "original source" of the information on which the fraud allegations are based. Before the PPACA, a whistleblower who was an "original source" had to have "direct and independent knowledge" of the fraud allegations and had to have provided the information to the government before filing an FCA claim. The PPACA eliminates this requirement. An original source is now defined as:

an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

31 U.S.C. Sec. 3730(e)(4)(B).

The impact on device and drug makers is that now a relator can file an FCA case even if he or she did not directly witness the fraud, if what he or she learned "materially adds to the publicly disclosed allegations or transactions." A relator may be able to base his or her case on information learned in private litigation, or state or local government. But even a request for information under the federal Freedom of Information Act could trigger the federal public disclosure bar. Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. ___, No.10-188 (2011). If the disclosure arises out of a state or federal hospital error reporting program, it is anyone's guess whether it will fall under the federal public disclosure bar.

The PPACA also aids plaintiffs because the public disclosure bar is no longer a jurisdictional bar. As amended by the PPACA, the statute states that "[t]he court shall dismiss an action or claim under this section, unless opposed by the Government." Thus, the public disclosure bar that a drug or device firm will assert is no longer a strict jurisdictional requirement but a mere affirmative defense, and one easily toppled by government opposition to the company's claims. 31 U.S.C. § 3730(e) (4) (A).

So expanded, FCA remedies give lawyers an option, once they learn that a defective medical device has been a factor in a medical injury. There may be a cause of action under the FCA, asserting that the device or drug maker has misled the government (Veterans Administration, Medicare, Medicaid, and the like) into believing that a medical device is safe when, in fact, it is not safe. If it was not safe and the government had not been told, then submitting an invoice to a government agency or hospital for the unsafe product may trigger the FCA, if the plaintiff pleads the case correctly.Cf. Ebeid ex rel. United States v. Lungwitz, 2010 WL 3092637 (9th Cir. Aug. 9, 2010); United States ex rel. Conner v. Salina Reg'l Health Ctr., Inc., 543 F.3d 1211 (10th Cir. 2008).

There is a new government attitude in play that favors injured plaintiffs, and a new willingness to hold companies liable under the FCA for delivering defective medical devices to federally supported medical facilities. On January 27, 2011, the United States filed a complaint-in-intervention in a pacemaker case, United States ex rel. Allen v. Guidant LLC et al., No. 0:11-cv-00022 (D. Minn. 2011). The United States alleged that Guidant knowingly sold implantable cardiac devices containing a life-threatening defect that could cause the devices to short-circuit without warning, thus establishing FCA liability for a defective product. Portions of the Fifth Circuit's opinion in a 2010 case also point the medical injury plaintiff toward FCA remedies, when properly pleaded. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010) (the provision of "worthless" goods or services to the government may violate the FCA).

The balloon of compensable medical liability is being squeezed, and new liberalized provisions of the FCA under the PPACA and the emerging case law point to future possibilities for plaintiffs' counsel, who are losing medical malpractice options, to instead pursue products liability cases and FCA claims. Other developments, including increased funding under the PPACA for Medicaid and Medicare vendor fraud enforcement, will accelerate this trend of greater accountability. Hospitals will be more likely to be defendants, joining the device and drug companies on the firing line as the heat of medical malpractice cools for individual physicians. So, the direct and indirect impact of the PPACA's changes deserves the attention of plaintiffs and defendants alike.

Keywords: litigation, products liability, PPACA, Patient Protection & Affordable Care Act, products liability insurance

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