Analysis

Although the circuit court rejected the district court’s reasoning, noting that a physician’s actions can be relevant in determining whether a service or item billed to the government is reasonable and necessary, the Third Circuit affirmed the district court decision on the grounds that relator could not establish materiality.

As noted by the court, an FCA violation involves four elements: falsity, causation, knowledge and materiality. Materiality is defined by the FCA as “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money.” 31 U.S.C. § 3729(b)(4). Last year, in the groundbreaking Escobar case, as explained more fully in a previous post, the Supreme Court expounded upon the FCA’s materiality requirement, describing the requirement as “demanding” and “rigorous.” As cited by the circuit court, Escobar  stands for the proposition that “a material misrepresentation is one that goes to the ‘very essence of the bargain.'” The circuit court continued, “[m]ateriality may be found where ‘the government consistently refuses to pay claims in the mine run of cases based on noncompliance with statutory, regulatory, or contractual requirement’…On the hand it is ‘very strong evidence’ that a requirement is not material ‘if the government pays a particular claim in full despite its actual knowledge that certain requirements were violated.'” Where noncompliance is “minor or insubstantial,” materiality will not be found.

Applying Escobar to the matter before it, the Petratos Court held that the relator could not prove materiality for several reasons. First, there were no factual allegations showing that the government would not have reimbursed claims for Avastin if the alleged reporting deficiencies been cured. Indeed, the relator conceded that the government would have paid the claims with full knowledge of the noncompliance. As noted by the court, “where a relator does not plead that that knowledge of the violation could influence the government’s decision to pay, the misrepresentation likely does not have a natural tendency to influence payment.” Second, the relator failed to plead that CMS consistently refuses to pay claims like those alleged. Rather, the relator’s allegations established that CMS would continue to reimburse the claims at issue with full knowledge of the alleged noncompliance. In fact, the relator had reported Genentech’s actions to the FDA and neither the FDA nor the Department of Justice had taken any actions against Genentech as a result. In sum, the court held, the allegations were the type of minor or insubstantial noncompliance that the Supreme Court had noted would not be material and that the circuit court held are “not appropriate for a private citizen to enforce through the False Claims Act.”

The court soundly rejected the relator’s arguments that the campaign was material because “if physicians would have prescribed no or less Avastin, the government would have paid less claims” and that “the relevant question is whether Genentech’s fraudulent misrepresentations were material to the physicians’ determination,” finding that the relator had conflated the FCA’s materiality and causation requirements. According to the court, the relator’s arguments were essentially a “but for” causation argument. In response, the court wrote:

The alleged fraud’s effect on physicians is relevant to the extent that it caused claims eventually to reach CMS. That is, evidence of how the claim makes its way to the government should be considered under the causation analysis, while the materiality analysis begins after a claim has been submitted. The materiality inquiry, in asking whether the government’s payment decision is affected, assumes that the claim has in fact reached the government.

Here, the Third Circuit firmly held, citing several sister circuits, that “it is the government’s materiality decision that ultimately matters…the alleged fraud must affect the United States’ payment decision to be actionable.”

Practical Takeaways

• It is the government’s materiality decision that is dispositive. This does not change when an alleged misrepresentation flows through an intermediary in an indirect causation case.
• A relator’s proof of causation, or proof that a claim reached the government, is irrelevant to establishing materiality.
• FCA defendants should examine a relator’s pleadings carefully. If a relator fails to plead that knowledge of the alleged violation could influence the government’s decision to pay or that the government consistently refuses to pay claims like those alleged, the allegations will likely be susceptible to dismissal on the grounds that the relator cannot meet the FCA’s materiality requirement.
• Federal Circuit Courts continue to consistently apply a “heightened” materiality standard in light of Escobar, rejecting the government’s arguments that Escobar represented little change.

If you have any questions, please contact:

• Benjamin A. Waters at bwaters@hallrender.com or (484) 532-5672;
• David B. Honig at dhonig@hallrender.com or (317) 977-1447; or
• Your regular Hall Render attorney.

Background

Dating back to 1998, a private cardiology and internal medicine group practice (“Practice”) provided exclusive cardiology services to an Ohio-based medical center (“Medical Center”). In the early 2000s, the two parties joined to form a heart institute, which involved entering into six agreements for the Practice physicians to provide medical director services (“Medical Director Agreements”). These Medical Director Agreements automatically terminated on December 31, 2006. However, the two parties continued their relationship with no change and did not formally renew the agreements until November 29, 2007 via addendums that were backdated to January 1, 2007. This scenario played out again in 2008 and in 2009, with the addenda expiring and the parties later entering into backdated addenda until the agreements were eliminated altogether in March 31, 2010 due to a restructuring plan. Further, in 2008, one of the Practice’s physicians began performing administrative duties and receiving pay as a Chairman for the Medical Center’s Department of Cardiovascular Medicine and Surgery (“CV Chair Arrangement”). However, this position was never documented in a formal arrangement.

A cardiologist who was formerly employed by the Practice (“Relator”) filed a qui tam complaint against the Practice, the Medical Center and four individual physicians (collectively “defendants”). The Relator alleged that the defendants violated the FCA by submitting false claims for payment to the United States Government under the expired and missing agreements in violation of the Stark Law and the Anti-Kickback Statute. The defendants countered the allegations by arguing that the agreements were protected by three exceptions to the Stark Law: the personal services arrangements;² the fair market value;³ and the isolated transaction⁴ exceptions. Although the government declined to intervene, the Relator continued to pursue the action.

The opinion from March 15, 2017 deals with cross-motions for summary judgment and specifically addresses whether the Stark Law writing requirements were satisfied for the above discussed agreements during the periods of time when the agreements lapsed. The court evaluates these issues under the clarified and modified view of the requirements promulgated by CMS.

CMS Revisions and Clarification

In the CY 2016 Medicare Physician Fee Schedule Final Rule (for a summary of the Final Rule, click here), CMS clarified that the Stark Law writing requirement does not require an arrangement to be documented in a single, formal contract and that a collection of documents could satisfy the writing requirement as long as they are contemporaneous and one of those documents bears the signatures of the parties to the arrangement. CMS provided a non-exhaustive list of the types of documents that could on their own or together constitute satisfactory contemporaneous documents:

– Board meeting minutes;Hard copy and electronic communications;
– Fee schedules for services;
– Check requests or invoices containing details of items or services along with relevant dates and rates;
– Timesheets with details regarding services performed;
– Call coverage schedules;
– Accounts payable or receivable; and
– Checks issued.

Relator’s Motion – The Writing Requirement

As to the plaintiff’s first claim that the Medical Director Agreements when lapsed did not meet the “in writing” requirement of the various Stark exceptions, the court began by outlining the requirements for the fair market value and personal service arrangement exceptions, stating the writing requirement is not a “mere technicality,” but instead is essential to the transparency demanded by the Stark Law. The court then acknowledged that the writing requirement must be satisfied at all times by a “document or collection of documents that ‘permit a reasonable person to verify that the arrangement complied with an applicable exception at the time a referral is made.'”⁵ With these considerations in mind, the court determined the critical question of “whether sufficient documentation ‘evidencing the course of conduct of the parties’ exists for the periods of time in between the expiration of the agreements and the execution of the addenda.”⁶

In applying the standards to the facts at hand, the court determined the Medical Director Agreements and addenda, when coupled with a collection of documents detailing the ongoing relationship, could persuade a reasonable jury that the necessary evidence was presented to show a course of conduct consistent with the writing requirement of the exceptions. The collection of documents the court found evidencing the Practice and the Medical Center’s course of conduct included invoices and corresponding checks that coincided with the services, timeframe and compensation described in the Medical Director Agreements and subsequent addenda. Thus, with respect to the Medical Director Agreements, the Relator’s motion for summary judgment was denied.

The court ruled differently in regards to the CV Chair Arrangement that was not formalized in any signed document. Instead, the defendants attempted to meet the collection of documents requirement with “undated, unsigned memoranda,” a letter with a passing reference to the position, meeting minutes and bylaws, none of which described the positions in any specific details or contained the signatures of any involved parties. The court found that at minimum to satisfy the writing requirement, the document or collection of documents must describe identifiable services, a timeframe and a rate of compensation. The court also reiterated the signature requirement and made clear that regardless of the sufficiency of the “collection of documents,” at least one contemporaneous document must contain the signatures of the parties. The defendants attempted to bring the CV Chair Arrangement under the isolated transaction exception, but the court found that exception typically only applies to “uniquely singular transactions” and does not apply in this instance where the payments were not singular, but instead the first in a series of payments. Thus, because the CV Chair Arrangement failed to meet each of the Stark exceptions, the Relator’s motion for summary judgment was granted.

Defendants’ Motion – FCA: Scienter and Materiality

The defendants’ motion for summary judgment also argued that the Relator failed to establish the scienter and materiality requirements of the FCA. The court rejected both arguments and denied the defendants’ motion.

Scienter. Under the FCA’s scienter requirement, the Relator was required to show that the defendants: (i) had actual knowledge of the information; (ii) acted in deliberate ignorance of the truth or falsity of the information; or (iii) acted in reckless disregard of the truth or falsity of the information. In analyzing the scienter requirement, the court noted that there was ample evidence that the physicians of the Practice and the Medical Center believed all of the agreements to be in compliance with the Stark Law. However, the court opined that there was also ample evidence in the record to suggest that the Practice and the Medical Center may have knowingly violated the Stark Law in at least one manner by submitting claims for payment arising from medical directorships that were not covered by a written agreement. The court noted that a Senior VP and Medical Director of the Medical Center issued a memorandum expressly acknowledging that the parties continued to operate under expired contracts. There was also additional evidence, including solicited legal advice, engagement of a Stark consultant and retroactive addenda to cover the lapse of time that showed the Practice and the Medical Center were aware the documents relating to the agreements were not at all times in compliance with Stark and yet they continued to act upon those agreements. This evidence, the court determined, could lead a reasonable jury to conclude that the Practice and the Medical Center continued to submit claims for payment despite knowing that the underlying arrangements may not have been properly documented for purposes of Stark compliance.

Materiality. In order to be actionable, the FCA also requires a misrepresentation or false claim to be “material to the Government’s payment decision,” and the defendants argued that even if they were found to have violated the Stark Law, those violations would not hold up under the materiality requirement of the FCA. Relying upon the 2016 standard outlined in United States ex rel. Escobar v. Universal Health Services, Inc., the court considered the following factors: whether compliance with a statute is a condition of payment; whether the violation goes to “the essence of the bargain” or is “minor or insubstantial”; and whether the government consistently pays or refuses to pay claims when it has knowledge of similar violations.

In applying these factors, the court determined that the alleged violations at issue were material because the Stark Law “expressly prohibits Medicare from paying claims that do not satisfy each of its requirements, including every element of any applicable exception.” Because compliance with each element is required, the writing requirement is not “minor or insubstantial.” Rather, it is crucial to the transparency demanded by the Stark Law and goes to the very “essence of the bargain.” The court also acknowledged that there was a lack of evidence suggesting the government refuses to pay or pays when they have actual knowledge of these violations but recognizes that providers who do violate these provisions are required to pay penalties when those violations are brought to light. Balancing all of these factors, the court determined summary judgment was not appropriate because the writing requirements contained in several Stark exceptions “are important, mandatory, and material to the government’s payment decisions.”

Practical Takeaways

Even in light of the clarified Stark Law writing requirements, providers must exercise caution in documenting physician arrangements. As noted by the court in this case, any “collection of documents” relied upon must contain at least one contemporaneous writing, signed by the parties. The collection of documents must also describe: 1) identifiable services; 2) a timeframe; and 3) a rate of compensation. Therefore, mere checks alone will not be sufficient to satisfy the writing requirement. Providers should attempt to document all physician arrangements and obtain signatures wherever possible. This case also illustrates that a failure to satisfy the writing requirements may subject a provider to increased liability under the FCA. Further, the holding in this case demonstrates that awareness that some claims may not be covered by a written agreement may be enough to satisfy the scienter requirement under the FCA.

If you have any questions about this case, or related issues, please contact:

– Allison Emhardt at (317) 429-3649 or aemhardt@hallrender.com;

– Brad Taormina at (248) 457-7895 or btaormina@hallrender.com; or

– Your regular Hall Render attorney.

Special thanks to Megan Culp, law clerk, for her assistance with the preparation of this article.

¹ U.S. ex rel. Tullio Emanuele v. Medicor Associates

² 42 C.F.R. § 411.357(d)(1).

³ 42 C.F.R. § 411.357(l).

⁴ 42 C.F.R. § 411.357(f).

⁵ U.S. ex rel. Emanuele v. Medicor Associates (citing 80 Fed. Reg. 70886, 71316).

⁶ Id.

Background

The whistleblowers in Escobar originally filed a FCA suit against Universal Health Services, Inc. (“UHS”) on July 1, 2011 in the United States District Court for the District of Massachusetts.  The whistleblowers alleged that UHS had failed to disclose that certain of its personnel did not comply with applicable licensing and supervision requirements, and therefore claims submitted to the government for services provided by such personnel were false under the “implied certification theory.”  The whistleblowers uncovered information that 23 UHS employees had obtained National Provider Identification numbers that misrepresented their licensure status.  The district court originally dismissed the claims for failure to state a claim, finding that the licensing and supervision requirements were conditions of participation, rather than conditions of payment, and therefore could not establish falsity under the FCA.  The First Circuit reversed, finding that the licensing and supervision requirements were conditions of payment, and therefore could establish falsity.

The Supreme Court granted certiorari to resolve a circuit split regarding the viability of the implied certification theory under the FCA.  As explained in a previous post, while the Supreme Court upheld the implied theory of certification, it placed the emphasis on whether compliance with the requirement that was violated was “material to the Government’s payment decision….”.  The Supreme Court then remanded the case to the First Circuit Court of Appeals.

First Circuit’s Opinion

The First Circuit stated that the fundamental inquiry under the materiality standard is “‘whether a piece of information is sufficiently important to influence the behavior of the recipient.'”  Applying this test, the Court found that the defendant’s alleged failure to meet the applicable licensing and supervision standards was material to the government’s decision to pay.  The Court provided the following support for its determination:

• • Compliance with the applicable requirements was a condition of payment, which is “relevant” even if not “dispositive” to materiality; and
• • The licensing and supervision requirements go to the “very essence of the bargain” regarding the government’s relationship with healthcare providers.

UHS argued that the government was aware of the alleged violations and yet continued to pay for related claims, which the Supreme Court listed as evidence against a finding of materiality.  In response, the First Circuit stated that it saw no evidence of the government’ actual knowledge of the defendant’s non-compliance, and furthermore that mere awareness of allegations concerning noncompliance “is different from actual knowledge” when considering materiality.

Discussion

Given the First Circuit’s previous ruling and its previous broad interpretation of the implied certification theory, this outcome is not unexpected.  However, it does provide additional insight into how courts will apply the Supreme Court’s materiality standard.

The First Circuit continued to emphasize the fact that the regulations at issue were a condition of payment, which indicates that the condition of payment vs. condition of participation distinction will continue to be important in future FCA cases.  The court’s discussion regarding the impact of the government’s actual knowledge of violations on materiality could also have interesting implications on self-disclosure.

Although the First Circuit specifically declined to review this point, the opinion indicates that self-disclosing a violation to the government could potentially cut off FCA liability for future claims, or even for all implicated claims, if the government continues paying for such claims after the self-disclosure, as such violation might not be considered material.

Practical Takeaway

While likely the end of the road for Escobar, this opinion demonstrates how a circuit that had adopted one of the broader interpretations of the implied certification theory can use the materiality standard to continue to support that broad interpretation.  It is also interesting to contrast the First Circuit’s application of Escobar‘s materiality standard in support of its previous broad interpretation to the Seventh Circuit’s application of that same standard in support of its previous narrow interpretation, discussed here.

If you have any questions, please contact:

David B. Honig at dhonig@hallrender.com or (317) 977-1447; or
Your regular Hall Render attorney.

In United States ex rel. Miller v. Weston Educational Inc., d/b/a Heritage College, two whistleblowers alleged Heritage College altered grade and attendance records to falsely demonstrate satisfactory academic progress. Satisfactory progress is required for a student to be eligible for specific federal grants, loans and scholarships, pursuant to Heritage College’s Program Participation Agreement (“PPA”) with the Department of Education. Satisfactory progress is measured by the students’ cumulative grade point average.

The whistleblowers’ case was based upon an allegation of fraudulent inducement, that Heritage College knew at the time it signed the PPA that it did not intend to keep accurate records and that the knowingly false statement that it would keep accurate records was material to the government entering into the agreement that led to disbursements.

Heritage College responded that the PPA does not explicitly require the maintenance of those grade and attendance records and that there are no regulations that do so either. More important, none of the altered records actually impacted government disbursements or led to refunds, and, therefore, the alteration was not material.

The Court began its analysis with a restatement of materiality from Escobar:

A false statement or record is “material” for FCA purposes if either (1) a reasonable person would likely attach importance to it or (2) the defendant knew or should have known that the government would attach importance to it.^[1]

Heritage College’s argument, that there was no link between the false records and disbursements, missed the point of the allegation – that it fraudulently induced the government to enter the contract when it signed the PPA, though it did not intend to comply with the PPA requirement that it maintain accurate grade and attendance records. That promise, at the time the contract was signed, was the material misrepresentation that could form the basis for a False Claims Act violation, the court determined.

The court specifically rejected Heritage College’s argument that the false statements were not material because they did not cause any actual harm. It did so relying upon a line of cases that state a party may be subject to FCA civil penalties, even where there is no monetary injury.

Practical Takeaway

Courts will continue to explore the full meaning of the ruling in Escobar for years to come. At its core, though, it stands for the proposition that a false statement that a defendant should know the government would find important in making decisions to enter into a contract or to make a disbursement will be material, even if there is no direct connection between the false statement and injury to the government fisc.

If you have any questions, please contact:

• David B. Honig at dhonig@hallrender.com or (317) 977-1447; or
• Your regular Hall Render attorney.

Many Medicare Part D plans require that aggregate pharmacy provider charges to not exceed the “usual and customary price.” The court notes that the term “usual and customary price” is generally understood to be the “cash price offered to the general public.” The question addressed here by the court was whether Kmart’s membership discount program, called the “Kmart Maintenance Program” (“KMP”), offering discounted prices to KMP members while charging higher prices to non-program insurers and cash customers was available to the “general public” and therefore considered the pharmacy’s usual and customary pricing.

In administering the KMP, Kmart hired a third-party processor to maintain the discount program. Kmart then determined its “usual and customary” price exclusive of the prices offered in the KMP, arguing that members of its discount programs were not part of the “general public.” The court disagreed with Kmart’s position and found that KMP pricing representing the usual and customary price. First, the court noted that the barriers to joining the discount programs were almost nonexistent and that members of the “general public” could easily become members of the discount programs by paying a small fee. Second, the court found that Kmart was not selective in who it permitted to join the program given that membership was offered to anybody who purchased prescription drugs. Third, the members of the programs were unlikely to consider themselves as belonging to any particular group because of their membership in the discount programs.

Going forward, the court affirmed the trial court’s denial of Kmart’s request for summary judgement with regard to calculation of Kmart’s “usual and customary” price, affirmed that the False Claims Act applies to almost all of the plaintiff’s claims and remanded the case to the district court for further proceedings.  The ultimate implications of the trial court’s holding on “usual and customary” meaning “cash price to the general public” will be fact-specific and must take into account specifically defined terms contained in individual state statute and PBM/administrator contracts/payor sheets in determining if there is False Claims Act liability with regard to various Medicare Part D claims.

Health Care Takeaway

Providers should carefully monitor the progress of this case. Pending a final resolution, they should consider whether their discount programs are structured such that they might be construed as being offered to the general public and whether such programs must be considered in determining “usual and customary pricing.” While it is by no means clear that all discount programs must be considered when calculating usual and customary pricing, discount programs that might affect usual and customary pricing should be carefully evaluated in coordination with claims processing and prescription drug plan contracting activities.

If you have any False Claims Act questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney. David is in our Indianapolis office.

If you have any pharmacy questions or specific questions about pricing, please contact Todd Nova at tnova@hallrender.com or (414) 721-0464, Rachael Ream at rream@hallrender.com or (216) 513-1314 or Stephen Rose at srose@hallrender.com or (425) 278-9337. Todd is in our Milwaukee office, and Rachael and Stephen are in our Seattle office.