The U.S. government’s unilateral investigative powers under the False Claims Act were bolstered by a ruling from the U.S. District Court for the Eastern District of California last week. Ruling on a Petition for Summary Enforcement of a Civil Investigative Demand (“CID”), the court held:
- Settlement discussions with a person or entity involved in a CID do not preclude the government from investigating others associated with that entity; and
- Extended, unilateral, ex parte discovery, while reflective of “an imbalance of power,” do not provide a legal basis for finding CIDs unenforceable.
In U.S. v. George Picetti, III, M.D., the United States investigated possible violations of the Anti-Kickback Statute and Stark Law arising from a relationship between Dr. Picetti and Christina Holland, an owner and operator of several medical device companies. As part of its investigation, the Department of Justice used its power of administrative subpoena to demand documents and oral testimony from Dr. Picetti. Dr. Picetti objected, arguing that the DOJ lacked authority to enforce the investigative demand because the government already elicited settlement discussions from Nexxt Spine, one of the medical device companies involved in the investigation.
The court adhered to a plain reading of the FCA, holding that the government may issue and force compliance with a CID where: 1) an individual may have information relevant to a false claims investigation; and 2) as long as the government has not yet commenced a civil proceeding under the act. The court emphasized that second factor: investigations are only limited to “the actual commencement of a civil action or an election related to actual qui tam litigation.” The settlement negotiations with a related entity in this case did not equate to the commencement of a civil action and so the government’s investigation of Dr. Picetti could continue.
Dr. Picetti also tried to dismantle the government’s investigation by arguing that CIDs are inherently unfair and allow the government to conduct “extended, unilateral ex parte discovery past the point when a civil action should have been commenced…thus giving respondent unequal access to the tools of civil discovery.” The court agreed with Dr. Picetti’s spin on the broad investigative authority granted by Congress but ultimately held that Congress’s intent was clear, and unless a subject of the investigation can show that an inquiry is “unreasonable because it is overbroad or unduly burdensome,” the subject of the investigation must comply with the government’s demands.
The court’s sympathetic but unforgiving enforcement of the CID in this case could prove a powerful tool for the government, allowing it to demand participation in broad investigations. Individuals or entities involved in such investigations must act quickly and, if possible, challenge the breadth and burden of the investigation to limit their liability.
Recently, the Department of Justice (“DOJ”) announced it had entered into a $42 million settlement (“Settlement”) with the owners of a California acute care hospital (“Parent Company”) to resolve allegations that the Parent Company had violated the False Claims Act by submitting false claims to Medicare and MediCal (California Medicaid) programs. The Parent Company is a fully integrated health care company comprising the Hospital at issue, a managed care organization, two physician practice associations and 50 percent ownership in a health plan specifically for MediCal. Nearly $32 million will be paid to the United States to settle allegations of false claims against Medicare and $10 million will be paid to the state of California to settle the allegations that carried potential damages of over $400 million.
A former manager of the Hospital filed the qui tam (i.e., whistleblower) action under seal in June 2013. The Complaint alleged improper relationships between the Parent Company and physicians and that the Parent Company compensated the physicians in excess of fair market value and took into account the volume or value of referrals to the Hospital by the physicians. In addition, the Complaint alleged that the Hospital violated the Civil Monetary Penalties Law (“CMP”) by inducing federal health care program beneficiaries to choose certain providers. Although both governments declined intervention in the case, the relator moved forward. In its Settlement announcement, the DOJ stated, “This settlement is a warning to health care companies that think they can boost their profits by entering into improper financial arrangements with referring physicians.”
Details Alleged in the Complaint
The relator alleged violations of both the Stark Law and the Anti-Kickback Statute for actions beginning in 2006. The relator alleged the Parent Company violated both statutes by entering into arrangements with physicians that accounted for the volume of the physicians’ patient referrals to the Hospital and intentionally induced referrals. Allegedly problematic arrangements between the hospital and various members of its medical staff included:
- Sublease Agreements: The Hospital entered into sublease arrangements with various physicians in order to host one-hour monthly meetings with federal health care program beneficiaries in the physicians’ offices. The rental value for these arrangements exceeded fair market value and accounted for the volume or value of referrals from the physicians. Additionally, the rent was paid on a monthly basis regardless of whether or not the Hospital conducted any meetings in the physicians’ offices.
- Shared Marketing Agreements: The Hospital entered into Shared Marketing Agreements with physicians in order to increase the physicians’ patient base and revenues. These initiatives were paid for by the Hospital matching the costs paid for by the physicians. The marketing services provided under these agreements included the advertisement of free transportation available to potential patients.
- Vendor Marketing Agreements: The Vendor Marketing Agreements were similar to the Shared Marketing Agreements but without any cost-sharing by the physicians.
- Medical Directorship Agreements: The Medical Director Agreements were entered into based upon a target number of referrals/admissions to be made to the Hospital by the physicians. The relator purported to hear the Hospital’s Vice President of Business Development tell a physician that he would receive a Medical Director appointment only if the physician referred or admitted 15-20 patients each month.
The relator claimed that the Parent Company paid remuneration directly to MediCal-enrolled expectant mothers as an inducement to receive maternity services from the Hospital but only if she chose to deliver her baby at the Hospital.
Alleged Evidence of Improper Intent
The relator alleged that the Hospital tracked referrals from physicians and threatened to cancel (or does cancel) arrangements if referral targets went unmet. The Hospital’s marketing team also allegedly conducted weekly discussions of physician referrals including physicians failing to meet referral targets.
The relator claimed personal knowledge of key conversations. These included conversations on providing physicians with compensation in exchange for a guaranteed number of referrals and/or inpatient admissions per month. While many of these discussions were verbal, the Complaint provided evidence of written logs from physician integration representatives documenting similar communications with referring physicians. These written communications summarized conversations with physicians regarding compensation in exchange for patient referrals. In some instances, physicians were told they would receive sublease and/or marketing arrangements if they increased the number of patients they referred to the Hospital.
The Hospital allegedly tracked referrals from physicians and calculated an estimated return on investment for the compensation that was paid to the physicians in exchange for the promise of patient referrals. The Hospital’s staff would then categorize referring physicians into separate tiers based upon the actual and goal volumes of patient referrals and the corresponding return on investment.
- As a part of the Settlement, the Hospital denied most of the allegations and all liability. However, providers can learn from the behavior that led to the qui tam action in order to limit potential liability for similar types of arrangements and programs.
- While some of the alleged conduct of the Hospital may show evidence of an improper intent on behalf of the parties, not all of the agreements described in the Complaint are per se improper. As such, it is imperative for health care organizations to ensure that they are entering into arrangements for proper purposes (such as community need/benefit, satisfaction of regulatory requirements, population health management, compliance with bundled payment programs, etc.) and that no purpose of any proposed arrangement is to induce or reward referrals from the referring entity.
- Health care providers should consult with legal counsel regarding the safeguards that should be in place prior to implementing any protocols to monitor referrals. In addition, providers should be careful regarding calculating things like the return on investment or “contribution margin” associated with referrals by physicians.
- When engaging in new physician arrangements, particularly those that are intended to market hospital and physician services and/or provide community outreach to federal health care program beneficiaries, health care organizations should consult with legal counsel in order to ensure that the proposed arrangement is appropriate and legally compliant.
- Health care organizations that believe they may have identified arrangements that may be potentially problematic should consult legal counsel as soon as possible in order to review the arrangements and begin any necessary remedial steps.
If you have any questions or would like more information about this topic, please contact:
 For a copy of the DOJ press release, click here.
On March 15, 2017, the U.S. District Court for the Western District of Pennsylvania provided the first federal court interpretation of the writing requirements affecting several regulatory exceptions in the federal physician self-referral statute (“Stark Law”) and its implementing regulations since the Centers for Medicare & Medicaid Services (“CMS”) provided sweeping revisions and clarifications to the Stark Law in 2016.1 This court opinion provides an in-depth interpretation of the recently implemented changes to the Stark Law writing requirements and how they relate to cases brought pursuant to the False Claims Act (“FCA”).
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.”
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 firstname.lastname@example.org;
– Brad Taormina at (248) 457-7895 or email@example.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).
Yesterday, November 20, the Department of Justice (“DOJ”) announced that the United States had recovered almost $6 billion from False Claims Act (“FCA”) litigation in 2014 – marking the first time the DOJ has recovered more than $5 billion in a single year.
With these recoveries, the DOJ reached several milestones. Not only was this the largest recovery year for the DOJ, but it makes 2014 the third consecutive year that the DOJ has announced record recoveries. The record recoveries were bolstered by over 700 whistleblower lawsuits filed on the government’s behalf in 2014. Of the total $5.69 billion recovered, almost $3 billion was recovered in lawsuits filed by whistleblowers in qui tam actions under the FCA…. Continue Reading →
Last week, the 11th Circuit Court of Appeals issued its unpublished ruling in US ex rel. Mastej v. Health Management Associates, Inc. At issue was whether the relator’s Third Amended Complaint adequately pled fraud with particularity, as required by Fed.R.Civ.Pro. 9(b).
Mastej was an Health Management Associate (“HMA”) executive from 2001 to February 2007. In that role, he attended monthly meetings and participated in discussions “in which Medicare and Medicaid patients and billing were discussed.” In February 2007, Mastej left HMA to work as CEO of a subsidiary facility.
Mastej alleged that the defendants violated the Stark Law and the Anti-Kickback Statute by giving free trips to golf outings on private jets and paying above-market rates for unnecessary call coverage to neurosurgeons all in exchange for Medicare and Medicaid referrals to the HMA facilities. Said violations, he alleged, made any payments, even for medically necessary services, non-payable. He alleged false claims were submitted in (a) the filing of interim claim forms for patients; (b) the filing of annual cost reports; and (c) a reverse false claim allegation based upon the submission of those forms and reports.
The defendants moved to dismiss based upon Fed.R.Civ.P. 9(b), which requires that claims of fraud be pled “with particularity.” Specifically, the defendants noted that Mastej did not identify a single specific claim for a patient or a specific date of a particular claim.
The court began its analysis by noting that an FCA relator may not merely describe a scheme to defraud but must also describe sufficient detail to show an actual false claim was submitted to the government. It then agreed with the defendants that the complaint did not show a specific false claim submitted to the government.
Having found that Mastej failed to plead fraud with particularity by identifying specific claims, the court then considered whether he otherwise offered sufficient indicia of reliability to survive the motion to dismiss. In the 11th Circuit, Rule 9(b) motions are considered “on a case-by-case basis,” and there are ways to demonstrate such reliability other than identifying specific claims.
The court found that Mastej, as a corporate insider who participated in discussions about claims to and payments by Medicare and Medicaid, pled fraud with sufficient particularity through 2007. However, the court refused to extend that knowledge beyond the time he left HMA and went to work for an HMA subsidiary. The court did not accept the assumption that HMA’s deeds were ongoing, but said he had “not provided the required indicia of reliability for his general allegation that the Defendants submitted false claims for referred patients to the government after Mastej stopped working for the Defendants.” (emphasis in original.)
The ruling is of interest for two reasons. First, it continues the 11th Circuit’s nuanced view of Rule 9(b), favoring identification of specific fraudulent claims, but allowing case-by-case analysis to demonstrate other indicia of reliability. Second, and perhaps more interesting, it did not allow a qui tam relator to claim knowledge during a specific time period then extrapolate that time beyond the actual knowledge. Given the specificity of the court’s ruling, it should be unlikely that discovery beyond the 2007 period would be permitted. This alone would place a significant limit on the ability of relators to turn a small amount of information into a large amount of recovery.
If you have any questions or would like more information on this topic, please contact David B. Honig at (317) 977-1447 or firstname.lastname@example.org or your regular Hall Render attorney.