Overview
In this issue:
- A California hospital system settles Medicare False Claims Act (FCA) claims stemming from improper billing practices.
- A relator fails to allege that a pharmaceutical manufacturer’s compliance deviations were material to its contracts with government healthcare programs.
- A third party, who settled prior FCA claims, wins motion to quash a portion of former co-defendant’s subpoena seeking communications relating to those settlements, on relevancy grounds.
California Hospital Settles FCA Claims Related to Improper Billing
Industry: Healthcare
Topics: Medicare fraud
Sacramento-based Sutter Health has reached a deal to settle allegations that it violated the FCA by billing the federal government for urine toxicology tests it was supposed to perform but instead contracted out to third-party labs.
According to the settlement agreement, Sutter Health submitted claims for payment for certain diagnostic tests through Medicare, Medicaid, TRICARE (the Department of Defense’s health care program for service members and their families), and the Federal Employees Health Benefits program administered by the Office of Personnel Management (OPM). The $13,091,452 settlement agreement does not specify whether Sutter Health billed the government more than it paid the third-party labs that performed the tests. The allegations resulted from a joint investigation between the US Attorney’s Office for the Northern District of California, the FBI, the Offices of Inspector General for the Department of Human Services and OPM, the Defense Health Agency, and other federal departments.
Takeaway: Sutter Health's sizeable settlement provides yet another example of the government’s willingness to pursue FCA claims based on improper billing practices.
United States ex rel. Yu v. Grifols USA, LLC, 2022 WL 7785044 (2d Cir. Oct. 14, 2022)
Industry: Healthcare
Topics: Rule 9(b), Materiality
In a recent decision, the Second Circuit affirmed a district court’s dismissal of relator Allen Timothy Yu’s FCA claim against pharmaceutical manufacturer Grifols, because the relator failed to plausibly allege that Grifols' alleged misrepresentations materially impacted the payment determinations of government healthcare programs or went to the "heart of the bargain" of Grifols' agreement with the government.
Yu, who served as Grifols' quality assurance project manager for a Los Angeles manufacturing facility, alleged that (1) Grifols presented false or fraudulent claims to government healthcare programs (including the Veterans Administration, TRICARE, and the Centers for Medicare and Medicaid (CMS)) because it only secured the necessary Food & Drug Administration (FDA) approval of its manufacturing method (its current Good Manufacturing Practices or cGMPs) through a Prior Approval Supplement (PAS) based on false representations to the FDA; and that (2) as a result of its misrepresentations, Grifols received overpayments from Medicare, Medicaid, and TRICARE, and then failed to report and return the overpayments as required by law in violation of the FCA. See 31 USC. § 3729(a)(1)(A)–(B) and 31 USC. § 3729(a)(1)(G).1
Citing the Supreme Court’s decision in Escobar, the Court explained that, to be actionable, an FCA plaintiff must allege that a misrepresentation is not only plausible, but material to the government's decision to pay. Universal Health Servs., Inc. v. United States ex rel. Escobar, 579 US 176, 192 (2016); United States ex rel. Foreman v. AECOM, 19 F.4th 85, 109 (2d Cir. 2021). Under the Supreme Court’s decision in Escobar, whether a misrepresentation or omission is material depends on three factors: "(1) whether the government expressly designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment; (2) the government's response to noncompliance with the relevant contractual, statutory, or regulatory provision; and (3) whether the defendants’ alleged noncompliance was 'minor or insubstantial.'" See Escobar, 579 US at 110.
Under the first factor, the Court reasoned that the government had not expressly identified compliance with cGMPs was a condition of payment for contracts with government healthcare programs. Yu argued that cGMPs were incorporated by reference into Grifols' contracts with government healthcare programs, solely because those contracts are conditioned on FDA approval which, in turn, requires compliance with cGMPs. The Court held, however, that incorporation by reference alone without an an express provision in the contract to comply with specific cGMPs is insufficient to establish materiality.
The Court determined that the second factor was "inconclusive." Whether compliance with a particular statute, regulation, or contractual provision is "material" can be proven by evidence that the government regularly refuses to pay noncompliant claims. When the government pays despite actual knowledge of a violation, however, this strongly suggests that the violation is not material. Although Yu’s suit had been pending for four years, the assumption that DOJ lawyers had likely conferred with the FDA during the pendency of the suit, and therefore that the FDA must be aware of Yu's claims was not sufficient evidence that the FDA actually knew of the alleged cGMP violations and declined to withdraw approval, or that the government healthcare programs knew of the violations and discontinued payments. Because there was no evidence of the government’s knowledge, the Court determined that this factor did not favor or disfavor a finding of materiality.
Lastly, under the third factor, the Court held that Yu merely claimed that the cGMP violations "may" or "could" cause the government to receive something less than safe and effective medications, and failed to identify any particular violations that led to any adverse impact on the medicine’s quality.
Takeaway: This case provides another example of the "rigorous" and "demanding" materiality standard imposed by Escobar. Without more, non-compliance with a contract term incorporated by reference cannot be the basis for an FCA action.
United States of America ex rel. Robert Romero v. AECOM et al., 2022 WL 9864837 (E.D. La. Oct. 17, 2022)
Industry: Higher Education
Topics: Discovery, Subpoena Duces Tecum
Relator Robert Romero filed a qui tam action on behalf of the United States under the FCA alleging AECOM employees, including Defendant Randall Krause, submitted false or misleading information to Federal Emergency Management Agency (FEMA), fraudulently increasing the amount that FEMA paid under its Public Assistance Program for recovery efforts from Hurricane Katrina. In the wake of Hurricane Katrina, Krause allegedly attempted to defraud FEMA of public assistance funding on behalf of organizations including Xavier University of Louisiana. AECOM, a multinational engineering firm, was hired as a technical assistance contractor by FEMA and was responsible for conducting site evaluations and preparing and reviewing damage and repair estimates that would be used to determine whether applicants were eligible for Public Assistance Program funds. Specifically, AECOM was tasked with providing FEMA with accurate information about the design of damaged facilities before the hurricane and the damage resulting from the hurricane. After Xavier was informed of the United States’ investigation in connection with this matter, Xavier entered into a settlement with the United States to resolve allegations related to its role in the submission of false and misleading repair estimates prepared by AECOM on its behalf.
Xavier recently moved to quash a subpoena issued by AECOM requesting both documents and testimony concerning Xavier’s communications with the United States. The court granted the motion in part and denied it in part.
First, Xavier argued that the subpoena was duplicative of a prior subpoena issued to Xavier, and so, should be quashed as unduly burdensome. The court held, however, that AECOM’s initial subpoena included only Xavier’s documents and communications produced to the government during its investigation, but excluded communications with the government. Therefore, the subpoenas were not duplicative.
Second, while the court declined to hold that AECOM's subpoena should be quashed because it requests information that may be inadmissible, the court held that the requested settlement communications were not relevant because counsel could only affirm that the requested discovery “may lead to relevant evidence,” but failed to identify which particular claims or defenses the settlement agreement discussions were relevant to.
Third, the court held that the mere inconvenience of traveling six blocks for a third-party deposition was insufficient to require AECOM to transport numerous boxes of documents to the offices of Xavier's counsel.
Takeaway: In order to survive a motion to quash a third-party subpoena, counsel in an FCA action should be prepared to identify which particular claims or defenses the subpoenaed information will be relevant to.
Endnotes
1Yu also contended that because Grifols knowingly concealed its obligation to return the monies improperly obtained, its use of false records and statements also violated requirements in the Social Security Act. See 42 USC. § 1320a-7k.
