First to File: Issue 7

In this issue:

• Court dismissed relator’s claims against hospital for allegedly fraudulent sleep tests where relator lacked personal knowledge of specific false claims, but permitted claims based on relator’s own firsthand work in the Sleep Lab to go forward.
• Prime contractor found liable and subject to civil penalties under the Anti-Kickback Act’s strict liability provision for subcontractor’s acceptance of bribes, even without evidence of prime contractor’s knowledge of kickback scheme.

United States ex rel. Revels v. Putnam Cmty. Med. Ctr. of N. Fla., No. 3:19-cv-00834-TJC-LLL, 2022 WL 14834500 (M.D. Fla. Oct. 26, 2022)

Industry: Healthcare

Topics: Medically Unnecessary Services

Summary: Last week, the District Court for the Middle District of Florida denied in part Putnam Community Medical Center’s (PCMC) motion to dismiss relator Willard Revels’ Second Amended Complaint and motion to strike paragraphs of the Second Amended Complaint.

Relator, a former employee of PCMC, alleged PCMC defrauded government-funded healthcare programs when it administered sleep and cardiopulmonary tests. The applicable regulation (42 C.F.R. § 410.32) requires a physician’s presence or a physician’s comprehensive training and supervision program for diagnostic tests to be “reasonable and necessary” for a given patient, and thus payable by government insurance. Relator alleged that the CEOs, compliance officers, and directors of cardiopulmonary services knew that the training and supervision did not meet regulatory standards. Additionally, the relator alleged that PCMC’s medical director of cardiopulmonary services—a physician—was supposed to provide training and supervision for diagnostic tests, but that the doctor allegedly did not provide necessary training and supervision.

In denying the motion to strike portions of the Second Amended Complaint, the court rejected PCMC’s argument that relator utilized former PCMC director of cardiopulmonary services Kimberly Moore’s deposition testimony and not his personal knowledge to meet Rule 9(b)’s heightened pleading standard.  The Eleventh Circuit has held that Rule 9(b)’s heightened pleading standard requires any plaintiff alleging fraud to state with particularity the circumstances constituting fraud based on personal knowledge not supplemented by evidence obtained in discovery. The court instead concluded that Moore’s deposition testimony was not material, meaning the deposition testimony did not “fill the required gap between Relator’s prior allegations and what is required for an FCA claim.” Rather, under Rule 9(b), Relator must allege claims were “actually made to federal health care providers and the State of Florida.” Because the deposition testimony does not provide that claims were filed, it did not circumvent the purposes of 9(b) and need not have been struck.

In its motion to dismiss, PCMC argued that (1) relator had not sufficiently alleged that PCMC had submitted false claims for any diagnostic test, (2) there was no material falsity present, (3) relator failed to state a False Record or Reverse False Claim under 9(b), and (4) the Complaint failed to allege a false claim to the State of Florida, thus precluding the Florida FCA claim. The court granted the motion in part.

First, the court held that the relator sufficiently alleged that PCMC submitted actual claims for Sleep Lab PSG and CPAP diagnostic tests, but failed to allege sufficiently the submission of any false claims for non-Sleep Lab EKG and PFT diagnostic tests, all of which were either outside the period of his employment at PCMC, or submitted by downstream providers, of which the relator had no firsthand knowledge. The court explained that mere disregard for a regulation or improper internal practice is not sufficient to state a claim and that relators must identify specific claims submitted to the government and the dates for those claims with some “indicia of reliability” to meet Rule 9(b)’s pleading standard. As a result, the court dismissed the relator’s allegations related to the non-Sleep Lab EKG and PFT diagnostic tests.

Second, the court held that the relator had sufficiently alleged falsity and materiality as to the remaining claims. PCMC argued that the falsity allegations were lacking because (1) PCMC had, as a factual matter, physicians present in the hospital, as the relevant Medicare B regulations required, (2) relator failed to allege that any diagnostic tests were billed under Medicare Part B, and (3) a local coverage determination alone requiring physician supervision in the lab was not legally binding and could not support an enforcement action. The Court ruled, however, that, taking the allegations in the Complaint in the light most favorable to the relator, and considering the government’s Statement of Interest that violations of Local Coverage Determinations could in fact support FCA liability, the relator had alleged with sufficient particularity that PCMC had submitted materially false claims.  

Third, while PCMC disputed that the statements made in its enrollment application, provider agreements, and Medicare claim forms were false, the court held that the relator sufficiently pleaded both a false record claim and a reverse false claim cause of action, and that the question of their falsity could be explored at later stages of the litigation.

Lastly, the court held that the relator satisfied the elements of the Florida FCA because the relator properly alleged violations of the parallel federal FCA and connected those allegations to the State of Florida’s Medicaid program.

Takeaways: Relators, at least in the Eleventh Circuit, must allege personal knowledge of false claims independent of information gained during discovery to survive the Rule 9(b) particularity requirement. Also noteworthy is the United States’ official position that claims that are inconsistent with LCDs can give rise to FCA liability. The extent to which LCDs can be a basis for FCA liability continues to be an unsettled legal question. Following the Supreme Court’s decision in Azar v. Allina Health Servs., 539 US 1804 (2019), Centers for Medicare & Medicaid Services (CMS) issued a memorandum providing that after the court’s decision in Allina, “government enforcement actions based solely on LCDs are generally unsupportable.”¹ Health and Human Services’ Office of General Counsel also issued an Advisory Opinion explaining that “government enforcement actions based solely on LCDs are generally unsupportable” because they “are not binding on HHS and therefore do not establish or change substantive legal standards.”²The government’s submission of this Statement of Interest, which the district court’s decision in Revels endorses, is a clear rejection of HHS OGC’s and CMS’ post-Allina guidance on this issue, and is also consistent with the Department of Justice’s (DOJ) broader rescission of the Brand Memo, which directed DOJ attorneys to avoid relying on agency guidance documents alone as a basis for establishing FCA liability.

United States v. Mgmt. Consulting, Inc., No. 1:21-cv-00890, 2022 WL 14151606 (E.D. Va. Oct. 24, 2022)

Industry: Construction

Topics: Anti-Kickback Act

Summary: The United States and Management Consulting, Inc. both filed motions for summary judgment. The Court granted summary judgment for the United States, denying Defendant’s motion.

Last week the US District Court for the Eastern District of Virginia granted the government’s motion for summary judgment in a suit seeking to impose a civil penalty under the strict liability provision of the Anti-Kickback Act (AKA) against a construction contractor.  

This AKA suit followed the criminal prosecution of Brodie Thomson, a former executive at Armed Forces Services Corporation (AFSC), who pleaded guilty to awarding four lower-tier government subcontracts in exchange for $4 million in kickbacks from a subcontractor,  Management Consulting, Inc. (Mancon), which was the prime federal government contractor for the two contracts at issue in this civil case—one with HHS supporting the Wounded Warrior Project and the other with the US Marine Corps (USMC) for recovery care coordinators and services supporting the USMC’s Wounded Warrior Regiment. The government paid Mancon approximately $265 million under both contracts. For both of these contracts, Mancon hired subcontractor AFSC, which further subcontracted to Special Media Enterprises LLC (SpecMed). In exchange for this work from AFSC, SpecMed paid multiple kickbacks to Brodie Thomson. For its part, AFSC paid $4.3 million to resolve civil claims.

The government also sought to recover $1,088,802.92 from Mancon under the strict liability provision of the AKA. As relevant to this case, the AKA includes both a “knowing” provision, which allows the government to recover a civil penalty equal to twice the value of each kickback, plus $10,000 per occurrence, from persons who knowingly engage in violations of the AKA, and a “strict liability” provision, which allows the government to recover a civil penalty equal to the amount of the kickback from any person whose employees, subcontractors, or subcontractor employees violate the AKA. The government only sought recovery from Mancon under the strict liability provision, and did not present evidence that Mancon knew or was aware of the kickback scheme, nor did it present evidence that Mancon passed costs to the government related to the kickbacks.

Both parties moved for summary judgment. Mancon did not dispute that the government satisfied the elements of the AKA’s strict liability provision—that (1) Mancon was a “person” covered by the act, (2) AFSC was a subcontractor to Mancon, and (3) Thomson and two other AFSC executives were “subcontractor employees” that accepted kickbacks totaling $1,088,802.92 (the amount sought by the government) in violation of the AKA. Instead, Mancon asserted that liability should not be imposed because (1) the AKA is remedial and the government cannot recover further after having been “made whole,” (2) the Eighth Amendment bars such expansive recovery, and (3) Mancon should be able to offset its penalty against the government’s past recoveries, relying on FCA cases where courts have held that offsetting damages was warranted.   

The court rejected Mancon’s arguments. First, the court held that the AKA serves both remedial and deterrent purposes and that no authority precluded the government from recovering the full statutory penalty, even in the absence of specific damages.

Second, although the court acknowledged the policy concerns raised by Mancon with respect to applying the AKA’s strict liability provision in “edge cases,”—i.e., cases where the prime contractor was not involved in or had no knowledge of the AKA violation—the court rejected Mancon’s Eighth Amendment argument. While characterizing Mancon’s “predicament” as an unknowing prime contractor as “unfortunate,” the court held that even in the absence of any evidence of knowledge, Mancon’s monetary penalty was not grossly disproportional to the gravity of the offense and thus not unconstitutional. Specifically, the court noted that the government had incurred $711,000 in investigative costs, and thus the penalty sought was not grossly disproportionate to the offense. The court also reasoned that the fact that Mancon committed “no offense” was irrelevant to the assessment of a penalty under a strict liability provision, and noted that Congress has made a judgment about the appropriateness of punishment in strict liability cases by providing for larger penalties for violators of the “knowing” provision.

Lastly, the court declined to adopt Mancon’s argument that its civil penalty liability should be offset by the amounts paid by other parties. Mancon based its argument on FCA cases where courts routinely offset damages. The court, however, rejected this analogy, noting that those cases did not involve the offsetting of penalties, and  even where those courts found that it was appropriate to offset damages, the offset did not apply to the calculation of penalties.

Takeaways: The AKA’s strict liability provision allows for a punitive remedy even where the offender did not know about the kickback scheme. Additionally, unlike certain FCA claims that do allow defendants to offset damages repaid by other defendants, the AKA does not allow offset penalties.

Endnotes

¹ CMS Chief Legal Officer, Impact of Allina on Medicare Payment Rules at 2-3 (Oct. 31, 2019).

²HHS-OGC Advisory Op. 20-05 (Dec. 3, 2020).