The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation


OIG Releases Its 2019 Top Recommendations for Health and Human Services Department to Reduce Fraud

Last month, the U.S. Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) released its annual Solutions to Reduce Fraud, Waste, and Abuse in HHS Programs: OIG’s Top Recommendations. This publication outlines the OIG’s top 25 unimplemented recommendations that, in OIG’s view, would most positively affect HHS programs in terms of cost savings, program effectiveness and efficiency, and public health and safety. These recommendations stem from OIG audits and evaluations and suggest changes coming to the federal healthcare programs that may impact healthcare facilities in the future. The OIG’s recommendations outline where providers could focus their own compliance program to prepare for any further government scrutiny.

The OIG also identified certain recommendations from HHS’ 2018 report and described the successful progress made by certain HHS operating divisions — i.e., the Food and Drug Administration and the Centers for Medicare & Medicaid Services (CMS) — with respect to HHS’ past recommendations. It is likely that the 2019 recommendations will receive the same push toward implementation.

This year, the OIG directed two-thirds of its top recommendations to CMS. The OIG intended the CMS items to “reduce improper payments, prevent and deter fraud, and foster economical payment policies.” With the trust fund for Medicare Part A (inpatient hospital insurance) projected to be depleted by 2026, policymakers likely will look to these areas to save costs, even if CMS does not implement all of these policies. Similar savings are projected for Part B (medical insurance), Part C (Medicare Advantage), Part D (drug plans) and Medicaid. Several of these recommendations may impact healthcare providers, if implemented.

A full list of the OIG’s 25 recommendations is included at the end of this alert; however, a few key recommendations for CMS are highlighted here:

  1. Revising Three-Night Counts for SNFs. The OIG reports that beneficiaries have varying access to and cost-sharing obligations with respect to skilled nursing facilities (SNFs), depending on whether the beneficiary had hospital outpatient or inpatient post-hospital care. Therefore, the OIG recommends that CMS analyze the potential impacts of counting time spent at a hospital outpatient facility toward the three-night requirement for SNF services so beneficiaries receiving similar hospital care have comparable access to these services.

Additionally, the OIG noted that a review of a sample of SNF claims revealed that many SNFs incorrectly used a combination of inpatient and non-inpatient hospital days to determine whether the three-night requirement was met, leading CMS to improperly pay an estimated $84.2 million between 2013 and 2015. CMS’ Office of the Actuary is conducting an analysis to determine whether, and to what extent, this problem persists. SNFs could see further review of their billing here, particularly as hospitals increasingly use observation beds before admission, which may lead patients to believe they have met coverage requirements.

  1. Surety Bonds for HHAs. The OIG previously recommended that CMS should require surety bonds for home health agencies (HHAs), similar to the surety bonds for durable medical equipment, prosthetic and orthotic suppliers. The OIG estimated that at least $39 million in uncollected overpayments between 2007 and 2011 could have been collected from HHAs had they held surety bonds. Policymakers previously made certain changes specifically with respect to HHAs, including implementing change-of-ownership requirements that are different from other providers’ requirements (i.e., limiting ownership changes within 36 months of a previous change) and capping outlier payments in 2010. The OIG’s focus on HHAs in this report suggests further changes and emphasis for HHA compliance will continue.
  2. Revise the Hospital Wage Index. The OIG recommends that CMS seek legislative authority to comprehensively reform the hospital wage index system, which is used to determine, in part, the amount Medicare pays for hospital inpatient services. The OIG noted that because contractor reviews do not always identify inaccurate wage data and CMS lacks authority to penalize hospitals that submit inaccurate or incomplete wage data, significant vulnerabilities exist in the system. Additionally, the OIG noted that the wage index may not always accurately reflect local labor prices, so Medicare payments to hospitals and other providers may not be appropriately adjusted to reflect the prices. CMS stated that it is considering whether to recommend wage index system reform, including these statutory proposals, in the upcoming president’s budget. Hospitals should monitor any such hospital wage reforms, as such changes would have winners and losers, particularly if changes were used in a manner to reduce overall spending.
  3. Least Costly Alternative Policies for Part B Drugs. The OIG noted in the report that CMS “has not made any legislative proposals” to seek authority to pay for Part B drugs based on a “least costly alternative” approach. Under this approach, utilized by CMS until 2010, reimbursement for Part B drugs was based on the payment rate for the least costly product determined clinically comparable to the applicable Part B drug. Previous OIG reports found that a “least costly alternative” policy would reduce Medicare expenditures by $33.3 million annually for certain prostate cancer drugs.

A broader policy could have larger implications, applying to more drugs than those treating cancer. Many drug treatments have various options with different costs particularly where new medical treatments are being developed. An expansive policy could reduce prices, but effectively mandate certain drug selection to be fully covered and limit the adoption of new drugs entering into the market.

  1. Data Collection From Medicare Advantage and Drug Plan Sponsors. For Medicare Parts C and D, the OIG recommends that CMS collect comprehensive data from plan sponsors, including data on potential fraud and abuse, to improve its oversight of plan sponsors’ efforts to identify and investigate these problems. Although plan sponsors may voluntarily report this data to CMS, they are not currently required to do so. The OIG noted that more than half of Part D plan sponsors did not report such data from 2010 to 2012, and, that as of December 2017, only 60 percent of Part C and D plan sponsors have even requested access to CMS’ electronic system for reporting potential fraud and abuse.

The OIG reported that CMS intends to require plan sponsors to report data on potential fraud and abuse and corrective actions taken and will work with plan sponsors to implement the requirement. Depending on implementation, providers should expect plan sponsors to require new provider reporting, similar to certain fraud and abuse training and reporting created by past Parts C and D changes.

  1. Provider Identifiers in Encounter Data. The OIG recommends that CMS require Medicare Advantage plans to include ordering and referring provider identifiers in encounter data. The OIG noted that tracking the quality of patient care by National Provider Identifiers is an important way to assess whether ordering or referring providers have determined that services were appropriate for patients. Although CMS has not reported any progress on this recommendation, the report notes that CMS would consider implementing it. The execution of this change with respect to encounter data could also be used to revise referral rules for Medicare Advantage patients.
  2. Facilitate Medicaid Enrollment Through Medicare Data. State Medicaid agencies have numerous federal requirements for screening new providers, many comparable to what Medicare collects. State Medicaid agencies believe it would be helpful to compare what providers submit to Medicare to what providers make available to state Medicaid agencies, and the OIG agrees.

CMS claims to have made progress here by sharing information in the Provider Enrollment, Chain and Ownership System and implementing a data exchange system with state Medicaid agencies. The OIG believes more could be done to facilitate a more seamless process so state Medicaid agencies can more easily identify providers it must terminate from the Medicaid program, pursuant to law. Depending on enrollment data-sharing implementation, providers could also see a benefit. Currently, providers often have to search multiple systems to ensure their employees and vendors are not excluded — a centralized Medicaid and Medicare exclusions and sanctions list could reduce administrative hurdles with further centralization.

The OIG’s list included many other recommendations to CMS and other HHS divisions. We include a full list of the OIG’s top 25 unimplemented recommendations below. The foregoing seven recommendations, however, are places where OIG would like CMS to focus its future efforts to reduce fraud, waste and abuse, so providers should be aware of them and prepare for any future changes that may impact the industry.

Please consult one of the authors if you have questions about any of the OIG recommendations or how such policy changes could impact your business.

25 Recommendations from Report:

CMS–Medicare Parts A & B

  1. CMS should analyze the potential impacts of counting time spent as an outpatient toward the 3-night requirement for SNF services so that beneficiaries receiving similar hospital care have similar access to these services.
  2. CMS should implement the statutory mandate requiring surety bonds for HHAs that enroll in Medicare and consider implementing the requirement for other providers.
  3. CMS should continue to ensure that medical device-specific information is included on claim forms and require hospitals to use certain condition codes for reporting device replacement procedures.
  4. CMS should seek statutory authority to establish additional remedies for hospices with poor performance.
  5. CMS should seek legislative authority to comprehensively reform the hospital wage index system.
  6. CMS should reevaluate the inpatient rehabilitation facility (IRF) payment system, which could include seeking legislative authority to make any changes necessary to more closely align IRF payment rates and costs.
  7. CMS should periodically review claims for replacement positive airway pressure device supplies and take remedial action for suppliers that consistently bill improperly.
  8. CMS should consider seeking legislative authority to implement least costly alternative policies for Part B drugs under appropriate circumstances.

CMS—Medicare Parts C & D

  1. CMS should collect comprehensive data from plan sponsors, including data on potential fraud and abuse, to improve its oversight of their efforts to identify and investigate potential fraud and abuse.
  2. CMS should require Medicare Advantage plans to include ordering and referring provider identifiers in their encounter data.
  3. CMS should strengthen oversight of Part D payments for compounded topical drugs to prevent fraud, waste, and abuse while maintaining appropriate access.


  1. CMS should ensure that national Medicaid data are complete, accurate, and timely.
  2. CMS and the Health Resources and Services Administration should ensure that States can pay correctly for 340B-purchased drugs billed to Medicaid, by requiring claim-level methods to identify 340B drugs and sharing the official 340B ceiling prices.
  3. CMS should require States to either enroll personal care services (PCS) attendants as providers or require PCS attendants to register with their State Medicaid agencies and assign each attendant a unique identifier.
  4. CMS should facilitate State Medicaid agencies’ efforts to screen new and existing providers by ensuring the accessibility and quality of Medicare’s enrollment data.
  5. CMS should improve managed care organizations’ (MCOs’) identification and referral of cases of suspected fraud or abuse.
  6. CMS should develop policies and procedures to improve the timeliness of recovering Medicaid overpayments and recover uncollected amounts identified by OIG’s audits.
  7. CMS should re-evaluate the effects of the healthcare-related tax safe-harbor threshold and the associated 75/75 requirement to determine whether modifications are needed.

Administration for Children and Families (ACF)

  1. ACF should develop a comprehensive strategy to improve States’ compliance with requirements related to treatment planning and medication monitoring for children prescribed psychotropic medication.


  1. FDA should ensure effective and timely processes related to food facility inspections and food recalls.

Indian Health Service (IHS)

  1. IHS should implement a quality-focused compliance program for IHS hospitals.
  2. IHS should assess the continuity of operations programs for all IHS facilities and ensure that each facility has a tested and viable program to respond to and recover from a range of disasters.

National Institutes of Health (NIH)

  1. NIH should require security training and security plans for principal investigators and entities and verify that they have fulfilled these requirements before granting them access to genomic data.

General Departmental

  1. HHS should address issues of non-compliance with the Improper Payments Information Act, as amended, for various programs deemed susceptible to significant improper payments.
  2. HHS should ensure that all future web application developments incorporate security requirements from an industry recognized web application security standard.

“Health Care Fraud Impacts Everyone”: Miner Emphasizes DOJ’s Ongoing Dedication to Combatting Fraud

Matthew S. Miner, Deputy Assistant Attorney General of the Criminal Division at the U.S. Department of Justice, gave the keynote speech at the 29th Annual National Institute of Health Care Fraud, held in New Orleans, LA.

In his speech, Miner, who supervises the Criminal Division’s Fraud and Appellate Sections, emphasized the DOJ’s continued commitment to combatting health care fraud, including utilizing carefully coordinated “takedowns” that have yielded “historic” results. In 2017, the DOJ conducted a takedown that resulted in the prosecution of 400 defendants, 56 of whom were doctors. In 2018, more than 600 defendants were charged, including 76 doctors. In 2019, the DOJ began to target telemedicine fraud, with recent takedowns of telemedicine company executives, owners of durable medical equipment companies, and medical professionals, for their participation in health care fraud that led to losses of over $1.2 billion.

Miner also emphasized the need for clear enforcement policies for institutional actors such as businesses and non-profits, opining that “clear enforcement policies can help influence decision‑making.” Miner indicated that the DOJ has strived in recent years to be increasingly transparent about its enforcement policies through changes in the Justice Manual which outline corporate cooperation expectations and guidance as to voluntary self-disclosure credit. Miner pointed to the newly announced Guidelines for Taking Disclosure, Cooperation, and Remediation into Account in False Claims Act Matters as an example. The Guidelines set forth the factors DOJ lawyers will consider (and the credit available) when a company or individual voluntarily discloses misconduct that could result in FCA liability or an administrative remedy.

Miner also noted that the criminal division and the civil division are beginning to take similar approaches to voluntary self-disclosures, and offered the following comments: “For those tracking the Department’s approach to voluntary self-disclosure in the civil and criminal health care fraud arenas, there is a remarkable degree of symmetry, and that is no accident. Although our criminal and civil enforcement tools are separate and often run along different tracks with different investigative teams, the reality is that a company facing a self-disclosure dilemma does not have multiple tracks. It must factor different risks, legal considerations, and potential outcomes into its analysis and reach a decision in the best interests of the company and its shareholders. At the Department, we understand that we need to be as clear as reasonably possible about our approach to those who voluntarily self-disclose, if we hope to influence the rational decision‑makers when they face self-disclosure dilemmas.”

Lastly, Miner addressed corporate compliance programs, noting that “prosecutors understand that compliance is not and cannot be one-size-fits-all.” Miner indicated that compliance monitors are not necessary where a corporation’s compliance program and controls are demonstrably effective and appropriately resourced at the time of resolution, and that monitors are generally disfavored unless there is a demonstrated need for one.

Miner’s keynote speech helps provide clarity and guidance to the FCA bar on a number of important and constantly evolving issues. We will continue to monitor for more policy and position statements from the DOJ.


DOJ’s Travel Act Prosecution Yields Convictions for Kickbacks Involving Private Payers

As detailed in our prior entry, on April 9, 2019, a Forest Park, Texas jury found seven individuals guilty of various charges related to a scheme engaged in by Forest Park Medical Center (“FPMC”). The physician-owned surgical hospital paid more than $40 million in bribes and kickbacks to induce surgeons to use FPMC to perform their services, while collecting more than $200 million in billings. These convictions came at the tail end of DOJ’s indictment of twenty-one FPMC founders and investors, other hospital executives, physicians, surgeons and nurses in a case called United States vs. Beauchamp, et al.[1]

The Beauchamp case is significant because two of the defendants were convicted for violating the federal Travel Act[2], which punishes the use of various means of interstate commerce for the purposes of carrying on unlawful activity under another statute, in this case the Texas Commercial Bribery Statute (“TCBS”)[3]. The government alleged that co-conspirators used email instructions and a Federal Reserve Bank’s computer network to send bribes and kickback payments constituting “unlawful activity” to a shell company, which in turn paid the kickbacks to physicians who referred patients to the FPMC. Many of the alleged bribes were facilitated through commercial or marketing contracts that purportedly provided free advertising for the physicians in return for their patient referrals.

The Travel Act, passed in 1961, establishes the illegality of committing unlawful acts across state lines – which can occur via email or other electronic means. The Travel Act has not historically been used in the healthcare context; rather it was used to curtail the activities of organized crime. The Travel Act gives the government the ability to “federalize” state law crimes, and consider whether private, commercial insurance arrangements comply with federal criminal law. Patient referral cases involving private insurance have traditionally escaped this prosecutorial scrutiny, since most federal enforcement actions focused on federal healthcare programs, and used as authority the federal fraud and abuse laws such as the Anti-Kickback Statute (“AKS”), the Physician Self-Referral Law (“Stark”) and the False Claims Act (“FCA”).

In Beauchamp, the government used the Travel Act because the allegedly fraudulent commercial and marketing arrangements between FPMC and the referring physicians fell under the safe harbors of the federal AKS, thus making them lawful under AKS. This was expanded on in the surgeon defendants’ briefs which argued, among other theories, that: (i) the TCBS, as the predicate state law violation needed to sustain a charge under the Travel Act, was preempted by AKS, since the alleged conduct was lawful under various exceptions and safe harbors; (ii) the TCBS conflicts with a later-enacted and more specific Texas law, the “Solicitation of Patients Act,” which mirrors AKS, incorporates its safe harbors, was intended to provide a single comprehensive statutory scheme regulating health care providers in Texas, and applies to both federal and private payers.

In its ruling, the U.S. District Court for the Northern District of Texas rejected these arguments and held that the TCBS was not preempted under federal law and could support the Travel Act charges because the two statutes “address different types of conduct performed by different potential actors.” The court also held that TCBS was valid under Texas law, as the state’s general bribery provision, and unlike the Solicitation of Patients Act, it applies to all persons, rather than just healthcare providers. Finally, the court held that the Travel Act’s use of the phrase “facilities of interstate commerce” encompasses purely intrastate uses of such interstate facilities.

The Beauchamp case has had a substantial impact on the healthcare space. The Department of Justice has long made healthcare fraud enforcement a priority and is devoting substantial resources to its efforts to curtail and prosecute fraud in the healthcare industry, both that of federal healthcare programs and private commercial plans. The Travel Act changes the rules in that even a health care provider who conducted itself in compliance with the standards of the federal AKS and its state law counterparts could still be prosecuted under the expansive reach of this off-label use of the federal criminal statute.

This reinforces the need for healthcare providers to re-evaluate their financial and other arrangements to ensure compliance with all applicable laws. The arrangements should include services that are bona fide, commercially reasonable, and actually performed. Most importantly, unlike the arrangements in Beauchamp, these arrangements must not take into account the volume and value of referrals, and should not track referrals as a metric.

Finally, healthcare providers cannot simply rely on compliance with the AKS and Stark Law, but should consider the applicable state laws, especially state commercial bribery statutes. Arrangements that do not involve federal program reimbursement, mainly Medicare and Medicaid, should not be assumed to be out of the federal government’s reach. As the use of the Travel Act suggests, the DOJ is taking an increased interest in private commercial health plans, thus these arrangements must be re-evaluated for compliance with the Travel Act.

[1] U.S. v. Beauchamp, et al., No. 3:16-cr-00516-JJZ-3 (N.D. Tex. Aug. 18, 2018).

[2] 18 U.S.C. § 1952.

[3] Texas Penal Code §32.43.


Diligence and Documentation in Private Equity Healthcare Transactions — Five Key Points

The healthcare private equity market continues to see high transaction multiples and unprecedented competition for transactions. These trends, along with continued growth in False Claims Act or qui tam cases, create interesting dynamics for investors performing diligence and documenting transactions, as discussed during a panel presentation at McGuireWoods’ 6th Annual Healthcare Litigation and Compliance Conference on May 21.

Panel members included McGuireWoods healthcare lawyers Tim Fry  and Holly Buckley; John Brock, managing director for Berkeley Research Group LLC; and Matthew Logan, general counsel for Experity. Brock provided expertise on the financial aspects of the diligence review of target companies, while Logan shared real-world experiences from his company’s recent merger and his past transactional legal practice. Fry and Buckley addressed the legal aspects of transaction diligence and drew examples from numerous recent private equity healthcare transactions.

Here are five key points drawn from that panel discussion.

  1. Organizational culture and workforce behavior constitute the most important factor determining whether a company can operate in a compliant manner — both in understanding historic liabilities and in go-forward post-closing operations. While the most important factor, it can also be one of the most difficult to evaluate from a diligence perspective. If an organization doesn’t have a top-down approach to compliance, open lines of communication, and a culture that rewards and incentivizes reporting of potential issues, maintaining compliance and defending allegations of noncompliance will be more difficult. Panel members discussed how they evaluate an acquisition target by interviewing key constituents and studying the compliance plan elements.
  2. With high transaction multiples stemming from private equity deal competition, buyers face more pressure on their investment thesis. This can create longer and more involved financial due diligence review, with more emphasis on understanding if the target’s operations need to change. Any such change can affect the purchase price or the investor’s ability to obtain a return on investment. In other words, if a buyer identifies a billing and coding issue, there will be discussion around refunding the overpayment from a compliance perspective and a question on whether the difference impacts the purchase price. Buyers also may need to support a more robust financial and back-office operation post-closing, which often must be factored into the price.
  3. Buyers are not necessarily turned off by targets who are in the midst of a False Claims Act case, government investigation or corporate integrity agreement. This is a change from a few years ago, when such status could make a deal difficult to complete. However, buyers will conduct extra diligence on the target and may retain experts to investigate alongside the government to gain confidence in the target’s historic operations. While such legal/compliance issues may create more work for buyers, they also may reduce the purchase price, creating more upside opportunities.
  4. Buyers frequently require or mutually agree with sellers that a self-disclosure is necessary as a condition to closing or as a post-closing covenant . These self-disclosures are most commonly to the Office of Inspector General for Anti-Kickback issues or Centers for Medicare & Medicaid Services for Stark Law issues. The panelists noted that such self-disclosures have become common in the marketplace and are easier to navigate when both parties have sophisticated legal counsel. Parties may also consider refunds to third party payors for billing issues without such a disclosure.
  5. There are opportunities for health systems and private equity funds to partner . However, it is important for both parties to recognize their own priorities as well as the priorities of the other party. For example, health systems generally will not relinquish control over decisions related to tax-exempt status, clinical quality and reputation in the community, while private equity funds will need to ensure they have the ability to exit, to create return on investment and to scale. Expect more exploration in this space in the next few years.
Investigations, Regulatory

The Travel Act in the Healthcare Space: 3 Notable Considerations

Earlier this year, a notable trial took place in Dallas (United States v. Beauchamp, et al., 3-16 Cr. 516D (N.D. Tex.) that could have an impact on the healthcare industry in the coming years. In the trial, the DOJ brought criminal claims against multiple physicians under the Travel Act, which resulted in multiple physicians being convicted and sentenced to prison time. The trial tested the boundaries and application of the Travel Act and was, in many ways, unexpected. This article summarizes 3 things that you ought to know about this trial and its potential impact.

  1. The Travel Act Overview 

It is important to first understand the Travel Act, which was a main statute advanced by the federal prosecutors in the prosecution of the physicians.

The Travel Act, which was passed in 1961, establishes the illegality of committing unlawful acts across state lines – which can occur via email or other electronic means. The Travel Act has not historically been used in the healthcare context in this manner.

Historically, this act gave the federal government the ability to oversee or claim jurisdiction on a broader array of cases because the underlying criminal activity crossed state lines. While the federal government exercised this ability in many different spaces after the passage of the Travel Act, the federal government had not typically utilized the Travel Act in this manner in the healthcare space.

  1. Overview of the Trial

The trial in Dallas involved criminal charges that were brought by the federal government against Forest Park Medical Center and multiple physicians. The trial specifically targeted any kickbacks or bribes by the hospital to get doctors to refer their patients there. Many of the alleged bribes were facilitated through commercial or marketing contracts that purportedly provided free advertising for the physicians in return for their patient referrals.

As the Dallas News mentions, some physicians had the perception that they could avoid scrutiny by the federal government if they avoided patients who are covered by federal health programs. However, prosecutors built a case around the Travel Act in order to establish their jurisdiction. The Travel Act was implicated due to the interstate communications that allegedly aided in the unlawful acts of the hospital and the physicians.

  1. The Impact

This trial could have a substantial impact on the healthcare space. The Department of Justice has long made healthcare fraud enforcement a priority and is devoting substantial resources to its efforts to curtail and prosecute fraud in the healthcare industry. The use of the Travel Act as a means to pursue federal claims even where healthcare providers may not be submitting claims to federal healthcare programs expands the avenues under which the federal government may pursue such claims.

This reinforces the need for healthcare providers to carefully consider their financial and other relationships and to ensure compliance with all applicable laws, while serving as a reminder of the importance to carefully consider the propriety of such relationships even if claims are not being submitted to government payors. Additionally, the case serves as a reminder that simply having a contract in place is insufficient to eliminate potential exposure if there are illegal or improper aspects of the contract.

Overall, the Forest Park case reflects the further scrutiny that is being brought on practices in the healthcare space. We will continue to monitor this litigation and any other efforts by the government to use the Travel Act in this manner.


DOJ Offers Further Guidance on False Claims Act Prosecutions

At a conference earlier this year, Deputy Associate General Stephen Cox offered further guidance on a number of topics central to the DOJ’s enforcement attitude in FCA actions over the past several years. Cox’s comments help provide further clarity and color to several recent memorandums authored by the DOJ and provide guidance on the DOJ’s initiatives and perspectives.

Granston Memo – In a January 2018 memorandum authored by Michael Granston, the Director of the DOJ’s Civil Fraud Section, the DOJ issued internal guidance on the factors that it considers when deciding to exercise its authority to dismiss meritless FCA actions. Cox reaffirmed the underlying principles of the Granston Memo, explaining that even non-intervened cases (which constitute about 80% of all qui tam actions) consume resources and time and that part of the DOJ’s gatekeeping role includes curbing cases that are “non-meritorious, abusive, or contrary to the interests of justice[.]” Cox clarified that the Granston Memo is not a pronouncement of a new policy; rather, it is an effort towards ensuring that the factors enumerated therein are applied more consistently.

Brand Memo – In another January 2018 memorandum, this one authored by then Associate Attorney General Rachel Brand, the DOJ clarified its position on the use and impact of subregulatory guidance, explaining that the violation of such guidance cannot be used to establish a violation of law as it does not have the force or effect of law. A year later, in discussing the Brand Memo, Cox succinctly noted that “agency guidance should educate, not regulate.” Cox elaborated that while an agency’s interpretation of a particular regulatory requirement can be “probative,” it is not binding.

Yates Memo – While not specifically identifying the Yates Memo, Cox’s remarks touched on a couple of the policies central to the September 2015 memorandum. For instance, Cox highlighted the DOJ’s focus on, and recovery from, individuals alleged to have violated the FCA, noting that in 2018 the DOJ had recovered $114 million from three individuals engaged in a kickback scheme.

Cox, however, also elaborated upon the DOJ’s recent clarification on the criteria for a company to receive cooperation credit. These clarifications, which were initially announced in November 2018 by Deputy Attorney General Rod Rosenstein, explained that the ability for a company to receive cooperation credit is not a bright-lined test and that companies are no longer required to admit the civil liability of every individual employee to receive credit. Cox elaborated on this point, explaining that cooperation credit is not an “all or nothing” concept and that DOJ attorneys hold significant discretion in determining the amount of credit to be provided to a company based on its level of cooperation. Building on this point, Cox explained further that when a company meaningfully assists the government’s investigation, the DOJ has discretion to award some credit even if the company does not qualify for maximum credit.

Cox’s remarks provide helpful clarifications and elaborations to the DOJ’s viewpoints on several key issues in the FCA arena and help provide the FCA defense bar with guidance on the DOJ’s areas of focus.

FCA Litigation

DOJ Permitted to Re-Plead Its FCA Claims Against Private Equity Firm

Throughout the past several years, private equity funds have made substantial investments in the healthcare industry. These funds have invested in many facets of the industry, including in physician practices, ambulatory surgical centers, and hospitals. More recently, the Department of Justice (“DOJ” or “Government”) has pursued claims against private equity sponsors under the False Claims Act (“FCA”).

One notable example is the case of U.S. ex rel. Medrano v. Diabetic Care Rx, LLC, Case No. 15-cv-62617-BLOOM (S.D. Fla. 2018). In Medrano, the DOJ intervened in an FCA case against a private equity sponsor, the pharmacy in which the investment was made, and two pharmacy employees.  In its Complaint, the Government alleged that the fund had a “controlling interest” in the pharmacy, that two representatives of the fund served as both board members and officers of the pharmacy, and that these individuals played an active role in the management of the pharmacy. The Complaint also alleged that the private equity fund had acted with the required intent under the FCA because it knew or should have known “that health care providers that bill federal health care programs are subject to laws and regulations designed to prevent fraud.” Id.

Specifically, the Government alleged that the pharmacy executed a provider agreement with Tricare’s contracted pharmacy benefits manager, and then submitted false claims that were generated through kickbacks paid to marketing companies in exchange for patient referrals. Kickbacks were also allegedly given directly to patients through waivers of co-pays. In the provider agreement, the pharmacy agreed to be bound by fraud, waste, and abuse laws, and specifically required compliance with the Anti-Kickback Statute.

The Defendants moved to dismiss, and, on November 30, 2018, the Magistrate Judge issued an opinion recommending that the FCA claims be dismissed. The Magistrate Judge’s opinion concluded that the government had adequately alleged the submission of “legally false” claims, but that the Government had failed to adequately allege any false express certification of compliance. Furthermore, the Magistrate Judge opined that the Government had failed to support its implied certification theory of liability with allegations that Defendants had submitted claims containing specific representations about the goods or services provided and that the Defendants had failed to disclose noncompliance with material statutory, regulatory, or contractual requirements. In contrast, the Magistrate Judge did conclude that the Government had satisfied the second “materiality” prong of the Escobar standard.

Notably, the Magistrate Judge also analyzed the arguments raised by the pharmacy’s private equity investor. One such argument was that the Government had failed to adequately allege that the investor “knew of, directed, or profited from” the alleged fraud. The Magistrate Judge acknowledged the allegation that the investor had communicated to the pharmacy manager that “routine copayment waivers could violate the AKS,” and noted that, without more, such an allegation was insufficient to establish the investor’s intent to violate the FCA. However, the fact that the investor: (1) received legal advice that paying commissions to marketers could violate the AKS, (2) “approved” of the pharmacy’s decision to “use marketers to generate referrals,” (3) knew of the commissions paid to the marketers, and (4) funded commissions paid to marketers, was adequate to allege the fund’s knowledge of the submission of false claims.

More recently, on March 6, 2019, the District Judge adopted the Magistrate Judge’s opinion and recommended that the Government’s complaint be dismissed for failing to adequately plead a false certification. However, the District Judge granted the Government leave to amend over the defendants’ objection.

The Medrano case is notable because it represents one of the more publicized FCA cases that the Government has pursued against a private equity fund based upon an investment in the healthcare industry. The case reflects the DOJ’s willingness to pursue claims based upon such investments. Of note, it does not appear that the Government was taking a bright-line stance against private equity investment in healthcare. Rather, it appears that the Government was focused on the private equity fund’s allegedly direct involvement in the management and operations of the pharmacy. It will be worth monitoring Medrano further in the future. Regardless of the ultimate result, Medrano provides a reminder for private equity funds to carefully consider their investments in the healthcare industry, to conduct appropriate due diligence, and to ensure that their involvement in the management of such entities, and the entities’ conduct generally, is consistent with all applicable laws and regulations.

FCA Statistics

Department of Justice Recovers $2.8 Billion from FCA Cases in 2018

The United States Department of Justice has announced that it has recovered $2.8 Billion from False Claims Act (FCA) cases during fiscal year 2018 (the 12 months ending on September 30, 2018).  The DOJ’s overall recovery in fiscal 2018 remained substantial; however, it marks a decline from the DOJ’s recoveries in fiscal year 2016 ($4.7 Billion) and fiscal year 2017 ($3.7 Billion).

The substantial majority of the DOJ’s recoveries came from the healthcare industry.  In fiscal 2018, almost 90% ($2.5 Billion) of the DOJ’s recoveries came from the healthcare industry (including hospitals, physicians, laboratories, drug companies, and pharmacies).  The DOJ has now recovered more than $2 Billion from the healthcare industry in each of the past 9 years.

Whistleblowers continued to play a role in a substantial number of the cases that led to the DOJ’s recoveries.  There were 645 claims filed by whistleblowers in fiscal 2018.  The Government recovered approximately $2.1 Billion from these cases, as well as from cases that were filed by whistleblowers in prior years.



Certiorari Granted in Eleventh Circuit Case Interpreting Tolling Provision of FCA Statute

The Supreme Court recently granted certiorari in an Eleventh Circuit False Claims Act (FCA) case, Cochise Consultancy, Inc. v. U.S. ex rel. Hunt, No. 16-12836 (11th Cir. 2018). The Supreme Court will decide how the FCA’s statute of limitations applies in qui tam actions that are brought by a private relator, particularly in cases where the government has declined to intervene, resolving a long standing split among the circuit courts.

The FCA’s statute of limitations provision is contained at 31 U.S.C. § 3731(b) and provides that:

“(b) A civil action under section 3730 may not be brought—

(1) more than 6 years after the date on which the violation of section 3729 is committed, or

(2) more than 3 years after the date when facts material of the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed,

whichever occurs last.”

Although § 3731(b)(2) operates as a tolling provision to the six-year statute of limitations period in § 3731(b)(1), there has been a historical split among the circuits regarding whether this tolling provision applies when the government declines to intervene in a relator’s action. The key question the Supreme Court will decide is whether the relevant trigger for the limitations period is the government’s knowledge of the material facts or the relator’s knowledge of the material facts.

Eleventh Circuit Reverses United States District Court for the Northern District of Alabama

In Hunt, the district court below ruled that § 3731(b)(2)’s tolling provision was inapplicable in qui tam cases where the government declined to intervene. However, the Eleventh Circuit reversed the Northern District of Alabama, holding that the alternative 3-year limitations period can apply when the government declines to intervene in a relator’s qui tam action.

The Eleventh Circuit also held that the 3-year limitations period is triggered by the government’s knowledge of the alleged fraud, not the relator’s. It also held for purposes of applying the limitations period, the relator’s knowledge of the alleged fraud was irrelevant to the analysis.

Supreme Court Decision May Resolve Years of Circuit Split on this Issue

There are currently three approaches to handling the tolling provision:

  1. The provision only applies in FCA cases filed by the government or in which the government has intervened (followed by the Fourth, Fifth, and Tenth Circuits),
  2. The provision applies in cases where the government has not intervened, but the clock begins to run when the relator learned of the fraud (followed by the Third and Ninth Circuits), and
  3. The provision applies in cases where the government has declined to intervene, and the clock begins to run when the government learned of the fraud.

The Supreme Court’s decision in Hunt could resolve this split and create a uniform national standard that eliminates confusion and uncertainty for FCA defendants.

FCA Litigation

Eleventh Circuit Weighs In On FCA’s Alternate Remedies Provision

Due to the infrequency in which the situation arises, the FCA’s “alternate remedy” provision is infrequently invoked or discussed.  In short, this provision states that when the relator presents information about a potential FCA claim for the Government to investigate, the Government has the option to pursue this claim through “any alternate remedy available to the Government.”  The provision goes on to explain that if the Government pursues an “alternate remedy,” the relator has the same rights as though the action was still being pursued under the FCA (i.e., the relator will still be able to recover a bounty).

The alternate remedy provision’s scope and application to criminal forfeiture statutes was recently addressed by the Eleventh Circuit in United States v. Couch, No. 17-13402, —F.3d—-, 2018 WL 5019480 (11th Cir. Oct. 17, 2018).  In Couch, a former employee filed a qui tam action against the pain management clinic she worked for, as well as a couple of physicians who ran the clinic.  The Government declined intervention and the qui tam case remains pending.

The Government, however, investigated the physicians and ended up charging them (and others) for racketeering, violations of the AKS, wire fraud, and illegal drug distribution.  The criminal charges included forfeiture counts.  The charges partially overlapped with the qui tam complaint.  The physicians were found guilty on several of the charges, and the court entered a preliminary forfeiture order.  Thereafter, the relator moved to intervene claiming that she had a right in the assets at issue pursuant to, amongst other statutes, the alternate remedies provision.

The trial court denied the relator’s motion to intervene and the 11th Circuit affirmed.  The Circuit Court first noted that whether a criminal fraud prosecution constitutes an “alternate remedy” is an issue about which courts are divided.  The 11th Circuit did directly weigh in on this dispute, however, as it found that the forfeiture statutes at issue here each specifically precluded – absent certain circumstances – a third party from intervening.  Because the forfeiture statutes specifically addressed this issue, they controlled over the more general “alternate remedy” provision.

Notably, however, the government did indicate that where a defendant is found liable under the FCA after being found criminally liable for the same conduct, the defendant is entitled to deduct the criminal restitution paid as a credit against the FCA damage, and the relator would be entitled to a share from this offset amount.

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