The FCA Insider

The FCA Insider

Insights and updates on False Claims Act Litigation

DOJ, Regulatory

Federal Authorities Crack Down on Fraudulent COVID-19 Schemes

As the public faces the crisis related to the 2019 novel coronavirus (COVID-19), federal authorities announced initial actions against individuals and companies promoting fraudulent schemes and products to the public. Federal agencies suggest concerns that individuals and companies are targeting vulnerable consumers and seeking to profit from the confusion and widespread fear during the pandemic.

The U.S. Department of Justice (DOJ) announced its first enforcement action filed in federal court against operators of a fraudulent website allegedly engaging in a wire fraud scheme seeking to profit from COVID-19.  The Government alleges that the website offered consumers access to “World Health Organization (WHO) vaccine kits” in exchange for a shipping charge and credit card information.  The DOJ obtained a temporary restraining order requiring that the registrar of the website immediately take action to block public access to it. There are currently no approved vaccines or drugs for COVID-19.

Furthermore, the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) recently alerted the public about fraud schemes wherein scammers are offering COVID-19 tests to Medicare beneficiaries in exchange for personal details, including Medicare information.  The OIG reports that scammers are targeting Medicare beneficiaries using multiple platforms, including social media, telemarketing calls, and even door-to-door visits.  Scammers target this information for use in identity theft schemes and, here, could charge Medicare and Medicaid beneficiaries for unapproved tests or other services.

The Federal Bureau of Investigation (FBI) similarly warned the public, “Scammers are leveraging the COVID-19 pandemic to steal your money, your personal information, or both.” Specifically, the FBI warned that they are seeing fake emails claiming .to be from the Centers for Disease Control and Prevention, phishing emails purporting to accept charitable donations and sales offers of counterfeit treatments or equipment. The FBI specifically wants individuals to be cautious of products claiming to prevent, treat or diagnose COVID-19, as such products are likely fake, counterfeit or unapproved devices.

Finally, similar to the FBI’s concerns, the U.S. Food and Drug Administration (FDA) has warned the public against fraudulent “at-home” COVID-19 testing kits. No such at-home tests have been approved as safe or effective by the FDA, and, accordingly, the FDA and the Federal Trade Commission (FTC) have jointly issued seven warning letters against companies marketing such fraudulent at-home tests. The warning letters are merely a first step, as the FDA notes that it is prepared to take additional actions against any companies selling fraudulent testing kits.

Federal agencies have suggested healthcare providers serve as gatekeepers for consumers, assessing an individual’s condition and approve any requests for COVID-19 testing. Healthcare providers should be aware of this guidance and anticipate serving in this gatekeeping role for patients who may instead be considering unapproved at-home tests if they have not been able to obtain a test in another manner.


The situation is rapidly evolving and we will continue to monitor any additional federal enforcement actions related to COVID-19. The National Center for Disaster Fraud has provided a hotline (866-720-5721) and email ( to report suspected fraud.

McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial coronavirus-related business and legal issues, and the firm’s COVID-19 Response Team stands ready to help clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic.


New DOJ Task Force to Target Substandard Nursing Home Care

In a March 3, 2020, speech by Attorney General Bill Barr, the Department of Justice (DOJ) announced a new nursing home enforcement initiative targeting “grossly-substandard” care of Medicare and Medicaid beneficiaries in nursing homes nationwide. The DOJ, in partnership with the U.S. Department of Health and Human Services, will also seek to enhance enforcement of civil and criminal efforts to more aggressively pursue owners and operators of nursing homes that mistreat residents, with a particular focus on withholding of food or medication, understaffing shifts, the use of physical and chemical restraints, and inadequate infection control practices.

As part of a broader initiative to combat elder fraud and abuse, Barr announced that approximately 30 nursing facilities in nine states are under investigation and cited facilities that were “unfit for living.” Particularly in an election year, this new initiative could lead to a significant expansion of civil fines and criminal penalties to shine a bright light on fraudulent and abusive practices and substandard facilities in the nursing home space. Although this initiative only purportedly covers nursing homes, there is some concern that the initiative could also expand to elder abuse and neglect in the broader long-term care arena, such as assisted living, home health and even skilled facilities in the future.

This announcement also confirms reports from last fall that the DOJ was making a push to more aggressively identify civil and criminal charges to be brought against the nation’s 15,000+ nursing homes and confluence with the expansion of False Claims Act actions in this space as well. In early 2019, a large long-term care system agreed to pay more than $18 million to settle False Claims Act liability related to the submission of claims to government payors for services provided to Medicare and Medicaid beneficiaries, alleging the underlying services were “grossly substandard or worthless.” Particularly, the DOJ alleged, in part, that five nursing facilities “failed to administer medications as prescribed; failed to provide standard infection control, resulting in urinary tract infections and wound infections; failed to provide wound care as ordered; failed to take prophylactic measures to prevent pressure ulcers, such as turning and repositioning; used unnecessary physical restraints on residents; and failed to meet basic nutrition and hygiene requirements of residents.”

This attention by the DOJ on personal liability for substandard services is not new, but represents a greater or reinvigorated focus on issues that continue to plague the industry. Over the better part of the past decade, the DOJ has taken an aggressive stance on enforcement against owners and operators of nursing homes giving poor care and providing improper services. In 2012, a Georgia nursing home operator was sentenced to 20 years in federal prison and ordered to pay more than $7 million in restitution to the government when surveyors found food shortages, poor sanitary conditions, staff shortages and other resident safety concerns in his facility. In 2019, a Miami-based owner of a chain of assisted-living and nursing home facilities was sentenced to 20 years in prison for accepting kickbacks and paying bribes to obtain improper referrals and provide unnecessary services (including mental health and prescription drug services) to Medicare and Medicaid beneficiaries.

Barr emphasized that “[t]he Initiative will bring to justice those owners and operators who put profits before patients, and it will help to ensure that the residents receive the care to which they are entitled.” The 2019 long-term care system settlement referenced above included $250,000 of additional fines brought against the system’s majority owner and former director of operations to further emphasize DOJ’s renewed focus on personal liability.

In addition to providing quality care to their residents, nursing homes and other long-term care facilities should closely scrutinize the areas for improvement the DOJ identified in its recent prosecutions cited above, as well as in its March 3 announcement. Specifically, Barr recounted a number of “horrifying examples” of mistreatment in his speech, where the DOJ and HHS found gaps in facility pest control, infection control and hygienic practices; poor care indicators such as resident pressure ulcers, pain and infections; and physical facility, resident nutrition and insufficient staffing levels. The DOJ may also more closely monitor areas of elder fraud, including manipulation or theft from resident trust accounts.

For lenders, private equity or other investors in this space, it is important to consider conducting robust diligence related to these issues, such as reviewing and understanding where these issues may come to light through the survey process and patient or family complaints, as they have the potential to significantly impact business from both financial and reputational perspectives. For those already invested, in addition to the increased scrutiny and potential for a government investigation in existing portfolio companies, consideration should be given to appropriately tracking and monitoring survey, complaint and potential related litigation matters to better anticipate issues and understand the steps being taken to mitigate the risks.

For questions or assistance on how this new approach may affect your facility, read about and contact McGuireWoods’ healthcare team.

Defense Arguments

Value-Based Purchasing and the False Claims Act: Tenth Circuit Finds Falsified Quality Data Immaterial Under Escobar

Last month, the Tenth Circuit upheld a grant of summary judgment in U.S. ex rel. Janssen v. Lawrence Memorial Hospital, 2020 WL 594508 (10th Cir. Feb. 7, 2020), applying the  “rigorous” and “demanding” standard of materiality for False Claims Act (“FCA”) cases established by the Supreme Court in Escobar.  In Janssen, the relator alleged that Lawrence Memorial Hospital (“LMH”) violated the FCA by (i) falsifying patient arrival times to maximize its Medicare reimbursement and (ii) falsely certifying compliance with Deficit Reduction Act (“DRA”) training requirements.  In a case of first impression on whether quality metrics reported to the Centers for Medicare and Medicaid Services (“CMS”) under certain programs can lead to FCA liability, the Tenth Circuit focused on the government’s “likely reaction” to the falsehoods, and found that the alleged non-compliance did not satisfy Escobar’s materiality standard.

Patient Arrival Times

The relator alleged that LMH intentionally falsified data that it reported under CMS’s Inpatient Quality Reporting (“IQR”), Outpatient Quality Reporting (“OQR”) and Hospital Value Based Purchasing (“HVBP”) programs to obtain higher Medicare reimbursement.  The IQR and OQR programs reward hospitals that report certain inpatient and outpatient quality measures with a market basket index increase, and penalize hospitals that do not report the data with a market basket index reduction.  The HVBP program adjusts payments to hospitals based on their overall performance score on certain quality metrics, including certain IQR measures.  Some of these measures incorporate patient arrival times (e.g., a patient receiving primary surgical intervention within 90 minutes of arrival).  The relator alleged that LMH falsified patient arrival times to maximize its quality scores under the IQR, OQR, and HVBP programs, which would affect its Medicare reimbursement. It did so, according to the relator and witness statements, by manipulating the arrival time to match the time the patient received an EKG.  While the Tenth Circuit agreed that a “reasonable inference” from the evidence was that LMH falsified some patient arrival times and reported inaccuracies to CMS, it determined that these falsehoods were not material under Escobar using a three-part analysis.

First, the court found that the government’s prior conduct in the case weighed in favor of immateriality.  The relator reported the inaccurate quality data reporting to a CMS fraud hotline in 2013, which triggered an investigation by a CMS contractor, NCI AdvanceMed (“NCI”).  In 2014, NCI closed its investigation, stating that “CMS [was] aware of the quality issue.”  The court noted that to date, CMS has not taken any action against LMH and has continued to pay Medicare claims despite knowing of the alleged falsifications.  The court found that CMS’ “inaction in the face of detailed allegations from a former employee suggests immateriality.”

The court continued its materiality analysis by looking at whether the alleged misconduct was “minor or insubstantial” or went “to the essence of the bargain” with the government.  The court noted that the alleged misconduct was limited and “affected only a subset of a subset” of the IQR and OQR data, and had “uncertain effects on a factor of a factor” of LMH’s performance score under the HVBP program.  While the court agreed that accurate reporting was arguably required, the court found that the minimal nature of the inaccuracies in LMH’s reported data did not go to the “essence of the bargain” between the hospital and CMS, and were therefore immaterial.  Importantly, the court noted that CMS’ existing regulatory regime establishes administrative procedures to address noncompliance with requirements of the IQR and OQR programs, and that substituting FCA liability would improperly render the FCA “a tool for policing minor regulatory compliance issues, contrary to the Court’s directive in Escobar.”

Finally, the court considered the relator’s argument that the government requires accurate reporting as a condition of payment under the IQR, OQR, and HVBP programs.  The court found that the statutory and regulatory provisions related to the programs were generic, and even if they did require accurate reporting as an express condition of payment, that alone is insufficient to establish materiality under Escobar.

DRA Compliance

The relator separately argued that LMH falsely certified its compliance with certain DRA training requirements.  The DRA requires entities receiving $5 million or more in annual Medicaid payments to educate employees on the FCA, specifying that any employee handbooks contain a specific discussion of the FCA and other laws.  The relator alleged that LMH’s employee handbooks lacked a detailed discussion of the FCA, and that LMH falsely signed Attestations of Compliance with the DRA.  The Tenth Circuit found this noncompliance to be immaterial as well, and that failure to have specific language in an employee handbook is “precisely the type of garden-variety compliance issue[] that the demanding materiality standards of the FCA are meant to forestall.”

Key Takeaways

The Janssen case provides a helpful framework for challenging FCA allegations using Escobar’s “rigorous” and “demanding” materiality standard, particularly highlighting the importance of the government’s knowledge of the non-compliant behavior and whether that non-compliance goes to the “essence of the bargain” with the government.  The Janssen case demonstrates that under the complex and technical regulatory environment that governs the Medicare and Medicaid programs, “not every regulatory foot-fault” will give rise to FCA liability.

FCA Litigation

3rd Circuit Case of First Impression Clarifies Lower Threshold for FCA Actions

Government contractors should take note of a March 4, 2020, ruling by the 3rd U.S. Circuit Court of Appeals (Court) that lowers the jurisdictional threshold for establishing a claim under the False Claims Act (FCA).

The 3rd Circuit’s decision in Druding v. Care Alternatives revived an FCA claim that the U.S. District Court for the District of New Jersey rejected through a grant of summary judgment. At the lower court, experts retained by the plaintiff and defendant disagreed about the factual basis of the alleged false claim. Confronted by this disagreement, the District Court ruled that “a mere difference of opinion between experts regarding the accuracy” of the claim at issue was “insufficient to create a triable dispute of fact as to the element of falsity.” The District Court opined that to meet the jurisdictional threshold, a plaintiff under the FCA must provide “evidence of an objective falsehood.” The appeals Court overturned the District Court’s finding that a viable claim must include evidence of an objective falsehood, instead finding that a dispute among the parties’ experts is enough to establish the basis of a triable claim because the expert’s testimony created a “genuine dispute of material facts as to the element of falsity.”

This case of first impression in the 3rd Circuit will allow more FCA cases to avoid early dismissal in the District Court, including those brought by qui tam relators, such as former employees. Relators are encouraged to bring qui tam actions because they are entitled to a portion of the recovered amount, subject to certain limitations. The Court reasoned that “[l]imiting falsity to factual falsity is inconsistent with our case law, which reads FCA falsity more broadly as legal falsity, encompassing circumstances where a claim for reimbursement is non-compliant with requirements under the statute and regulations.”

Government contractors, healthcare entities and other heavily regulated industries are encouraged to be proactive in mitigating the risk of enforcement actions, including through the maintenance of a robust Governance, Risk, and Compliance (GRC) internal infrastructure. McGuireWoods assists clients in gap analysis and remediation of compliance systems, audit support and FCA litigation defense. Proactive mitigating steps are especially important in areas where noncompliance includes high penalties, such as the potential for treble damages under the FCA statute.

This case creates a split of opinion among the circuits. The District Court opinion that was overturned applied the falsity standard adopted by the 11th Circuit in United States v. AseraCare, Inc., 938 F.3d 1278 (11th Cir. 2019); United States v. AseraCare Inc., 176 F. Supp. 3d 1282 (N.D. Ala. 2016); and United States v. AseraCare Inc., 153 F. Supp. 3d 1372 (N.D. Ala. 2015). McGuireWoods will monitor and report updates, including a potential Supreme Court resolution.

For questions or assistance, read about and contact McGuireWoods’ Government Contract Investigations and Enforcement team, McGuireWoods’ Government Contracts team, and/or Healthcare team.

McGuireWoods’ Government Investigations & White Collar Department is a nationally recognized team of nearly 60 attorneys representing Fortune 100 and other companies and individuals in the full range of civil and criminal investigations and enforcement matters at both the federal and state level. Our team is comprised of a deep bench of former senior federal officials, including a former Deputy Attorney General of the United States, former U.S. Attorneys, more than a dozen federal prosecutors, and an Associate Counsel to the President of the United States. Strategically centered in Washington, DC, our Government Investigations & White Collar Litigation Department has been honored as a 2019 Law360 Practice Group of the Year and earned the trust of international companies and individuals through our representation in some of the most notable enforcement matters over the past decade.


Federal Court Upholds CMS’ Use of Extrapolation to Claw-Back Improper Payments

A recent federal court decision should serve as an important reminder to providers that the Centers for Medicare and Medicaid Services (“CMS”) and its contractors have substantial authority to audit provider Medicare claims and to broadly apply extrapolation to calculate overpayments. In Palm Valley Health Care, Inc. v. Azar, No. 18-41067, 2020 BL 14097 (5th Cir., Jan. 15, 2020), the United States Court of Appeals for the Fifth Circuit re-affirmed CMS’ application of extrapolation of errors identified in a sample of claims to over 10,000 claims. The resulting demand for the provider, Palm Valley Health Care, Inc. (“Palm Valley”), to refund claims was $12 million rather than the amounts paid on the sample set. Providers need to be aware that when CMS audits their claims, CMS is not required to use the most precise statistical methodology for selecting claims for audit.

Background on CMS Audits and the Application of Extrapolation

As part of its oversight obligations, CMS, through its Medicare Administrative Contractors and other contractors, audits claims submitted for payment to ensure the claims comply with Medicare billing requirements. When CMS determines that it made a payment to a provider for services that were “medically unnecessary or incorrectly billed”, an “actual overpayment” will be deemed to have occurred and CMS will seek a refund of the overpayment from the provider.

Because Medicare cannot conduct a comprehensive review of every claim submitted for payment to ensure it complies with billing requirements, Congress has authorized CMS to use statistical sampling and apply extrapolation when “there is a sustained or high level of payment error.” [1]  Significantly, the Medicare Program Integrity Manual (the “Manual”), which was amended considerably with respect to extrapolation in 2019, provides a broad array of general factors that the contractor “shall” use in order to determine that “a sustained or high level of payment error” has occurred. These factors include but are not limited to:

  1. High error rate determinations by the contractor or by other medical reviews (i.e., greater than or equal to 50 percent from a previous pre- or post-payment review);
  2. Provider/supplier history (i.e., prior history of non-compliance for the same or similar billing issues, or historical pattern of non-compliant billing practices);
  3. CMS approval provided in connection to a payment suspension;
  4. Information from law enforcement investigations;
  5. Allegations of wrongdoing by current or former employees of a provider/supplier; and/or
  6. Audits or evaluations conducted by the Office of Inspector General (“OIG”).[2]

A contractor can also identify reasons beyond those listed above as a basis for using extrapolation (e.g., billing for non-covered services, billing for services not rendered) although those decisions are subject to further review within CMS.[3]

Palm Valley’s Targeted Audit with Extrapolation

In Palm Valley, CMS’s contractor, Palmetto GBA, LLC (“Palmetto”), conducted a targeted audit of Medicare claims submitted by Palm Valley for the period of July 1, 2006 through January 31, 2009. According to CMS, Palm Valley was selected for an audit because it had submitted an unusually high number of claims (10,699) for the period at issue. For the audit, CMS employed a methodology that resulted in 54 claims being selected for review. CMS’ review of those claims determined that 29 claims were not eligible for payment by Medicare because the beneficiaries’ records did not satisfy Medicare’s requirements for eligibility for home health care.

The overpayment for those 29 claims totaled $81,681 but more significantly, the 29 claims represented a 53.7% error rate based on the 54 total claims selected for audit. With this error rate, CMS used extrapolation based on its determination that there had been a “sustained or high level of payment error.” After the administrative appeals process, which overruled the contractor on four claims, by using extrapolation on the remaining 25 claims, Palm Valley was required to repay $12,589,185 to CMS.

CMS Has Substantial Authority to Select Statistical Methods in Extrapolation

Although Palm Valley primarily sought judicial review over whether the denied claims complied with Medicare’s billing requirements for home health care, Palm Valley also challenged CMS’ sample and extrapolation methodology. Palm Valley argued that CMS’ selection of 54 claims out of 10,669—in other words a mere 0.0051% of the total claims Palm Valley submitted during the period at issue was too imprecise of a sample to rely on. After relying upon statutory language to note that the decision that there is a “sustained or high level of payment error” is not reviewable, the court examined the merits of Palm Valley’s argument. The court quickly dismissed it, noting that while the statistical sampling methodology may not be the most precise methodology available, CMS’ selection methodology did represent a valid “complex balance of interests.” Principally, the court noted, quoting the Medicare Appeals Council, that CMS’ methodology was justified by the “real world constraints imposed by conflicting demands on limited public funds” and that Congress clearly envisioned extrapolation being applied to calculate overpayments in instances like this.

While the court suggested it agreed with Palm Valley’s contention that a more precise formula may result in a more precise calculation for extrapolation, the court held that the law merely requires CMS to apply a statistically valid formula—which may not be the most precise formula. Even Palm Valley’s own expert had testified that CMS’ formula was statistically valid. Further, the court held that at a minimum CMS’ methodology provided “substantial evidence” to support CMS’ decision to require Palm Valley to refund claims which did not satisfy Medicare’s billing requirements. The court further noted that, if anything, it believed the extrapolation methodology was “provider friendly” in that CMS’ formula gives the provider substantial benefit of doubt—CMS’ formula assumes that the average overpayment for all claims is equal to a number that there is a 90% chance is smaller than the actual overpayment. Therefore, the court concluded that there was a 90% chance that Palm Valley’s overpayment liability was in fact greater than the $12 million that CMS had determined Palm Valley owed.

Lessons for Providers

While all providers will routinely be required to refund claims that do not satisfy Medicare billing requirements, providers need to be cognizant that sustained billing errors substantially increase their risk for significant audits and refund demands. Providers need to make sure that they not only understand and abide by Medicare’s billing requirements when providing care but also that their documentation supports their claims. This documentation is important not only to make sure the claim is paid upon submission but also to make sure the claim will sustain CMS’ scrutiny if the provider is selected for an audit. Taking relatively small proactive steps during the course of providing care and billing for services can help providers avert potentially financially devastating refunds down the road.

[1] 42 U.S.C. § 1395ddd(f)(3)(A).

[2] Medicare Program Integrity Manual §

[3] Id.


DOJ announces $5.5 Million Settlement Concerning Allegations of Undisclosed Grants

On December 19, 2019, the Department of Justice (DOJ) announced that Van Andel Research Institute (VARI) has agreed to pay $5.5 million to resolve allegations that it violated the False Claims Act by submitting grant applications to the National Institute of Health (NIH) without disclosing Chinese government grants for involved researchers.

VARI is an independent research institute in Grand Rapids, Michigan. Between January 2012 and December 2018, at least one researcher at VARI received funding from China’s Thousand Talents Program. This initiative intends to draw researchers to China for China’s benefit. DOJ explains that not only did VARI omit reference to this funding, but it also “removed references to those grants from the proposed funding attributions in its press release.” Even after receiving correspondence from NIH directly concerning the need to disclose foreign funding, VARI did not disclose the financial source. Instead, VARI sent correspondence in December 2018 to NIH stating that it was not required to disclose the information because “there was no undisclosed overlap of any budgetary resources, commitment, or scientific endeavor” between the Chinese and NIH grants. However, NIH requires disclosure of all financial sources, and DOJ further alleges that VARI does not know whether such an absence of overlap is true.

DOJ explained that enforcement of grant disclosure requirements is particularly important due to the competitive nature of the application process. “Nondisclosures and false statements to granting agencies are especially harmful because they distort competition, disadvantage applicants who play by the rules, and undermine agencies’ decision-making on the use of their limited resources.” As part of this application process, NIH requires that applicants disclose all funding sources. Moreover, intellectual property security has become a top priority for NIH in recent years due to allegations that researchers are stealing applications and sending the concepts abroad.

For those institutions concerned about past application submissions, DOJ highlights that “proactive, timely, and voluntary self-disclosures to the Department about misconduct will receive credit during the resolution of a False Claims Act case.”  This settlement, and the government’s use of the False Claims Act in this context, is a signal that the administration intends to use all tools at its disposal to enforce NIH interpretations of grant requirements. If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.



DOJ Releases FY 2019 False Claims Act Statistics with Numbers that Highlight the Focus on the Healthcare Industry

The U.S. Department of Justice (DOJ) Office of Public Affairs recently released a report detailing the settlements and judgments from civil cases involving fraud and abuse claims obtained in fiscal year 2019.  In total, the DOJ reports that it obtained more than $3 billion during FY 2019, the substantial majority of which ($2.6 billion) involved the healthcare industry.  The report notes significant penalties involving the healthcare industry, including drug and device manufactures, healthcare providers, and individual owners and directors of healthcare companies.

The vast majority of the settlements and judgments during FY 2019 ($2.1 billion) arose from qui tam whistleblower lawsuits.  The DOJ reported that 633 qui tam suits were filed in 2019, with an average of at least 12 new cases each week.  During FY 2019, the Government paid out $265 million to the whistleblower individuals in these cases.  The DOJ emphasized the “high priority this administration places on deterring fraud against the government” and noted the “tireless efforts” of DOJ investigators and litigators.

There were certain trends that the statistics reflected in terms of common allegations against healthcare providers.  For example, there were multiple settlements involving allegations of improper marketing relationships, purported kickbacks being paid to providers, assertions of coding violations and upcoding, and allegations of false or misleading marketing.

Notably, the DOJ also highlighted several significant cases against, and settlements that were reached with, individuals.

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Members of the healthcare industry should take careful note of the previous year’s settlements and judgments and assess their own internal compliance with healthcare fraud and abuse laws.  If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our healthcare department, including the authors of this alert.


OIG Issues Advisory Opinion Approving Supermarket Pharmacy Loyalty Program

On December 17, 2019, the Office of Inspector General (OIG) issued an Advisory Opinion regarding a proposed supermarket loyalty program that would have provided customers with rewards points on out-of-pocket costs related to the purchase of pharmacy products. OIG determined that while the proposal would implicate the Federal anti-kickback statute (AKS) and the prohibition on beneficiary inducements under the civil monetary penalties (CMP) law, the arrangement would satisfy the CMP law’s exception for retailer rewards and pose minimal risk under the AKS.

The requester operates over 200 grocery stories, approximately half of which operate in-store, full-service pharmacies. The stores operate a loyalty program under which customers may earn points for every dollar spent on “qualifying” purchases.  In particular, qualifying purchases do not currently include costs related to pharmacy items or immunizations. The requester inquired as to the permissibility under federal fraud and abuse laws of expanding the rewards program to include out-of-pocket costs paid in connection with pharmacy products. Rewards points earned on pharmacy products would be available to the general public and subject to the same restrictions (such as expiration dates and point limits) that apply to all other rewards points.

The OIG concluded that although the proposed arrangement would implicate the federal anti-kickback statute and the CMP statutes regarding beneficiary inducements, but would satisfy the requirements of an applicable exception to the definition of remuneration and pose a low risk of fraud and abuse. Specifically, the OIG reasoned that the proposed arrangement would fall under an exception for retailer rewards programs, where:

(1) the rewards consist of coupons, rebates, or other rewards from a retailer;

(2) the rewards are offered or transferred on equal terms available to the general public, regardless of health insurance status; and

(3) the offer or transfer of the rewards is not tied to the provision of other items or services reimbursed in whole or in part by the Medicare or Medicaid programs.

The OIG concluded that the proposed arrangement meets all of these criteria. Furthermore, the OIG concluded that the proposed arrangement would pose a low risk of fraud and abuse under the federal anti-kickback statute for two reasons. First, the risk that the proposed arrangement would drive customers to requester’s supermarkets to purchase federally reimbursable items or services is unlikely. Second, the proposed arrangement would not involve a waiver or reduction in cost-sharing amounts, therefore, the risk of over-utilization or increased costs to the federal health care programs is also small.

Accordingly, the OIG concluded that it would not impose administrative sanctions on the requester in connection with the proposed arrangement. As with all OIG opinions, this conclusion only applies to the proposed arrangement however, it is an informative illustration for those evaluating similar loyalty programs.  If you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.

CMS Guidance, Regulatory

CMS Internal Memorandum Clarifies Impact of Supreme Court Decision on Enforcement Practices

The Deputy General Counsel and Chief Legal Officers at the U.S. Department of Health and Human Services (HHS) Centers for Medicare & Medicaid Services (CMS) recently issued an Internal Memorandum clarifying that a recent Supreme Court ruling may limit HHS’s enforcement practices going forward. Consistent with the Court’s ruling, the Memorandum clarifies that subregulatory guidance issued without notice-and-comment rulemaking may not be used as the sole basis for an enforcement action when such guidance creates or changes a substantive legal    standard.

The Supreme Court issued a ruling earlier this year in Azar v. Allina Health Services, invalidating a CMS payment policy due to the Agency’s failure to provide the public with a notice-and-comment period. The Court reasoned that the policy created a “substantive legal standard,” requiring a notice-and-comment period, and noted that the government cannot evade such notice-and-comment obligations by establishing or changing an “avowedly ‘gap’-filling policy.”

The CMS Memorandum references the Allina ruling and notes that CMS payment rules often form the basis for enforcement actions and would therefore be subject to the rulemaking procedure requirements set forth in Allina. Significantly, the Memorandum points out that guidance and policies promulgated without notice-and-comment rulemaking procedures may not be documents upon which the Agency can predicate enforcement actions. If such guidance documents are to be used as the basis for enforcement actions, the Memorandum clarifies that such documents must comply with Allina.

Specifically, the Memorandum points to Internet-Only Manuals (IOMs) and preamble text published with final rules that are sometimes cited in enforcement actions. To the extent that these texts are closely tied to existing statutory or regularity requirements, they can be implicated in enforcement actions. Because such subregulatory guidance does not substantively establish or change a legal standard, it meets the Allina requirements because it merely aids in demonstrating whether or not parties have failed to meet statutory or regulatory requirements. Where such IOMs and guidance documents issued without notice-and-comment set forth payment rules that are not closely tied to statutory or regularity language, the Memorandum warns that such documents are not validly issued under Allina and therefore cannot be used as the sole basis for enforcement action.

The critical question—according to the Memorandum—is whether the enforcement action can be brought absent the guidance document. Where such actions cannot be brought absent a guidance document, then the guidance document establishes a norm and implicates the notice-and-comment requirements of Allina.

The Memorandum notes that Local Coverage Determinations (LCDs) do not implicate the Allina requirements as they merely reflect payment determinations, are not binding on HHS and therefore do not establish or change substantive legal standards. Under Allina, however, LCDs may not be used as the sole basis for enforcement actions. Similarly, the Memorandum clarifies that neither Stark Law advisory opinion nor statutorily-authorized fraud and abuse waivers would require notice-and-comment rulemaking.

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While CMS has not commented on the Memorandum, the Memorandum ends with an assurance that legal counsel will continue to work with CMS to “identify particular guidance documents that might be appropriate to issue through notice-and comment-rulemaking on a more expedited basis.”

Consequently, there may be an uptick in guidance documents being pushed through the notice-and-comment process so as to stand as the basis of enforcement actions. We will continue to monitor and provide updates accordingly. In the meantime, if you have any concerns with your compliance with federal fraud and abuse law or the contents of this alert, please contact any member of our health care department, including the authors of this alert.


DOJ, Individual Liability, Settlements

DOJ Settlement Resolves Allegations of Individual Liability

On October 4, 2019, the U.S. Attorney’s Office for the Central District of California announced a settlement in which the Retina Institute of California Medical Group, its former CEO, and several of its physicians paid the United States and California approximately $6.65 Million to settle False Claims Act allegations.  The settlement related to accusations of billing for unnecessary eye exams, improperly waiving Medicare co-payments, and violating other regulations.

 Between January 2006 and August 2017, the retinal group allegedly billed public health programs by misclassifying simpler exams as being more complex and using billing codes for patients with severe or emergency conditions. The retinal group also allegedly waived Medicare co-payments and deductibles without proper documentation of financial hardship and without reasonable collection efforts, which was viewed as intending to induce referrals.  Finally, the Department of Justice’s press release note that the defendants allegedly billed Medicare and Medicaid for “medical services that weren’t performed, were unnecessary, not documented in the medical record or were not in compliance with applicable rules and regulations.”

The arrangement described above was uncovered as a result of a whistleblower claim filed by Bobbette Smith and Susan Rogers who worked for the retinal group as administrators.  The case was initially filed in 2013 and unsealed in 2016.

The settlement serves as yet another reminder of the Department of Justice’s increased focus on individual liability and refusal to allow the resolution of allegations against a corporation to provide protection to individuals accused of engaging in wrongdoing.  These principles – memorialized in the September 2015 Yates Memo – have resulted in a significant uptick in the number of cases brought against corporate executives and settlements involving the resolution of individual liability.


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