Discerning the True Meaning of Escobar: the remarkable case of US ex rel Ruckh v. Salus Rehabilitation

Dear Readers:

I strongly commend to you the recent case, US and State of Florida ex re Ruckh v. Salus Rehabilitation, LLC, et al, 2018 WL 375720 (1/11/2018, M.D. Fla). Applying the Supreme Court’s decision in Universal Health Services, Inc. v. Escobar, 136 S. Ct. 1989 (2016), the Court overturned a $347 million False Claims Act (FCA) trial judgment entered in favor of the Relator after a month long jury trial. The Court granted the Defendants’ motion for judgment as a matter of law and for a new trial on the grounds that the Relator failed to prove that (1) the government regarded the alleged violations of Medicaid and Medicare by a group of 53 nursing homes as material such that they would have refused to pay the Medicaid claims at issue; and that (2) the defendants submitted the Medicaid claims at issue knowing that the government would refuse to pay them if they had known about them. 

Ruckh does so much more than apply a simplistic Escobar analysis of whether the government would have objected to this or that individual billing practice or paperwork errors--what I would call a retail analysis of disputed practices. Rather, acknowledging the punitive nature of the FCA’s treble damages and penalties, the Court evaluates the materiality of defendants’ disputed practices in light of “common sense” and the impact of an FCA judgment would have on the delivery of nursing home care to a large, vulnerable population. For the Court, the “controlling question” is essentially whether the government would effectively shut down 53 nursing homes on the basis of what appears to be paperwork errors–-what the court calls “traps, zaps and zingers”--about which the government “has permitted . . . to remain in place for years without complaint or inquiry.”

I won’t try to capture all of the Court’s discussion, but here are a few highlights:

• The Court appeared to appreciate the complexity and burden of Medicare and Medicaid regulations:  “Federal and state government’s regard the disputed practices with leniency or tolerance or indifference or perhaps with resignation to the colossal difficulty of precise, pervasive, ponderous, and permanent record-keeping in the pertinent clinical environment.” The evidence at trial showed that “Medicaid and Medicare consistently paid in the mine run of cases despite Medicare’s routine audits and Medicaid’s knowledge of billing documentation deficiencies.” 

• The Court explained Escobar’s meaning as follows:  Escobar rejects a system of government traps, zaps, and zingers that permits the government to retain the benefit of a substantially conforming good or service but to recover the price entirely--multiplied by three--become of some immaterial contract or regulatory noncompliance.  A principal mechanism to ensure fairness and to avoid traps, zaps, and zingers is a rigorous standard of materiality and scienter. 

• The Court openly questioned whether the FCA’s “punitive” treble damages and $11,000 fines can be “lawfully imposed on a supplier who delivers substantially compliant goods or services that are received and accepted by the government with knowledge of, or the indifference toward, some material, formalistic, or technical non-compliance.”

• Acknowledging that the defendants “used qualified providers who ably provided services in accord with orders issued by qualified professional but who, for example, could not--years later--identify a ‘comprehensive care plan’ for each patient,” the Court found that  “[c]ommon sense falls far, far short of depicting that . . . a reasonable purchaser would abruptly refuse to pay those providing continuing and sustaining health care to a mass of highly vulnerable and mostly elderly and frail patients.” 

The Court’s key point is that evaluating the materiality of a disputed act or practice must take into account a far broader context and circumstance than simply whether the government would object to this or that individual disputed practice. Escobar, the Court instructed, “demands proof of materiality in the circumstances as they are at the time for which the proof is offered and in the place, in the industry, and in the other regnant circumstances that attend the moment for which materiality is offered.” In the case of the defendants 53 nursing homes, the Court explained:

In other words, the controlling question is not whether on a small scale — a patient or a few patients or a facility or even a few facilities or one physician, on therapy, or one pharmaceutical — but whether on a large scale, on the sale of a major statewide provider of a scarce health care resource in a large and potent state, the federal [or state] government would refuse to pay the provider because of a dispute about the method or accuracy of payment after the government has permitted a practice to remain in place for years without complaint or inquiry. . . . . If a non-compliance is found quickly and remains small, the government might likely demand perfect performance and full accounting. If compliance is larger and lingers longer and the repayment times three becomes a burden that threatens the vitality of the vendor and threatens the public interest, the government might not demand repayment times three.

In my view, Ruckh is a far more important and far reaching application of Escobar than U.S.ex rel Harman v. Trinity Indus., Inc., 872 F.3d 645 (5th Cir. 2017). 

A. Brian Albritton
January 29, 2018

Court Refuses to Permit Government to File Statement of Interest or Amicus in Non-Intervened False Claims Act Cases

Counsel who regularly defend False Claims Act (FCA) cases often encounter “statements of interest” filed by the government in non-intervened FCA cases. Though not a party to the case since it has declined to intervene, the government files these advisory pleadings to argue its interpretation or position on some issue of the False Claims Act, frequently to the detriment of the defendant’s position.

For example, in US ex rel Nevyas v. Allergan, Inc., Dkt 66, Case No. 2:09-CV-432 (E.D. Pa), we see a typical example of a government statement of interest. In Allergan, the defendant moved to dismiss the relator’s second amended complaint in a non-intervened FCA case, and challenged the relator’s claim that it violated the Anti-Kickback Statute, 42 USC §1320a-7b(b) (AKS). Presumably, the relator’s response to the motion to dismiss was not adequate in the eyes of the government because the government filed its statement of interest to address “an argument” raised in the defendant’s motion to dismiss with which it disagreed. Claiming it “has a keen interest in the interpretation of [the FCA and the AKS],” the government submitted its statement of interest to “refute [Defendant’s] argument that the Court should narrowly construe the AKS.”

For its authority as a non-party to submit a brief, the government in Allergan relied on 28 USC § 517 and the fact that it “remains a real party in interest in this matter.” Section 517 does not reference statements of interest or filing briefs on behalf of the United States; rather, it only provides:

The Solicitor General, or any officer of the Department of Justice, may be sent by the Attorney General to any State or district in the United States to attend to the interests of the United States in a suit pending in a court of the United States, or in a court of a State, or to attend to any other interest of the United States.

As in Allergan, district courts rarely refuse the government permission to file statements of interest in FCA cases.

One court in the Middle District of Florida apparently has had enough of these statements of interest. In the last few months, the Court issued two orders refusing the government’s request to file statements of interest. The Court’s opinion in US ex rel Ruckh v. SalusRehabilitation, 2017 WL 1495862 (M.D. Fla. 4/26/2107) is most instructive. In that non-intervened case, after “years of discovery” the relator prevailed after a six week trial and obtained a “spectacular result.” After the defendants moved for judgment as a matter of law and the relator filed its opposition, the government sought to file a statement of interest. Calling it a “euphemism for an advocate’s brief,” the Court refused. It explained its reasons as follows:

·      Section 517 “says nothing” about a statement of interest in a qui tam or otherwise and “nothing about Section 517 supports an intent to create in the Solicitor General the right to appear and submit argument in any case in which the United States articulates a generic interest in the ‘development’ and the ‘correct application’ of the law.”

·  “The clarity with which Congress establishes elsewhere the right to participate in an action belies the assumption that Congress conceals in an organizational chapter the purported right to submit a ‘statement of interest’ and to intervene-in-fact without formally intervening in accord with the False Claims Act.”

·   The government’s request “fails to identify an interest inadequately protected by the relator.”

·        As to the government’s argument that it asserts a “specific interest in . . . the development of law applicable to complex FCA cases,” the Court noted that the government “presumedly maintains an enlivened interest in the development of all federal law, and little if anything, distinguishes this action from all the others . . . . .  Understanding a party’s interest in money requires no additional briefing.”

·     Section 517 appears “inapplicable” in an FCA case since the government declined to intervene.  Section 3730(c)(3) of the FCA “specifically limits the [government’s] participation” and . . . . . invoking Section 517 to proffer argument about the interpretation of the False Claims Act impermissibly circumvents the narrow role prescribed in Section 3730(c)(3).”

Relying on its decision in Ruckh, the Court rejected the government’s attempt to file a statement of interest in response to several of the defendants’ motion to dismiss arguments in another case: US ex rel McFarland v. Florida PharmacySolutions, Dkt 310, Case No.8:15-cv-178-T-23 (M.D. Fla.). The Court’s Order also rejected the government’s alternative argument that it be permitted to file an amicus curiae brief. Noting that the government remains the “remain party in interest” in a qui tam case, the Court denied the government’s request “[b]ecause a party may not gratuitously compound the papers by submitting an amicus curiae  brief.”

Hopefully, the Court’s opinions in Ruckh and McFarland will prompt other courts to more carefully consider whether additional briefing by the government in non-intervened cases is in fact warranted and necessary. 

A. Brian Albritton

July 23, 2017

Middle District of Florida Employs Unique Provisions for False Claims Act Settlements with Compounding Pharmacies

During the last three years, the U.S. Attorney for the Middle District of Florida ("the District") settled a number of False Claims Act investigations relating to "compounding pharmacies" that sold and marketed compounded pain cream medications that were reimbursed by Tricare. See here and here. The allegations against these pharmacies and their owners were very similar: compounding pharmacy paid kickbacks of one kind or another to marketers and/or physicians to generate prescriptions for compounded pain cream medications that were, in turn, filled by the same pharmacy who profited handsomely due to Tricare's very high rate of reimbursement. The District announced in October 2016 that it had "recovered almost $70 million" from these FCA settlements.

The FCA settlements for WELLHealth, Topical Specialists, and North Beaches compound pharmacies included settlement provisions that are rarely, if ever, seen. In these settlements, the District agreed to accept payment over five years of "50% of net profits" from each of these pharmacies. Normally, the Government only permits an FCA defendant three years to pay its settlement obligations. Additionally, I have never seen an FCA settlement where the Government agreed to accept a defendant's pledge of future net profits to pay off an FCA settlement obligation.

For example, the District's FCA settlement agreement with WELLHealth pharmacy of Jacksonville also provided:

• No admission of liability;
• Payment of approximately $1.9 million at the time of settlement;
• Payment of proceeds from the liquidation by WELLHealth's shareholders of their interest in another pharmacy; 
• Payment of proceeds from a future sale of a property owned by a third party after paying off the initial investment of the investors who purchased the property;
• Payment of net proceeds from the future sale of a second property; 
• Payment of 50% of the pharmacy's net profits over the next five years; and 
• In the event the defendant defaults on the settlement, the Government has options (1) to enter a consent judgment in the amount of $28 million, which includes treble damages; and (2) to exclude the pharmacy and its current or former owners, officers or directors during the covered conduct period from participating in all federal health care programs.

To obtain this ability to pay settlement, WELLHealth not only had to provide financials so that the Government could evaluate its ability to pay but also had to swear to and warrant the accuracy of its financial statements. Additionally, WELLHealth promised to provide yearly balance sheets for the business, so the Government could evaluate the pharmacy's net profit calculation.

From the perspective of FCA defendants, such ability to pay settlements as these are a combination of good news and bad news. Good news because such settlements permit longer repayment periods, the ability to sell properties in the future, and the ability to apply a portion of future profits to pay off settlement obligations. Bad news because the financial obligations and the disastrous exposure from a consent judgment resulting from a default extend years into the future. Notwithstanding the mixed message, such settlements show that the Government is sometimes willing to go outside its comfort zone of "this is the way we always do it" in order to secure an FCA settlement.

A. Brian Albritton

May 2, 2017

Worth The Read: Interpreting Unclear Medicare Regulations and FCA Liability - U.S. ex rel Parker v. Space Coast Medical Associates, L.L.P.

Dear Readers:

I commend to you the analysis of the Middle District of Florida opinion, U.S. ex rel Space Coast Medical Associates, LLP, 2015 WL 1456122 (M.D. Fla. Feb. 6, 2015), by Arnold and Porter attorneys Mark D. Colley, Alan E. Reider, and Murad Hussain. Space Coast is another example wherein a court refused to find that a defendant "knowingly" submitted false claims when the Medicare regulations at issue were unclear and the defendant's interpretation of the regulations was not unreasonable.

In this qui tam case, the relators alleged that physicians in an oncology practice failed to provide the proper level of supervision required by "Medicare guidelines." In its order granting the motion to dismiss filed by Messrs. Colley, Reider, and Hussain, the Court conducted a thorough analysis of these so called "guidelines" only to find after analyzing the regulations, the Medicare Benefit Policy Manual, and Local Coverage Determinations that they did not actually require "that radiation oncologists be the physicians who supervised the radiation therapists at issue" and that the regulatory authorities relied on by relators were not preconditions for payment of Medicare claims. Following cases such as U.S. ex rel Hixson v. Health Mgmt. System, Inc., 613 F.3d 1186, 1190 (8th Cir. 2010), the Court then went a step further and found that the Defendants did not knowingly submit a false claim because relators had not shown that "Defendants' interpretations of the regulations were unreasonable."

A. Brian Albritton

August 26, 2015

Stark Law Violations and the False Claims Act: US ex rel Baklid-Kunz v. Halifax Hospital Medical Center

In the ongoing qui tam case, US ex rel Baklid-Kunz v. Halifax Hospital Medical Center, case no. 6:09-cv-1002-Orl-31 (M.D. Fla.), which I have previously featured, the Court recently granted the Government's Motion for Partial Summary Judgment and found that the hospital's compensation arrangement with several oncologists that it employed violated the Stark Law. As there was a "factual issue" regarding whether the Hospital "knowingly" submitted claims for payment from Medicare or Medicaid arising from these Stark violations, the Court did not find --yet-- that the Hospital violated the False Claims Act. False Claims Act liability based on these Stark Law violations, however, remains a real possibility: if the Court or jury later determines that Halifax "knowingly" submitted claims for payment arising from Stark violations, then it could be subject to hundreds of millions of dollars in treble damages and penalties arising under the False Claims Act.

Halifax Hospital and a recent ruling in another Middle District of Florida case, US ex rel Schubert v. All Children's Health System, Inc., case no. 8:11-cv-01687-T-27, involving a Stark Law violation serving as the basis for a False Claims Act violation, demonstrate the incredible breath of the Stark Law, how easy it can be for hospitals to run afoul of it in compensating physicians, the incredible damage exposure to hospitals, and why such claims are especially attractive to relators seeking to bring False Claims Act cases. For example, the relator in Halifax Hospital is reported to be the hospital's former compliance officer.

The Stark Law, 42 USC 1395nn(a), prohibits physicians from referring Medicare/Medicaid patients to a whole host of business entities or "services," including hospitals, clinical labs, durable medical equipment providers, in which the physician or an immediate family member has a financial interest. In turn, hospitals are prohibited from submitting any claim for payment to Medicare or Medicaid that were furnished as a result of a prohibited referral. For example, if a physician has a "financial relationship" with a hospital that violates Stark and refers Medicare patients to the hospital, the hospital may not bill for any services rendered arising from that referral, regardless of whether the patient needed those services, was otherwise entitled to them, or what the services cost. Now, the reference to "financial relationship" does not refer only to some kind of under the table payment or kickback. Rather, the statute interprets "financial relationship" broadly to include "any arrangement involving remuneration between a physician (or an immediate family member of such physician) and an entity" and includes "any remuneration, directly or indirectly, overtly or covertly, in cash or in kind." 42 USC 1395nn(h)(1)(B).

According to the Court, Halifax Hospital ran afoul of Stark Law by employing six oncologists at the hospital for five years and paying them an "incentive bonus" which turned out to violate Stark Law. The Stark Law permits hospitals and other entities to employ physicians and others who might refer Medicare patients to them provided that a "bona fide employment relationship" exists. Whether an employment relationship is bona fide or not depends in large part on whether the entity, such as a hospital, pays the physician "consistent with the fair market value of the services," without regard to the "volume or value of any referrals made by the physicians, as reflected in a "commercially reasonable agreement." 42 USC 1395nn(e)(2). Basically, Halifax Hospital's incentive bonus for its oncologists turned out to be too generous and thus did not satisfy the bona fide employment exception. As a result, Halifax Hospital was prohibited by Stark from submitting Medicare claims for its services that were furnished pursuant to referrals from these ineligible oncologists employed by the hospital.

As a result of Halifax's violations, the Government sought reimbursement of $27,102,000 in Medicare payments generated as a result of these improper referrals. The Hospital did not have any way of lowering this damage figure. By that, I mean the Hospital cannot claim that the referrals were really warranted regardless of the improper bonus; that the bonus payment was immaterial to whether the referral for services was appropriately made; that services were really provided or needed; or that damages were the difference in value between normal referrals that comply with Stark and referrals allegedly made as a result of Stark violations. No, the result is particularly harsh because the services provided were simply not eligible for payment based solely on the ineligible referral source.

The Court found that Stark Law violations can give rise to False Claim Act liability if a hospital or other provider who accepted the illegal referral "falsely certified compliance with the Stark Law" in connection with submitting a claim to a federally funded insurance program such as Medicare. If, as the Government contends in Halifax Hospital, the Hospital is found to have violated the False Claims Act by submitting claims for payment arising from Stark Law violations, then the $27 million damage will be trebled and the hospital would additionally be subject to fines of $5,500 to $11,000 for each separate billing or claim submitted to Medicare. Damages could easily exceed $100 million. One press report stated that the Government was seeking damages in excess of $750 million. 

A. Brian Albritton
December 4, 2013

Wake Up Call for Those Asserting Broad Privilege Claims: U.S. ex rel Kalid-Kunz v. Halifax Hospital

The Court in the False Claims Act/Qui Tam case of US ex rel Kalid-Kunz v. Halifax Hospital Medical Center, et al., 2012 WL 5415108 (M.D. Fla., November 6, 2012) recently rejected a number of privilege claims made by the defendant in that hotly contested litigation. See previous blog post. The Court’s opinion evaluating Halifax Hospital’s privilege claims is a wake up call both for litigators and in-house counsel, and serves as a refresher on where and when the attorney-client privilege and work product doctrine applies. Though it did not really apply new law as some commentators have claimed, the Court examined Halifax’s privilege claims in a manner and at a level of detail not usually seen in discovery orders. In doing so, the Court emphasized that the attorney-client privilege applies to communications made by or to counsel in the course of obtaining or receiving legal advice and it rejected privilege claims for any email, document, or record that did not exhibit such a clear purpose, regardless of whether a lawyer was copied on the document. The Court’s rulings are quite instructive.  For example: 

·                  The Court rejected the hospital’s attempts to shield as privileged hospital compliance communications that only tangentially involved legal counsel;

·                  In lieu of examining every single document for which defendant claimed a privilege, the Court required that the parties file a “representative samples” for in camera review and based its rulings on review of those samples;

·           Communications by in-house counsel were not entitled to a “presumption” of being privileged, given the mixed role of in-house counsel and their involvement in business decisions; 

·                  Just because a document is labeled “attorney-client privilege” and “funneled through an attorney” does not “automatically encase the document in the privilege.” It has to be related to providing or receiving legal assistance;  

·                  Emails on which both a lawyer and non-lawyer are copied or sent are not considered to have the “primary purpose” of seeking legal advice and thus did not qualify for the privilege; 

·                  You can send “privileged” emails to non-lawyers if you are “apprising “them of the legal advice that was sought and received” -- essentially passing along advice of a lawyer;

·           “A draft of a document is protected by the attorney-client privilege if it was prepared with the assistance of any attorney for the purpose of obtaining legal advice or, after an attorney’s advice, contained information a client considered but decided not to include in the final,” and

·           Each email of an email string must be listed separately in a privilege log and the privilege evaluated for each email in an email string. Email string may not be listed as one message.

Additionally, the Court rejected the Hospital’s privilege claim over its “compliance referral log.” In the face of Hospital’s claim that it was a “factual record about compliance issues that may need to be investigated" and that the log was prepared in anticipation of litigation, the Court found the log was kept in normal course, often just recorded facts, incorporated emails that were not privileged, and did not reflect review by counsel.

The Court rejected privilege log descriptions such as “facilitates the provision of compliance advice”, “facilitates the rendering of compliance advice”, and “reflecting request for compliance advice” on the grounds that you “cannot tell from the descriptions whether privilege is properly asserted.”

The Court rejected the Hospital’s privilege claims for “audit reviews” conducted by the management department, compliance department, and finance department. Again, these audits were not conducted primarily for the purpose of obtaining or receiving legal advice.

Overall, the Court refused to recognize privilege claims that were simply based on the fact that the lawyer may be a recipient of the document or information or on the fact that the subject matter of the report or document (e.g., audits or compliance log) might be of interest to counsel or report matters that might raise a legal concern.  

A. Brian Albritton

December 20, 2012

Who Am I and Why Am I Writing This Blog on FCA/Qui Tam?

Dear Readers:

A colleague has suggested to me –my first blog comment—that I introduce myself, explain my expertise and experience in this area, and explain why I am writing this False Claims Act/Qui Tam blog. So, here goes:

First, as to my experience, I have practiced law here in Tampa and throughout Florida for over 20 years, and much of my practice has concentrated in the areas of white collar criminal defense and the defense of regulatory matters. A number of the white collar matters that I have defended involved allegations of health care fraud. Though many of these cases were criminal, over the years the criminal health care fraud cases gave way to more and more cases and investigations involving health care fraud related False Claims Act and qui tam cases. I see far more False Claim Act cases now than ever before.

I served as U.S. Attorney for the Middle District of Florida from 2008 to 2010. The Middle District of Florida has traditionally been one of the nation’s most active districts in the prosecution of health care fraud cases and in the number of qui tams filed, and that was certainly true when I served. As U.S. Attorney, I oversaw numerous investigations and prosecutions of False Claims Act matters, qui tams, and health care fraud cases, including U.S. v. WellCare Health Plan, Inc., which arose from a qui tam filed in the Middle District of Florida.

Second, I write about the False Claim Act and qui tams because I have genuine interest in the False Claims Act statute, 31 U.S.C. §§ 3729–3733, and how it is applied in practice. It is an incredibly powerful weapon to combat fraud given its treble damages, fees, ruinous penalties, and in some industries, terrible collateral consequences if a company is found to have violated it. In my experience, the government often uses it aggressively, especially while the cases are under seal and it is able to apply maximum settlement leverage. Add to that weapon, the financial incentives enjoyed by relators and plaintiffs’ counsel to bring such suits and you have a formidable threat to corporations who receive funds from either the state or the federal government.