Fifth Circuit Refuses to Take the “One Purpose” Test of the Anti-Kickback Statute to Its Logical Extreme: United States ex rel Ruscher v. Omnicare, Inc.

Dear Readers:

As you have probably experienced, False Claims Act (“FCA”) cases based on alleged violations of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), have risen sharply in the last few years. Simply stated, the Anti-Kickback Statute (“AKS”) makes it a crime to knowingly and willfully offer, pay, solicit, or receive any remuneration directly or indirectly to induce or reward referrals of items or services reimbursable by a Federal health care program, such as Medicare or Medicaid. The AKS has been broadly enforced primarily, in my view, due to the application of the “one purpose” test: that is, to prove that a contract or transaction between health care providers violates the AKS, a relator or the government need only show that “one purpose” of the remuneration involved in the transaction was for the purpose of inducing referrals. See Robert G. Homchick, “Federal Anti-Kickback Statute Primer.” Not surprisingly with a lower standard of proof to prove a “false claim,” enforcement of the AKS through the False Claims Act has expanded its reach into areas that would have been unthinkable years ago when most of the AKS enforcement was on the criminal side. In fact, one commercial blog claims that “Anti-Kickback Statute violations — as well as violations of the Stark Law — now make up most False Claims Act cases.” Becker’s Hospital Review, “20 things to know about the Anti-Kickback Statute,” September 5, 2014.

Amidst these ever growing AKS cases, I came across a remarkable case, United States ex rel Ruscher v. Omnicare, Inc., et al., 2016 WL 6407128, __ Fed. Appx.__ (5th Cir., 10/28/2016), that applied a common sense analysis to this “one purpose” test and refused to extend it to a logical extreme.  Ruscher refused to find an AKS violation simply because one of the parties to a contract designed to provide legitimate pharmacy services “merely hoped” or expected referrals as a benefit or by-product of that contract. 

Here are some of the key facts: Defendant Omnicare provided pharmacy services to skilled nursing facilities (“SNFs”) and their residents. Omnicare routinely entered into Preferred Provided Agreements with the SNFs, which designated Omnicare as the SNFs’ preferred provider of pharmacy services and set forth, among other things, pricing, payment terms, and billing mechanisms. These SNFs provided medical, nursing, and therapy services to residents who usually had their pharmacy drug costs reimbursed by Medicare Part A, Medicare Part D, or Medicaid. Part A benefits last for 100 days. When providing pharmacy benefits to residents covered by Part A, Omnicare billed the SNF for prescription costs. Medicate, in turn paid the SNFs a per diem amount for each Part A resident’s care, including pharmacy services. After a resident’s Part A benefits expired, any pharmacy services provided to residents by Omnicare were reimbursed by the patient’s Medicare Part D and/or Medicaid coverage. 

Omnicare’s billing and collections from these SNFs sometimes resulted in some confusion as to whether Omnicare had properly billed and been paid for the services it provided. This confusion gave rise to billing disputes with the SNFs that sometimes took years to resolve.  The relator in Ruscher worked in Omnicare’s Collections Department for a time, collecting past-due accounts from SNFs. She became suspicious of Omnicare’s contract negotiations with these SNF clients over past due accounts receivables, and as a result, filed a False Claims Act qui tam against Omnicare and several other defendants in the Southern District of Texas. Among other things, the relator alleged that Omnicare violated the FCA by purportedly making and causing SNFs to make false claims on the SNFs’ cost reports for Medicare and Medicaid reimbursement that allegedly resulted from kickbacks in violation of the AKS. After pending for several years, the Court granted summary judgment in favor of Omnicare, and the Fifth Circuit affirmed that summary judgment. Among other things, the relator primarily contended that Omnicare paid unlawful kickbacks to the SNFs both by not collecting Part A debt that was allegedly owed it and by offering prompt-payment discounts to induce the SNFs to refer patients to Omnicare who were covered under Medicare Part D and Medicaid. Stated simply, the relator alleged that Omnicare was not collecting all that it was due from the SNFs or offering the SNFs favorable payment terms so that the SNFs in turn would have a favorable opinion of Omnicare, continue to contract with it, and continue to refer the SNF residents whose pharmacy services were reimbursed by Medicare Part D and Medicaid.

The Fifth Circuit acknowledged that the AKS “criminalizes the payment of any funds or benefits designed to encourage an individual to refer another party to a Medicare provider for services to be paid for by the Medicare program" and that the relator needed to only show that “one purpose of the remuneration was to induce such referrals.” Yet, the Court found the Omnicare did not violate the AKS: “there is no AKS violation . . . where the defendant merely hopes or expects referrals from benefits that were designed wholly for other purposes.” Among the reasons cited by Ruscher to support its finding were:

• OIG – HHS had previously stated that prompt payment discounts were not included among the designated HHS “Safe Harbors” because “by definition, preferred payment discounts are designed to induce prompt payment and thus do not appear to violate” the AKS.
• Relator’s evidence primarily showed Omnicare was trying to collect verifiable debt and settle billing disputes without unnecessarily aggravating its SNF clients in the midst of ongoing or anticipated contract negotiations.
• At best, the evidence showed that Omnicare did not want unresolved settlement negotiations to negatively impact its contract negotiations with SNF clients and was avoiding confrontational collection practices that might discourage SNFs from continuing to do business with Omnicare.
• None of the evidence showed that Omnicare designed its settlement negotiations and debt collection practices to induce SNF clients to continue making Medicare and Medicaid referrals to Omnicare.
• SNFs were not told they were getting special benefits from Omnicare settlement negotiations and debt collection practices let alone that any such benefits were tied to Medicare and Medicaid referrals.  The Court noted that “if purported benefits were designed to encourage SNFs to refer Medicare and Medicaid patients, one might expect to find evidence showing that the SNFs at least knew about those benefits.”
• While Omnicare “may have hoped for Medicare and Medicaid referrals, absent any evidence that Omnicare designed its settlement negotiations and debt collection practices to induce such referrals, relator cannot show an AKS violation.”
• Omnicare’s prompt payment discount offers to SNFs did not violate the AKS because there was no evidence they were designed to induce referrals.  The relator showing that they were offered in contract negotiations and included in new contracts was not enough in and of itself to show an illegitimate motive for the purpose of inducing referrals rather than the legitimate purpose of inducing payments.  

In short, the Court found that Omnicare’s legitimate billing and collections practices with its SNF clients did not run afoul of the AKS simply because a byproduct of its contracts and its collections practices was to promote continued good will with the SNFs and, in turn, their referrals. The Court distinguished such an agreement from other agreements that are designed, at least in part, to induce referrals. 

Perhaps the most remarkable result is that the 5th Circuit affirmed summary judgment for Omnicare and did not find this question of Omnicare’s motive or intent to be a jury question. In affirming summary judgment, the Ruscher Court relied on a criminal case, U.S. v. McClatchey, 217 F.3d 823, 834 (10th Cir. 2000), which addressed the AKS in the context of ruling on a jury instruction. According to McClatchey, determinations as to a defendant’s motive in AKS cases are jury determinations. In a footnote, the Court observed that “it may be difficult for a jury to distinguish between a motivating factor and a collateral hope or expectation. Making such difficult determinations, however, is the very role to which our system of justice assigns to the finder of fact.”  

Unfortunately, the 5th Circuit decided not to publish Ruscher. Nor did the Court provide any guidance as to how better to distinguish between agreements for which one purpose is the inducement of referrals and legitimate agreements wherein one of the parties hopes that referrals result from the agreement.  Nevertheless, it is a good first step, and hopefully one that other courts will expand upon and bring some common sense limitations to the application of the AKS. 

A. Brian Albritton
December 1, 2016 

The Government Should Dismiss Meritless Qui Tam Suits - The Case of US ex rel Thomas v. Black and Veatch Special Projects Corp.

Dear Readers:

Last week the 10th Circuit affirmed the District Court's grant of summary judgment in favor of the defendant in US ex rel Thomas v. Black and Veatch Special Projects Corp., 2016 WL 1612857 (10th Cir.). I previously covered the District Court's decision.

Black and Veatch is a great case that addresses whether and when a defendant's "false certification" of its compliance with a government contract is material to the government's decision to pay on that contract. As the Court explained, "liability [under the False Claims Act (FCA)] does not arise merely because a false statement is included in the claim; rather, the false statement must be material to the government's decision to pay out moneys to the claimant." Here, the Court essentially found that the false certification regarding minor breaches of the contract was not material to the government's decision to continue paying on the contract because the government continued to pay defendant on the contract long after the government knew of and defendant self-reported the violations.

Defendant Black and Veatch was a large construction firm that contracted with the United States Agency for International Development (USAID) to build a huge electrical plant in Afghanistan. The Relators discovered (and the construction firm also self-reported) that some of the employment records for a handful of the defendant's employees had been fraudulently tampered with so that the employees could get visas and work permits in Afghanistan. Such violations, Relators alleged, constituted a "material" violation of the contract and resulted in a false certification to the government that went to the heart of the defendant's government contract.

Looking at the contract as whole and the impact these minor violations had on its performance, the Court found that these violations did not undermine the contract's purpose and that the defendant substantially performed all of its contractual duties and obligations. More importantly, the Court found that these violations were not material because the USAID continued to pay the defendant on the contract long after government officials learned of the defendant's violations and the results of defendant's internal investigation. 

I said it when I reviewed the District Court case but it's worth repeating: the real significance of this case is the government's failure to exercise its authority under the FCA to dismiss the Relators' suit pursuant to 31 U.S.C. 3730(c)(2)(a). What possible justification was there for allowing it to continue?  If the government as the "real party in interest" didn't have a problem with the defendant, why let Relators, acting in the government's name and collecting money for the government, proceed with this matter? Why force a defendant to defend a case like this? 

Apparently, the government never exercises its power to dismiss meritless qui tam cases. I know of only one case where the government dismissed a claim under 3730(c)(2)(a): US ex rel Roach v. Obama, 2014 WL 7240520 (D. DC). In that case, the relator alleged that Barack Obama was not eligible to hold the office of President and that transactions engaged by him as President violated the FCA. Is Roach the bar for when the government will exercise its power to dismiss meritless qui tam suits -- that they have to be brought by a birther? It sure seems like it.

A. Brian Albritton

May 2, 2016

No False Claims Act Liability Based on Ambiguous Medicare Regulations: Donegan v. Anesthesia Associates of Kansas City

Medicare regulations are often complex, ambiguous (especially when applied), and bereft of any guidance by the Centers for Medicare and Medicaid Services (CMS) or the local Medicare administrative contractor. As the 4th Circuit aptly observed, Medicare statutes and regulations "are among the most completely impenetrable texts within human experience." Rehabilitation Ass'n of Va., Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994). As a result of the complexity of these regulations, qui tam relators are increasingly exploiting the ambiguities of Medicare billing regulations in order to bring qui tam actions alleging Medicare providers submitted false claims when they failed to follow the relator's interpretation of billing regulations.

In US ex rel Donegan v. Anesthesia Associates of Kansas City, 2015 WL 3616640 (W.D. Mo., June 9, 2015), the Western District of Missouri recently addressed whether False Claims Act (FCA) liability can be based on an ambiguous Medicare regulation for which there was no authoritative interpretation prohibiting the defendant's billing practice. The Court found as a matter of law that the relator could not establish that the defendant knowingly submitted a false claim because the relator could not "show that there is no reasonable interpretation of the law that would make the [defendant's] allegedly false statement true."

In this qui tam case, the relator sued an anesthesiologist group practice alleging that it had fraudulently billed for anesthesiology services that its anesthesiologists did not "direct" but only "supervised." The case turned on whether the anesthesiologists complied with a Medicare billing regulation, referred to as the "Seven Steps" regulation, and the question of whether the anesthesiologists "personally participated in the most demanding aspects of the anesthesia plan including . . . emergence." 

The issue facing the Court was that there was no authoritative interpretation of "emergence." In its regulation, CMS did not define "emergence," when it began or when it ended. Moreover, no Medicare billing contractor had provided a Local Coverage Determination that defined "emergence" either. The Court noted further that there was "no guidance from any national or state anesthesiology organization defining 'emergence' because emergence is a process, and each patient is different."  

Fortified with the testimony of two experts, the relator argued that emergence excluded time in the recovery room after an operation: to personally participate in the patient's "emergence" from anesthesia that had been administered by a certified registered nurse anesthetist (CRNA) under the physician's "direction" meant the physician had to examine the patient in the operating room. In fact, one expert even referenced "a nationwide medicare carrier for railroad retirees" which defined "emergence" as the period between when anesthesia is no longer administered to the patient and before the patient is turned over to the recovery room. Citing its own evidence, the defendant, however, argued that emergence included a patient's time in the recovery room, which is where its physicians most often checked in on patients who had been administered anesthesia by CRNAs.  

The Court granted summary judgment in favor of the defendant on the relator's only remaining theory left from the amended complaint: that the defendant's anesthesiologists did not personally participate in patient's emergence from anesthesia because emergence did not extend to the recovery room.  

First, the Court rejected the relator's attempt to assert another theory of liability that was not contained in the amended complaint. Acknowledging that this unpled theory "may be meritorious," the Court nevertheless held that the relator may not assert new theories of FCA liability that were not contained in the amended complaint and which were "based on information learned during discovery." "A relator," the Court stated, "cannot plead an FCA violation generally and then fill in the blanks following discovery." Because the relator described a "distinct, independent scheme" and had not pled this theory of liability or provided a representative example in the complaint, the Court "cannot consider this theory of liability." 

Second, observing that the "Seven Steps" regulation is ambiguous because there is no authoritative interpretation in the regulation or otherwise as to when emergence ends, the Court found that the defendant reasonably interpreted the regulation's reference to emergence to include a patient's recovery in the recovery room. The Court acknowledged that the defendant's interpretation is "opportunistic because it has a financial motive to interpret the regulation that way." Yet, in the "absence of an authoritative contrary interpretation of the regulation . . . a defendant does not act with the requisite deliberate ignorance or reckless disregard by taking advantage of a disputed legal question." Moreover, the Court conceded that "the relator has arguably put forth a more reasonable interpretation of the regulation," but "this is not enough" because the relator "must carry its burden of showing that there is no reasonable interpretation of the law that would make the allegedly false claim valid."

Donegan is a real step forward in preventing relators from exploiting ambiguities in Medicare regulations to bring a qui tam action against Medicare providers and hold them hostage if they do not settle. Of course, the Court is not saying a defendant's mistaken or opportunistic interpretation can never give rise to other civil remedies by Medicare -- the government has numerous avenues other than the FCA to enforce its regulatory interpretations. Yet, civil remedies are one thing, but subjecting a defendant to harsh FCA sanctions for violating an ambiguous regulation is a whole different order of magnitude. This is especially true for Medicare providers, like the defendant in this case, who easily can bill and submit thousands of small Medicare claims and for whom the $5,500 - $11,000 penalty per Medicare claim can quickly lead to exposure for catastrophic damages if they lose. Essentially, the Court's ruling has brought common sense back to the analysis of when a false claim arises when dealing with ambiguous regulations. Now, at least in the 8th Circuit, a defendant who reasonably interprets an ambiguous regulation in the absence of a contrary authoritative regulation cannot know that its interpretation is false and thus cannot be found guilty of violating the False Claims Act.

A. Brian Albritton
July 28, 2015

Violation of Government Contract Does Not Give Rise to False Claim Where Government Knows of Violation and Continues to Pay Claims

Dear Readers:

I commend to you the recent False Claims Act case of U.S. ex rel Thomas v. Black and Veatch Special Projects Corp., 2015 WL 3570661 (D. Kan. June 5, 2015). The Court granted summary judgment in favor of the defendant, a government contractor, who contracted with the United States Agency for International Development ("USAID") to provide services and support for power projects in Kandahar, Afghanistan. In a common sense ruling, the Court found that defendant did not falsely certify its compliance with the provisions of the USAID contract because USAID continued to make numerous contract payments to the defendant even after it both learned of the defendant's failure to comply with one of the contract's provisions and was served with a copy of the qui tam complaint together with relators' disclosure of material evidence.

The USAID contract provided for defendant to submit invoices every two weeks to the USAID, which in turn, reviewed and evaluated whether the work was satisfactory, and if it was, authorized periodic payments to the defendant. All work remained subject to USAID's final inspection and acceptance, and the USAID contracting officer was permitted to reduce or suspend payments if he found substantial evidence that the defendant failed to comply with any material requirement of the contract.

Among its many provisions, the USAID contract required the defendant to comply with Afghan law and to obtain work visas and permits for all foreign citizens working for the defendant on the contract in Afghanistan. The relators, employees of the defendant, discovered that forged documents had been submitted to the Afghan government on behalf of seven of the defendant's employees, and they informed the USAID of their discovery. Subsequently, the defendant conducted its own internal investigation and confirmed to USAID that forged educational documents had been provided on behalf of seven employees to the Afghan government in order to obtain work permits for them.  

In their qui tam complaint, Relators alleged that the defendant submitted legally false claims for payment to USAID by impliedly certifying its compliance with Afghan law in its periodic requests for contract payment. Relators cited to a Federal Acquisition Regulation that required defendant and its personnel to comply with all applicable United States and host country laws. Relators asserted that because defendant fraudulently obtained permits and visas in violation of Afghan law, it failed to comply with a contractual prerequisite of payment and as a result falsely certified its compliance with the contract.  

Granting summary judgment in favor of the defendant, the Court found that the realtors had not provided any facts to show that "USAID may have reduced or refused payments" based on alleged false documents and the violation of Afghan law.  The Court found that compliance with Afghan law "was not material to the government's decision to pay defendant's invoices" because "USAID . . . continued to pay defendant, even though it knew about these allegations and even though . . . it could not determine whether defendant had filed the forged documents."

Remarkably, the Court noted further the government continued to pay the contract even after the relators filed their qui tam suit:  

USAID's conduct after relators filed suit also demonstrates that compliance with Afghan law did not matter to the government's payment decision. Relators commenced this action and provided a copy of the Complaint and a statement of all material facts to the government on August 23, 2011. . . .  . Since then, defendant had submitted at least forty-seven invoices for USAID payment. USAID never demanded that defendant refund any amount paid. Nor has it reduced or withheld payment of any invoice submitted after realtors filed suit. Instead, USAID has accepted and paid for all deliverable components completed by defendant under the contact. . . . . USAID's conduct after relators filed this action demonstrates that defendant's compliance with Afghan work permit and visa requirements did not matter to the government's payment decision. 2015 WL  3570661 *13 (citations omitted).

In short, the Court found that the defendant's compliance with Afghan law provision must not be material to the contract's conditions of payment because USAID continued to make payments on its contract even though it was aware of relators' qui tam suit and the defendant's contractual violation. 

The case illustrates two of the maddening aspects of qui tam litigation. First, the government should have dismissed this case when it was filed on the basis that the agency did not believe the defendant's had violated a material provision of the contract.  Instead, as the government so often does, the relator filed a qui tam suit alleging that the defendant violated some government contractual provision or regulation, the government declined to intervene and of course said nothing and the relator prosecuted the matter in the name of the government --all the while as the government agency in question continued to do business with the defendant in the same manner that is alleged to be a FCA violation in the suit.  Almost assuredly, the U.S. Attorney's Office would have inquired of USAID when relators filed their suit and they should have learned then that USAID did not find the contract violation to be material.  Yet, the government permitted the qui tam to proceed even though the government later permitted the defendant to obtain  statements from the USAID contracting representatives who confirmed that they knew "about the defendant's conduct" but continued to direct that USAID pay defendant's invoices.  

Second, the case offers some hope to defendants who are accused by realtors --but not the government-- of violating some obscure or ambiguous regulation or contractual provision. This case permits the defendant to use the government's knowledge of the alleged violation and its continued payment of claims to show that the so called violation must not be material if the government does nothing in the face of these allegations and continues to pay claims.

Defendant's counsel Kathleen Fisher, Nathan F. Garrett, and Todd P. Graves, (the former U.S. Attorney for Kansas City, Missouri) of the Graves Garrett firm should be commended for their excellent work in securing this decision by the Court.

A. Brian Albritton
July 5, 2015

United States ex rel Williams v. Renal Care Group: 6th Circuit Refuses to Impose FCA Liability on Company that Took Lawful Advantage of Medicare Loopholes

In a startling reversal of a summary judgment entered in favor of the government in a False Claims Act (FCA) case, the 6th Circuit recently rejected attempts by the government to establish FCA liability simply because a company, Renal Care Group, Inc. (“RCG”), a dialysis provider, had “created a wholly-owned subsidiary to take advantage of loopholes in the Medicare regulatory scheme that would permit it to increase profits.” United States ex rel Williams v. Renal CareGroup, 2012 WL 4748104 (6th Cir.) In the absence of regulations and statutes clearly prohibiting such an arrangement, the Court found that RCG had not acted with reckless disregard of the truth or falsity of the claims submitted by its subsidiary to Medicare because RCG had taken several steps to try to determine whether its subsidiary relationship violated applicable statutes and had not made a secret of its corporate arrangement.  

RCG was a dialysis provider that provided dialysis services at more than 260 facilities and in addition provided “dialysis supplies and services to home dialysis patients.” RCG created a subsidiary, RCGSC, that only provided dialysis equipment, but not services, to home dialysis patients. Medicare reimbursed dialysis providers according to two different methods: Method I applied to dialysis providers who operated dialysis facilities and who also provided home dialysis and services. Method II applied to providers who provided equipment and supplies to home dialysis patients but who did not provide dialysis services. Medicare reimbursed Method II providers at a higher rate than those of Method I, and further provided that “Method II payments may only go to an entity that is not a ‘provider of services [or] a renal dialysis facility . . . '”

RCG created RCGSC for the purpose of obtaining the higher Method II Medicare reimbursements. Moreover, RCG controlled RCGSC’s operations. The two companies shared RCG’s employees, officers, and directors, all of whom "held key roles in RCGSC’s corporate structure” as well as shared “office space, payroll, insurance benefits, contracts, and human resource services.”

The government alleged that RCG and RCGSC violated the False Claims Act by submitting false claims “while knowing that RCGSC was a sham corporation created for the sole purpose of increasing Medicare reimbursements” and “while knowing that RCGSC was not in compliance with Medicare rules and regulations.” The government moved for partial summary judgment on the issues of falsity and materiality, which the Court granted. The Court went a step further, however, and later found that the defendants had acted with the requisite knowledge to violate the False Claims Act as well, and it entered judgment against the defendants in the amount of $82,000,000.

The 6th Circuit reversed the judgment on all counts and instead entered summary judgment for the defendants on the two False Claims Act counts. First, the Court rejected the government’s argument that the RCG’s subsidiary was an alter-ego of RCG, observing that “[t]he corporate form need not be disregarded when its adoption was meant to 'secure its advantages and where no violence to the legislative purpose is done by treating the corporate entity as a separate legal person.'” (citation omitted). RCG, the Court went on, had not acted with an unlawful purpose simply because it sought to “maximize profits,” saying “[w]hy a business ought to be punished solely for seeking to maximize profits escapes us.” Analyzing the statutory and regulatory basis underlying the differences in reimbursement, the Court concluded “[a]ll of this points to the conclusion that the structure of RCG and RCGSC is not obviously inconsistent with Congress's goals for the payment scheme.”