Spotlight on the False Claims Act

Why it matters: The False Claims Act (FCA) continued to prove itself a powerful tool to combat fraud on the government in 2016. In December 2016, the DOJ released figures showing that, for fiscal year 2016, it had collected over $4.7 billion, its “third highest annual recovery in False Claims Act history.” Fiscal year 2017 has started off with a bang, with numerous FCA resolutions announced in October through early December 2016 (as noted in our newsletters for those months), as well as in the second half of December 2016 and to date in January 2017 (discussed here). Also of note, on December 16, 2016, the Ninth Circuit issued a largely “form over substance” amendment to its high profile FCA decision from August 2016, United States ex rel. Swoben v. United Healthcare Ins. Co. Read on for a recap of the amended Swoben opinion as well as recent FCA resolutions we found to be of interest.

Detailed discussion: On December 14, 2016, the DOJ announced that, for the fiscal year ended September 30, 2016 (FY2016), it had recovered over $4.7 billion from FCA judgments and settlements, making it “the third highest annual recovery in False Claims Act history.” The DOJ elaborated that the $4.7 billion collected for FY2016 brought “the fiscal year average to nearly $4 billion since fiscal year 2009, and the total recovery during that period to $31.3 billion.” Of the amount collected in FY2016, the DOJ said that “$2.5 billion came from the health care industry, including drug companies, medical device companies, hospitals, nursing homes, laboratories, and physicians,” with the second largest recoveries—totaling nearly $1.7 billion—coming from the “financial industry in the wake of the housing and mortgage fraud crisis.”

We recap the latest FCA resolutions of note below (the amounts collected for which will go to the next fiscal year’s bottom line), but we first wanted to highlight an interesting action taken by the Ninth Circuit on December 16, 2016, when it issued an amended opinion in United States ex rel. Swoben v. United Healthcare Ins. Co., its high profile FCA decision from August 2016 (we covered the Ninth Circuit’s opinion in Swoben in our September 2016 newsletter under “Spotlight on the False Claims Act”). The amended opinion addresses heightened pleading standards required by Rule 9(b) of the Federal Rules of Civil Procedure (Rule 9(b)), rather than to the “substance” of the ruling under the FCA, which was unchanged.

Original opinion: Briefly, in its August 10, 2016 opinion, the Ninth Circuit had vacated a Central District of California court’s judgment that had dismissed without leave to amend the third amended complaint of qui tam relator James Swoben (Swoben)—which had alleged that the defendant Medicare Advantage organizations United Healthcare, Aetna, WellPoint and Health Net (Defendants) submitted false certifications to the Centers for Medicare & Medicaid Services (CMS) in violation of the FCA—and remanded with instructions to allow Swoben leave to file a proposed fourth amended complaint. In so doing, the Court said that the district court had abused its discretion in denying Swoben leave to amend on the grounds of “futility of amendment,” holding that Swoben’s proposed fourth amended complaint sufficiently alleged facts under Rule 9(b) to support Swoben’s claims that the Defendants designed their retrospective review procedures to not reveal erroneously reported diagnosis codes in violation of the FCA.

Amended opinion: In the amended opinion issued on December 16, 2016, the Ninth Circuit concluded that the allegations in Swoban’s proposed fourth amended complaint sufficiently and with specificity stated a cause of action under Rule 9(b) only with respect to United Healthcare and an independent practice association (IPA) with which United Healthcare contracted, because there were detailed factual allegations about how United Healthcare had instructed the IPA to review its medical charts for additional diagnosis codes. By contrast, the Court concluded that the “broad” allegations contained in the fourth amended complaint against Aetna, WellPoint and Health Net did not satisfy the heightened pleading standard required by Rule 9(b), but said that Swoben should still be afforded leave to amend. The amended opinion also contained an order denying the petition for rehearing en banc that had been filed by the appellee health companies.

Now, we turn to the recent healthcare and nonhealthcare FCA resolutions we found to be of interest:

Healthcare resolutions:

  • On January 13, 2017, the DOJ announced that Massachusetts-based Medstar Ambulance Inc., including four subsidiary companies and its two owners, Nicholas and Gregory Melehov (collectively Medstar), agreed to pay $12.7 million to resolve allegations that it knowingly submitted false claims to Medicare in violation of the FCA. As part of the settlement, Medstar also entered into a corporate integrity agreement with the U.S. Department of Health and Human Services (HHS). According to the DOJ’s allegations, which were neither admitted nor denied by Medstar, “Medstar routinely billed for services that did not qualify for reimbursement because the transports were not medically reasonable and necessary, billed for higher levels of services than were required by patients’ conditions, and billed for higher levels of services than were actually provided.” Qui tam whistleblower to receive award of $3.5 million.
  • On January 11, 2017, the DOJ announced that Ireland-based multinational pharmaceutical firm Shire Pharmaceuticals LLC and other subsidiaries of Shire plc (Shire) agreed to pay $350 million to settle federal and state FCA allegations that Shire and the company it acquired in 2011, Advanced BioHealing, employed kickbacks and other unlawful methods to induce clinics and physicians to use or overuse its former product “Dermagraft” (a bioengineered human skin substitute approved by the FDA for the treatment of diabetic foot ulcers). Principal Deputy Assistant Attorney General Benjamin C. Mizer said that “[t]his settlement represents the largest False Claims Act recovery by the United States in a kickback case involving a medical device.” According to the DOJ’s findings (which were neither admitted nor denied by Shire), Dermagraft salespersons unlawfully induced clinics and physicians with “lavish dinners, drinks, entertainment and travel; medical equipment and supplies; unwarranted payments for purported speaking engagements and bogus case studies; and cash, credits and rebates” in order to induce them to use Dermagraft. The DOJ said that the settlement resolved allegations brought in six qui tam lawsuits, the awards for which have not yet been determined.
  • On December 28, 2016, the U.S. Attorney’s Office for the Northern District of California announced that Bay Sleep Clinic, its related businesses—Qualium Corporation and Amerimed Corporation—and their married-couple owners and operators (Defendants) agreed to pay $2.6 million to settle allegations that they violated the FCA by fraudulently billing Medicare for diagnostic sleep tests and medical devices in violation of Medicare payment rules. The Defendants neither admitted nor denied liability. Qui tam whistleblower to receive award of $545,000.
  • On December 15, 2016, the DOJ announced that New York–based Forest Laboratories LLC and its subsidiary Forest Pharmaceuticals Inc. (collectively Forest) agreed to pay $38 million to resolve allegations that they violated the FCA and Anti-Kickback Statute by paying kickbacks consisting primarily of illegal speaking fees to physicians in order to induce them to prescribe three drugs. Forest neither admitted nor denied the allegations. Qui tam whistleblower to receive award of $7.8 million.
  • On December 13, 2016, the U.S. Attorney’s Office for the Eastern District of Texas announced that Texas-based Elite Lab Services, LLC (Elite Lab) and its husband-and-wife owners Gerard and Suzanne Dengler agreed to pay $3.75 million to resolve FCA charges that Elite Lab billed Medicare for “tens of thousands of miles” that were never driven by Elite Lab’s personnel. The government said that, as part of the settlement, the Denglers and Elite Lab admitted that they submitted false claims to Medicare that contained inflated mileage calculations beyond those actually driven by Elite Lab’s employees. Qui tam whistleblower to receive award of $787,500.

Non-healthcare resolution: On December 28, 2016, the DOJ announced that Michigan-based United Shore Financial Services LLC (USFS) agreed to pay $48 million to resolve allegations that it violated the FCA by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) that did not meet applicable requirements. The DOJ said that the settlement resolved allegations that between 2006 and 2011, USFS failed to comply with certain FHA origination, underwriting and quality control requirements. As part of the settlement, USFS admitted to, among other things, (a) improperly pressuring underwriters to approve FHA mortgages, and its compensation plan used a formula expressly tying underwriter compensation to the percentage of loans approved by the underwriter and closed by USFS, and (b) falsely certifying that direct endorsement underwriters personally reviewed appraisal reports prior to USFS approving and endorsing mortgages for FHA insurance. The DOJ said that USFS also was deficient in self-reporting requirements and keeping senior management apprised of quality control issues. Last, the DOJ said that, after it had commenced its investigation in January 2014, USFS made “certain discretionary distributions” to one of its shareholders. The DOJ said that, as a result of this conduct, “HUD insured hundreds of loans approved by USFS that were not eligible for FHA mortgage insurance under the Direct Endorsement program, and that HUD would not otherwise have insured. HUD subsequently incurred substantial losses when it paid insurance claims on those loans.” No qui tam suit referenced.

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