As those in the health care industry undoubtedly know, the past decade has seen an explosion in the number of health care actions brought under the civil False Claims Act. Originally enacted during the Civil War to combat the bilking of the government by corrupt defense contractors1 , the False Claims Act ("FCA") was amended in 1986 to encourage more private " qui tam " lawsuits and to spur the federal government to prosecute more actions.2 The government and whistleblowers complied. In 2005, the Department of Justice reported that since the 1986 amendments, the federal government has recovered over $15 billion from FCA suits and investigations, much of it from the health care industry, and $1.4 billion in 2005 alone.3 If that were not enough to strike fear into the industry, in recent years, private whistleblowers and the government have successfully pursued a new type of FCA claim - based on the Anti Kickback Act. This marks a significant development in health care litigation, and one that means even greater financial exposure for health care providers.
The False Claims Act is a civil statute that prohibits the knowing submission of false or fraudulent claims to the government for payment.4 It provides for a civil penalty of not less than $5,500 and not more than $11,000 for each claim plus triple damages. It also authorizes " qui tam " suits, allowing private plaintiffs referred to as "whistleblowers" (typically former and sometimes current employees) to bring an action on behalf of the United States.5 The FCA affords the federal government an opportunity to intervene in such whistleblower suits. The private plaintiffs, also known as "relators," receive a share of any recovery from the defendant of up to 30%.6 Typical FCA claims include claims of overcharging the government, or charging for goods or services that were unnecessary or never provided.7
The Anti-Kickback Act ("AKA") is a criminal statute that prohibits anyone from knowingly or willfully paying or receiving remuneration in exchange for referrals or the purchase of any item or service that may be paid for by a federal health care program.8 It is a felony offense that carries with it penalties of imprisonment of up to five years, fines, and mandatory exclusion from federal health care programs.9 The AKA also provides for administrative remedies, authorizing the Office of Inspector General of Health and Human Services to impose a civil monetary penalty and seek to exclude any provider which it determines has violated the Act.10 It is an extremely broad statute, covering everything from volume-based discounts to physician referrals. Health care providers are vulnerable to prosecution under the AKA for seemingly benign conduct unless it falls into one of the statutory or regulatory "safe harbors."11
The Anti-Kickback Act contains no private right of action. A private plaintiff may not sue a health care provider under the AKA.12 Nor does the Act state that payment from the government is conditioned upon compliance with the statute. Nevertheless, the government and qui tam plaintiffs have successfully argued across the country that violations of the AKA, a criminal statute, can serve as the basis for a claim under the False Claims Act. Under this theory, a claim to the government is rendered "false" for purposes of the FCA if the medical services or items were furnished in violation of the Anti-Kickback Act notwithstanding the fact that the services or items provided were themselves appropriate and proper.
Despite vigorous opposition by the health care industry and defense bar, a number of courts have accepted the theory that a violation of the AKA can serve as the basis for a FCA claim, although through different approaches. The seminal cases in this area are United States ex rel. Pogue v. American Heatlhcorp 13 and United States ex rel. Thompson v. Columbia/HCA Healthcare Corporation.14
In Pogue , the relator brought an FCA action based on allegations that the defendants, a mix of hospitals, treatment centers and physicians, engaged in a physician referral scheme in violation of the Anti-Kickback Act and the Stark self-referral laws. The relator argued that as a result of the kickback and related violations, the claims submitted to the government were fraudulent because the defendants had impliedly certified that they would comply with all applicable statutes and regulations, and the government would not have paid the claims had it known of the violations. The district court initially sided with the defendants, ruling that the AKA and Stark violations do not by themselves render the claims "false" for purposes of the FCA. However, the court then reversed itself on a motion for reconsideration. It held that the relator had stated a claim under the FCA based on the allegations that the government would not have paid the claims had it known of the AKA and Stark violations, and that the defendants took steps to conceal the violations from the government.15
The case was later transferred to the United States District Court for the District of Columbia and consolidated with a number of other qui tam actions. That court also rejected the defendants' renewed arguments that the relator could not make out an FCA claim on the basis of the AKA violations.16 In so doing, the court in Pogue II looked to Medicare's enrollment application, revised in 2001, as "evidence" that the government would not have paid the claims had it known of the AKA violations. The revised enrollment application requires providers to certify that they will comply with Medicare "laws, regulations, and program instructions" and that they "understand that payment of a claim by Medicare is conditioned upon the claim and underlying transaction complying with such laws, regulations, and program instructions (including the Federal anti-kickback statute)."17
Thompson similarly involved an FCA claim based on allegations that the defendant-hospitals improperly induced physician referrals in violation of the AKA and Stark laws.18 To establish the requisite falsity under the FCA, the relator pointed to the cost reports that the defendants submitted to the government which contained certifications that the defendants were in compliance with applicable laws, including the AKA. The district court rejected the argument that such certification rendered the claims false and dismissed the action.19 The relator appealed, and the government submitted an amicus brief in support of the relator.20 The Fifth Circuit reversed. It ruled that the relator could state a cause of action under the FCA claim if the government's decision to pay the claims was conditioned upon the defendants' certification of compliance with the pertinent laws.21 The court then remanded the case to the district court to determine whether Medicare's decision to pay the claims submitted by the defendants was in fact conditioned upon the certifications of compliance.22 On remand, the district court ruled in favor of the relator, concluding on the basis of an affidavit submitted by the then acting chief of the Health Care Financing Administration ("HCFA") that "HCFA conditions both payment and provider eligibility on the veracity of" a provider's certification in the cost report that all services were provided in compliance with applicable law, specifically the AKA.23
In United States ex rel. Schmidt v. Zimmer, Inc., the Third Circuit also permitted an FCA suit to proceed based on allegations that a manufacturer of orthopedic equipment paid kickbacks to hospitals in the form of incentives and bonuses in order to induce purchases of its equipment.24 Like Thompson, the "falsity" was alleged to be in the hospitals' cost report certifications that they would comply with the AKA.25
More recently, in United States ex rel. McNutt v. Haleyville Medical Supplies, Inc. 26, the Eleventh Circuit also ruled that a violation of the AKA can serve as the basis for an FCA claim. A former employee brought the case against related medical services companies based on allegations that the companies paid kickbacks to pharmacists disguised as rental payments. The government intervened and argued that the defendants' AKA violations were actionable as "false" claims because the defendants had certified in their Medicare enrollment agreements that they would comply with the AKA, and that compliance was a prerequisite to payment.27 This is the same certification that the court in Pogue II relied on in concluding that the relator's FCA claims were actionable. After half-heartedly denying the defendants' motion to dismiss, the district court certified the issue for interlocutory appeal given its significance.28 With little discussion, the Eleventh Circuit accepted the government's argument, finding that it had alleged sufficiently that compliance with the AKA is a condition of payment, that the defendants were aware of this condition, and submitted claims "knowing that they were ineligible for the payments demanded."29
For the health care industry, the implications of McNutt are alarming.30 The Medicare enrollment form upon which both the government and the Pogue II relator relied requires providers to certify that they will comply with "all Medicare laws, regulations and program instructions" and that they understand such compliance is a condition of payment.31 Followed to its logical conclusion, then, the Eleventh Circuit's holding in McNutt , as well as the reasoning of the Pogue II court, suggest that once a provider signs the enrollment certification - which it must do to participate in Medicare - it opens itself up to be sued under the False Claims Act for a violation of any "Medicare law, regulation, or program instruction" at any time.
The district court in McNutt recognized the potentially draconian consequences of accepting the government's position. It warned, "If one of the purposes of the United States in drafting the enrollment form and in intervening in qui tam suits like this one is to discourage people from becoming Medicare suppliers, it may succeed, especially if it wins a few."32
Only time will tell what the government's success in McNutt will mean for the health care industry. Given the number of contexts in which the government and whistleblowers have already pursued Anti-Kickback Act FCA claims - for example, disguised physician referral fees; Stark self-referral violations; below market rent; consulting agreements; unreported discounts; and various pharmaceutical company marketing practices - health care providers must be ever vigilant in reviewing their financial arrangements with other health care entities and professionals. A strong compliance program is essential.1 See United States v. McNinch, 356 U.S. 595, 599 (1958).
2 See U.S. ex rel Mistick PBT v. Housing Authority of City of Pittsburgh, 186 F.3d 376, 400 (3d Cir. 1999) (Becker, C.J. dissenting) (discussing primary aims of 1986 FCA Amendments).
3 U.S. Department of Justice Press Release, November 7, 2005, available at www.usdoj.gov/opa/pr/2005.
4 See 37 U.S.C. 3729 et seq.
5 See id . at 3730(b).
6 See id. at 3730(d).
7 See Robert N. Rabecs, Kickbacks as False Claims: The Use of The Civil False Claims Act To Prosecute Violations of The Federal Health Care Program's Anti-Kickback Statute, 2001 L. Rev. Mich. St. U. Det. C.L. 1, 39-41 (2001).
8 See 42 U.S.C. 1320a-7b(b).
9 See id. at 1320a-7b(b); 1320a-7(a).
10 See id. at 1320a-7a(a); 1320a-7(b).
11 See Rabecs, supra note 7 at 5-20.
12 See United States ex rel. Barrett v. Columbia/HCA Healthcare Corp . , 251 F.Supp.2d 28, 37 (D.D.C. 2003).
13 914 F.Supp. 1507 (M.D. Tenn. 1996) ("Pogue I").
14 125 F.3d 899 ( 5th Cir. 1997).
15 See Pogue I, 914 F.Supp. at 1513 .
16 See United States ex rel. Pogue v. Diabetes Treatment Centers of America, Inc . , 238 F.Supp.2d 258, 263-66 (D.D.C. 2002) ("Pogue II").
17 Pogue II, 238 F.Supp.2d at 264 (emphasis added); Medicare Enrollment Application, CMS Form 885A, available at www.cms.hhs.gov/cmsforms/downloads/cms855a.pdf.
18 See Thompson, 125 F.3d at 901.
19 See id.
20 See Rabecs , supra note 11, at 56.
21 See Thompson , 125 F.3d at 902-03.
22 See id . at 903.
23 U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 20 F.Supp.2d 1017, 1041-42, 1046 (S.D. Tex. 1998).
24 386 F.3d 235 (3d Cir. 2004).
25 See id . at 236-37. See also U.S. ex rel. Bidani v. Lewis, 264 F.Supp.2d 612 (N.D. Ill. 2003) (permitting FCA suit to go forward based on allegations that medical supplier defendants received discounts in violation of AKA).
26 423 F.3d 1256 ( 11th Cir. 2005).
27 See id . at 1258 .
28 See United States ex rel. McNutt v. Haleyville Medical Supplies, Inc., Civ. A. No. 01-3156, slip op. 3-7 (N.D. Ala. July 20, 2004).
29 McNutt, 423 F.3d at 1260 .
30 See Ronald H. Clark, Prospective Certifications and The False Claims Act , available at www.arentfox.com/legal_updates/content1236.html.
31 See McNutt, Civ. A. No. 01-3156, slip op. at 2 (quoting Medicare enrollment form).
32 Id. at 4
Shannon S. Quill is an Associate in the Litigation Department of Philadelphia-based Ballard Spahr Andrews & Ingersoll, LLP and a member of the White Collar Litigation Group. Ms. Quill focuses her practice on criminal investigations and related civil litigation. She can be reached by phone at (202) 661-7627.