In a landmark decision that could have significance for any False Claims Act case in the Medicare context, the Eastern District of Pennsylvania recently held that Medicare reimbursement criteria must be established through notice-and-comment rulemaking if they are to be the basis of a viable FCA suit. Polansky v. Executive Health Resources, Inc., No. 12-4239, 2019 WL 5790061 (E.D. Pa. Nov. 5, 2019). Because the relator was relying on a reimbursement policy that was found solely in a CMS manual, the Eastern District held that the relator’s claims failed “as a matter of law.”

The district court’s decision was based in large part on a recent Supreme Court case, Azar v. Allina Health Services, 139 S. Ct. 1804 (2019). There, the Supreme Court interpreted a 1987 addition to the Medicare statute that says:

No rule, requirement, or other statement of policy (other than a national coverage determination) that establishes or changes a substantive legal standard governing the scope of benefits, the payment for services, or the eligibility of individuals, entities, or organizations to furnish or receive services or benefits under this subchapter shall take effect unless it is promulgated by the Secretary by regulation ….

42 U.S.C. § 1395hh(a)(2) (emphasis added). The Supreme Court held 7-1 to that the phrase “substantive legal standard” encompasses more than just the “substantive rules” that already require notice and comment under the Administrative Procedure Act (APA). See Allina Health, 139 S. Ct. at 1814. The Supreme Court noted in particular that the many manuals that provide guidance to participants in the Medicare program might contain substantive legal standards that require notice and comment. See id. at 1816.

Following that decision, the Eastern District concluded that CMS policies that “affect[] the right to, or amount of reimbursement” are substantive legal standards and must go through notice and comment. Because the reimbursement policy at issue had been established solely in the 1989 edition of the Medicare Hospital Manual, the court found that it “cannot withstand scrutiny under Allina’s interpretation of the Medicare Act.” Further, because the policy was not validly established, the court concluded that “there can be no FCA liability” based on an alleged failure to comply with that policy.

Polansky is, we believe, the first application of 42 U.S.C. § 1395hh(a)(2) and Allina Health in an FCA case. But we doubt it will be the last. Innumerable FCA cases have been brought against Medicare participants based on reimbursement criteria or other requirements found only in CMS guidance. The Polansky decision demonstrates that § 1395hh(a)(2) can be an important way to push back against such allegations. Indeed, subsequent cases may show that § 1395hh(a)(2) provides way for defendants to enforce the Brand memo, which was notably quoted in the Eastern District’s decision alongside Allina Health.

In addition to the notice-and-comment holding, the Eastern District also granted DOJ’s request to dismiss on Granston memo grounds. The court was openly influenced by prior misconduct by relator, which had already resulted in sanctions. The court found that dismissal was warranted based on DOJ’s determination “that the litigation burden imposed by Relator’s case is no longer justified” under any potential standard of review and, therefore, did not attempt to predict whether the Third Circuit would adopt the “unfettered discretion” to dismiss approach endorsed by the D.C. Circuit.

Finally, the court went well out of its way to offer an opinion (in dicta) regarding the lack of materiality under Universal Health Servs., Inc. v. Escobar, 136 S. Ct. 1989 (2016). The court found that the government’s declination of intervention and motion to dismiss were both “probative of the lack of materiality.” The court also noted that there was “no evidence that … the Government ever refused to pay [the defendant’s claims].”