Editor’s Note: In a recent webinar for Bloomberg BNA, Manatt examined game-changing fraud and abuse trends and cases—and revealed strategies for avoiding False Claims Act (FCA) actions. In a new, three-part series, Manatt summarizes key insights and guidance from the program. Part 1, below, speaks to the current state of play—and defines what a false claim looks like in 2017. Coming in December, part 2 will examine the latest enforcement trends, and in January, part 3 will explain how to build an effective compliance program, as well as provide practical recommendations for preparing for and responding to government inquiries.

To view the full webinar free on demand, click here. To download a free copy of the presentation, click here.


The Current State of Play: Healthcare Fraud Remains a Priority

Under the Trump administration, healthcare fraud will remain a key focus. At his nomination hearing, Attorney General Jeff Sessions promised to “make it a high priority to … root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claims.”

The President’s budget, released in March, clearly supports investing in activities to prevent Medicare and Medicaid fraud, waste, and abuse. The budget proposed $751 million in discretionary funding—up about $70 million from fiscal year (FY) 2017—for fraud and abuse control. Seema Verma, administrator of the Centers for Medicare & Medicaid Services (CMS), underscored this administration’s focus on healthcare fraud, saying, “I will ensure that efforts around preventing fraud and abuse are a priority, since we cannot afford to waste a single taxpayer dollar.”

We are seeing the results of healthcare fraud prosecutions continuing to be a top priority. In 2017, the Department of Justice (DOJ) announced the largest healthcare fraud takedown1 in history. The record-breaking 2017 healthcare takedown involved 41 districts, approximately $1.3 billion in false billings and 30 state Medicaid Fraud Control Units (MFCUs). It resulted in charges against 412 defendants, including 115 doctors, nurses and other licensed professionals.

The emphasis on healthcare fraud continues to yield significant funds for the government. Healthcare accounted for $2.5 billion of the $4.7 billion in settlements and judgments that the DOJ obtained from civil fraud and abuse cases in FY 2016. In fact, FY 2016 marked the seventh consecutive year that healthcare civil fraud recoveries exceeded $2 billion. Between January 2009 and the end of FY 2016, the DOJ recovered $19.3 billion in healthcare fraud claims—and these figures represent just federal dollars. In many cases, the DOJ was instrumental in recovering additional millions of dollars for state Medicaid programs. Plus, states continue to bring their own healthcare fraud cases.

Key Fraud and Abuse Laws: Criminal

There are a significant number of criminal fraud and abuse laws from which the government can choose—not just healthcare fraud statutes but also general criminal statutes that can be used in healthcare fraud cases, such as Mail and Wire Fraud (18 U.S.C. §§ 1341 and 1343), False Statements (18 U.S.C. § 1001) and Obstruction of an “Official Proceeding” (18 U.S.C. § 1512 (c)). These general statutes are easier to prove and can be used effectively in false claims situations. In addition to the federal statutes, states have their own false claims act statutes and can piggyback onto federal cases. There are many different avenues available to pursue people believed to be engaging in activities that would fall under the FCA.

Let’s look first at the criminal fraud and abuse laws:

  • 18 U.S.C. § 287—the standard FCA statute—is not particular to healthcare. It applies to any “false, fictitious or fraudulent” claim made knowingly to any U.S. government department or agency.
  • 18 U.S.C. § 1035 is specific to false statements that are “knowingly and willfully” made in connection with the delivery of or payment for any healthcare programs, benefits, items or services. This includes falsifying, concealing or covering up material facts; making materially false, fictitious or fraudulent statements; or making or using any materially false writing or document knowing the same contains materially false, fictitious or fraudulent statements. (It is important to note that in criminal statutes, the term “knowingly” does not only mean actual knowledge but also covers reckless disregard for the truth or a knowing closing of one’s eyes to the facts.)
  • 42 U.S.C. § 1320a-7b(a)(1) covers false statements in an application for any benefits or payment under a federal healthcare program.

The penalties for violating these statutes include fines and imprisonment for up to five years per count.

Another critical healthcare fraud statute is 18 U.S.C. § 1347, which applies to those who “knowingly and willfully” execute a scheme or artifice to defraud a healthcare benefits program. Like the mail and wire fraud statute, it is fairly easy to prove because it is a general statute. It focuses not just on a particular claim but on an overall scheme to defraud.

The healthcare fraud statute carries much more serious penalties than do the criminal statutes in titles 18 and 42. Conviction under the healthcare fraud statute can result in imprisonment for up to ten years. The penalty increases to up to 20 years if the violation causes serious bodily injury—and up to life in prison if it results in death. It is also important to note that the DOJ has the option of bringing on injunctive action, if a defendant is violating or “about to violate” the healthcare fraud statute.

Finally, misbranding is considered a misdemeanor. If, however, the misbranding is done with the intent to defraud or after a criminal conviction, it can be classified as a felony and punishable by up to three years of imprisonment per count.

Key Fraud and Abuse Laws: Civil

Civil false claims cases start with a whistleblower advising the government—the U.S. Department of Justice—that the whistleblower is filing a complaint on its behalf, and then filing the complaint under seal. The government then begins to investigate while the complaint is under seal in order to decide whether or not to intervene in the whistleblower’s action. A civil FCA complaint is based on the False Claims Act, which prohibits:

  • Knowingly presenting or causing to be presented a false claim for payment or approval;
  • Knowingly making, using, or causing to be made or used a false record of statement material to a false or fraudulent claim; and
  • Knowingly making, using, or causing to be made or used a false record to avoid or decrease an obligation to pay or transmit property to the government.

In civil FCA cases, as in criminal FCA cases, “knowingly” includes reckless disregard, as well as a deliberate closing of the eyes to the truth.

Potential penalties have gone up in the last two years and include treble damages. Publicly traded companies also face the possibility of shareholder and derivative suits and 10-b(5) cases brought by the Securities and Exchange Commission (SEC). In addition, resolving these cases may involve implementing a Corporate Integrity Agreement, requiring regular reporting to the Office of Inspector General (OIG).

The Effects of Escobar

In June of 2016, in a unanimous opinion written by Justice Thomas, Universal Health Services v. United States ex rel. Escobar, the Supreme Court resolved a circuit split as to whether an implied certification theory was available under the FCA. The plaintiff in Escobar alleged that, in submitting a claim for mental health services, the provider implicitly certified that its employees administering the services were qualified per required licensing and regulations.

The Court held that the implied certification theory can be the basis for liability under the FCA when a defendant submitting the claim makes specific representations about the goods or services provided but fails to disclose noncompliance with material statutory, regulatory or contractual requirements that make those representations misleading. “Material” is key because questions remain around what materiality is and how it can be established.

It is interesting to note that evidence that a false statement or omission of a fact could have affected the government’s decision to pay is not sufficient to establish materiality for the purposes of surviving a motion to dismiss. The relator must establish that the government’s decision was likely to have been affected or, in fact, was affected by the false statement or omission. The Court found that a decision by the government to continue to pay following being made aware of the falsity may negate an allegation of materiality, but it is not fully determinative.

Since Escobar left open the question of whether or not the government’s decision to pay following the receipt of knowledge of falsity always negates an allegation of materiality, courts continue to grapple with this issue in a number of cases—and different courts are coming up with different answers.

The Impact of Caronia

In 2012, in U.S. v. Caronia, the Second Circuit overturned a criminal conviction on First Amendment grounds when a sales rep for a pharmaceutical company made truthful statements regarding off-label benefits. That case sowed the seeds of change, and we’ve seen lessening enforcement in the off-label market area. Based on Caronia, in August 2015 in Amarin v. FDA, in the Southern District of New York, the district court granted a preliminary injunction on First Amendment grounds permitting Amarin to engage in truthful off-label marketing.

The lack of focus in the off-label arena is evident when we look at the activities of the Federal Drug Administration’s (FDA’s) Office of Prescription Drug Promotion (OPDP). In 2010, the OPDP issued 52 Warning and Untitled Letters relating to off-label drug marketing, misbranding and potential misbranding violations. As of August 2017, however, the OPDP had issued only one letter.

In 2015, the FDA proposed a rule regarding the scope of intended use stating:

“… if the totality of the evidence establishes that a manufacturer objectively intends that a drug introduced into interstate commerce by him is to be used for conditions, purposes, or uses other than ones for which it is approved (if any), he is required, in accordance with section 502(f) of the Federal Food, Drug, and Cosmetic Act, or, as applicable, duly promulgated regulations exempting the drug from the requirements of section 502(f)(1), to provide for such drug adequate labeling that accords with such other intended uses.”

The effective date of the rule was postponed until March 2018, and it remains open for comments. Overall, the evidence indicates that we will see fewer standard off-label and misbranding issues used as the basis for FCA cases.

The FCA and the Anti-Kickback Statute (AKS)

The AKS is alive and well as the basis of a false claim. Just last month, it was announced that Galena Biopharma agreed to pay $7.55 million to resolve allegations under the civil FCA that it had paid monies to doctors for speaker programs and post-marketing trials that the government viewed as kickbacks to boost prescribing of its fentanyl-based drug.

The facts alleged in that case are reminiscent of the cases against big pharma in the early 2000s. At that time, big pharma was paying doctors to serve on advisory boards and enroll patients in post-marketing surveillance studies. These types of activities became the basis for civil and criminal FCA cases focused on such payments as kickbacks to prescribe the defendants’ drugs. Big pharma has since engaged in robust compliance programs to ensure that such initiatives involve remuneration to the physicians at fair market value. Smaller pharma and biotech companies—that are hot and growing—should look back at those cases and learn from them when deciding on programs to engage with prescribers.

The Overpayment

The Affordable Care Act (ACA) § 6402(d)(3) ties Medicare and Medicaid overpayments to the FCA, stating that “any overpayment retained by a person after the deadline [of 60 days from the date the overpayment was identified] for reporting and returning overpayment is an obligation for purposes of [the FCA.]” Although this law dates back to 2015, the DOJ now has begun to focus on it.

The clock starts ticking the date an overpayment is identified as needing to be reported or returned. If a company does not act within 60 days of the overpayment being identified, it can face an FCA case. Liability can exist even when a company is unaware of the overpayment if it shows “reckless disregard” or “deliberate ignorance” of the mistake.

If a company suspects an overpayment has been made, it is critical to start investigating quickly so if the government claims that no action has been taken within the 60 days, there is proof that, in fact, actions are underway. The importance of being aware of that 60-day clock is demonstrated in U.S. ex rel. Kane v. Continuum Health Partners, No. 11 Civ. 2325, 2015 WL 4619686 (S.D.N.Y. August 3, 2015). In Kane, the court ruled that the 60-day clock starts running when a provider becomes aware of a “potential” overpayment. At the end of the 60 days, the payment gives rise to FCA liability. Due to the First-to-File Rule, this creates a strong incentive for whistleblowers to file an FCA case on day 61. If, however, a provider has started to conduct a good faith investigation within the 60-day time frame, it provides a potential defense that the repayment is not being improperly withheld.

Not Complying With REMS—the New Misbranding

The Food and Drug Administration (FDA) requires companies to engage in a risk evaluation and mitigation strategy (REMS) for certain drugs that can pose potential health issues. The REMS mandate requires that manufacturers educate providers and ensure they fully understand any possible problems. Novo Nordisk recently paid $58 million for allegedly not complying with the REMS mandate, which included $46.5 million for alleged violations of the FCA. This case broke new ground, with the finding that failure to comply with REMS requirements to communicate accurate risk information renders the drug misbranded under the law and can become the basis for an FCA case.

Examining an FCPA Case

Since 2002, there has been a long line of Foreign Corrupt Practices Act (FCPA) cases around kickbacks that some pharmaceutical companies were allegedly paying to physicians overseas. Because doctors in most countries outside the United States are employed by the state through state-run universities or hospitals, they are considered government officials under the FCPA. If, for example, a company gives a physician a nice gift for serving on an advisory board or takes a doctor out for a relatively expensive meal, those actions could raise potential FCPA problems.

Facing the Opioid Crisis

The government is focusing on the opioid crisis, which some are suggesting is responsible for 150 deaths a day. One example would be the Mallinckrodt case from July 2017. Although the case was not brought under the FCA, Mallinckrodt—one of the largest manufacturers of generic oxycodone—paid $35 million to settle with the DOJ after being accused of failing to design and implement an effective system to detect and report suspicious orders of controlled substances, such as oxycodone, to the Drug Enforcement Agency (DEA).

Mallinckrodt came under scrutiny after DEA investigators noticed a large quantity of pills in another jurisdiction and began to ask questions. Mallinckrodt had a manufacturing facility in the Northern District of New York and also did business in Michigan. The U.S. attorney’s office in eastern Michigan joined forces with the Northern District of New York office in investigating Mallinckrodt.

One notable learning from the Mallinckrodt case for companies that are involved in the distribution of narcotics is that they have to be mindful of information in their possession that would indicate excessive quantities being distributed to downstream customers. During the investigation, the government learned that Mallinckrodt had charge-back information based on sales to downstream customers that should have detected the excessive sales.

The second critical learning is for companies to ensure they have accurate methods for counting the actual number of tablets being manufactured and accounting for waste and other aspects in the manufacturing process. While Mallinckrodt did not admit liability, it acknowledged that certain aspects of its monitoring systems and record-keeping practices did not meet DEA standards. Companies need to be mindful that the DEA is augmenting its standard approaches to deal with the opioid issue.