The U.S. Court of Appeals for the Sixth Circuit has reversed a summary judgment that held a business liable for violating the False Claims Act by using regulatory loopholes to maximize profits under the Medicare program. In the decision (United States ex rel. Williams v. Renal Care Group Inc., 6th Cir., No. 11-5779), which was issued on October 5, 2012, the court ruled that a company will not be found to have acted with reckless disregard of its obligations when it actively attempts to comply with and understand the intent behind ambiguous regulations.

Case Background

In May 2011, the U.S. District Court for the Middle District of Tennessee granted summary judgment to the Department of Justice (DOJ) in a qui tam action under the False Claims Act against a dialysis provider. The Sixth Circuit reversed based on the company's documented good faith efforts at compliance with what the court held to be regulatory ambiguity in two potentially applicable reimbursement methods. The regulatory ambiguity arose from the distinction between two different Medicare reimbursement schemes for end-stage renal disease Method I and Method II.

  • Method I provided a uniform composite rate for dialysis equipment and services. Method II provided a fee-for-service, "reasonable charge" basis for reimbursement.
  • Method II was limited only to companies that provide equipment and supplies directly to home dialysis patients and which are not "a provider of services [or] a renal dialysis facility."1

Method II reimbursements became more expensive than Method I reimbursements, causing Congress to cap the rates, except for supplies for certain types of dialysis treatments.2 In 2010, Method II was eliminated completely.

In this case a regulatory ambiguity occurred, where a parent company fell under Method I, while its wholly owned subsidiary was eligible under Method II. Renal Care Group (RCG), the parent, provided dialysis services and supplies to patients, while its wholly owned subsidiary, Renal Care Group Supply Company (RCGSC), provided only equipment and supplies to home dialysis patients and was structured to fall under Method II.

In 2005, two former RCG employees filed a qui tam action under the False Claims Act alleging that RCGSC "'is not a legitimate and independent medical equipment supply company,' but instead is a 'billing conduit' used to unlawfully inflate Medicare reimbursements."3 In 2009, DOJ intervened alleging that the defendants violated the False Claims Act "by submitting claims while knowing that RCGSC was a sham corporation created for the sole purpose of increasing Medicare Reimbursements."4 Ultimately the District Court granted summary judgment for the United States, awarding damages totaling more than $82 million.5 The Sixth Circuit reversed, however, finding that neither the falsity nor knowledge elements of the False Claims Act were satisfied by the United States.

Falsity

The United States claimed that RCGSC was an "alter ego" of RCG. Therefore, because a dialysis facility such as RCG cannot seek Method II payments, its alter ego is also prohibited from seeking Method II reimbursements. The Sixth Circuit disagreed, pointing out that DOJ had focused "obsessively" on evidence that RCG's only purpose in seeking Method II payments was to increase profit margins. The court said, "Why a business ought to be punished solely for seeking to maximize profits escapes us."6 Citing the U.S. Supreme Court decision in Schenley Distillers Corp. v. United States, 326 U.S. 432, 437 (1946), the Sixth Circuit commented that as long as the purpose behind a legislation is not frustrated, the corporate form should not be ignored. The court found no such clear purpose in either the statute or the legislative history. It found that Congress created the distinction between Method I and Method II for two reasons — neither of which was violated by allowing RCGSC access to Method II reimbursements.

The court then looked to the plain meaning of the statutory text to determine whether a wholly owned subsidiary qualified for Method II treatment. Method II precludes a "supplier of home dialysis supplies and equipment" that is "under the direct supervision of an approved provider of services or renal dialysis facility."8 The court noted that "42 C.F.R. §400.202 defines a 'supplier' as 'an entity other than a provider, that furnishes health care services under Medicare.'"9 After a study of how different statutes define "entity," the court determined that, "[a]lthough not dispositive, these regulations suggest that an organization can be controlled by another and yet still be considered an 'entity' for purposes of Method II reimbursement."10 Thus, where, as here, statutes or regulations are "unclear and ambiguous," evidence of RCG's efforts to understand the requirements and contacts with and disclosures to CMS would be relevant to issue of knowledge under the False Claims Act.

Knowledge

The defendants claimed that they did not knowingly submit false claims because they did not know that RCGSC was not a valid entity under the Method II requirements. The District Court had decided that RCGSC knowingly submitted false claims, concluding the defendants acted with "'reckless disregard' of relevant Medicare statutes and regulations."11

The Court of Appeals turned to legislative history to understand Congress' intent when it added "reckless disregard" as a basis for meeting the knowledge element. The only congressional report on point defined the obligation to avoid acting with reckless disregard of regulations as a duty not to act with gross negligence. This provision was intended to:

target that defendant who has "buried his head in the sand" and failed to make some inquiry into the claim's validity. The inquiry, however, need only be "'reasonable and prudent under the circumstances,' which clearly recognizes a limited duty to inquire as opposed to a burdensome obligation."12

The Sixth Circuit found that because the defendants had actively tried to decipher and comply with the ambiguous language of the statute, they could not be held to have acted in reckless disregard. The evidence showed that officials at RCG and RCGSC took the following steps to determine whether they could seek payments under Method II:

  1. consulted with legal counsel on the issue
  2. asked their legal counsel to seek clarification from government officials
  3. legal counsel sent a letter to the government official she had spoken with memorializing their conversation
  4. identified other large companies which had wholly owned subsidiaries filing under Method II
  5. found industry publications encouraging the use of Method II payments
  6. registered RCGSC with its own Medicare supplier number
  7. the government knew of RCGSC's ownership structure

The court held, "[t]o deem such behavior "reckless disregard" of controlling statutes and regulations imposes a burden on government contractors far higher than what Congress intended when it passed 31 U.S.C. §3729(b)(1)(A)(iii)."13

What This Means for You

The Renal Care Group decision has two implications for companies facing False Claims Act allegations. First, the decision demonstrates that at least some courts will strictly analyze the elements of the False Claims Act and mandate that the government (or relators) provide sufficient evidence to meet them all. Second, it demonstrates an unwillingness to find a False Claims Act violation when statutes or regulations are ambiguous, as long as a company is proactive and makes reasonable efforts to determine the regulatory requirements.

The last finding is particularly important in the context of companies' compliance and ethics programs. When, as here, the company takes careful, documented steps to analyze the rules governing its business, and then conforms its behavior to the results of the analysis, it cannot, as a matter of law, be acting in reckless disregard of its obligations. A company can use its compliance and ethics program to ensure that regulatory and enforcement risks are analyzed, policies are drafted in accordance with the analysis, appropriate training is administered and behavior is monitored to ensure compliance with the policies. Consulting counsel and/or relevant agencies when regulations are not clear (as is often the case) is a particularly useful mechanism for avoiding reckless disregard. Finally, companies should maintain accurate, easily retrievable documentation of their compliance efforts in the event of a government investigation of their behavior.