The FCA continues to be the federal government’s primary civil enforcement tool for investigating allegations that healthcare providers or government contractors defrauded the federal government. In the coming weeks, we will take a closer look at recent legal developments involving the FCA. This week, we examine the requirement that the conduct alleged to have resulted in a false claim must be material to the government’s decision to pay that claim and how courts have evaluated this issue in recent cases.
FCA claims should fail when the regulations allegedly violated are immaterial to the government’s decision to pay a claim. Where the theory of FCA liability turns on compliance with statutes and regulations in the healthcare context, courts continue to distinguish between regulations that are conditions of participation in the federal healthcare program and regulations that are conditions of payment, holding only violations of the latter can underpin FCA liability. As the Sixth Circuit has explained, violations of condition of participation are best addressed through administrative sanctions, not the “extraordinary remedies” of the FCA. See U.S. ex rel. Hobbs v. MedQuest Assocs., 711 F.3d 707 (6th Cir. 2013).
An example from this line of cases includes U.S. ex rel. Davis v. District of Columbia, 793 F.3d 120 (D.C. Cir. Jul. 10, 2015), a case that involved allegations that the defendant violated regulations in seeking Medicaid reimbursement. Explaining “[n]ot all failures to comply with a federal statute or regulation expose a provider to liability,” the D.C. Circuit cited cases from the Second, Third, Sixth and Tenth Circuits and held that “a defendant may be held liable under the [FCA] for falsely certifying it complied with a statute or regulation only if certification was a prerequisite to the government action sought.” The D.C. Circuit ultimately did not determine whether the regulations at issue were prerequisites to payment because the relator had failed to establish that the defendant was in knowing violation of any regulation.
In United States v. N. Am. Health Care, Inc., 2015 WL 6871781 (N.D. Cal. Nov. 9, 2015), the district court dismissed allegations that a skilled nursing facility violated the FCA by manipulating its Star Ratings, a metric published on Medicare.gov and Nursing Home Compare websites to help consumers compare facilities. These allegations were not tied to any specific false claims and did not satisfy the FCA’s materiality standard. The district court reiterated for “Plaintiffs to state a claim based on the false certification theory, they must allege that Defendants violated a statute, regulation, or other law upon which the government conditions payment of Medicare or Medicaid claims.”
The district court in U.S. ex rel. Bierman v. Orthofix Intern, N.V., 2015 WL 4197551 (D. Mass. July 1, 2015), granted summary judgment, dismissing allegations that the defendant violated Medicare provider enrollment regulations by not creating a rental option for its DME. Concluding that the regulations at issue were not conditions of payment, the district court noted that even if it were to assume they were, relator’s claims would fail because it did not satisfy the materiality requirement. The summary judgment record before the district court contained a CMS position letter that explicitly stated that a violation of the regulation at issue may lead to a revocation of billing privileges, but not a denial of a request for payment. As the district court explained, “[i]n light of this unequivocal statement about the consequences of non-compliance from the agency that administers Medicare, a reasonable jury could not conclude that defendants’ allegedly false certifications were capable of influencing CMS’s decision to pay their claims.”
Likewise, the district court granted summary judgment for defendant in U.S. ex rel. Marshall v. Woodward, Inc., 85 F.Supp.3d 973 (N.D. Ill. Mar. 27, 2015), finding that relators had failed to establish materiality with regard to defendant’s certifications of contractual compliance for helicopter parts manufactured for the U.S. Department of Defense (DoD). The district court acknowledged that materiality is judged objectively, but agreed with the defendant that “evidence that the fully-informed Government continues to purchase and pay for the product is legally dispositive evidence that any alleged fraud concerning the products quality is not capable of influencing the payment decision.” In the present case, “the record show[ed] that DoD understood Relators’ allegations, conducted an extensive review, determined that there was no problem and that Relators’ concerns were unfounded, and continued to purchase the parts from [Defendant].”
In U.S. ex rel. Watkins v. KBR, Inc., 2015 WL 2455533 (C.D. Ill. May 22, 2015), the district court held that a government contractor’s Truth In Negotiations Act (TINA) certifications that cost and pricing data was accurate, complete and current were too remotely connected to payment to be considered material to the government’s decision to pay. The relator complained that the defendant submitted knowingly false “statement of allowable cost” reports with each invoice to the government. The district court ruled that such action, even if true, was not material to government payment, for two reasons. First, the regulations did not require the defendant to submit these allegedly false “statements of allowable costs” with invoices. “It can hardly be argued with a straight face that the Government deemed something it did not even require to be submitted to be influential to its decision-making process.” Second, the regulations that dictate the content that invoices must contain to be paid do not require an affirmative statement that the cost is allowable and reasonable.
In contrast to the above cases, certain courts avoided the distinction between conditions of payment and conditions of participation in favor of a less technical analysis of materiality. This trend was largely confined to cases outside of the healthcare industry. For example, the Eighth Circuit in U.S. ex rel. Miller v. Weston Educ’l, Inc., 784 F.3d 1198 (8th Cir. 2010), eschewed reliance on the dichotomy between conditions of participation and conditions of payment and instead opted for a more organic view of materiality. The relators alleged that Heritage College fraudulently induced Title IV funding by falsely stating it would maintain accurate records. The district court granted summary judgment for defendant, finding relator had not identified any conditions of payment. The Eighth Circuit reversed and remanded. Pointing to three places in the applicable regulations that conditioned participation on the maintenance of records, the Eighth Circuit reasoned that “Heritage could not have executed the [agreement with the government] without stating it would maintain adequate records .… And without [this agreement], Heritage could not have received any Title IV funds. This forms a ‘causal link’ between the promise and the government’s disbursement of funds.” Responding to the concern that “finding materiality here makes any regulatory violation actionable under the FCA,” the Eighth Circuit responded that the FCA still requires violations to be knowing, which would help cabin liability to appropriate cases.
U.S. ex rel. Garbe v. Kmart Corp., 73 F. Supp. 3d 1002 (S.D. Ill. Jan. 12, 2015), involved allegations that Kmart artificially inflated its usual and customary (U&C) prices for prescription drugs. Kmart argued the relator’s claims failed for lack of materiality because relator could not establish that Kmart’s U&C prices influenced government reimbursement. CMS pays Plan Sponsors flat-rate fixed reimbursement under contracts, only providing additional compensation in a few narrow situations. The district court rejected this defense, noting “materiality requires ‘only that the false or fraudulent statements either (1) make the government prone to a particular impression, thereby producing some sort of effect, or (2) have the ability to effect the government’s actions, even if this is a result of indirect or intangible actions on the part of defendants.'” The district court agreed that CMS would have paid the Plan Sponsor the same amount absent the alleged fraud, but noted “the government (acting through the PBMs and Plan Sponsors) would not have paid Kmart the same amount of money.” The false claim allegedly submitted was material “because it gave the ‘particular impression’ that Kmart was entitled to more money than it should have been entitled, thereby producing an ‘effect,’ i.e. Kmart receiving more Medicare Part D funds than it was entitled to receive.”
In U.S. ex rel. Simpson v. Bayer, 2015 WL 1190160 (D.N.J. Mar. 16, 2015), the relator alleged that the defendant had engaged in off-label marketing and argued that noncompliance with the Food, Drug and Cosmetic Act’s (FDCA) misbranding provisions were conditions of payment. The district court dismissed the allegations for failure to establish materiality, noting that although the government “may eventually sue a drug manufacturer for failing to comply with the FDCA’s misbranding provisions … [i]t does not follow  that the Government conditions its payments for pharmaceuticals on a drug manufacturer’s compliance with the FDCA’s misbranding provisions[.]”
In U.S. ex rel. Petratos v. Genentech, Inc., 2015 WL 6561240 (D.N.J. Oct. 29, 2015), the district court dismissed allegations that the defendants withheld information regarding a popular cancer drug, reasoning that it was immaterial whether fewer doctors would have prescribed the drug if they had had more information. Material to the government’s decision to pay is whether or not the relevant agency, not any individual doctor, has deemed the drug medically reasonable and necessary.