On January 27, 2011, the United States filed its complaint-in-intervention in United States ex rel. Allen v. Guidant LLC et al. (including Boston Scientific), Case No. 0:11-cv-00022 (D. Minn.). The Guidant case involves the events surrounding medical device manufacturer Guidant’s recall of the Prizm 2 and Contak Renewal 1 and 2 cardiac devices in June 2005. According to publicly available information, Guidant, which was acquired by Boston Scientific in 2006, has already paid more than $550 million in fines and civil settlements to resolve litigation and legal issues concerning this matter in the past several years.

In the new Guidant FCA complaint, the United States alleges that Guidant knowingly sold implantable cardiac devices which contained a potentially life-threatening defect that could cause the devices to short-circuit without warning. In Guidant, the government is seeking to establish FCA liability for a product defect - which has not been a common use of the FCA in health care litigation against drug and medical device manufacturers.

Typically, FCA cases against drug and device manufacturers have focused on the companies’ sales, marketing, or accounting activities, and have involved alleged conduct such as improper government price reporting, kickbacks, best price violations, and off-label marketing. In 2010, we saw an expansion of the FCA in health care litigation involving manufacturers to reach drug quality issues. In the first half of 2010, two drug companies paid the government $3.5 million and $22 million respectively to settle qui tam actions based on the allegation that the companies sought to charge the government for “less than effective" drugs. In October 2010, GlaxoSmithKline agreed to pay $750 million to settle a qui tam action alleging that the company violated certain current good manufacturing practices at its plant in Cidra, Puerto Rico, causing adulterated products to enter the United States which were then reimbursed by government-funded health care programs.

Product defect cases, however, have been relatively rare in FCA litigation against drug and medical device manufacturers. We know of only six other large-scale FCA suits for product defects; three of those cases settled, two were dismissed, and one is currently pending. The government intervened in three of the cases.

When reading the short case summaries below, it is important to keep in mind that FCA cases often settle before any court decisions addressing the merits of the claims are issued, and many times, settlement occurs before the complaint is even unsealed. The fact that a settlement occurs, therefore, is not necessarily a strong or reliable indicator that the theory of FCA liability alleged by the government in a given case would be able to withstand a dispositive motion for failure to state a claim.  

FCA Cases for Product Defects Which Settled

  1. In December 2000, a medical device manufacturer, Lifescan, paid $30.4 million to settle FCA allegations that it knowingly sold a faulty blood glucose monitoring system to Medicare patients and concealed this defect from the FDA. The U.S. intervened in the action.
  2. In July 2002, in another case in which the U.S. intervened, a medical device maker, Agilent Tech., paid $7 million to settle allegations that it knowingly sold faulty medical monitoring devices to the Veterans Administration and Department of Defense and failed to properly investigate product failures even though the company was aware of them.
  3. In June 2005, a medical device manufacturer, Boston Scientific, settled an action with the United States for $74 million based on allegations that it knowingly sold defective coronary stents in violation of the FDCA over a seven-week period in 1998.

FCA Cases for Product Defects Which Were Dismissed

  1. In 1998, two plaintiffs attorneys who had previously sued the device maker, Medtronic, in a product liability action and lost, filed an FCA case based on information they learned in discovery in the prior action. The attorneys alleged that Medtronic violated the FCA by selling defective pacemaker leads to Medicare recipients. The government declined to intervene in the action in October 2002 and the case was unsealed. In August 2005, the court dismissed the action at the pleading stage on the ground that the suit was barred by the public disclosure bar. Specifically, the court held that the prior product liability lawsuits against Medtronic alleging fraud on the FDA notified the government of potential Medicare fraud and thus precluded the attorney-relators’ FCA claims.
  2. In March 2009, the Eighth Circuit - which is the Circuit in which the Guidant case is pending - dismissed a product defect case in a relator-only action at the pleading stage against the device maker, Hypoguard USA. The relator alleged that Hypoguard knowingly sold defective blood glucose monitors and test strips to Medicare patients. In dismissing the action, the Eighth Circuit held that “sales of a defective product do not give rise to FCA liability absent proof that a party knowingly or with deliberate ignorance charged the government for worthless services.”

FCA Case for Product Defects Which Is Currently Pending

  1. In May 2007, a relator filed an FCA action against Cardinal Health alleging that it knowingly sold defective and unsafe infusion pumps to the Veterans Administration. The government declined to intervene in the suit in January 2008 and the case was unsealed. The district court dismissed the action under Rules 9(b) and 12(b)(6). In November 2010, the Fifth Circuit remanded the case with instructions to the district court to permit the relator to amend because it was possible the relator could state an FCA claim for defective products based, e.g., on a “worthless services” theory. The case is currently pending.

The Government’s Theory of FCA Liability in the Guidant Case

The government’s theory of FCA liability in the Guidant case is based on medical necessity. Specifically, the government alleges that knowingly implanting Medicare patients with defective devices when non-defective devices were available was not a reasonable and necessary medical treatment. (Complaint, ¶¶ 80, 135). Under § 1395(a)(1)(A) of the Medicare statute, Medicare will only pay for services which are reasonable and necessary:

[N]o payment may be made…for any expenses incurred for items or services which …are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.” 42 U.S.C. § 1395(a)(1)(A).

Several Problems With The Government’s Theory of FCA Liability in the Guidant Case

  1. The Eighth Circuit Has Dismissed FCA Claims Based on Product Defects

Two years ago, in United States ex rel. Roop v. Hypoguard USA, Inc., 559 F.3d 818 (8th Cir. 2009), the Eighth Circuit affirmed the dismissal of an FCA case against a medical device manufacturer for alleged product defects. The relator alleged that Hypoguard blood glucose monitors and test strips were defective, and that Hypoguard knew they were defective, and failed to file reports of defects required by the FDA’s medical device reporting regulations, which caused Medicare to pay countless fraudulent reimbursement claims. The United States declined to intervene in the action. The district court granted Hypoguard’s motion to dismiss the action for failure to comply with Rule 9(b). The Eighth Circuit affirmed the dismissal, and in doing so, held that:

“[S]ales of a defective product do not give rise to FCA liability absent proof that a party ‘knowingly or with deliberate indifference charged the government for worthless services.’” 559 F.3d at 824 (citing United States ex rel. Lee v. SmithKlineBeecham, Inc., 245 F.3d 1048, 1053 (9th Cir. 2001)). “In a worthless services claims, the performance of the service is so deficient that for all practical purposes it is the equivalent of no performance at all.” (citing Mikes v. Straus, 274 F.3d 687, 703 (2nd Cir. 2001)).

In the Guidant case, the government did not plead a “worthless services” claim, but rather has attempted to allege an FCA claim based on medical necessity. However, as demonstrated below, there are problems with the government’s attempt to invoke medical necessity as a viable theory of FCA liability against a medical device manufacturer for alleged product defects.

  1. Is Medical Necessity A Viable Theory of FCA Liability Against Manufacturers For Product Defects?

The short answer is no, it should not be, given the precedent on the issue. Courts have held that Medicare’s requirement that a service be reasonable and necessary generally pertains to the selection of a particular procedure and not to the manner - or quality - of its performance. See, e.g., Mikes v. Straus, 274 F.3d 687, 701 (2d Cir. 2001); In re: Cardiac qui tam litigation, 221 F.R.D. 318 (D. Conn. 2004). In Mikes, the Second Circuit held that the medical necessity for a procedure and its quality are distinct considerations. In Mikes, the relator alleged that the defendant doctors did not perform spirometry tests for which they billed Medicare in accordance with the applicable standard of care, and thus sought reimbursement for services which were not reasonable and necessary under the Medicare statute in violation of the FCA. The court dismissed the relator’s FCA claims based on its determination that “[i]nasmuch as Mikes challenges only the quality of defendants’ spirometry tests and not the decisions to order this procedure for patients, she fails to support her contention that the tests were not medically necessary.” 274 F.3d at 699.

The government’s use of a medical necessity theory in the Guidant case is an attempt to fit a square peg in a round hole. The Mikes case demonstrates that whether or not a procedure is medically necessary under the Medicare statute is really a question of a physician’s judgment to perform a certain procedure, rather than a question of the quality of the procedure (or the quality of a device used to perform the procedure). This conclusion is further reinforced by the statutory design of the Medicare statute itself, pursuant to which medical necessity for a procedure - and its quality - are distinct considerations governed by separate sections of the statute.