Based on the recent decision in United States, ex rel. Williams v. Renal Care Group, Inc., medical service providers in the Sixth Circuit that have established separate corporate entities to maximize corporate profits and take advantage of separate Medicare reimbursement programs do not inherently violate the False Claims Act under an alter ego theory, particularly when advice and approval is sought from regulators regarding ambiguous Medicare regulations.

A recent decision by the U.S. Court of Appeals for the Sixth Circuit overturned a district court’s $82.6 million False Claims Act (FCA) judgment against Fresenius Medical Care Holdings, Inc. (successor-in-interest to co-defendants Renal Care Group, Inc., and Renal Care Group Supply Company), finding that defendants did not act with “reckless disregard” of the alleged falsity of their Medicare submissions, and defendants were not liable for FCA allegations because there was no evidence in the record that defendants acted with actual knowledge or in deliberate ignorance of the truth.

Based upon this ruling, medical service providers in the Sixth Circuit that have established separate corporate entities to maximize corporate profits and utilize separate Medicare reimbursement programs do not inherently violate the FCA under an alter ego theory, particularly when the subject Medicare regulations are ambiguous.  Importantly, this ruling also enhances the value of FCA defendants making reasonable and prudent inquiries of the Centers for Medicare and Medicaid Services and legal counsel on the legality of their conduct, particularly when defending against FCA allegations of “reckless disregard.”  The Sixth Circuit’s willingness to acknowledge the impact of ambiguous Medicare regulations on FCA allegations regarding proof of knowledge presents further support for medical service providers to reasonably seek advice from regulators when confronted with regulatory ambiguity.

Background

The FCA creates a cause of action against a party who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to an officer, employee or agent of the United States, or to a contractor, grantee or other recipient under certain circumstances.  31 U.S.C. § 3729(a)(1)(A),(b)(2)(A)(i).

The FCA allows private persons to bring suit for violations of the FCA on behalf of the U.S. government.  31 U.S.C. § 3730(b).  Such suits are called qui tam lawsuits, and the private party bringing the action is referred to as a relator.  If the government decides to intervene in the lawsuit, then it is primarily responsible for conducting the action.  When the government intervenes, the relator is generally entitled to 15 percent to 25 percent of the amount recovered by the government.  31 U.S.C. § 3730(d)(1).  If the government chooses not to intervene, then the relator is generally entitled to 25 percent to 30 percent of the amount recovered for the government.  31 U.S.C. § 3730(d)(2).  Successful qui tam plaintiffs may also be entitled to attorneys’ fees and other costs.  31 U.S.C. § 3730(d)(1-2).

To establish liability, a plaintiff or relator must show that the defendant knowingly submitted a claim to the government and the claim was false.  The FCA defines “knowingly” as a person who has actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information.  31 U.S.C. § 3729(b)(1)(A)(i–iii).  While no proof of specific intent to defraud the government is required under 31 U.S.C. § 3729(b)(1)(B), the falsity must be material to the claim.

Violators of the FCA are liable to the government for a civil penalty of no less than $5,500 and no more than $11,000 (the statutory amount adjusted for inflation) plus three times the amount of damages sustained by the government.  31 U.S.C. § 3729(a)(1).

United States, ex rel. Williams v. Renal Care Group, Inc.

Renal Care Group, Inc. (RCG), a dialysis service provider, created and controlled wholly owned subsidiary Renal Care Group Supply Company (RCGSC), a home dialysis equipment supplier.  Prosecutors alleged that RCG created RCGSC solely to take advantage of loopholes in Medicare that would allow it to increase profits by receiving Method II reimbursements for continuous cycler-assisted peritoneal dialysis treatment supplies.  Prior to their elimination in 2010 by the Secretary of Health and Human Services, such Method II reimbursements were capped at 130 percent of the Method I rate and were available to independent companies that provided only equipment and supplies (but not services) directly to home dialysis patients.  However, counsel for RCG had sought clarification from CMS officials regarding establishment of a subsidiary entity and received verbal confirmation that such an arrangement was acceptable.

In 2005, two relators filed a qui tam action under the FCA in the Eastern District of Missouri contending that RCG used RCGSC as a “billing conduit” to unlawfully inflate Medicare reimbursements.  In 2007, the United States intervened, and relators voluntarily dismissed their claim.  The United States alleged numerous causes of action, including that defendants had violated the FCA by using a sham corporation (RCGSC), which the government alleged had been created for the sole purpose of increasing Medicare reimbursements (Count One) and unjust enrichment (Count Six). 

In ruling on cross-motions for summary judgment, the district court granted summary judgment for the United States on the issues of falsity and materiality, two of the four elements of the alleged FCA violations (Count One), and on liability under the unjust enrichment claim (Count Six).  The district court concluded that defendants had acted with “reckless disregard” of relevant Medicare statutes and regulations, and adopted the United States’ damages calculation for Count One, the only count for which the United States sought damages and penalities.  The Count One award totaled $38,873,592—$12,957,864 trebled because of FCA liability.  The district court also awarded additional statutory penalties of $43,769,000 based on its determination that defendants had admitted 3979 patients to whom equipment was provided under the Method II program and the FCA’s $11,000 statutory penalty standard.

On appeal, in analyzing the grant of summary judgment on the element of “falsity,” the Sixth Circuit rejected the United States’ alter ego argument.  The court determined that a company’s creation of a wholly owned subsidiary to secure advantages in a regulatory structure was not fraudulent when no violence to the legislative purpose was done by treating the corporate entity as a separate legal person.  Accordingly, the court determined that RCG had done nothing wrong by creating RCGSC to maximize profits, and that the structure of the two companies was not inconsistent with the legislative goals for the Medicare payment scheme.

In reviewing the lower court’s finding of defendants’ “reckless disregard” of relevant Medicare statutes and regulations, the Sixth Circuit noted that only those who act in gross negligence of their duty to make reasonable and prudent inquiries will be found liable under the “reckless disregard” prong of the FCA.  The court further noted that this is a limited duty to inquire rather than a burdensome obligation.  In rejecting the United States’ contention that the applicable regulations were clear that wholly owned subsidiaries were ineligible for Method II reimbursements and that defendants’ reliance on statements by government officials could not surmount such clear direction, the court concluded that defendants did not act with reckless disregard because they sought clarification on the issue, followed industry practice in trying to sort through ambiguous regulations and were forthright with government officials over RCGSC’s structure.  Coupled with the fact that there was “no evidence” in the record that defendants acted with actual knowledge or in deliberate ignorance of the truth, the court found no FCA liability under Count One.

On October 5, 2012, the Sixth Circuit issued its ruling reversing the lower court’s judgment, granting summary judgment for defendants on Counts One and Two, and reversing and remanding judgment on all other counts for further proceedings.