In recent years, the US Department of Justice (DOJ) has used alleged violations of Medicare’s DME Supplier Standards as grounds for prosecuting False Claims Act suits against DME suppliers. Two recent federal court decisions raise significant doubts whether DOJ will be able to assert that purported non-compliance with the DME Supplier Standards, as set forth in 42 CFR § 424.57(c), can trigger False Claims Act liability.

The DME Supplier Standards are minimum operational standards applicable to all types of DME suppliers. For example, the standards mandate that suppliers maintain a physical facility on an appropriate site, maintain a primary business telephone listed in a local business directory, permit on-site inspections by CMS, honor warranties, have comprehensive liability insurance, and have a complaint resolution protocol to address beneficiary complaints. Given the nature of these requirements and the regulatory remedies available for non-compliance, it seems clear that they are general conditions of a supplier’s participation in the Medicare program rather than conditions of payment for particular items or services.

DOJ, however, has taken the opposite position in litigation, asserting in multiple federal suits that violations of the DME Supplier Standards raise actionable claims under the False Claims Act. In two recent high profile cases, the federal government’s theory has been resoundingly rejected. In U.S. ex rel. Williams v. Renal Care Group, Inc., 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012), DOJ had asserted, and a federal district court agreed, that the defendants had set up a renal supply company that was “merely a billing conduit was not in compliance with the durable equipment supplier standards,” which resulted in the submission of false and fraudulent claims for payment to the government, resulting in violations of the False Claims Act. Both at the district court and later on appeal, the defendants countered, arguing that the DME Supplier Standards are (i) conditions of participation, not payment, (ii) enforced by CMS through a separate administrative process that can lead to the revocation of a supplier number, and (iii) violations of the DME Supplier Standards do not render a claim materially false.

The Sixth Circuit ultimately agreed with the defendants and overturned the district court’s granting of summary judgment in favor of DOJ and entered it in favor of the defendants. The court reasoned that “(t)he defendants are correct, irrespective of whether they in fact violated the regulations. The False Claims Act is not a vehicle to police technical compliance with complex federal regulations … (t)he regulations set forth in the United States complaint [the DME Supplier Standards] are conditions of participation, the violation of which do not lead to False Claims Act liability.”

The Sixth Circuit’s decision came on the heels of a 2011 decision in which a district court issued partial summary judgment in a False Claims Act case in favor of multiple defendants accused by DOJ of violating the DME Supplier Standards. In U.S. ex rel. Jamison v. McKesson Corp., 784 F. Supp. 2d 664 (N.D. Miss. 2011), DOJ intervened in a False Claims Act qui tam suit that alleged, among other things, that defendants had falsely certified compliance with DME Supplier Standards and submitted legally false claims. According to DOJ, False Claims Act liability accrued, in part, because the supplier failed to fully comply with the DME Supplier Standards and was not functionally equipped to deliver DME supplies, items and services. Significantly, DOJ emphasized in court filings that “(t)he Supplier Standards go to the very heart of what it means to be a DME provider” and compliance with them constituted conditions for receiving Medicare payment.

The district court rejected the theory that the claims were legally false on multiple grounds. First, the court explained that the defendants’ billing privileges as a DME supplier had been scrutinized over the years by CMS and the National Supplier Clearinghouse (NSC). Those government agencies had administrative oversight over the defendants and had deemed them valid suppliers entitled Medicare payments. The court took issue that, in litigation, DOJ’s interpretation of the DME Supplier Standards and defendants’ compliance seemingly differed from the NSC in that agency’s oversight of DME billing privileges. Second, the court concluded that the DME Supplier Standard regulations were “thoroughly unclear” and differed over time, which negated the knowledge and falsity elements of the False Claims Act. And third, the court found that the defendants had actually complied with the DME Supplier Standards.

The district court concluded that Fifth Circuit False Claims Act precedent required ruling in favor of the defendants on summary judgment:

The False Claims Act does not create liability merely for a health care provider’s disregard of Government regulations or improper internal policies unless, as a result of such acts, the provider knowingly asks the Government to pay money it does not owe… Moreover, claimants do not knowingly present false claims where there were instances of mere contractual or regulatory non-compliance, because the FCA is not an appropriate vehicle for policing technical compliance with administrative regulations. The FCA is a fraud prevention statute, violations of agency regulations are not fraud unless the violator knowingly lies to the government about them.

Id. at 680.

These two decisions suggest that courts will be skeptical of future False Claims Act suits predicated on non-compliance on the DME Supplier Standards.