Introduction:

One of the first rules learned by regulatory lawyers in training is the distinction between federal regulations, which have the force of law, and non-binding agency guidance. Health care lawyers, in particular, are often called upon to apply this rule given the mountain of agency interpretive instruction, Medicare manuals, memoranda and other authorities. In spite of a long line of cases1 in support of this distinction, in our experience it is not unusual for the federal FCA relators and DOJ attorneys to argue that guidance documents can be relied upon as binding authorities in pursuit of legal theories under the FCA.

A well-known example of this argument is in DOJ’s reliance on the Medicare Benefit Policy Manual (the Manual) as binding authority regarding the definition of “reasonable and necessary,” as that phrase is used in Title XVIII of the Social Security Act. Specifically, the Social Security Act provides that “no payment may be made under part A or part B of this subchapter 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.”2 Although this is the core coverage criteria for the Medicare program, nowhere in the Act or applicable regulatory text is the phrase “reasonable and necessary” defined. Nevertheless, in sub-regulatory guidance issued by the Centers for Medicare & Medicaid Services (CMS), the agency offers its own interpretations of the phrase in various circumstances including, for example:

The services delivered are reasonable and necessary for the treatment of a patient’s illness or injury, i.e., are consistent with the nature and severity of the individual’s illness or injury, the individual’s particular medical needs, and accepted standards of medical practice. The services must also be reasonable in terms of duration and quantity.3

This section of the Manual has been used in several FCA actions against Medicare Skilled Nursing Facilities in recent years to establish what relators and DOJ consider to be the requirements for therapy services under the Medicare program. Of note, relators and DOJ have pointed to this provision to establish that therapy services must comply with certain professional association guidelines (for example, APTA, AOTA and ASHA guidelines) as the “accepted standards of medical practice.” These association guidelines set forth best practices for what therapy services should be used, how therapy should be provided and how therapy services should be documented. These “requirements” are not specified anywhere in the Social Security Act or applicable regulations. Stated otherwise, the DOJ is pursuing providers for civil fraud using interpretive guidance that defers to non-governmental third parties.

Last year, one federal court recognized the deficiency of this reliance. In United States ex rel. Polukoff v. St. Mark’s Hosp.,4 relator argued that guidelines issued by the American Heart Association and American Stroke Association applied to establish whether a certain medical procedure was “medically reasonable or necessary.” The United States District Court for the District of Utah rejected relator’s argument and noted that “Medicare does not require compliance with an industry standard as a prerequisite to payment. Thus, requesting a payment for medical procedures that allegedly did not comply with a particular standard of care does not amount to a fraudulent scheme actionable under the FCA.”5 The court also recognized that the government could promulgate a regulation that clarifies the conditions under which certain services would be considered medically reasonable and necessary.6 Without such an objective standard created by the government, no certification of medical necessity could be found to be objectively false, as required by the FCA.7

On January 25, 2018, DOJ issued a memorandum (the Brand Memo) that further limits its ability to rely on sub-regulatory guidance like the Manual to establish legal requirements for health care providers.8 This memorandum prohibits DOJ from “using its guidance documents to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation.” In addition, the memorandum provides that “[t]hese principles also should guide [DOJ] litigators in determining the legal relevance of other agencies’ guidance documents in affirmative civil enforcement (“ACE”).” DOJ writes that “effective immediately for ACE cases, the Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules.”

There are some limitations to the instruction, however, as DOJ litigators will still be allowed to use agency guidance documents to prove that a party has the requisite knowledge of a rule when the guidance document is simply a paraphrasing or explanation of an actual law or regulation; this is a common paradigm for Medicare interpretive authorities as the Manual is often a vernacular explanation of a federal regulation. But differences between “plain-spoken” manuals and the Code of Federal Regulation are often the subject of dispute.

The Brand Memo ends by addressing the regulatory “creep” that can occur when regulators write lengthy vernacular explanations of actual notice and comment regulations, noting that DOJ “should not treat a party’s noncompliance with an agency guidance document as presumptively or conclusively establishing that the party violated the applicable statute or regulation. That a party fails to comply with agency guidance expanding on statutory or regulatory requirements does not mean that the party violated those underlying legal requirements; agency guidance documents cannot create any additional legal obligations.”

For our specific example discussed above, the question remains whether the Manual’s provision setting forth CMS’s interpretation of the definition of “reasonable and necessary” falls into the category of “simply explain[ing] or paraphrase[ing] legal mandates from existing statutes or regulations.” As there are no statutory or regulatory provisions defining the phrase “reasonable and necessary,” the logical answer is that the Manual’s provision is exactly the type of “guidance” that the attorney general and associate attorney general seek to limit through the issuance of their November 16, 2017, and January 25, 2018, memoranda. That is, the Manual and its provision related to what is considered reasonable and necessary attempt to “create binding requirements that do not already exist by statute or regulation.” According to the memoranda, DOJ is now prohibited from using guidance documents like the Manual to coerce compliance beyond what is required by the terms of the applicable statutory and regulatory provisions.

In spite of protestations from DOJ line attorneys across the country (as expressed at ACI’s False Claims & Qui Tam Enforcement forum), we believe that this directive is a change in policy. In many circumstances, CMS’s “plain-spoken” sub-regulatory guidance is welcomed by an industry attempting to comply with a growing list of regulatory requirements. But applying nonbinding guidance in the FCA context, where defendants face quasi-punitive treble damages, civil penalties and possible exclusion, is clearly improper.

Importantly, these new restrictions highlight a greater underlying issue – that the FCA is an inappropriate means by which to prosecute medical necessity cases, which require application of the “reasonable and necessary” standard. It is frankly unsurprising that Congress did not define these criteria in the Act, leaving this task instead to the agency. Similarly, it is reasonable for CMS to look to the experience of professional societies to inform the basis for dynamic Medicare coverage criteria. In addition, Congress created an extensive administrative process within the Act to manage coverage disputes. Participation in Medicare is permissive, and CMS and its contractors have broad authority to suspend and recoup payment to providers who are suspected of fraudulent conduct.9

Notably, Federal Magistrate Judge Theresa Carroll Buchanan alluded to the issue of using the FCA in such cases during an October 27, 2017, hearing in United States ex rel. Ribik v. HCR ManorCare, Inc.,10 that ultimately led to the exclusion of DOJ’s lead witness and the dismissal of the case. Similarly, the wave of cases applying the rigorous and demanding materiality standard described by the United States Supreme Court in Univ. Health Servs., Inc. v. United States (“Escobar”)11 opens the door for defendants to challenge FCA enforcement in medical necessity cases where the government continues to pay for an item or service “despite knowledge of some disputed practice, some non-compliance, or some other claimed defect.”12

Of course, this position will face opposition and will continue to be challenged in litigation in the months to come, but perhaps for the first time, both the foundation and momentum may favor the defense. Evidence of the shifting tide can be seen specifically in the issuance of the Brand Memo, the Escobar decision and its progeny, and generally in the current political environment favoring deregulation and placing limitations on non-intervened qui tam cases. As health care attorneys representing providers on the front lines of some of these issues, we will continue to advocate for reasonable applications of the enforceable laws that govern our industry.