In a recent case, the First Circuit held that a provider's truthful certification can be a false certification with respect to an underlying supplier based upon the supplier's conduct in an underlying transaction. The court found that compliance with the anti-kickback statute (AKS), by both the provider and its underlying suppliers, was a precondition for Medicare reimbursement and that a provider's submission of a claim which included items and services from a supplier's underlying transaction that violated the AKS would give rise to a violation of the False Claims Act (FCA) with respect to the supplier, based on the provider's implied certification.

To state a claim under the FCA, a person must have "(1) knowingly presented or caused to be presented, (2) a false claim, (3) to the United States government, (4) knowing its falsity, (5) which was material, and (6) seeking payment from the federal treasury." A claim for payment, according to the court, implies that the claimant has complied with the preconditions to payment.

In this case, the supplier paid kickbacks to physicians to induce the use of the supplier's spinal implant products. The court held that when a physician or hospital certifies that it will abide by Medicare laws, regulations and instructions in its provider agreement with respect to his or her own compliance, the provider also is making an implied certification concerning the behavior of non-claim-submitting entities in the provider's supply chain; specifically, that its supplier's underlying transactions to obtain the items and services necessary to provide the services billed in a provider's claim did not result from a kickback. The court focused on the provider agreement's language that states, "I understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying" with the AKS. The court's extremely broad definition of what constitutes an underlying transaction is unprecedented. Rather than treating the underlying transaction solely as the transaction between the patient and the provider, the court incorporated all of the transactions in the underlying supply chain as underlying transactions. Thus, the supplier's kickback to a physician to encourage the order of an item by the hospital, violated that hospital's implied certification that the underlying transaction was compliant with the AKS. We believe that the Supreme Court, if it reviews this issue, would be unlikely to view the term "underlying transaction" as expansively as the First Circuit has.

The district court had held that provider agreements only included representations about the provider entity's conduct and that unlawful conduct by a third party, about which the provider neither knew nor had reason to know, could not render the provider's claims false or fraudulent. The district court also held that a claim can be false or fraudulent only if the submitting entity knew or should have known of the underlying falsehood or fraudulence. The First Circuit rejected both propositions.

The court also found that the supplier's kickback to a physician rendered the physician's Medicare billing for surgical services related to the implantation of the spinal implant products to be false, even though the physician did not bill for the supplier's spinal implant products.

The supplier essentially was deemed to have caused the provider to submit false claims, even though the provider's certification was accurate as to its own transactions. It is likely, in this case, that the hospital would have no liability for the false claim as it had no knowledge of the kickback. However, where a hospital has some knowledge of a physician's financial relationship, for example, when a physician forms a product distribution company, the hospital may have an obligation to investigate the physician's financial relationship to assure that its certification of compliance with the AKS is accurate.

It should also be noted that the Senate Finance Committee minority staff recently issued a report on their inquiry into physician-owned distributors , and several ranking senators have sent letters to the HHS Office of Inspector General and the Centers for Medicare and Medicaid Services asking that an investigation be opened into physician-owned distributorships.