In United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011), the relator, a former regional sales manager for Blackstone Medical, Inc., filed a qui tam action against the medical device manufacturer alleging that it violated the federal FCA. The relator alleged that Blackstone caused hospitals and physicians to submit materially false claims to Medicare by engaging in a nationwide kickback scheme to induce physicians to use its medical devices in spinal surgeries. The relator further alleged that Blackstone knew this scheme would cause physicians and hospitals to present Medicare with payment claims that contained material misrepresentations. According to the relator, both hospital and physician claims for reimbursement were allegedly tainted by kickbacks provided to physicians (even though the hospitals were unaware of the kickbacks). The hospitals and physicians who submitted the claims to Medicare were not named as defendants in the action. Blackstone did not submit claims for reimbursement to Medicare. The government declined to intervene in the action (which is typically a sign that the merits of the relator’s claims are weak, the potential damages are low, or both). Blackstone moved to dismiss the action for failure to state a claim under Rule 12(b)(6). At issue was whether the claims were materially false under the FCA.

The Massachusetts district court applied the traditional falsity analysis outlined in Part I and held that the relator’s complaint failed to identify any materially false claims. The First Circuit reversed the district court, rejecting what it deemed to be “judicially created” “categorical rules” to determine whether a claim is materially false under the FCA. According to the First Circuit, the “district court appeared to employ the concept of certification such that a claim can be false or fraudulent only if the submitting entity knew or should have known of the underlying falsehood or fraudulence.” Blackstone, at *10. The First Circuit held that this view was incorrect because “[t]he Supreme Court has long held that a non-submitting entity [such as Blackstone] may be liable under the FCA for knowingly causing a submitting entity [such as the hospitals] to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s lawful conduct.” Blackstone, at * 11. In response to Blackstone’s concerns that failing to adopt the traditional framework for analyzing falsity would overextend liability under the FCA, the First Circuit held that this concern does not “call for ‘adopting a circumscribed view of what it means for a claim to be false or fraudulent,’ but rather calls for ‘strict enforcement of the Act’s materiality and scienter requirements.’” Blackstone, at *9 (quoting United States v. Sci. Applications Int’l Corp., 626 F.3d 1257, 1269 (D.C. Cir. 2010)).

The First Circuit held that the appropriate test for falsity is to determine, without any categorical limitations, whether the claims at issue “misrepresented compliance with a precondition of payment so as to be false or fraudulent,” and if so, “whether those misrepresentations were material.” Blackstone, at *13. The first step of this analysis is to identify a precondition of payment under the relevant government program. In Blackstone, the relator asserted that compliance with the AKS is a precondition of payment under the Medicare program and identified four potential sources to support her argument: (1) the language and legislative history of the AKS; (2) a non-retroactive 2009 amendment to the FCA which provides that violations of the AKS are also violations of the FCA; (3) the hospitals’ Medicare Cost Reports drafted by CMS; and (4) the hospitals’ and physicians’ Medicare Provider Agreements, also drafted by CMS. The First Circuit held that the Medicare Hospital Cost Reports and Provider Agreements established that AKS compliance is a precondition of Medicare payment for the hospital and physician claims at issue. The First Circuit declined to rule on whether the first and second sources established the same.

According to the First Circuit, the Medicare Provider Agreements executed by the hospitals and physicians established that compliance with the AKS is a precondition of payment under Medicare:

The Provider Agreement, drafted by CMS, requires that hospitals and physicians acknowledge that they “understand that payment of a claim by Medicare is conditioned upon the claim and the underlying transaction complying with Medicare’s laws, regulations and program instructions.” The Agreement specifically identifies “the Federal anti-kickback statute” as one of only two enumerated examples of the relevant “laws, regulations, and program instructions.” This language make clear that the federal Medicare program will not pay claims if the underlying transaction that gave rise to the claim violated the AKS. The Agreement makes no exception for instances in which that “underlying transaction” violated the AKS because of the actions of a third party like Blackstone.

Blackstone, at *13.

The First Circuit held that the Medicare Cost Reports submitted by the hospitals likewise demonstrated that AKS compliance is a precondition of Medicare payment:

The Hospital Cost Report, also drafted by CMS, further underscores that hospitals submitting claims represent compliance with the AKS. The form states that “if services identified in this report [were] provided or procured through the payment directly or indirectly of a kickback…fines and/or imprisonment may result.” It also requires that the hospital’s representative sign a statement certifying that he or she is “familiar with the laws and regulations regarding the provisions of health care services, and that the services identified in this cost report were provided in compliance with such laws and regulations.” This makes it abundantly clear that AKS compliance is a precondition of Medicare payment and makes no exceptions for violations caused by third parties like Blackstone.

Blackstone, at *14.

The First Circuit next considered whether compliance with the AKS is a “material” precondition of payment under the Medicare program. Blackstone, at *14-15. Blackstone argued that AKS compliance is irrelevant to the payment of the Medicare claims at issue because neither hospitals nor physicians billed Medicare specifically for Blackstone’s devices. For hospital claims, Blackstone argued that hospitals classified patients within “diagnostic-related groups” (“DRGs”) and received a set payment for treating patients in a group regardless of the particular services provided. For physician claims, Blackstone contended that physicians billed Medicare for their services in performing medically necessary surgeries, not for the devices used because of the alleged kickbacks. The First Circuit declined to adopt Blackstone’s position as a matter of law, and held that the relator’s allegations were “sufficient to show, for purposes of this motion to dismiss, that the kickbacks were capable of influencing Medicare’s decision as to whether to pay the hospital and physician claims.” Blackstone, at *15. The First Circuit observed that “[e]xpress contractual language may ‘constitute dispositive evidence of materiality,’ but materiality may be established in other ways, ‘such as through testimony demonstrating that both parties to the contract understood that payment was conditional on compliance with the requirement at issue.’” Blackstone, at 15.

Based on this analysis, the First Circuit reversed the district court’s dismissal of the relator’s complaint under Rule 12(b)(6) for failing to identify a materially false claim under the federal FCA, and remanded the action.

Tomorrow, we will discuss the First Circuit’s application of its new falsity analysis to the state FCA claims at issue in New York ex rel. Westmoreland et al. v. Amgen, Inc. et al.