Following our inaugural installment of the Health Care Enforcement Quarterly Roundup, we are pleased to be back this quarter with another overview of key enforcement trends in the health care industry. In this issue, we report on continued interpretations of the landmark Escobar case, the latest guidance from US Department of Justice (DOJ) leadership regarding enforcement priorities, the uptick in state and federal efforts to combat the opioid crisis, and recent court decisions regarding the use of statistical sampling in False Claims Act (FCA) cases. We also examine a recent increase in regulatory scrutiny of co-location and shared services/equipment arrangements. Please sign up to receive updates from our FCA Update blog, where we regularly post news about cases and other developments in health care policy and enforcement.
Continued Interpretations of the Landmark Escobar Case
Two years after the Supreme Court’s ruling in Universal Health Services, Inc. v. United States ex rel. Escobar,
136 S. Ct. 1989 (2016), lower courts continue to grapple with several issues raised in the decision. Escobar held that the “implied certification” doctrine can be a basis for FCA liability if certain requirements are satisfied. Those requirements include, without limitation, the following:
- Compliance with the regulatory, statutory or contractual provision in question must be “material” to the government’s decision to pay a claim; and
- The defendant must know that such compliance is material to the government’s payment decision.
As we reported in the Q1 Quarterly Roundup, courts have interpreted this reinvigorated materiality standard favorably for FCA defendants at all stages of litigation, whether on motions to dismiss, motions for summary judgment or at trial. In recent months, district courts have dismissed or granted summary judgment in cases on materiality grounds. United States ex rel. Cressman v. Solid Waste Servs., Inc., is an example of one such case. There, the Eastern District of Pennsylvania demonstrated that materiality can be a potent defense weapon on summary judgment. The Cressman court granted summary judgment to the defendant because the government had continued to pay the defendant after the FCA suit was filed and after the government had a chance to investigate the alleged violation, belying any notion that the defendant’s alleged non-compliance was material to the government’s payment decision. No. CV 13-5693, 2018 WL 1693349, at *6 (E.D. Pa. Apr. 6, 2018). The court also noted that the government’s decision not to intervene was evidence that the defendant’s alleged violation was not material.
Although materiality has proved a valuable tool for FCA defendants, it is not always a silver bullet. The US Court of Appeals for the Sixth Circuit recently held, in a two-to-one decision, that the relator had sufficiently alleged materiality under Escobar, reversing the district court’s dismissal of the case. United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018).
Over a vigorous dissent, the majority held that the government’s previous payment of non-compliant claims cannot weigh against materiality unless the government had actual knowledge of the alleged violations. In the government’s view, as articulated in its amicus brief, materiality is usually a question for the jury. This, of course, is at odds with the Supreme Court’s recognition in Escobar that materiality can be appropriate for resolution as early as a motion to dismiss. 136 S. Ct. at 2004, n. 6 (rejecting the “assertion that materiality is too fact intensive for courts to dismiss False Claims Act cases on a motion to dismiss or at summary judgment”).
The dissent, on the other hand, explained that materiality must be alleged with particularity under Rule 9(b), and pointed to the many courts that have applied a stringent pleading standard for materiality in accordance with the Supreme Court’s guidance. See Id. at 843. Although the Sixth Circuit allowed the case to proceed, the split decision illustrates the uncertainty and active litigation that continues in the wake of Escobar. Brookdale filed a petition for rehearing en banc, which is pending at the time of this report.
Practice Note: Lawyers defending FCA cases or investigations should evaluate materiality early, particularly in situations where the government payor has not ceased paying claims despite knowledge of the alleged fraud. Many FCA cases fall short of the Escobar standard, whether on the pleadings or on the evidence, and are ripe for a motion to dismiss or for summary judgment on materiality grounds. Materiality also plays an important role in the defense of FCA investigations. If impediments to proving materiality can be demonstrated, this may impact the government’s intervention decision.
 See, e.g., United States v. UnitedHealthcare Ins. Co., No. 15-CV-7137, 2018 WL 2933674 (N.D. Ill. June 12, 2018); United States ex rel. Bachert v. Triple Canopy, Inc., No. 1:16-CV-456, 2018 WL 3018219, at *5 (E.D. Va. June 8, 2018); United States ex rel. Patel v. Catholic Health Initiatives, No. 4:17-CV-1817, 2018 WL 2234814 (S.D. Tex. May 16, 2018); United States ex rel. Lemon v. Nurses To Go, Inc., No. CV H-16-1775, 2018 WL 1898559 (S.D. Tex. Apr. 20, 2018); United States ex rel. Folliard v. Comstor Corp., No. CV 11-731 (BAH), 2018 WL 1567620 (D.D.C. Mar. 31, 2018).
DOJ Continues to Provide Guidance on Enforcement Priorities
As reported in the Q1 Quarterly Roundup, the Trump Administration’s DOJ has issued a series of guidance memoranda in an effort to shift enforcement priorities under the FCA. In June 2018, Acting Associate Attorney General Jesse Panuccio spoke at the American Bar Association’s 12th National Institute on the Civil False Claims Act and
Qui Tam Enforcement. Mr. Panuccio’s speech reaffirmed several of DOJ’s FCA enforcement priorities.
Qui Tam Dismissals
To begin, Mr. Panuccio reaffirmed the principles outlined in the January 2018 “Granston Memorandum,” authored by Michael Granston, director of the Civil Division’s Fraud Section, that the United States should consider exercising its dismissal authority over cases that “lack merit or are otherwise contrary to the interests of justice.” The Granston Memorandum outlines several factors that prosecutors should consider in determining whether to exercise DOJ’s statutory authority to dismiss qui tam matters under 31 USC § 3730(c)(2)(A), chief among them curtailing meritless claims.
While Mr. Panuccio recognized “the risks that relators may take in coming forward to expose fraudulent conduct,”
he nonetheless emphasized that the United States should consider exercising its prosecutorial discretion when presented with a “frivolous case.”While it remains to be seen whether DOJ will take a more proactive approach to dismissing meritless qui tam cases, Mr. Panuccio’s comments serve as a reminder to the defense bar to consider appealing to prosecutors to exercise their statutory authority to dismiss weak qui tam claims pursuant to 31 USC § 3730(c)(2)(A).
Mr. Panuccio reiterated the attorney general’s November 2017 announcement that DOJ would no longer issue guidance documents “that have the effect of adopting new regulatory requirements or amending the law.” The so-called “Sessions Memorandum” prevents DOJ from “evading required rulemaking processes by using guidance memos to create de facto regulations.” The general principles outlined in the Sessions Memorandum were applied more broadly in the January 2018 “Brand Memorandum,” issued by then-Associate Attorney General Rachel Brand. The Brand Memorandum notes that “[DOJ] litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable laws in [affirmative civil action] cases.” While agency guidance is not law and does not have the force or effect of a statute or regulation, relators have often pointed to alleged failure to comply with agency guidance as the basis for FCA claims.
Reinforcing the message of the Sessions and Brand memoranda, Mr. Panuccio further explained that guidance documents should not be used to substantiate any claims of legal violations to ensure “rule of law, fair notice, and due process.” He also noted that “[w]e hope other agencies will follow this example,” suggesting that the use of subregulatory guidance by other agencies would be inconsistent with “rule of law, fair notice, and due process.” Mr. Panuccio’s comments represent the latest evolution in the shift that began with the Sessions Memorandum and continued with the Brand Memorandum.
Mr. Panuccio spoke about DOJ’s new policy relating to “piling on,” i.e., when multiple law enforcement or regulatory agencies impose penalties on a single entity for the same conduct. He recognized “that repeated and unwarranted punishment for the same conduct has the potential to undermine the spirit of fair play and the rule of law.” As a result, DOJ has announced a policy “designed to avoid piling on by promoting coordination within the Department and with other regulators to apportion penalties and fines where appropriate, to ensure that defendants are subject to the appropriate, not just the highest, level of punishment that is available.”
Mr. Panuccio also emphasized DOJ’s continued enforcement efforts against individual defendants. Specifically, Mr. Panuccio stated, “[w]e want to create incentives for companies to help us identify the individuals responsible for wrongdoing, because we remain steadfast in our resolve to hold such individuals accountable.”
In recent months, the United States has secured several settlements with individuals for alleged wrongdoing under the FCA. For example, in April 2018, the District of Connecticut reached a $650,000 settlement with World Health Clinicians, Inc.; its CEO; and a physician for alleged violations of federal and state False Claims Acts by billing Medicare for physical therapy services when massage therapy was provided to patients. In May 2018, three physicians separately agreed to pay a total of $700,000 to settle FCA allegations that they received improper payments for providing referrals to a drug-testing laboratory in violation of the Stark Law and the Anti-Kickback Statute (AKS). And in July 2018, a psychologist in Connecticut agreed to a $126,000 settlement for allegedly billing for Medicaid services that were not provided. This settlement is part of DOJ’s larger effort to investigate behavioral health providers.
These recent settlements demonstrate DOJ’s continued emphasis on holding individuals accountable for FCA violations.
Value of Cooperation
Mr. Panuccio’s speech also emphasized the value of cooperation for companies facing FCA investigations. He reaffirmed that DOJ will continue to “recognize genuine cooperation of corporate entities accused of wrongdoing in both civil and criminal matters.” He highlighted the tremendous enforcement discretion” DOJ has with respect to structuring settlements but reiterated that a favorable settlement will depend on the “nature of the cooperation,” including assistance in pursing individual wrongdoers. While this is nothing new for qui tam defendants, the value of cooperation and civility during the investigation and settlement discussion cannot be overstated.
In addition to cooperation, Mr. Panuccio emphasized the value of compliance and DOJ’s efforts to reward companies that incorporate compliance programs into their “corporate culture.” When something goes wrong in an organization, “the greatest consideration should be given to those companies” that have integrated and robust compliance programs, Mr. Panuccio stated. This, too, is not a surprise but serves as an important reminder that health care providers and companies can and should preemptively prepare for future enforcement activity by ensuring that an effective compliance program is not only in place on paper, but actually followed and monitored by executive leadership and the board/oversight bodies.
Practice Note: As DOJ’s leadership continues to emphasize the enforcement priorities outlined in the Sessions, Granston and Brand memoranda, we are closely monitoring the impact of this guidance in our cases. Particularly in light of the Granston Memorandum, lawyers representing FCA defendants and investigation targets should question frivolous qui tams and advocate for DOJ to dismiss such cases. Likewise, in cases where multiple agencies are “piling on” to a target, lawyers should encourage prosecutors to heed the new policy announced by Mr. Panuccio that encourages inter-agency cooperation. Finally, where relators rely on alleged failure to comply with agency guidance, the principles of the Sessions and Brand memoranda should be utilized at the outset of an investigation to narrow the scope of claims on which the United States may intervene—or perhaps lead to a dismissal of the qui tam altogether.
 See Press Release, US Dep’t of Justice, Acting Associate Attorney General Jesse Panuccio Delivers Remarks at the American Bar Association’s 12th National Institute on the Civil False Claims Act and Qui Tam Enforcement (June 14, 2018), https://www.justice.gov/opa/speech/acting-associate-attorney-general-jesse-panuccio-delivers-remarks-american-bar.
 The Granston Memorandum outlines a total of seven factors to be considered by prosecutors: (1) curbing meritless qui tams, “either because the legal theory is inherently defective, or the relator’s factual allegations are frivolous”; (2) preventing parasitic or opportunistic qui tam actions, where qui tam cases duplicate pre-existing government investigations and “add no useful information”; (3) preventing interference with agency policies and programs; (4) “avoid[ing] the risk of unfavorable precedent”; (5) safeguarding classified information and national security interests; (6) preserving government resources; and (7) addressing egregious “procedural errors.”
 See Press Release, US Dep’t of Justice, Attorney General Jeff Sessions Ends the Department’s Practice of Regulation by Guidance (Nov. 17, 2017), https://www.justice.gov/opa/pr/attorney-general-jeff-sessions-ends-department-s-practice-regulation-guidance.
 See Press Release, US Dep’t of Justice, Norwalk Medical Practice, CEO and Physician to Pay $650,830 to Settle False Claims Act Allegations (Apr. 10, 2018), https://www.justice.gov/usao-ct/pr/norwalk-medical-practice-ceo-and-physician-pay-650830-settle-false-claims-act-allegations.
 See Press Release, US Dep’t of Justice, Three Physicians Agree to Pay Total of $700,000 to Settle Alleged False Claims Act Violations Arising from Improper Financial Relationship with Drug Testing Laboratory (May 7, 2018), https://www.justice.gov/usao-wdpa/pr/three-physicians-agree-pay-total-700000-settle-alleged-false-claims-act-violations.
 See Press Release, US Dep’t of Justice, Waterford Psychologist Pays $126,760 to Settle Allegations under the false Claims Act (July 3, 2018), https://www.justice.gov/usao-ct/pr/waterford-psychologist-pays-126760-settle-allegations-under-false-claims-act.
Continued Uptick in State and Federal Efforts to Combat the Opioid Crisis
Following up on our initial coverage in the Q1 Quarterly Roundup, we continue to track increased enforcement efforts at the state and federal level to combat the opioid crisis. At the federal level, DOJ made clear through a series of speeches that it would use the FCA as one of the tools to reach all levels of the opioid distribution chain. The government also filed a statement of interest in the closely watched multi-district litigation currently pending in the US District Court for the Northern District of Ohio (17-MD-2804) and is currently participating in settlement discussions between the parties.
Continuing the trend, the United States and six states joined whistleblower litigation in May 2018 against Insys Therapeutics. The litigation alleges that Insys violated the FCA and AKS in connection with its marketing of Subsys, a sub-lingual spray form of the powerful opioid fentanyl. Subsys is approved only for the treatment of persistent breakthrough pain in adult cancer patients who are already receiving, and are tolerant to, around-the-clock opioid therapy. The lawsuit alleges that Insys knowingly offered and paid kickbacks to induce physicians and nurse practitioners to prescribe the drug, and that it knowingly caused Medicare and other federal health care programs to pay for non-covered uses. Insys allegedly disguised these kickbacks using a sham speaker program, by providing jobs for prescribers’ friends and relatives, and by furnishing prescribers with visits to strip clubs, lavish meals and entertainment. Many of the physicians allegedly receiving these benefits were not even oncologists.
DOJ’s decision to join the Insys lawsuit aligns with several trends identified in our Q1 Quarterly Roundup. First, it highlights the government’s interest in using the FCA as part of its efforts to combat the opioid epidemic, as articulated by Attorney General Sessions in March 2018. Second, it affirms the government’s commitment to holding responsible the individuals directly accountable—the civil lawsuit against Insys is on hold pending resolution of five criminal cases against 15 former Insys officials for their involvement in the alleged scheme. Third, the involvement of numerous states in the lawsuit demonstrates state governments’ interest in litigating against opioid manufacturers. Finally, the government’s complaint captures the post-Escobar attention to materiality, explicitly asserting that alleged false certifications in claims for reimbursement were material to Medicare’s payment of those claims.
Elsewhere, state and local governments have brought litigation against various entities in the opioid supply chain. In May 2018, 10 Chicago suburbs filed suit against nearly 30 entities, including pharmaceutical companies (among them, Insys) and their subsidiaries, drug distribution companies and three physicians who allegedly ran an opioid “pill mill.” See Village of Melrose Park, et al. v. Purdue Pharma L.P., et al., Case No. 2018-CH-06601 (Cook Cty. Cir. Ct.). The plaintiffs filed their suit in the Chancery Division of Cook County Circuit Court and have made it clear that they intend to maintain local control over the case, rather than join the multi-district litigation pending in the Northern District of Ohio, also discussed in our Q1 Quarterly Roundup. Lawyers for the plaintiffs have stated that they intend to file many more such lawsuits in the coming weeks.
Practice Note: Over the past year, DOJ has clearly indicated that it will be an active participant in enforcement efforts against opioid manufacturers and other individuals and entities in the opioid distribution system. While DOJ dipped its toes in the water with the Ohio multi-district litigation—filing a statement of interest and taking part in settlement discussions—it is fully involved in the litigation against Insys. How DOJ handles its intervention in the Insys case will serve as a bellwether for future cases as the United States increasingly devotes resources to combating the national opioid crisis.
 See, e.g., Press Release, US Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the Federal Bar Association Qui Tam Conference (Feb. 28, 2018), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-federal-bar-association.
Recent Court Guidance on the Use of Statistical Sampling in FCA Cases
Affirming a trend that has been evolving for the past several years, courts continue to demonstrate skepticism towards the use of statistical sampling to establish liability under the FCA. In cases where a relator alleges that a defendant induced a third party to submit false claims, some courts have allowed the relator to prove false claims by providing “statistical evidence to strengthen the inference of fraud beyond possibility without necessarily providing details as to each false claim.” United States ex rel. Duxbury v. Ortho Biotech Products, 579 F.3d 13 (1st Cir. 2009). However, two recent decisions have shown that some courts are reluctant to extend this relaxed standard of proof to situations where a relator alleges that the defendant itself submitted false claims to the government.
In United States ex rel. Conroy v. Select Medical Corporation, et al., No. 3:12-cv-00051-RLY-DML (S.D. In. April 2, 2018), relators alleged that a long-term acute care hospital defrauded Medicare by submitting claims for medically unnecessary lengths of stay. The relators also named the hospital’s parent corporation in the suit, and sought discovery involving statistical sampling to show that the practice was the result of a company-wide policy. However, the magistrate judge in the case denied the relators’ discovery request. The magistrate noted that the complaint failed to allege any facts concerning decision making at other hospitals owned by the parent corporation. Moreover, to prevail, the relators would have to prove fraud “on a claim-by-claim basis based on the patient’s actual medical condition and actual medical care”—that is, mere statistical evidence suggesting fraud would not suffice. The relators have appealed the magistrate judge’s ruling, and DOJ has submitted a statement of interest in support of the relators’ objections.
In the US District Court for the District of Massachusetts, a judge recently dismissed a complaint that relied on statistical evidence to allege that the defendant hospital submitted fraudulent claims to the government. United States ex rel. Wollman v. The General Hospital Corporation et al., No. 15-cv-11890-ADB (D. Mass March 30, 2018). The court stated that the relator’s complaint provided ”notable” details about the allegations that Medicare’s overlapping surgery rules were violated, including the date, surgeon, start time, location, duration, and type of surgical procedure. However, citing her lack of access to hospital billing records and claim information, the relator attempted to use statistical evidence to show that the hospital must have submitted fraudulent claims to Medicare, such as the percentage of knee replacements Medicare paid for in certain years and that some of the patients who had overlapping surgeries were likely Medicare beneficiaries. . The court concluded that this was insufficient to satisfy Federal Rule of Civil Procedure 9(b)’s particularity requirement, as a relator must identify specific false claims that the hospital submitted to the government in order to survive a motion to dismiss. The judge dismissed the complaint without prejudice.
Practice Note: In cases that use statistical sampling to prove FCA liability, qui tam defendants should immediately evaluate the viability of a motion to dismiss for failure to meet the pleading particularity requirements of Federal Rule of Civil Procedure 9(b). Similarly, if data is sought during discovery to support a statistical basis for FCA liability, defendants should vigorously push back and encourage courts to deny such requests, as the court did in Conroy.
Increased State and Federal Scrutiny of Co-Location Arrangements
We have recently experienced an increase in clients seeking advice in structuring arrangements involving co-location (or proposed sharing of services/equipment) between multiple health care entities, and have helped them structure these arrangements. The growing prevalence of these types of arrangements has resulted in a corresponding uptick in state and federal scrutiny of such arrangements.
In particular, the Centers for Medicare and Medicaid Services (CMS) has increased its review of co-location arrangements in connection with reviews of provider-based attestations, enrollment records and hospital certification surveys. Further CMS guidance specific to co-location is expected soon, and is anticipated to reduce to writing the more informal guidance provided up to this point. We have also noticed that certain states, such as California, have been more closely reviewing licensure and Medicaid enrollment materials to identify circumstances where two entities may be utilizing the same space. In some cases, regulators are taking enforcement action against entities with co-location arrangements that do not meet applicable criteria, including requesting overpayment refunds and threatening termination of Medicare enrollment.
The government’s increased scrutiny of these types of arrangements—and the significant adverse consequences that could result from non-compliance—should be taken into consideration when arrangements involve more than one health care entity and there is actual (or potential) sharing of space, staff or equipment. The specific facts and circumstances of any such arrangement should be reviewed for compliance with relevant state and federal
co-location requirements, which are often complex and may be conflicting.
Practice Note: It is important to ensure that co-location arrangements are proactively reviewed under all applicable rules specific to the provider types at issue. For example, co-location arrangements involving hospitals require review under Medicare rules for enrollment, provider-based rule compliance and Conditions of Participation. If the arrangements involve entities excluded from Prospective Payment Systems (e.g., long-term care hospitals or psychiatric units/hospitals), the arrangements also require additional review under Medicare “hospital-within-a-hospital” or “satellite” rules. Other health care entities, such as Independent Diagnostic Testing Facilities and Durable Medical Equipment Suppliers, are generally prohibited from sharing space with any other Medicare-enrolled entity.