In this installment of the Healthcare Enforcement Quarterly Roundup we cover several topics that have persisted over the past few years and identify new issues that will shape the scope of enforcement efforts in 2020. In this Quarterly Roundup, we discuss new guidance and proposed rules with major implications for healthcare companies, enforcement developments in healthcare private equity investing, Anti-Kickback and Stark Law, and opioid litigation matters, and other issues that were brought forward in the final quarter of 2019.
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Medicare Sub-Regulatory Guidance Enforcement Developments
In November 2019, the news media published an internal memorandum by the Office of the General Counsel (OGC) at the US Department of Health and Human Services (HHS) addressing the Supreme Court’s holding in Azar, Secretary of Health and Human Services v. Allina Health Services, et al.  In its opinion, the Supreme Court vacated an HHS policy to reduce Medicare payments because HHS failed to satisfy its notice-and-comment obligations under the Social Security Act (SSA).
Background on the Court’s Decision
The main issue in the case was whether HHS’s decision to include Medicare Part C patients in the Medicare fraction represented a change in a “substantive legal standard” within the meaning of Section 1871(a)(2) of the SSA. In a 7–1 decision, the Supreme Court found that HHS’s decision changed a substantive legal standard, and HHS was required to provide an appropriate notice and comment period under the SSA. The Supreme Court explained that under Section 1871(a)(2), a “substantive legal standard” includes any legal decision that creates rights and obligations, such as the scope of benefits; payment for services; eligibility of individuals to receive benefits; or eligibility of individuals, entities or organizations to furnish services.  The HHS policy decision, which was challenged by a coalition of hospitals and health systems, resulted in lowering reimbursements to hospitals that served low-income patients. The Court concluded that this was a substantive change in the legal standard, requiring notice and comment.
Interpretation in the OGC’s Memorandum
In interpreting the Court’s ruling, the OGC set forth several important conclusions. First, it concluded that, in some instances, the Court’s holding restricted HHS’s ability to take enforcement action or even collect overpayments. “Where [HHS or the Centers for Medicare and Medicaid Services (CMS)] issued guidance that, under Allina, should have been promulgated through notice-and-comment rulemaking, the department’s ability to bring enforcement actions predicated on violations of those payment policies is restricted,” the memo stated. Congress imposed a notice-and-comment requirement for substantive Medicare rules in a broader range of circumstances than otherwise would be required under the Administrative Procedure Act. This means that HHS and CMS may not use CMS guidance documents setting forth interpretive payment rules, such as Medicare internet-only manuals, as the basis of an enforcement action. For example, if a “broadly worded statute or regulation can be interpreted a variety of ways,” sub-regulatory policy statements found in a manual may create a new substantive rule that is not enforceable under the Court’s decision. The OGC further advised that, when deciding whether a guidance document can be used in an enforcement action, “the critical question is whether the enforcement action could be brought absent the guidance document.” If the answer is “no,” then the document is invalid, unless issued through notice-and-comment rulemaking.
Second, the OGC memo provided examples of instances when HHS or CMS may not be restricted from using agency guidance in an enforcement action. CMS guidance documents that are “closely tied to a statutory or regulatory requirement” provide only additional clarity and do not limit an enforcement actions. Further, according to OGC, even if the sub-regulatory guidance is not specifically enforceable, the agency can still use it for other purposes, such as scienter or materiality, as stated in the US Department of Justice Brand Memo and the Justice Manual. For example, under Universal Health Services, Inc. v. United States ex rel. Escobar, the touchstone of materiality is whether the government payor would have paid the claim(s) if it had known of the defendant’s non-compliance with an applicable law or regulation. In a particular case, the government may attempt to use guidance documents to argue that the alleged violation would have influenced HHS’s decision to pay.
Third, the OGC specifically addressed the opinion’s effect on the enforceability of local coverage decisions (LCDs). According to the OGC memo, LCDs merely reflect payment determinations of the local Medicare Administrative Contractor (MAC). Accordingly, they do not create any substantive legal standards. Nonetheless, the OGC memo concluded that LCDs cannot be solely used as the basis for a “government enforcement action,” including an overpayment demand.
Finally, the OGC memo addressed several other agency documents that are familiar to healthcare providers. According to the OGC, it is unlikely that the Court’s decision will affect Stark Law advisory opinions, because advisory opinions do not usually establish or change substantive legal standards governing payment for services. Likewise, fraud and abuse waivers are not required to go through rulemaking procedures because they are statutorily authorized. The memo also states that CMS may be able to enforce payment provisions in its contracts. Therefore, even if CMS cannot enforce certain guidance documents on its own, it may attempt to include the terms of those guidance documents in its contracts, and then enforce them that way.
PRACTICE NOTE: Healthcare organizations, including providers and suppliers as well as health plans, should carefully examine any enforcement action, including an overpayment determination, to determine whether the decision is based on sub-regulatory guidance that offends the Supreme Court’s standard. A recent district court case shows the potential value of the Court’s test, finding that the Medicare Manual provisions concerning inpatient status coverage criteria issued prior to the “two midnight” regulation were not enforceable.* Industry should also be on the lookout for attempts by CMS to codify sub-regulatory guidance in notice-and-comment rulemaking in order to prospectively avoid this problem, and for CMS attempts to impose the same obligations through contracts.
 139 S. Ct. 1804 (2019). Notably, several other hospitals and health systems were parties in filing this lawsuit.
 Id. at 1809.
 Department of Health & Human Services – Office of the General Counsel, Impact of Allina on Medicare Payment Rules (October 31, 2019).
 Universal Health Services, Inc. v. United States ex rel. Escobar, 579 U.S. __, 136 S. Ct. 1989 (2016).
* Jesse Polansky M.D., M.P.H. v. Exec. Health Res., Inc., 2019 WL 5790061, at *1 (E.D. Pa. 2019).
Focus on Private Equity
Private equity (PE) has been an increasing focus of the government, False Claims Act (FCA) relators and others, and we may see this trend continue in 2020. The government’s negotiation of a $21 million settlement stemming from an FCA action in United States ex rel. Medrano will likely encourage continued scrutiny of PE involvement in healthcare.
In Medrano, the government intervened in an FCA action against a Florida-based compounding pharmacy, Patient Care America (PCA). The government included two PCA employees and Riordan, Lewis & Haden, Inc. (RLH), PCA’s private equity sponsor, as defendants. The US Department of Justice (DOJ) negotiated a settlement in which PCA and RLH collectively agreed to pay $21 million. In the settlement announcement, DOJ indicated its “continuing commitment to hold all responsible parties to account” for submission of false claims to federal healthcare programs.
According to the allegations in the Medrano case, RLH initiated PCA’s entry into the business of compounding topical creams. TRICARE, the federal healthcare program for active duty military members, retirees and their families, reimbursed such creams. The basis for the government’s FCA claim was an alleged scheme to drum up referrals for these creams, in violation of the federal Anti-Kickback Statute (AKS). The government alleged PCA hired outside marketers to solicit patients, particularly military members, and orchestrated telemedicine physicians to prescribe the compounded creams. PCA allegedly paid commissions to the marketers and improperly paid patients’ copayments.
RLH’s alleged involvement included approving PCA’s decision to use the marketers, knowing that TRICARE was the main payer, and allegedly providing $2 million in cash advances to PCA to cover the marketers’ commissions, among other allegations.
The settlement was preceded by the magistrate judge’s report and recommendation on a motion to dismiss, which held that some, but not all, claims against RLH survived. While three alleged schemes underpinned the FCA claims, the magistrate judge found that a claim had been sufficiently alleged against RLH for only one of them: a marketer-kickback scheme in which PCA was allegedly paying commissions to outside marketers and for which RLH allegedly knew about the commissions and provided money for some of them. RLH was alleged to have known about and to have approved the marketers, to have received financial statements about the commissions, and to have known that the use of these marketers could violate AKS. Because RLH allegedly fronted some of the money for the commissions, the magistrate judge also found that causation was sufficiently pleaded with respect to RLH. The district court did not reach these issues in dismissing without prejudice. The parties settled in September 2019.
Others are also scrutinizing private equity. In September 2019, the US House Committee on Energy and Commerce signaled its interest in investigating PE involvement in “surprise billing.” In letters to several PE firms, the Committee requested information regarding the firms’ relationships with physician staffing and emergency transportation companies.
Senator Elizabeth Warren has been vocal with respect to private equity, promoting legislation that would substantially impact the way private equity firms do business. In October 2019, Senator Warren and Representatives Mark Pocan and Lloyd Doggett sent letters to five PE firms voicing concern about PE investment in the health care industry, also focusing on surprise billing and investment in physician staffing and emergency medical transportation service companies. In July 2019, Senator Warren and Representative Pocan, with other Democratic colleagues, introduced legislation (H.R.3848; S.2155), which, among other things, would hold PE firms liable for the debts of portfolio companies and require greater transparency in PE firms’ practices.
Bodies like the American Medical Association are also studying the role of private equity in healthcare. This recent interest, along with FCA enforcement and litigation, suggests that there will be continued scrutiny of PE actors’ roles in healthcare in the coming year.
 United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC, No. 15-CV-62617, 2018 WL 6978633 (S.D. Fla. Nov. 30, 2018) (report and recommendation from Magistrate Judge); United States ex rel. Medrano v. Diabetic Care RX, LLC, No. 15-CV-62617, 2019 WL 1054125 (S.D. Fla. Mar. 6, 2019) (dismissal of the FCA claim for failure to plead with particularity in accordance with Federal Rule of Civil Procedure 9(b)). The government filed its Intervenor Complaint on February 16, 2018, alleging a claim for violation of the FCA (Count I) against PCA, the employees, and RLH, and common law claims for payment by mistake (Count II) and unjust enrichment (Count III) against PCA.
 See United States ex rel. Carmen Medrano v. Diabetic Care RX, LLC, No. 15-CV-62617, 2018 WL 6978633 (S.D. Fla. Nov. 30, 2018); United States ex rel. Medrano v. Diabetic Care RX, LLC, No. 15-CV-62617, 2019 WL 1054125 (S.D. Fla. Mar. 6, 2019).
 See Medrano, 2018 WL 6978633, at *1.
 See U.S. DEPT. OF JUSTICE, Compounding Pharmacy, Two of Its Executives, and Private Equity Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations, Press Release (Sept. 18, 2019), available at here.
 SeeMedrano, 2018 WL 6978633, at *1.
 Id. at *2.
 Id. at *3.
 Id. at *13.
 Id. at *11.
 Id. at *13
 See Medrano, 2019 WL 1054125, at *7.
 See U.S. DEPT. OF JUSTICE, Compounding Pharmacy, Two of Its Executives, and Private Equity Firm Agree to Pay $21.36 Million to Resolve False Claims Act Allegations.
 See HOUSE COMM. ON ENERGY & COMMERCE, Pallone and Walden Launch Bipartisan Investigation Into Private Equity Firms’ Role in Surprise Billing Practices, Press Release (Sept. 16, 2019), available at here.
 See HOUSE COMM. ON ENERGY & COMMERCE, Letter to Blackstone (Sept. 16, 2019), available at here;
HOUSE COMM. ON ENERGY & COMMERCE, Letter to KKR & Co. Inc (Sept. 16, 2019), available at here;
and HOUSE COMM. ON ENERGY & COMMERCE, Letter to Welsh, Carson, Anderson & Stowe (Sept. 16, 2019), available at here.
 OFFICE OF SENATOR ELIZABETH WARREN, Warren, Pocan, and Doggett Examine Role of Private Equity in Rise of Surprise Medical Billing, Press Release (Oct. 21, 2019), available at here
 See AMERICAN MEDICAL ASSOCIATION, Report of the Council on Medical Service: Corporate Investors (2019), available at here.
Substantial Changes Proposed to Stark Law, Anti-Kickback Statute Regulations: Fraud and Abuse Enforcement Update
On October 9, 2019, as part of the Regulatory Sprint to Coordinated Care, the Centers for Medicare and Medicaid Services (CMS) published proposed changes to several regulations promulgated under the physician self-referral law (Stark Law), and the Office of Inspector General (OIG) published proposed changes to several regulatory safe harbors promulgated under the Anti-Kickback Statute (AKS) and the Beneficiary Inducement Civil Monetary Penalty Law (CMPL). The US Department of Health and Human Services (HHS) launched the Regulatory Sprint to Coordinated Care in 2018 in an effort to reduce regulatory burden and incentivize coordinated care. The CMS and OIG proposed rules represent some of the most significant potential changes to fraud and abuse regulation in the last decade.
The Stark Law proposed rule includes new exceptions aimed at enabling value-based care arrangements and proposes changes intended to address many of the most challenging aspects of Stark Law compliance. Key proposals by CMS include:
- New Compensation Exceptions
- Value-Based Care Exceptions. New exceptions for value-based care arrangements that satisfy a series of requirements depending on the level of financial risk undertaken by the parties to the arrangement.
- New Exception for Limited Remuneration to a Physician. A new exception to protect compensation not exceeding an aggregate of $3,500 per calendar year if certain conditions are met.
- New Exception for Cybersecurity Technology and Related Services. A new exception to protect arrangements involving the donation of certain cybersecurity technology and related services.
- New Defined Terms and Regulatory Modifications
- New or Modified Definitions for Key Stark Law Terms. New definitions of key concepts, including commercial reasonableness, the volume/value standard and fair market value. CMS also proposes to modify the definition of designated health service (DHS) to clarify that an inpatient hospital service is only DHS if furnishing the service affects the amount of Medicare’s payment to the hospital under the Inpatient Prospective Payment System. This change has the potential to dramatically reduce the number of hospital claims that may be tainted by a prohibited financial relationship between a hospital and a physician where the physician is not the admitting physician.
- Clarifications to “Group Practice” Requirements. Clarifications to the regulations defining a “group practice” for purposes of the Stark Law, including revisions that clarify that group practices may not use DHS-specific pods for purposes of distributing DHS profits.
- Modifications to Various Compensation Exceptions. A series of modifications to various compensation exceptions, including the space lease exception, recruitment exception, fair market value exception and others. Most but not all of these modifications appear intended to relax the requirements.
- Temporary Non-Compliance. Expansion of the 90-day grace period for certain writing requirements.
- Period of Disallowance. CMS Removal of the period of disallowance rules.
- Modification of Electronic Health Record Items and Services. Extended protection for certain related cybersecurity technology, updated interoperability provisions, and removal of the “sunset” date (making the exception permanent).
The AKS proposed rule includes new AKS safe harbors, proposed modifications to existing AKS safe harbors, and new CMPL exceptions. OIG’s proposals are described below:
- New AKS Safe Harbors
- Value-Based Arrangements. Three new safe harbors to protect certain remuneration exchanges among certain individuals and entities in a value-based arrangement. The three new safe harbors vary in the type of remuneration that could be provided, the level of financial risk the parties assume, and the types of “safeguards” OIG proposes to include. These safe harbors are modeled to track the proposed Stark value-based exceptions, but contain notable differences making them more difficult to satisfy.
- Patient Engagement. Protection for certain individuals and entities furnishing certain tools and support to patients to improve quality, health outcomes and efficiency.
- CMS-Sponsored Models. Protection for certain remuneration provided in connection with certain models sponsored by CMS, reducing the need for HHS to issue individualized fraud and abuse waivers for each model.
- Cybersecurity Technology and Services. Creation of a standalone protection for donations of cybersecurity technology and services.
- Modifications to Existing AKS Safe Harbors
- Personal Services and Management Contracts Safe Harbor. Modification of the existing safe harbor to provide greater flexibility for part-time arrangements by, among other things, removing the part-time schedule requirement and the aggregate compensation set-in-advance requirement (which results in this safe harbor having limited practical use) and proposing a new outcomes-based arrangement.
- Local Transportation. Expansion and modification of mileage limits applicable to rural areas and for transportation related to patients discharged from inpatient facilities and transported home.
- Electronic Health Records Items and Services Safe Harbor. Extension of protection for certain related cybersecurity technology, updated interoperability provisions, and removal of the sunset date to make the safe harbor permanent.
- Warranties. Protection for bundled warranties for one or more items and related services.
- Accountable Care Organization (ACO) Beneficiary Incentive Programs. Codification of the Bipartisan Budget Act of 2018 statutory exception for ACO beneficiary incentive programs for the Medicare Shared Savings Program.
- New CMPL Exception
- Telehealth for In-Home Dialysis. Incorporation of the Bipartisan Budget Act of 2018 statutory exception for furnishing telehealth technologies to certain in-home dialysis patients.
Comments to the proposed rules were due on December 31, 2019. More than 1,000 comments were submitted in total; 332 comments on the AKS proposed rule, and 758 comments on the Stark Law proposed rule. Whether the proposed rules are finalized, the extent to which they are revised prior to finalization, the timing of finalization, and the potential effective date are unknown at this time, although further information may be revealed in the coming months in public comments from HHS officials and regulators.
AKS and Stark Law Enforcement Update
Several noteworthy litigation and enforcement activities occurred in the fourth quarter of 2019 that provide further insight into the government’s areas of focus and concern:
- Third-Circuit Reverses Course on Indirect Compensation Arrangements.  In October 2019, the US Court of Appeals for the Third Circuit issued an opinion concluding the relator’s complaint sufficiently alleged that the University of Pittsburgh Medical Center’s productivity bonuses paid to affiliate-employed physicians based on personally performed work RVUs constituted an indirect compensation arrangement under the Stark Law. According to the court, the surgeons’ aggregate compensation “varied with” referrals to the hospital where it correlated with their hospital referrals. In December 2019, the Third Circuit vacated its October holding that indirect compensation arrangements could be established simply when payment for personally performed services correlates with the volume or value of physician referrals. However, the court permitted the suit to proceed to discovery, finding that the relator’s complaint sufficiently alleged an indirect compensation relationship based on a potential causal relationship between the compensation and the volume or value of referrals, such as allegations of inflated RVUs and medically unnecessary services.
- U.S. District Court for the Western District of Missouri Rejects Payments for Preventive Care as Kickbacks.  In December 2019, the US District Court for the Western District of Missouri dismissed a whistleblower suit filed against Cox Medical Centers (CoxHealth) alleging that CoxHealth defrauded Medicare Advantage by paying kickbacks to physicians to induce them to provide no-cost preventive care in the hope that the physicians would diagnose patients with a condition that would increase Medicare Advantage payments to CoxHealth. The court reasoned that CoxHealth’s payments to physicians were not prohibited kickbacks intended to induce the doctors to purchase, lease, order or arrange for services that would be paid for by CMS where CMS did not pay for the encounters. Furthermore, the court found the relator could not state a claim under the FCA because he did not allege that the diagnoses reported were false.
- Health System Pays $20.25 Million to Settle Alleged Knowledge of Physician Kickbacks Through Physician-Ownership Distributor.  In October 2019, the US Department of Justice announced a settlement with Sanford Health, Sanford Medical Center and Sanford Clinic, settling allegations that Sanford knew one of its top neurosurgeons was improperly receiving kickbacks for his use of implantable devices distributed by his physician-owned distributorship. Sanford was allegedly warned that the neurosurgeon was receiving prohibited kickbacks and performing medically unnecessary procedures involving the devices in which he had a substantial financial interest, but Sanford continued to submit claims for the physician’s surgeries.
These enforcement examples illustrate the broader trend of relators and the government continuing to consider strategies to expand enforcement under the AKS and the Stark Law.
 Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations, 84 Fed. Reg. 55,766, 55,766–55,847 (Oct. 17, 2019) (to be codified at 42 C.F.R. pt. 411).
0] Medicare and State Healthcare Programs: Fraud and Abuse; Revisions To Safe Harbors Under the Anti-Kickback Statute, and Civil Monetary Penalty Rules Regarding Beneficiary Inducements, 84 Fed. Reg. 55,694, 55,694¬–55,765 (Oct. 17, 2019) (to be codified at 42 C.F.R. pts. 1001, 1003).
 See United States ex rel. Bookwalter v. UPMC, No. 18-1693 (3d Cir. Sept. 17, 2019).
 See United States ex rel. Bookwalter v. UPMC, No. 18-1693, slip op. at 24, 33 (3d Cir. Dec. 20, 2019).
 See U.S. v. Essence Group Holdings Corporation; et al., No. 17-3273-CV-S-BP (W.D. Mo. 2019).
 Sanford Health Entities to Pay $20.25 Million to Settle False Claims Act Allegations Regarding Kickbacks and Unnecessary Spinal Surgeries; https://www.justice.gov/opa/pr/sanford-health-entities-pay-2025-million-settle-false-claims-act-allegations-regarding.
Federal Enforcement to Combat Opioid Crisis
In the fourth quarter of 2019, federal and state governments continued to create new avenues to hold doctors, drug makers, distributors and retailers liable for their respective roles in the opioid crisis.
As discussed in the Q1 2019 Roundup, one of the most closely watched cases involving the pain management industry was set to begin on October 21, 2019. In re: National Prescription Opiate Litigation was positioned as a test case, with more than 2,000 lawsuits filed by local jurisdictions against approximately two dozen drug manufacturers, distributors and pharmacies, consolidated into one federal case in the Northern District of Ohio. Anticipated to be one of the largest civil disputes in US history, it settled on the eve of trial.
US District Judge Dan Polster consistently encouraged the parties to seek settlement, but his denial of defendants’ motions to dismiss in September 2019 conveyed a message to the defendants that trial was imminent.
Johnson & Johnson settled weeks before trial and agreed to pay two Ohio counties $10 million in cash, reimburse $5 million in legal fees and direct $5.4 million to nonprofits for opioid-related programs in those communities. Earlier this year, an Oklahoma state court judge ordered Johnson & Johnson to pay more than $572 million for its alleged role in fueling the opioid crisis. That decision, combined with the uncertainty of a federal trial, paved the way for a pre-trial settlements.
McKesson, Cardinal Health and AmerisourceBergen, the three largest drug distributors in the United States, together with Teva Pharmaceutical Industries, also settled on the eve of trial. The settlement requires McKesson, Cardinal Health and AmerisourceBergen to pay a total of $215 million. Teva must also contribute $20 million in cash and $25 million worth of donated drugs.
Update on Insys Litigation
As discussed in the Q2 2019 Roundup, 15 former executives of opioid manufacturer Insys Therapeutics were convicted of racketeering conspiracy in May 2019 for their involvement in a scheme that involved payment of kickbacks to doctors and unlawful marketing practices in connection with Subsys, Insys’s opioid spray.
On November 26, 2019, US District Judge Allison Burroughs struck down the Controlled Substances Act predicate of the Racketeer Influenced and Corrupt Organizations (RICO) Act convictions and ruled that while Insys wanted to sell as much of the drug as possible, the government did not prove that the executives knew or that there was an implication of the drug being prescribed improperly. Despite this ruling, she did not overturn the entire RICO conviction or grant a new trial.
Among those convicted was Insys’s founder, John Kapoor, who allegedly directed the company’s scheme to bribe doctors to prescribe more and higher doses of Subsys. In sentencing memoranda filed in December 2019, Boston prosecutors argued that Kapoor should spend 15 years in prison, and recommended similar sentences for the other convicted executives. On January 23, 2020, Kapoor was sentenced to five and a half years in prison. The government also filed a motion for restitution against the other executives, seeking approximately $306.4 million, of which $169 million would go to commercial insurance companies that covered Subsys, $136 million would compensate Medicare, and the remaining $10,000 would be paid to six individual patients.
Litigation Under the FCA
In January 2020, the US Court of Appeals for the Ninth Circuit refused to revive a dismissed qui tam complaint originally filed by Alexander Volkhoff, LLC, which accused Janssen Pharmaceutical (a subsidiary of Johnson & Johnson) of allegedly pushing off-label uses of its opioid drugs, allegedly orchestrating sham speaker programs for physicians to promote its various drugs, and allegedly causing artificially inflated reimbursements from Medicaid and Medicare.
Two years after the original complaint was filed, “Jane Doe” filed a First Amended Complaint as the sole relator after Janssen successfully challenged Volkhoff’s ability to bring a False Claims Act retaliation claim. After the switch was made, however, the California district court found that the change in party ran afoul of the False Claims Act’s first-to-file doctrine and dismissed the case.
On appeal, the Ninth Circuit held that it did not have jurisdiction over the appeal from Volkhoff because of the substitution of Jane Doe as the relator in the suit. The Ninth Circuit noted that while it has allowed nonparties to appeal a case in which “they were significantly involved in the district court proceedings,” Volkhoff’s participation in the suit “all but ceased” when the amended complaint was filed. The Ninth Circuit rejected arguments that the two parties were interchangeable, stating that the “lack of identity between Doe and Volkhoff was the central merits problem before the district court.”
New Litigation Avenues
In November 2019, Chicago Public Schools filed a proposed class action suit accusing a dozen pharmaceutical companies of unlawful opioid sales. Chicago Public Schools seeks damages for expenses related to special education, addiction counseling, campus security and employee health insurance. The school board for Miami-Dade County, as well as smaller school districts in Louisiana and Washington, have filed similar suits.
In December 2019, Cardinal Health shareholders sued the company’s current and former directors in the Southern District of Ohio, alleging that the directors ignored their duty to curb the amount of opioids entering the illegal market and, as a result, cost the company billions of dollars in damages. The complaint stated that directors took a passive approach to their duties under the Comprehensive Drug Abuse Prevention and Control Act of 1970 to police the distribution of opioids and other controlled substances, and under the directives of a 2008 settlement with the US Drug Enforcement Agency (DEA). The shareholders further stated that the current and former directors were more concerned with avoiding DEA enforcement than with their duty to curb the opioid epidemic.
The Q2 2019 Roundup discussed the DEA’s role in combating the epidemic, but recently the DEA has come under scrutiny. A September 2019 report by the US Department of Justice Office of Inspector General revealed that the DEA approved the manufacturing of an increasing amount of opioids from 2003 to 2013. This report illuminates the scrutiny that all the players involved in the opioid crisis face, not just drug makers, doctors and distributors.
Cases to Watch in 2020
Efforts to pursue all players in the opioid epidemic will continue to ramp up in 2020. Although the anticipated landmark trial set for last October ended in settlement, another trial involving Ohio’s Cuyahoga and Summit Counties is scheduled to begin on November 9, 2020, for claims brought against five groups of pharmacy companies, including CVS Health, Rite Aid and Walgreens. In December 2019, Judge Polster ordered the pharmacy chains to produce 14 years’ worth of opioid prescription records to the plaintiffs. 
PRACTICE NOTE: As state and federal enforcement action related to opioids continues to expand beyond manufacturers and distributers, health systems and physician practice groups alike should revisit their pain management guidelines and reevaluate policies and procedures related to appropriate standards of care and prescription of opioids.
 Opinion re Pending Motions, In re: National Prescription Opiate Litigation, No. 1:17-md-02804-DAP (N.D. Ohio Sept. 23, 2019), ECF No. 2626; Opinion and Order Regarding Adjudication of Plaintiff’s Public Nuisance Claims, In re: National Prescription Opiate Litigation, No. 1:17-md-02804-DAP (N.D. Ohio Sept. 24, 2019), ECF No. 2628; Opinion and Order, In re: National Prescription Opiate Litigation, No. 1:17-md-02804-DAP (N.D. Ohio Sept. 26, 2019), ECF No. 2676 (denying defendants’ motions to disqualify Judge Polster).
 Order Dismissing Johnson & Johnson With Prejudice Pursuant to Rule 41(a)(2), In re: National Prescription Opiate Litigation, No. 1:17-op-45004-DAP (N.D. Ohio Oct. 11, 2019), ECF No. 114; see also Johnson & Johnson, Johnson & Johnson Reaches Settlement Agreement with Two Ohio Counties Ahead of Upcoming Opioid Trial (Oct. 1, 2019), available at https://www.jnj.com/johnson-johnson-reaches-settlement-agreement-with-two-ohio-counties-ahead-of-upcoming-opioid-trial.
 Judgment After Non-Jury Trial, Oklahoma v. Purdue Pharm., No. CJ-2017-816 (Okla. Dist. Ct. Cleveland Cty. Aug. 26, 2019).
 Stipulated Dismissal Order, In re: National Prescription Opiate Litigation, No. 1:17-md-2804 (N.D. Ohio Oct. 21, 2019), ECF No. 2868.
 Jeff Overley, Opioid Trial Halted By Drug Cos.’ 11th Hour $260M Deal, LAW360 (Oct. 21, 2019), https://www.law360.com/articles/1196365/opioid-trial-halted-by-drug-cos-11th-hour-260m-deal.
 Memorandum and Order on Defendants’ Motions for Judgment of Acquittal and for a New Trial at 81, United States v. Gurry, No. 1:16-cr-10343-ADP (Nov. 26, 2019 D. Mass.), ECF No. 1028.
 Sentencing Memorandum on Behalf of John N. Kapoor, United States v. Kapoor, No. 1:16-cr-10343-ADB (D. Mass. Dec. 18, 2019), ECF No. 1070.
 Chris Villani, Insys Founder John Kapoor Gets 5 ½ Years, LAW360 (Jan. 23, 2020), https://www.law360.com/articles/1237076.
 United States’ Motion for Restitution Pursuant to the Mandatory Victim Restitution Act at 2, United States v. Kapoor, No. 1:16-cr-10343-ADB (D. Mass. Dec. 13, 2019), ECF No. 1035.
 United States ex rel. Doe v. Janssen Pharm., No. 16-06997-RGK-RAO, 2018 WL 5276291 at *2 (C.D. Cal. Apr. 18, 2018).
 U.S. ex rel. Volkhoff v. Jansssen Pharm., 945 F.3d 1237, 1242 (9th Cir. 2020).
 Id. at 1245.
 Class Action Complaint at 211-212, In re: National Prescription Opiate Litigation, No. 1:19-op-46042-DAP (N.D. Ohio Nov. 21, 2019), ECF No. 1.
 See Complaint, In re: National Prescription Opiate Litigation, No. 1:19-op-45913 (N.D. Ohio Sept. 30, 2019), ECF No. 1 (Complaint filed by School Board of Miami-Dade County, originally filed in the Southern District of Florida); Short Form for Supplementing Complaint and Amending Defendants and Jury Demand, In re: National Prescription Opiate Litigation, No. 1:18-op-46232-DAP (N.D. Ohio March 15, 2019), ECF No. 6 (Amended complaint filed by St. Mary Parish School Board, originally filed in the Middle District of Louisiana); Complaint, In re: National Prescription Opiate Litigation, No. 1:19-op-45029-DAP (N.D. Ohio Dec. 21, 2018), ECF No. 1 (Complaint filed by City of Anacortes and Sedro-Woolley School District, originally filed in the Western District of Washington at Seattle).
 Verified Shareholder Derivative Complaint at 6, Malone v. Anderson, No. 2:19-cv-05442-SDM-EPD (S.D. Ohio Dec. 13, 2019).
 Id. at 29.
 US Dept. of Justice, Office of Inspector General, Review of the DEA’s Regulatory and Enforcement Efforts to Control the Diversion of Opioids (Sept. 2019), https://oig.justice.gov/reports/2019/e1905.pdf.
 Track One-B Case Management Order at 5, In re: National Prescription Opiate Litigation, No. 1:17-op-45004-DAP (N.D. Ohio Nov. 19, 2019), ECF No. 118.
 Order on Reconsideration Regarding Scope of Discovery in Track One-B, In re: National Prescription Opiate Legislation, No. 1:17-op-45004-DAP (N.D. Ohio Dec. 30, 2019), ECF No. 131.
AsceraCare and Potential Reverberating Effects on Cases Involving Medical Necessity
On September 9, 2019, the US Court of Appeals for the Eleventh Circuit issued its long-awaited decision in United States v. AseraCare, Inc.  The court affirmed the US District Court for the Northern District of Alabama’s ruling that a claim cannot be deemed “false” under the FCA solely based on a reasonable difference of opinion between medical experts as to the medical necessity of hospice services. For a claim to satisfy the falsity requirement under the FCA, the underlying clinical judgment must reflect an “objective falsehood” that the patient receiving hospice services had a terminal condition where death was anticipated within six months.
For Medicare to cover hospice services, the patient’s attending physician (when applicable) and the hospice medical director (or other physician member of the hospice interdisciplinary group) must certify at the beginning of the initial 90-day benefit period, and the hospice physician must certify at the beginning of each subsequent 60- or 90-day benefit period, that the patient’s normal course of illness gives rise to a medical prognosis of a life expectancy of six months or less. The government’s expert in the case applied a “checkbox” approach to assessing the patient – looking at the patient’s medical record against the applicable local coverage determinations (LCDs) and other medical guidelines for specific terminal illness diagnoses in order to determine life expectancy. By comparison, AseraCare’s expert described AseraCare’s practice as using LCD guidelines as just one tool in its holistic approach to determining a terminal illness, which also looks to the patient’s entire medical history, the patient’s specific symptoms and the physician’s experience with end-of-life care.
The Eleventh Circuit agreed with the district court that LCD criteria are non-binding eligibility guidelines and called out the relevant language in the regulations emphasizing the importance of a physician’s clinical judgment and professional medical opinion. Accordingly, the Eleventh Circuit echoed the district court’s ruling, finding that “a clinical judgment of terminal illness warranting hospice benefits under Medicare cannot be deemed false, for purposes of the False Claims Act, when there is only a reasonable disagreement between medical experts as to the accuracy of that conclusion, with no other evidence to prove the falsity of the assessment.” Under the court’s reasoning, subjective evidence of the lack of medical necessity is insufficient by itself to support allegations of fraud.
The court explained that in the following circumstances an “objective falsehood” may exist based on the physician’s conduct:
- “[A] certifying physician fails to review a patient’s medical records or otherwise familiarize himself with the patient’s condition before asserting that the patient is terminal…;
- “[A] plaintiff proves that a physician did not, in fact, subjectively believe that his patient was terminally ill at the time of certification…[; or…]
- “[E]xpert evidence proves that no reasonable physician could have concluded that a patient was terminally ill given the relevant medical records.”
Ultimately, the Eleventh Circuit remanded the case, explaining that while a difference in clinical judgment is not sufficient to show falsity, the government should be able to point to the entire record, not just the trial record, to show that there was a disputed issue of fact that could overcome the district court’s post-trial sua sponte ruling that granted summary judgment in favor of AseraCare on the falsity question.
The Eleventh Circuit’s holding in AseraCare comes in the wake of relevant decisions in other circuits. For example, in US v. Paulus, the Sixth Circuit upheld a jury determination that the defendant made a false statement under the FCA. The court noted that “the government claims that Paulus repeatedly and systematically saw one thing on the angiogram and consciously wrote down another, and then used that misinformation to perform and bill unnecessary procedures,” and that the defendant “was convicted for misrepresenting facts, not giving opinions.” The AseraCare court distinguished Paulus, observing that courts should treat legitimately held but discordant expert opinions differently from repeated and systematic misrepresentation of test results that no reasonable physician could maintain as being true.
The Eleventh Circuit’s decision in AseraCare will affect future cases involving medical necessity and certification of hospice eligibility. Under AseraCare, it is insufficient for the government’s expert to disagree with the certifying physician’s or hospice medical director’s clinical judgment to prove falsity under the FCA. The Eleventh Circuit itself recognized that its decision will have an effect on the government’s ability to prove falsity through an expert witness. It noted that “it will likely prove more challenging for an FCA plaintiff to present evidence of an objective falsehood than to find an expert witness willing to testify to a contrasting clinical judgment regarding cold medical records.”
 United States v. AseraCare, Inc., 938 F.3d 1278 (11th Cir. 2019). McDermott has published several articles regarding the progression of this case, which can be found at https://www.fcaupdate.com/tag/u-s-ex-rel-paradies-v-aseracare/.
 42 U.S.C. § 1395f(7)(A); 42 U.S.C.§ 1395x(dd)(3)(A).
 AseraCare, 938 F.3d at 1281.
DOJ’s Continued Focus on Compliance Programs
Over the course of 2019, the DOJ took significant steps to explain what companies can do through their corporate compliance programs to avoid investigations by the Department – and to more favorably resolve investigations when they arise. The Q2 2019 Roundup covered this guidance after two consecutive announcements by DOJ’s Criminal and Civil Divisions. Following the new guidance, DOJ officials have continued to reinforce their focus on compliance programs and their message of increased transparency, and have answered a number of questions that had remained. Of particular note: DOJ officials have emphasized that prosecutors should not evaluate compliance programs with 20/20 hindsight and will not focus solely on a company’s compliance program weaknesses at the time of a potential violation—but should give substantial weight to efforts made to remediate and strengthen programs after issues arise.
On April 30, 2019, DOJ’s Criminal Division issued new guidance to prosecutors on the effectiveness of corporate compliance programs, which updated and answered questions posed in previous guidance issued in 2017. At its core, DOJ’s guidance provided that companies should affirmatively answer three fundamental questions in evaluating their compliance program:
- Is the compliance program well-designed?
- Is the program implemented (or being implemented) effectively and in good faith?
- Does the compliance program work in practice?
Following the Criminal Division’s announcement, DOJ’s Civil Division issued guidance on May 7, 2019 regarding how it awards cooperation credit to entities and individuals in FCA and other civil investigations. Under DOJ’s guidance, cooperation credit may be awarded for:
- voluntarily disclosing misconduct unknown to the government;
- cooperating in an ongoing investigation; or
- undertaking remedial measure in response to a potential violation.
In considering the value of a voluntary disclosure and cooperation, DOJ indicated that it would look to a number of factors, including timeliness, completeness, reliability and usefulness – each of which relate to a compliance program’s ability to both detect and respond to potential violations. DOJ also indicated that remediation is an equally important consideration: that it would look at whether a company conducted a root cause analysis, addressed weaknesses or gaps in the program, and removed those responsible for misconduct.
Further Clarity from DOJ
A number of open questions remained with respect to how prosecutors would practically evaluate and credit a company’s efforts, even following DOJ’s announcements and previous guidance in the Justice Manual, previous departmental memoranda, deferred prosecution and non-prosecution agreements, and the US Sentencing Guidelines. DOJ officials have addressed some of those questions in recent months.
In an October 8, 2019 speech, Assistant Attorney General Brian Benczkowski explained that the new guidance is part of DOJ’s ongoing transparency initiative and, “just as compliance programs must evolve over time, so too should [DOJ] policies and practices in order to remain clear, comprehensive, and current.”  As part of that transparency initiative, the Assistant Attorney General shed light on the connection between DOJ’s imposition of monitorships and it’s evaluation of compliance programs. Benczkowski asserted that DOJ will not impose monitors as a punitive measure. He then clarified that decisions about a monitorship will not be solely focused on a compliance program at the time of a violation. The imposition of a monitor, Benczkowski explained, is also tied to a company’s own efforts after a potential violation is identified: “demonstrable changes to a compliance program and culture can suffice to protect against future misconduct, and eliminate the need for a monitor.”
In December 2019, Deputy Assistant Attorney General Matt Miner spoke to the Risk & Compliance Journal about DOJ’s efforts to incentivize companies to invest in compliance. In this interview, Miner sought to allay skepticism that DOJ has a genuine interest in crediting companies for their compliance programs when investigations arise. Miner stated that DOJ will not be evaluating compliance programs through the lens of “perfect 20-20 hindsight” or with “an eye on the misconduct.” The “sole basis for a criminal prosecution” against an entity, according to Miner, will not be the “single worst actor in a corporation that is otherwise 99.9% filled with compliant employees” for entities that have truly invested in a “compliant culture and a strong program.” Miner acknowledged that prosecutors should consider that a compliance program is more than the compliance department, and stated that DOJ is working to educate prosecutors on the “range of components of a compliance program,” to provide a “level of greater sophistication and appreciation of the challenges that a compliance program faces.”
Critically, Miner reinforced that DOJ expects prosecutors to assess a compliance program both at the time of a potential violation and at the time of settlement. Miner vowed that the work companies do after discovering misconduct, such as conducting root-cause analyses, addressing controls and compliance gaps, and undertaking training, is important to DOJ and will merit credit in a resolution. Miner further reinforced Benczkowski’s message on monitors, stating “[i]f you find something and you invest in remediation based upon what you found—whether you voluntarily self-disclose or we come knocking later—we’re likely not going to impose a monitor.”
In a December 11, 2019, speech, Deputy Assistant Attorney General David Morrell provided a reminder that DOJ’s focus on compliance programs extends beyond frequently discussed criminal and civil enforcement areas such as the FCA and Foreign Corrupt Practices Act, to the Consumer Protection Branch’s enforcement of the Food, Drug, and Cosmetic Act (FDCA) and the Controlled Substances Act (CSA). Morrell explained that the Consumer Protection Branch will follow the same principles as the Criminal Division in assessing compliance programs both for charging and resolution purposes. Entities subject to the FDCA, CSA and other consumer protection statutes should ensure that their programs adequately answer DOJ’s three fundamental questions.
PRACTICE NOTE: The April 2019 compliance program guidance is being adopted across DOJ’s Criminal and Civil Divisions. After detailing the elements of what it believes constitute an effective corporate compliance program in its guidance, the DOJ is emphasizing the importance of strengthening compliance programs and appropriately remediating after potential misconduct is identified. DOJ is trying to incentivize companies to do so in a number of ways, including by instructing prosecutors to assess compliance programs both at the time of a violation and at the time of resolution. Despite its recent efforts to encourage self-disclosure, DOJ also reiterates that voluntary disclosure won’t be required for credit in some circumstances: the DOJ first and foremost expects companies to be in a position to detect and appropriately address misconduct.
 See Press Release, US Dep’t of Justice, Criminal Division Announces Publication of Guidance on Evaluating Corporate Compliance Programs (Apr. 30, 2019)
 US Dep’t of Justice, Criminal Division, Evaluation of Corporate Compliance Programs (Apr. 2019).
 Press Release, US Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual; and US Dep’t of Justice, Justice Manual, at 4-4.112 – Guidelines for Taking Disclosure, Cooperation, and Remediation Into Account in False Claims Act Matters, https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.112.
 US Dep’t of Justice, Justice Manual, § 4-4.112, https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.112.
 See id.
 See Prepared Remarks by Brian A. Benczkowski, “Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the Global Investigations Review Live New York” (Oct. 8, 2019)
 Dylan Tokar, How the Justice Department Incentivizes Companies to Invest in Compliance, WALL ST. J., Dec. 24, 2019.
 See id.
 See id.
 See id.
 See id.
 See Prepared Remarks by David Morrell, “Deputy Assistant Attorney General David Morrell Delivers Remarks at the Food and Drug Law Institute Annual Enforcement, Litigation, and Compliance Conference” (Dec. 11, 2019)
 See id.