Top False Claims Act Developments
Ethan P. Davis, William S. McClintock, and Mark J. Villapando, King & Spalding LLP
This week’s top False Claims Act (FCA) developments include: a Second Circuit decision holding that the FCA’s materiality requirement applies to expressly false and factually false claims; an FCA settlement resolving allegations that a construction contractor caused Vermont to submit false claims to the Federal Highway Administration; an FCA settlement related to home health services and alleged improper claims submitted to Medicare and Medicaid; a resolution demonstrating the willingness of DOJ to take a “double-barreled” approach and pursue civil and criminal penalties against individuals for Anti-Kickback Statute (AKS) and Stark Law violations; and a district court decision dismissing an FCA case filed by DOJ after finding state medical drug coverage restrictions improper.
1. Second Circuit holds that the FCA’s materiality requirement extends to claims alleged to be “factually false” or false by virtue of an express certification
Overview: On November 19, the Second Circuit decided United States ex rel. Foreman v. AECOM et al., affirming in part and reversing in part the dismissal of a qui tam suit against defense contractor AECOM. In a welcome development for defendants, the court held that the FCA’s materiality requirement applies not only where claims are alleged to be false by virtue of an implied certification, but also where claims are alleged to be factually false or false by virtue of an express false certification. In a different, relator-friendly holding, the court concluded that disclosures solely to government agencies do not trigger the FCA’s public disclosure bar.
The Decision: In 2016, relator Hassan Foreman filed suit against AECOM and several of its affiliates, alleging that the company submitted false claims in connection with a roughly billion-dollar contract to provide maintenance and support services for the U.S. Army in Afghanistan. Foreman, a former AECOM finance employee, alleged that AECOM overstated its man-hour utilization rate, billed for labor that was not performed, and failed to track government property. In 2020, the district court granted AECOM’s motion to dismiss.
The Second Circuit affirmed the dismissal of the man-hour utilization rate and property-tracking claims, but reversed the dismissal of the labor billing claims. In reaching those conclusions, the court considered and rejected the relator’s argument that the Supreme Court’s decision in Escobar established a materiality requirement only for implied false claims. The court acknowledged that Escobar involved the implied certification theory, but held that “nothing in the opinion suggests that its materiality requirement was intended to be limited to that specific theory of liability.” The Second Circuit accordingly held that Escobar imposes a materiality requirement on expressly false and factually false claims.
In another part of the opinion, the Second Circuit rejected AECOM’s argument that the case was barred by the FCA’s public disclosure bar because the relator’s allegations were reflected in several government agency materials. In so doing, the court held that disclosure solely to government officials does not trigger the public disclosure bar.
The Second Circuit also held that the district court improperly relied on documents that were not alluded to in the complaint. The court held that these documents were not “integral” to the complaint and could not be considered without converting the motion to dismiss to a motion for summary judgment.
Our Take: AECOM helpfully makes clear that the materiality requirement described in Escobar applies to all FCA claims, including those brought under an express certification theory or a factual falsity theory. That holding ensures that technical, immaterial errors on claim forms should not give rise to FCA liability.
2. Contractor resolves allegations that it caused Vermont to submit false claims to the Federal Highway Administration
Overview: On November 29, DOJ announced a settlement in which general contractor J.A. McDonald (JAM) agreed to pay $637,500 to the United States and Vermont. The settlement resolves allegations that JAM caused Vermont to submit false claims to the Federal Highway Administration in connection with the construction of federally funded bridges in Vermont.
The Settlement: In its press release, DOJ alleged that JAM cut or burned multiple sections of reinforced steel out of the reinforced-concrete substructures supporting bridges, and that JAM employees took affirmative steps to conceal those alterations. Consequently, according to the allegations, the Vermont Agency of Transportation paid JAM for faulty construction and then submitted false reimbursement claims to the Federal Highway Administration.
Our Take: This is a noteworthy FCA resolution because the alleged submitter of false claims is a state government agency. Because the settlement resolves allegations under both the federal and Vermont FCA, Vermont is entitled to some of the settlement amount paid by JAM, leading to an unusual outcome where the alleged submitter of false claims is paid part of the settlement recovery.
3. DOJ takes into account subsequent remedial measures in FCA resolution with home health agency
Overview: On November 22, DOJ announced a $4.2 million settlement with PruittHealth, Inc. (Pruitt) to resolve allegations that Pruitt submitted false claims to Medicare and Medicaid for home health services that were not covered by the programs.
The Settlement: The government alleged that during a roughly 18-month period beginning in January 2011, Pruitt submitted claims for services that were not eligible for payment. The government asserted that the claims did not reflect the required face-to-face certifications or plans of care and did not document beneficiaries’ homebound status or need for home health services. The government also alleged that Pruitt failed to disclose and refund overpayments to Medicare and Medicaid in a timely manner.
The government’s press release states that it “took into account” Pruitt’s subsequent efforts to improve its compliance practices. Those measures included the hiring of an outside consultant to audit historical home health claims and the implementation of pre-bill reviews and quarterly audits on a going-forward basis.
Our Take: This resolution illustrates how DOJ applies its FCA policies to give credit for a company’s subsequent compliance and remediation efforts. At the same time, the government’s “took into account” formulation makes it difficult for companies to figure out how much these measures really matter.
4. DOJ continues Anti-Kickback Statute enforcement efforts against relationships between pain management clinics, laboratories, and pharmacies
Overview: In early November, South Carolina chiropractor Daniel McCollum, owner and operator of a number of pain management clinics, pleaded guilty to a conspiracy to violate the AKS and entered a separate civil consent judgment in which he agreed to pay $9 million to resolve a qui tam suit brought by former employees.
The Agreement: McCollum was a chiropractor who owned and operated pain management clinics, laboratories, and a pharmacy. As part of the resolution, McCollum admitted he violated the AKS by offering a direct bill program to providers that gave them an opportunity to earn revenue on all the commercially insured urine drug tests they referred to his laboratory, which functioned as an incentive for them to refer their federally insured urine drug tests to his laboratory as well. McCollum also admitted to causing medically unnecessary prescriptions for pain creams without the knowledge or approval of the patients’ healthcare providers.
Notably, the federal government had previously obtained civil judgments totaling more than $140 million from a number of entities owned or operated by McCollum.
Our Take: This resolution—and the significant criminal and civil consequences leveled against an individual—demonstrate DOJ’s continued determination to aggressively pursue financial relationships between pain management clinics, providers, and lab services providers that the government thinks violate the FCA and the AKS.
5. U.S. District Court for the Western District of Virginia holds that alleged fraud regarding medical drug coverage restrictions was not material
Overview: On December 3, the U.S. District Court for the Western District of Virginia issued a decision in United States et al. v. Walgreen Co., granting Walgreens’ motion to dismiss the federal and state governments’ FCA claims. The court held that the alleged falsification of patient information to circumvent coverage restrictions was not material because the coverage restrictions were in violation of federal law that barred cost-based controls for medically necessary drugs.
The Decision: The government alleged that a Walgreens pharmacy manager falsified patient records to obtain preauthorization for coverage for expensive hepatitis drugs when those patients did not meet the coverage criteria. The pharmacist previously pleaded guilty to health care fraud for the underlying conduct. Walgreens argued that the coverage rules improperly limited coverage on bases that were unlawful – for example, by denying coverage based on a patient’s use of illicit drugs. The court agreed and granted Walgreens’ motion to dismiss, holding that the pharmacist’s falsification of patient records was not material. “On a superficial level,” the court explained, the false records “did influence” the government’s coverage decisions. But the fraud was not material because it “should not have so influenced the decision-making because the drugs should have been covered for [the patients at issue] regardless of the information contained on the falsified records.” In short, Walgreens received payment for medications that were properly prescribed and medically necessary, so there was no FCA violation.
Our Take: This decision underscores the rigorous nature of the FCA’s materiality requirement and the basic principle that the government must act according to law in its coverage determinations and thus that an FCA action cannot rely on underlying payment rules that are themselves unlawful.
Ethan P. Davis is a partner in the Special Matters and Government Investigations Practice Group in the firm’s San Francisco office, William S. McClintock is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Washington, D.C. office, and Mark J. Villapando is an Associate in the Special Matters and Government Investigations and Government Contracts practices in the firm’s Northern Virginia office.