Top False Claims Act Developments
Jeffrey S. Bucholtz, Ethan P. Davis, Jamie Lang, Yelena Kotlarsky, King & Spalding LLP
This week’s top False Claims Act developments include: new proposed legislation aimed at making the FCA more relator-friendly; DOJ’s recent efforts to discourage defendants from trying to use discovery to induce DOJ to dismiss declined qui tam cases; predictions about an uptick in FCA investigations stemming from funds distributed as part of the COVID-19 Provider Relief Fund; and a decision that may help DOJ use local Medicare coverage determinations to demonstrate falsity.
1. Senator Grassley introduces bipartisan legislation to change the application of the FCA’s materiality standard, make it more difficult for DOJ to dismiss qui tam suits, and bolster the government’s ability to recover on smaller claims
Overview: On Monday, a bipartisan group of legislators led by Iowa Senator Chuck Grassley introduced a pair of bills that would represent the most significant changes to the FCA in more than a decade. In broad strokes, the legislation would make it more difficult for defendants to argue that certain regulatory violations are not material, make it more difficult for DOJ to dismiss qui tam cases, and strengthen the government’s ability to collect on smaller claims.
The impetus for the new legislation can be traced back to 2016, when the Supreme Court held in Universal Health Services v. Escobar that the FCA’s “materiality standard is demanding.” In Escobar, the Court invited defendants to show that the government regularly pays claims despite knowing about the regulatory violations at issue, calling such a showing “very strong evidence that those requirements are not material.” After Escobar, defendants now often seek information about the government’s payment practices.
In Senator Grassley’s view, Escobar’s reasoning “fails to take into account that government bureaucrats are highly segmented and often unable to make key decisions for their monolithic organizations” and that government officials are not “highly motivated to stop fraud.”
The first of the bills he introduced in response would not overrule Escobar, but it would reduce its significance. Among other things, the bill would shift the burden of proof to the defendant to prove by clear and convincing evidence that violations are not material. It would also require courts to award attorney’s fees and costs to the government in response to “irrelevant, disproportional, or unduly burdensome” discovery in declined qui tam cases.
The first bill would also restrict DOJ’s authority to dismiss qui tam cases under section 3730(c)(2)(A). It would place on the government “the burden of demonstrating reasons for dismissal” and give relators the right to “show that the reasons are fraudulent, arbitrary and capricious, or contrary to law.”
The second bill would expand what many have called the “mini-False Claims Act” to allow for recovery of payments up to $1 million (up from $150,000) and expand the number of DOJ officials who can review these claims.
Our Take: This new legislation would expand the FCA’s footprint and breathe oxygen into many qui tam cases that under current law would likely be dismissed at an early phase of the proceedings as meritless. With the double threat of mandatory attorney’s fees and costs along with a tougher standard of review, defendants would be less likely to argue materiality. At the same time, the new hurdles to the exercise of DOJ’s dismissal authority would encourage the filing of more creative or questionable qui tam cases.
2. DOJ objects to discovery allegedly aimed at extracting (c)(2)(A) dismissals
Overview: In another Escobar-related development, a brief filed by the government recently in the Eastern District of New York strongly criticized FCA defendants for deploying what the government believes is a tactic to leverage burdensome discovery to prompt the government to dismiss declined qui tam cases.
The Government’s Brief: In a declined qui tam case, the defendants served discovery on FDA, which moved to quash on typical grounds: that the discovery was irrelevant, overbroad, and unduly burdensome. The government took it a step further, however, and admonished the defendants for appearing to “misus[e] discovery as a cudgel to extract from the government a dismissal of Relator’s FCA claims pursuant to 31 U.S.C. §3730(c)(2)(A).” The brief claimed several times that the defendants’ discovery was designed to “pressure” and “induce” the government rather than to seek legitimate sources of relevant information.
The strong statements in the government’s brief echo public comments made by Deputy Assistant Attorney General Michael Granston in 2019, where he stated that “Defendants should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority.”
Our Take: While the government understandably is concerned about the toll that discovery can exact, DOJ should recognize that it is Escobar that opened the door to discovery about materiality. What is more, as DOJ’s 2018 Granston Memo correctly noted, one reason why DOJ may dismiss declined qui tam cases is the government’s need to “preserv[e] government resources,” which might otherwise be spent “responding to discovery requests.”
3. FCA COVID-19 Provider Relief Fund enforcement on the horizon
Overview: Established by the 2020 CARES Act, the Provider Relief Fund allocated hundreds of billions of dollars to support healthcare providers during the COVID-19 pandemic. In order to receive funds, providers had to make various representations to the government, including promising that the funds would be used only to prevent, prepare for, or respond to the coronavirus or to reimburse providers for health care-related expenses, or lost revenues, attributable to the coronavirus.
Just this month, HHS opened a reporting portal where recipients of Provider Relief Fund payments will need to explain how the payments were used. After the reporting portal closes, we expect that relators and the government will be on the lookout for potential violations of the program’s terms and conditions.
Our Take: Perceived noncompliance with the terms and conditions of Provider Relief Fund payments could lead to significant legal exposure for providers, including the risk of FCA liability. The often confusing and contradictory guidance issued by HHS regarding the Provider Relief Fund will both make FCA cases more difficult for the government and create fertile ground for relators.
4. The government wins in the Ninth Circuit in an important dispute over the validity of local Medicare coverage determinations, which has significant implications for FCA claims based on such determinations
Overview: In many FCA investigations, the government uses local coverage determinations (LCDs) issued by Medicare Administrative Contractors (MACs) to argue that a particular service billed to Medicare by a provider was not “reasonable and necessary” and that the provider’s Medicare claim was therefore “false” for purposes of the FCA. A recent Ninth Circuit case rejected a provider’s challenge to the legality of LCDs, holding that LCDs do not need to go through a notice-and-comment period and that they do not represent unconstitutional delegations of legislative power.
The Decision: On July 16, a divided panel of the Ninth Circuit reversed a district court decision that had held that LCDs must go through a 60-day notice-and-comment period to be valid. At issue was whether an LCD “establishes or changes a substantive legal standard” governing Medicare such that it needs to go through notice and comment. The Ninth Circuit determined that LCDs merely serve as a guide for MACs’ reimbursement decisions and are not binding and that the notice-and-comment requirement therefore does not apply. The Ninth Circuit also held that Congress did not unconstitutionally delegate legislative power to the MACs, reasoning that MACs remain under the supervision of CMS.
Our Take: This decision is a significant win for the government. If the Ninth Circuit had invalidated LCDs, the government would have little benchmark for demonstrating what services are “reasonable and necessary” and, conversely, what services could signal false claims. Instead, the government would be left with the vague “reasonable and necessary” requirement, which is much more difficult to enforce under the FCA. However, the Ninth Circuit’s conclusion that LCDs are not binding, and are merely guidance, may help defendants to argue in FCA cases that a claim differing from an LCD is not truly a “false” claim within the meaning of the FCA.
Also In the News
EEG Testing Company And Private Investment Company Settle FCA Allegations. On July 21, DOJ announced a $15.3 million settlement with Alliance Family of Companies LLC, a national electroencephalography (EEG) testing company, to resolve allegations that the company had paid kickbacks to referring physicians and had also sought payment for work that either had not been performed or should have been reimbursed at a lower rate. The settlement also resolves allegations that Ancor Holdings LP, a private investment company that managed Alliance, had caused false billings resulting from the alleged kickback scheme.
Jeff Bucholtz is a partner on the Appellate, Constitutional and Administrative Law team in the Washington, D.C. office of King & Spalding LLP. Ethan Davis is a partner in the Special Matters and Government Investigations Practice Group in the San Francisco office of King & Spalding LLP. Jamie Lang is Counsel in the Special Matters and Government Investigations Practice Group in the firm’s Los Angeles office, and Yelena Kotlarsky is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s New York office.