Top False Claims Act Developments
John C. Richter, Amy Boring, and Christina Kung, King & Spalding LLP
This week’s top False Claims Act developments include: FDA’s final intended use rule for medical products; DOJ’s recent intervention in six FCA cases involving Medicare Part C; a Fifth Circuit decision that emphasizes the importance of vigorous litigation with regard to privilege issues; expanding FCA risks for private equity firms; and an aggressive theory of liability being put forth by the government in a reverse FCA case.
1. FDA Issues Final Rule to Amend Medical Product “Intended Use” Regulations
Overview: On August 2, FDA, after a six-year saga, published its final intended use rule for medical products. FDA had proposed various amendments to its intended use regulations in 2015, but those amendments had not been implemented, partly due to industry objections. In September 2020, FDA proposed amendments that expanded the intended use rule, and it has now adopted those amendments despite significant constitutional and practical concerns.
The Final Rule: The Rule amends FDA’s regulations describing the types of evidence it will consider in determining a product’s intended use. This determination is critical, as selling a product that is deemed to have an off-label intended use exposes a company to potential prosecution and FCA claims. The Rule rejects industry’s position that only promotional claims should create a new intended use and instead reaffirms FDA’s position that knowledge that a product is used off-label can establish a new intended use. Indeed, the Rule expands FDA’s ability to rely on evidence other than promotion by stating that the design of a product can show an intended use.
FDA also rejected the industry’s arguments that the Rule must distinguish between truthful and false or misleading speech. According to FDA, the government’s reliance on truthful promotional speech to assert the existence of an additional intended use of a product—and thus to make it a crime to sell an approved or cleared product—does not implicate the First Amendment.
Our Take: FDA traditionally has held the position that promotion of an off-label use would render the use “intended”—a position that is difficult to sustain, given First Amendment protection for commercial speech and recent case law. Accordingly, FDA has pivoted to rely more on knowledge of off-label use and other non-speech-based “relevant evidence” as a basis for identifying an additional intended use. That pivot, however, gives rise to Fifth Amendment problems for FDA. If no one can know in advance what will lead FDA—or DOJ—to deem an off-label use to be “intended,” there would seem to be a strong argument that the Rule is void for vagueness. And if the answer to that vagueness objection is that knowledge of an off-label use makes it an “intended” use, then would seem to be a strong argument that the Rule is arbitrary and irrational: given that off-label use is common, lawful, and often necessary to adequate patient care, it can’t be a crime to know about it. Indeed, it is generally impossible for a medical product company not to know about such off-label uses, which are widely discussed by participants in the medical community and the health care industry.
FDA has had years to rethink its regulatory framework, but the new Rule appears to be seriously vulnerable to legal challenge. In the past, FDA has maneuvered to avoid having to defend the constitutionality of its intended use regulations in court. But now that FDA has reissued the Rule with amendments, it may have to defend the constitutionality of the Rule soon.
2. DOJ’s Recent Activity in FCA Cases Involving Medicare Part C
Overview: On July 30, DOJ intervened in six qui tam actions alleging that members of Kaiser Permanente violated the FCA by submitting inaccurate diagnosis codes for its Medicare Advantage Plan (MA Plan) enrollees in order to receive higher reimbursements (a practice commonly known as “upcoding”). Kaiser allegedly pressured its physicians into fabricating risk-adjusting diagnoses through the creation of addenda to medical records.
Medicare Part C: Under Medicare Part C, beneficiaries can enroll in private company insurance plans (MA Plans). To receive payments, these companies submit diagnosis data to CMS. CMS calculates a “risk score” for each beneficiary, which translates into CMS’s monthly payment to these companies per beneficiary. More severe diagnoses typically lead to higher risk scores and larger payments. Allegations of untruthful data submitted to CMS to increase Medicare reimbursements are often the basis of FCA claims.
Our Take: While pursuing Medicare Part C fraud remains an important priority for DOJ, as evidenced by Deputy Assistant Attorney General Michael Granston’s December 2020 remarks, these recent interventions seem notable; there have not been many FCA cases against Medicare Part C insurers historically, as compared with other entities in the healthcare space. Moreover, upcoding claims against insurers can be difficult to prove, so these cases will be worth watching.
3. Fifth Circuit Upholds Privilege in Face of Government’s “Callous Disregard”
Overview: The Fifth Circuit recently ruled that a government “taint team” process failed adequately to protect a health system’s rights to attorney-client privileged materials. This is the most recent in a series of cases questioning the use of taint teams and their ability to protect privileged information.
The Ruling: As part of an investigation into alleged FCA violations, prosecutors from the U.S. Attorney’s Office for the Eastern District of Texas executed search warrants on Harbor Healthcare System’s offices and utilized a “filter team” to review seized materials for privilege. But the government refused to return documents that its filter team deemed privileged and in fact transferred a significant number of privileged documents to civil and criminal investigators. Despite this conduct, the district court rejected Harbor’s motion for the return of its privileged materials. The Fifth Circuit reversed and remanded, finding that the government had made no attempt to respect Harbor’s attorney-client privilege rights in the initial search and had further disregarded Harbor’s rights in its treatment of privileged materials post-search.
Our Take: While the Justice Manual provides for the creation of taint teams to review seized materials for privilege, it also instructs prosecutors to employ “adequate precautions” to ensure that privileged information is identified and returned to the appropriate party. In contrast, here, the government refused to destroy or return documents that the taint team had identified as privileged, retaining Harbor’s privileged materials for over four years. While this case illustrates an aggressive government stance, the Fifth Circuit’s ruling is consistent with several recent cases in which courts have expressed skepticism about the ability of “taint teams” to protect attorney-client privileged information. This case thus reinforces the availability of judicial avenues to protect privileged materials even after the government seizes them.
4. Expanding FCA Risks in Private Equity Space
Overview: In recent years, we have seen an increase in private equity firms being named in FCA cases. As reported in our July 29th post, DOJ recently announced another FCA settlement against a private investment company, Ancor Holdings LP, and the national electroencephalography (EEG) testing company, Alliance Family of Companies LLC, in which Ancor invested. Ancor allegedly learned of kickbacks being provided by Alliance during due diligence before investing in Alliance and then allowed the kickbacks to continue post-acquisition after Ancor became a minority shareholder and began managing Alliance.
Our Take: DOJ does not allege that Ancor itself was involved in perpetuating the scheme. Rather, DOJ’s allegations are based on Ancor’s pre-investment knowledge of Alliance’s alleged misconduct and its post-investment failure to stop that activity. This is a departure from earlier cases, in which firm principals were alleged to have been actively embroiled in the alleged misconduct. Firms should be mindful of increasing risks related to portfolio company misconduct, particularly where the firm has knowledge, significant control over company operations, and fails to stop the misconduct.
5. Government’s Aggressive Theory of Reverse FCA Liability
Overview: In an FCA action filed against Walgreen Company in the U.S. District Court for the Eastern District of Tennessee, the United States and Tennessee allege that Walgreens violated 31 U.S.C. § 3729(a)(1)(G), which forbids, among other things, “knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the Government.” As pled in the complaint, the government’s reverse FCA theory of liability rests on its assertion that Walgreens failed to repay certain amounts to the government after the government put it “on notice” that it believed those amounts were overpayments. The complaint does not allege that there has been any judicial or administrative determination that Walgreens received overpayments.
Our Take: The U.S. Chamber filed an amicus brief in this case, arguing that the government’s broad “on notice” theory essentially means that once the government tells a company it owes money, the company is required to immediately meet the government’s payment demand or face reverse FCA liability, even if the company disputes the government’s allegations or is still investigating them. The brief argues that this theory is fundamentally mistaken, as it ignores the statutory requirement that a defendant know both (1) that it has an obligation to pay the government and (2) that its conduct constitutes improper avoidance of that obligation. The brief further argues that accepting the government’s theory would chill beneficial and proper conduct by companies, such as conducting internal investigations and engaging with the government in good faith.
John Richter is a partner in the Special Matters and Government Investigations Practice Group in the firm’s Washington, D.C. office. Amy Boring is a Senior Associate in the Special Matters and Government Investigations Practice Group in the firm’s Atlanta office, and Christina Kung is an Associate in the Special Matters and Government Investigations Practice Group in the firm’s Washington, D.C. office.