Top False Claims Act Developments
Michael Paulhus, Isabella Wood, and Maggie Thomas, King & Spalding LLP
This week’s top False Claims Act developments include: a Third Circuit decision regarding standards applicable to government dismissals of qui tam actions; legislative developments related to potential amendments to the FCA; the Department of Justice’s intervention in an FCA action against a Medicare Advantage insurer alleging unsupported diagnoses; an award of attorneys’ fees based on a relator’s harassing behavior; and FCA settlements involving requests for reimbursement alleged to be based on medically unnecessary urine drug testing and Paycheck Protection Program funds.
The Third Circuit Weighs in on Government Dismissals of Qui Tam Actions
Overview: On October 28, 2021, the Third Circuit released its precedential opinion in U.S. ex rel. Polansky v. Executive Health Resources et al., No. 19-3810, and joined the Seventh Circuit in holding that the government must intervene in a qui tam action before it can move to dismiss and that such dismissals are governed by the standards in Federal Rule of Civil Procedure 41.
Polansky filed the qui tam action in 2012. The government declined to intervene, and Polansky litigated the case for several years. After the district court ordered the government to produce extensive discovery over its objection, the government moved to dismiss pursuant to § 3730(c)(2)(A). The district court granted the motion and Polansky appealed, arguing that the government lacked statutory authority to move to dismiss and that even if the government had the authority, its motion should have been denied on the merits.
The Third Circuit affirmed. The court first joined the Sixth and Seventh Circuits in holding that the government must intervene before it can move to dismiss, but that it can seek leave to intervene at any point in the litigation upon a showing of good cause. Op. 14. In doing so, the court rejected Polansky’s argument that the government may seek dismissal only if it intervened at its first opportunity. Id. at 16. Because “good cause” is not a “burdensome . . . obligation,” the court also rejected the government’s argument that requiring intervention as a prerequisite to moving to dismiss compromises the government’s ability to control litigation brought in its name and risks violating the separation of powers. Id. at 18.
Next, the court considered the standard applicable to the government’s motion to dismiss. The D.C. Circuit has held that district courts should not engage in substantive review of the government’s reasons for dismissal and must grant such a motion, at least absent extraordinary circumstances such as fraud on the court. See id. at 20, 25. In contrast, the Ninth Circuit has held that district courts should engage in a limited substantive review of the rationality of the government’s reasons. See id. at 20, 27. Most recently, the Seventh Circuit opted for a different approach, holding that Fed. R. Civ. P. 41(a) governs. See id. at 20.
The Third Circuit sided with the Seventh Circuit, holding that Rule 41(a) applies. Under that Rule, if the motion to dismiss is filed before the defendant files an answer or summary judgment motion, the plaintiff may dismiss an action without a court order. See id. at 21. Where the defendant has filed a responsive pleading, however, “an action may be dismissed at the plaintiff’s request only by court order on terms that the court considers proper.” Id.
Applying Rule 41(a)(2), the court affirmed the dismissal, emphasizing that the district court had “exhaustively examined the interests of the parties, their conduct over the course of the litigation, and the Government’s reasons for terminating the action.” Id. at 28.
Our Take: The D.C. Circuit’s approach best respects the Constitution’s allocation of responsibility to the Executive Branch to decide whether and how cases should proceed in the government’s name. The Third Circuit’s approach of applying Rule 41(a) gives district courts a somewhat larger role in reviewing government dismissal motions. But the Third Circuit suggested that its approach will usually lead to the same outcome, as district courts normally should defer to the government and grant dismissal motions under the framework of Rule 41(a).
Senate Judiciary Committee Votes to Approve FCA Amendments, Sends S. 2428 to the Senate for Vote
Overview: On October 28, 2021, the Senate Judiciary Committee voted 15-7 to report the False Claims Amendments Act of 2021 (“S. 2428”) out of committee, referring it to the Senate. As amended, S. 2428 proposes substantive and procedural amendments to the FCA. In particular, the bill would:
- Change the materiality requirement in response to the Supreme Court’s ruling in Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). In Escobar, the Court concluded that “if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.” Id. at 2003-04. S. 2428 would address Escobar by adding the following legislative language: “In determining materiality, the decision of the Government to forego a refund or to pay a claim despite actual knowledge of fraud or falsity shall not be considered dispositive if other reasons exist for the decision of the Government with respect to such refund or payment.”
- Amend the government dismissal provision to require the government to “identify a valid governmental purpose and a rational basis between dismissal and accomplishment of the purpose” and provide relators with the opportunity to show that such reasons are “fraudulent, arbitrary and capricious, or illegal.”
- Broaden the FCA’s anti-retaliation provision to apply to former employees.
DOJ Accuses Kaiser of $1B Medicare Fraud, Unsupported Diagnoses
Overview: On October 25, 2021, DOJ filed a complaint in intervention in an FCA case against Kaiser Permanente, Kaiser Foundation Health Plan, Inc., and certain Permanente Medical Groups. DOJ alleges that between 2009 and 2019, Kaiser added half a million diagnoses using addenda submitted to the Centers for Medicare & Medicaid Services and received Medicare payments in the range of $1 billion from these additional diagnoses.
Using “data mining” and “chart review,” Kaiser allegedly used algorithms and/or human reviewers to identify new diagnoses for patients and add them to an addendum. Generally, an addendum is a part of a patient’s medical record and is a means by which medical-record entries can be updated, corrected, or supplemented. CMS rules and guidance recognize an addendum as having legitimate uses where the addendum is related to a service that was provided during the visit. According to DOJ’s complaint, however, in some cases these addenda were added many months after the visit and many patients allegedly were not informed of the diagnoses that Kaiser added to their medical records.
Our Take: As noted in prior posts (e.g., see here, here, here, and here), DOJ is increasingly focused on Medicare Advantage and Part C enforcement, with a particular focus on theories related to allegedly unsupported diagnosis codes. This case reflects DOJ’s continued focus on diagnosis codes and “upcoding” as part of FCA enforcement.
Court Rules Utah Relator Owes Attorneys’ Fees for Harassing Behavior
Overview: On October 29, 2021, Judge Jill N. Parrish of the U.S. District Court for the District of Utah found that an FCA relator owes $92,665 in attorneys’ fees for pursuing a “clearly vexatious” suit against the Emigration Improvement District (“EID”)—a Utah entity tasked with providing water services—and individual defendants. U.S. ex rel. Tracy v. Emigration Improvement District et al., No. 2:14-cv-701-JNP, 2021 WL 5042917 (D. Utah Oct. 29, 2021).
The focus of the relator’s suit was a $1.846 million loan that EID received around September 2004 from Utah’s Drinking Water State Revolving Fund, which uses federal funds to finance the construction of water systems for drinking or culinary water. The relator filed a qui tam complaint against the District and individual defendants in 2014 and then amended his complaint three times. The United States declined to intervene on three separate occasions. Following the dismissal of his third complaint as time-barred, the relator appealed to the Tenth Circuit, which remanded for further analysis. On remand, the district court again dismissed the case as time-barred in March 2021.
The district court had previously awarded attorneys’ fees and costs against both the relator and his lawyer, and the Tenth Circuit noted in remanding the case that if the defendants prevailed, the court could again find the relator’s claims “clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.” U.S. ex rel. Tracy v. Emigration Improvement Dist., 804 F. App’x 905, 909 (10th Cir. 2020).
In its October 2021 opinion, the district court found that the relator engaged in “harassing behavior” and brought the case against EID to “air personal grievances” rather than seeking monetary damages for the federal government. The court also found that the relator filed a “wrongful” lis pendens action against certain water rights in the district that the relator claimed were the subject of the FCA lawsuit and that there was no good faith basis for suggesting that the relator’s lawsuit for damages under the FCA had any bearing on the ownership of the water rights.
Our Take: This decision is noteworthy because it is rare for a court to impose a sanction of fees against a relator.
In the News:
DOJ Announces FCA Settlement with Physicians Related to Urine Testing Alleged to Be Medically Unnecessary - On October 22, 2021, DOJ announced [see https://www.justice.gov/opa/pr/texas-pain-management-physicians-agree-pay-39-million-resolve-allegations-relating] that two Texas pain management physicians had agreed to pay $3.9 million to resolve FCA allegations relating to requests for reimbursement alleged to be based on medically unnecessary urine drug testing. This settlement is an example of continued FCA enforcement arising from the opioid epidemic.
DOJ Announces PPP Loan FCA Settlement - On October 28, 2021, DOJ announced [see https://www.justice.gov/opa/pr/covid-19-task-force-nets-florida-duct-cleaning-company-settles-false-claims-act-allegations] a settlement of FCA allegations relating to an allegedly improper Paycheck Protection Program loan with a Florida duct cleaning company. There have been fewer civil PPP resolutions so far than one might have expected, but we predict an uptick in PPP enforcement in 2022.
Michael Paulhus is a partner in the Healthcare practice in the Atlanta office of King & Spalding LLP. Isabella Wood is a senior associate in King & Spalding’s Atlanta office and a member of the firm’s Healthcare practice. Maggie Thomas is a senior associate in King & Spalding’s Washington, D.C. office and a member of the firm’s Special Matters and Government Investigations practice.