1st Circuit rejects restrictions on FCA liability

The 1st U.S. Circuit Court of Appeals has overturned the dismissal of a False Claims Act complaint against a medical supplier accused of committing a nationwide kickback scheme.

The qui tam complaint alleges that the defendant supplier paid doctors to use its medical devices and, in doing so, duped hospitals and other providers into unwittingly filing false or fraudulent claims for reimbursement with Medicare because they were unaware of the kickbacks.

The plaintiffs asserted that compliance with the Anti-Kickback Statute is a pre-condition for receiving federal health care reimbursement and that Medicare would have disallowed payment had it been aware of the kickbacks.

The defendant contended that the payment claims were not false or fraudulent under the FCA because they did not contain factual misstatements or certify compliance with a statute or regulation. And it said that the claims, even if flawed, could not be materially false or fraudulent because they were filed by providers that were not influenced by alleged kickbacks.

But the 1st Circuit disagreed, finding the defendant’s argument for restrictions on FCA liability to be inconsistent with the statute and caselaw.

Writing for the unanimous panel, Chief Judge Sandra L. Lynch added that third parties like the defendant can be held liable under the FCA regardless of whether the claim-filing party knew or should have known about a non-filing party’s illegal conduct.

“When the defendant in an FCA action is a non-submitting entity, the question is whether that entity knowingly caused the submission of either a false or fraudulent claim or false records or statements to get such a claim paid,” Lynch said. “The statute makes no distinction between how non-submitting and submitting entities may render the underlying claim or statements false or fraudulent.”

The 40-page decision is United States ex rel. Hutcheson, et al. v. Blackstone Medical, Inc.

Sending a message

The decision takes away a common defense employed by medical suppliers in False Claims Act cases, said Suzanne E. Durrell, one of several attorneys for the plaintiffs.

Suppliers have argued that because they are outside the system and not filing claims for reimbursement with Medicare, they are immune from FCA liability, said Durrell, a solo in Milton, Mass.

“They want to hide behind the providers, or doctors, and use a very technical argument when the False Claims Act is a broad statute,” she said. “I think this sends a strong message that says they can’t hide behind the providers.”

The decision also rejects the notion that a supplier can be held liable under the FCA only if there is evidence that it conspired with a provider to commit fraud, said plaintiffs’ attorney Jennifer M. Verkamp of Cincinnati.

Had the decision gone the other way, the court would have rewarded deception by allowing suppliers to fly under the radar, Verkamp added.

“If you wanted to commit fraud, you could just be more secretive,” she said. “By being more secretive, you become more immune to liability.”

In an amicus brief, U.S. Attorney Carmen M. Ortiz in Boston warned that the court’s ruling could have a significant impact on the government’s ability to prosecute health care fraud.

She said the U.S. District Court’s dismissal of the plaintiffs’ FCA complaint had potentially “insulated” medical device suppliers from FCA liability in kickback cases. She urged the court to focus on whether the claims were tainted by kickbacks, not on whether the providers submitting the claims had knowledge of any illegal activities.

The defendant’s attorneys at Ropes & Gray in Boston did not respond to requests for comment.

But in its brief, the defense argued that the plaintiffs could not “identify a single claim the government made for [the defendant’s] device” and therefore failed to state an implied certification-based FCA claim.

The defense went on to argue that the plaintiffs had failed to prove that the Medicare claims were “’factually” or “legally” false and had instead tried to “advance an unprecedented theory that the claims were ‘inherently false’” because they were tainted by violations of the Anti-Kickback Statute.

“That radical interpretation of the FCA has been rejected whenever it has been presented,” the brief states. “The concept of ‘inherent falsity’ is a clever lawyer’s invention, but it cannot expand the FCA’s coverage beyond that which Congress provided.”

Whistleblower complaint

Lead plaintiff Susan Hutcheson was fired from her regional manager position at Blackstone Medical in 2006 after working there for two years. She filed a qui tam action against the company a few months later.

Hutcheson accused defendant Blackstone of paying kickbacks to doctors so they would use the company’s devices in spinal surgeries. She described the kickbacks as “monthly payments under sham consulting agreements; paid development projects; research grants; royalties; exorbitant and sometimes illicit entertainment expenses; high-end travel and accommodations; speaking engagements and seminars; and other illegal incentives.”

Hutcheson said Blackstone’s management supervised the scheme and knew that many spinal surgery patients were in federal health care programs. She also alleged that doctors across the country had used Blackstone’s devices in spinal surgeries on Medicare patients so they could receive kickbacks.

Hutcheson’s complaint stalled when U.S. District Court Judge William G. Young in Boston determined that her allegations failed to state a claim under the FCA. Young dismissed the complaint, concluding that the hospital claims were not false and that while the doctors’ claims were false, they were not materially false.

Dismissal reversed

In reversing the lower court, the 1st Circuit first determined that the plaintiffs had, in fact, stated a claim by alleging that the requests for Medicare payment represented compliance with the Anti-Kickback Statute.

“It follows that Hutcheson has stated a claim that Blackstone knowingly caused the submission of materially false or fraudulent claims in violation of the FCA,” Lynch wrote. “In reaching this conclusion, we do not adopt the judicially created conceptual framework employed by the district court, nor do we adopt any categorical rules as to what counts as a materially false or fraudulent claim under the FCA.”

The 1st Circuit also rejected the District Court judge’s holding that a pre-condition of payment must be explicitly stated in a statute or regulation to support a false claim, even though other circuits have issued similar rulings, Lynch said.

“The risk of federalization of what have been private party tort actions is not a foregone conclusion of declining to adopt a rule that preconditions of payment must be expressly stated in a statute or regulation; nor is that risk sufficient to justify such a rule,” Lynch wrote.

Calling the defendant’s policy concerns “overblown,” Lynch said that holding third parties liable for knowingly causing claim filers to violate the FCA, whether the filers are aware of the violation or not, is “hardly boundless” and “has been richly developed as a constraint in various areas of the law.”

“We find Hutcheson’s allegations sufficient to show, for purposes of this motion to dismiss, that the kickbacks were capable of influencing Medicare’s decision as to whether to pay the hospital and physician claims,” she said.