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Decision raises the bar for defending False Claims Act cases

1st Circuit says non-submitting entities can be liable for false claims filed by others.

Whistleblower Susan Hutcheson,a former regional manager for Blackstone Medical, claimed to have observed nationwide business practices that violated the Anti-Kickback Statute (AKS). She claimed Blackstone employees offered surgeons cash and other financial incentives, including consulting contracts, research grants and travel and entertainment expenses, to induce them to use Blackstone’s devices in spinal surgeries. Because these physicians and their hospitals submitted claims for payment by Medicare for surgeries using the devices, she alleged in U.S. ex rel. Hutcheson v. Blackstone Medical that Blackstone had caused the medical professionals to violate the False Claims Act (FCA) by submitting false claims to the government.   

Hutcheson alleged that the hospital and physician claims were materially false or fraudulent because the alleged kickbacks could have affected Medicare’s decision whether to pay them. The key issue in the case was whether Blackstone, the sole defendant, was responsible for the alleged fraud in the Medicare claims, even though it did not submit the claims.

The district court granted Blackstone’s motion to dismiss the complaint, holding that Hutcheson’s allegations did not state a claim. The court wrote that the hospitals had not filed claims that were either “factually false” or “legally false.” The district court also stated that because the doctors had not submitted claims for “medically unnecessary surgeries,” the misrepresentations had not influenced the government’s payment decisions.

On appeal, the 1st Circuit reversed, issuing an opinion June 1. It held that an entity not submitting Medicare claims may be liable under the FCA for knowingly causing hospitals and physicians to submit false or fraudulent claims. This liability is not dependent on whether the submitting entity knew or should have known about a non-submitting entity’s unlawful conduct, the court said. 

“The case could raise the bar for companies to be successful in a motion to dismiss in an early stage of a proceeding in the 1st Circuit, before having to go through expensive discovery,” says Foley & Lardner Partner Lawrence Kraus. “In addition, the FCA applies to any false claim submitted to the federal government—whether in the health care field or any other. Given the focus of Congress and federal prosecutors, many more cases by the government can be expected.”

Circuit Split

The 1st Circuit opinion explicitly rejected much of the analytical framework employed by the district court in this case and created a split with the 2nd, 6th, 9th, 10th, 11th and D.C. Circuits. In June, the 3rd Circuit in United States ex rel. Wilkins v. United Health Group also joined the majority.  

The 1st Circuit stated that the text of the FCA does not refer to “factually false” or “legally false” claims, nor does it refer to “express certification” or “implied certification” as included in the majority of circuit opinions. It held that these are “[j]udicially-created categories.”

The court noted that the hospitals submitted cost report forms to Medicare with a certification that claims for Medicare reimbursement may only be paid if they complied with the AKS and that to the hospital’s knowledge its claims complied. The provider agreement forms submitted by physicians and hospitals to Medicare contained similar representations. According to the court, that constituted the filing of false claims under the FCA.     

The 1st Circuit view flies in the face of the Supreme Court’s narrower and textual-focused reasoning in both Rockwell International v. United States ex. rel. Stone and Allison Engine v. United States ex. rel. Sanders, claims David Douglass, a partner at Shook, Hardy & Bacon.  

“The Blackstone decision is important,” says Douglass, “because it greatly expands the reach of the False Claims Act. The analysis is Orwellian. It continues a disturbing legislative and judicial trend of transforming the False Claims Act into a general-purpose, anti-fraud statute.”

No “Ostrich Defense”

Andrew Beato, a partner at Stein, Mitchell & Muse, contends the case will force hospitals and other submitting parties to exercise greater oversight.  

“There is no ostrich defense,” says Beato. “Burying your head in the sand doesn’t avoid FCA liability if you submit a claim for payment tainted by a kickback. Hospitals are sophisticated participants in federal payer programs. A hospital has an interest in knowing whether a doctor accepted a kickback that interferes with independent clinical judgment in treating the hospital’s patient.” 

That may require hospitals to beef up their internal controls. 

“The Blackstone opinion demonstrates the increasing need to implement robust internal compliance programs that are adopted and embraced by individuals in management positions,” says Kraus. “Moreover, providers should be proactive in investigating potential issues as they arise.”

Douglass suggests a number of reasonable and appropriate compliance measures to help ensure companies’ business partners observe applicable laws, including knowing vendor procedures; requiring certifications of compliance from vendors, where appropriate; educating personnel on the red flags for unlawful financial arrangements; and taking appropriate disciplinary and legal action against those who engage in improper conduct.

“Additionally, it is important to continue to monitor both the facts and the holdings in FCA cases because these can provide guidance concerning potentially problematic conduct, especially new schemes that can entangle a company in the government’s net,” he adds.

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