Health Care Reform, or 'Qui Tams Made Easy'

While the insurance provisions of the new health care reform law (the Patient Protection and Affordable Care Act or PPACA) have received much media attention, the media have barely noticed another PPACA feature that could have a profound impact on the pharmaceutical, medical-device and health care industries ' its revisions to the False Claims Act (FCA), 31 U.S.C. ” 3729 et seq. The PPACA makes it significantly easier for whistleblowers to bring suits under the FCA, a statute that already entices whistleblower plaintiffs with potential millions in treble damages. An uptick in whistleblower suits will likely bring increased health care enforcement by the Department of Justice (DOJ), since whistleblower suits generated almost ten times as many new matters opened by the DOJ as department-initiated investigations during the period 2002-2009.

Narrowing What Is a 'Public Disclosure'

The “public disclosure bar” of the old FCA allowed defendants like hospitals, medical-device companies, pharmaceutical companies and doctors to obtain dismissal of a qui tam suit when the facts alleged had already been publicly disclosed. This bar reflected Congress's attempt to strike a balance between encouraging whistleblowers to come forward and preventing opportunistic plaintiffs from piggybacking on facts already in the public domain. The PPACA noticeably shifts that balance.

First, the new law narrows the category of disclosures that qualify as “public.” Historically, facts underlying the allegation were deemed “publicly disclosed” if they had appeared in the media or any federal, state, or local reports, hearings, motions, etc. In other words, “public” meant, essentially, the plain meaning of the word. Now only the media and federal sources appear to count.

This restriction seems to rob a recent Supreme Court decision of prospective significance. On March 30 ' one week after enactment of the PPACA ' the Court ruled that disclosures contained in state or local administrative reports trigger the public disclosure bar. Graham County Soil and Water Conservation District v. United States ex rel. Wilson, 130 S. Ct. 1396 (2010). The Court took note of the PPACA and held that the new law does not apply retroactively. But for FCA cases about conduct occurring after March 23, 2010, Graham may well be a dead letter. Any person who brings a suit based solely on information from publicly available state or local reports, audits or investigations appears to face no bar. Now, any health care company that discovers fraud by a rogue employee and ' acting as a good corporate citizen ' reports it to the State Medicaid Fraud Control Unit could be sued under the FCA for treble damages, perhaps even by the rogue employee involved in the fraud.

Moreover, disclosures made in certain hearings could arguably no longer trigger the bar. Before, disclosures in any “criminal, civil, or administrative hearing” could block subsequent FCA suits. Now, the only adjudicatory disclosures that seem to count are those made in federal hearings in which the federal government or its agent is a party. If that is the case, a plaintiff who learns of allegations from a federal litigation between private parties can now bring an FCA suit.

Expanding Who Qualifies As an 'Original' Source

Previously, the only way a whistleblower could avoid dismissal of FCA allegations that were subject to the public disclosure bar was to establish that he was an “original source” of the information underlying the allegations, meaning that he had both “direct and independent knowledge” and provided his information to the government before filing suit. The new law appears to weaken the “direct” knowledge requirement in that it no longer expressly requires it. This could permit qui tam plaintiffs lacking first-hand knowledge of fraud to argue that they, nevertheless, qualify as an “original source,” and are thus not subject to the bar.

No Longer 'Jurisdictional'

Previously, because the public disclosure bar was deemed “jurisdictional,” it could be raised at any time, or even by the court sua sponte. The new law appears to relegate it to merely a defense that can be raised in a motion to dismiss under Rule 12(b)(6). The PPACA also appears to give the government authority to block dismissal based on the bar. If the public disclosure bar applies, the Act directs the court to order dismissal “unless opposed by the Government.” 31 U.S.C. ' 3730(e)(4)(A) (as amended). How problematic this apparent government veto power will be for FCA defendants remains to be seen. It is unclear what interest the government would have in saving suits by whistleblowers whose allegations are based on public disclosures and whose knowledge does not “materially add” to what the government already knows. 31 U.S.C. ' 3730(e)(4)(B) (as amended).

Expansion of Kickback Liability

A provider who takes kickbacks to use a drug or device and files a related claim for payment may be sued under the FCA even though the claim itself was not false in describing the service or drug provided to the patient, because each submission for reimbursement carries with it a certification that the provider did not take any such kickbacks. See, e.g., United States ex rel. McNutt v. Haleyville Med. Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005); United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5th Cir. 1997). Under the old FCA, however, some courts rejected FCA claims where the recipient of the kickback was a different person than the one filing the claim ' for example, an unwitting hospital that submitted a claim and certification for services rendered by one of its doctors who took a kickback from a medical device company. See, e.g., United States ex rel. Hutcheson v. Blackstone Med., Inc., 2010 WL 938361, at *15 (D. Mass. Mar. 12, 2010).

Congress has responded to this line of cases by adding a provision (to be codified as a new subsection of 42 U.S.C. ' 1320a-7b(j)) specifying that “a claim that includes items or services resulting from” a kickback (or certain other violations) “constitutes a false or fraudulent claim for purposes of” the FCA. It thus appears that, under the new law, a pharmaceutical company or medical device manufacturer whose employee pays a kickback to a health care provider for use of a drug or device could be exposed to liability under the FCA for any claims submitted for reimbursement of the product, regardless of whether the hospital submitting the claim was aware of the kickback or the company was aware of the submission.

Improper Retention of Payments

Another change expands liability under the so-called “reverse false claims” provision of the FCA for knowingly retaining overpayments received from Medicare or Medicaid. This follows a significant expansion of the reverse false claims provision in the Fraud Enforcement and Recovery Act of 2009 (FERA). Before FERA, the FCA created liability for affirmatively making a false record or statement to conceal, avoid, or decrease an obligation to pay the government. In FERA, Congress eliminated the requirement of an affirmative false statement to the government, broadening the scope of liability to cover the knowing retention of government funds. The March 2010 legislation adds a provision to the Social Security Act (42 U.S.C. ” 1301 et seq.) stating that an overpayment received from Medicare or Medicaid is an actionable “obligation” under the FCA after the deadline for reporting and returning the overpayment expires.

FCA Liability of Private Insurers

Another PPACA provision relevant to the FCA affects the health care “Exchanges” that the PPACA establishes to provide options to individuals for purchasing health insurance. This amendment makes private insurers offering plans within the Exchange subject to the FCA if the plans include federal funds. FCA violations based on this provision carry potentially severe penalties of up to six times the actual damages to the government.

New Whistleblower Law

Publicly traded companies, including those in the life sciences, may soon face even greater exposure to whistleblower suits if financial regulatory reform is enacted. Both Houses of Congress have proposed legislation that would authorize the SEC to pay an award to whistleblowers of up to 30% in any judicial or administrative action brought by the Commission that results in more than $1 million in sanctions. This legislation has passed the House and the Senate and was awaiting action by the conference at press time.

Conclusion

The life science industries truly are in the cross-hairs of the government's increased reliance on whistleblowers. Whereas since 1986 whistleblower suits have netted $24 billion, in 2009 alone the penalties resulting from qui tam actions reached $2.4 billion. Congress's reforms are apt to spur more qui tam suits and awards. Companies in the life science industries need to pay renewed attention to compliance, including sales and marketing policies and procedures, training, internal reviews, and audits to prevent the increased exposure to whistleblower actions from translating into greater civil and criminal liability.

Jacqueline C. Wolff ([email protected]), a member of Covington & Burling LLP's White Collar Defense and Investigation Group, is a former federal prosecutor and a member of this newsletter's Board of Editors. Jonathan Marcus ([email protected]), a member of the firm's Appellate and Supreme Court Practice Group, is a former Assistant to the Solicitor General. The authors thank Andrew Lamb, an associate at the firm, for his assistance.

While the insurance provisions of the new health care reform law (the Patient Protection and Affordable Care Act or PPACA) have received much media attention, the media have barely noticed another PPACA feature that could have a profound impact on the pharmaceutical, medical-device and health care industries ' its revisions to the False Claims Act (FCA), 31 U.S.C. ” 3729 et seq. The PPACA makes it significantly easier for whistleblowers to bring suits under the FCA, a statute that already entices whistleblower plaintiffs with potential millions in treble damages. An uptick in whistleblower suits will likely bring increased health care enforcement by the Department of Justice (DOJ), since whistleblower suits generated almost ten times as many new matters opened by the DOJ as department-initiated investigations during the period 2002-2009.

Narrowing What Is a 'Public Disclosure'

The “public disclosure bar” of the old FCA allowed defendants like hospitals, medical-device companies, pharmaceutical companies and doctors to obtain dismissal of a qui tam suit when the facts alleged had already been publicly disclosed. This bar reflected Congress's attempt to strike a balance between encouraging whistleblowers to come forward and preventing opportunistic plaintiffs from piggybacking on facts already in the public domain. The PPACA noticeably shifts that balance.

First, the new law narrows the category of disclosures that qualify as “public.” Historically, facts underlying the allegation were deemed “publicly disclosed” if they had appeared in the media or any federal, state, or local reports, hearings, motions, etc. In other words, “public” meant, essentially, the plain meaning of the word. Now only the media and federal sources appear to count.

This restriction seems to rob a recent Supreme Court decision of prospective significance. On March 30 ' one week after enactment of the PPACA ' the Court ruled that disclosures contained in state or local administrative reports trigger the public disclosure bar. Graham County Soil and Water Conservation District v. United States ex rel . Wilson , 130 S. Ct. 1396 (2010). The Court took note of the PPACA and held that the new law does not apply retroactively. But for FCA cases about conduct occurring after March 23, 2010, Graham may well be a dead letter. Any person who brings a suit based solely on information from publicly available state or local reports, audits or investigations appears to face no bar. Now, any health care company that discovers fraud by a rogue employee and ' acting as a good corporate citizen ' reports it to the State Medicaid Fraud Control Unit could be sued under the FCA for treble damages, perhaps even by the rogue employee involved in the fraud.

Moreover, disclosures made in certain hearings could arguably no longer trigger the bar. Before, disclosures in any “criminal, civil, or administrative hearing” could block subsequent FCA suits. Now, the only adjudicatory disclosures that seem to count are those made in federal hearings in which the federal government or its agent is a party. If that is the case, a plaintiff who learns of allegations from a federal litigation between private parties can now bring an FCA suit.

Expanding Who Qualifies As an 'Original' Source

Previously, the only way a whistleblower could avoid dismissal of FCA allegations that were subject to the public disclosure bar was to establish that he was an “original source” of the information underlying the allegations, meaning that he had both “direct and independent knowledge” and provided his information to the government before filing suit. The new law appears to weaken the “direct” knowledge requirement in that it no longer expressly requires it. This could permit qui tam plaintiffs lacking first-hand knowledge of fraud to argue that they, nevertheless, qualify as an “original source,” and are thus not subject to the bar.

No Longer 'Jurisdictional'

Previously, because the public disclosure bar was deemed “jurisdictional,” it could be raised at any time, or even by the court sua sponte. The new law appears to relegate it to merely a defense that can be raised in a motion to dismiss under Rule 12(b)(6). The PPACA also appears to give the government authority to block dismissal based on the bar. If the public disclosure bar applies, the Act directs the court to order dismissal “unless opposed by the Government.” 31 U.S.C. ' 3730(e)(4)(A) (as amended). How problematic this apparent government veto power will be for FCA defendants remains to be seen. It is unclear what interest the government would have in saving suits by whistleblowers whose allegations are based on public disclosures and whose knowledge does not “materially add” to what the government already knows. 31 U.S.C. ' 3730(e)(4)(B) (as amended).

Expansion of Kickback Liability

A provider who takes kickbacks to use a drug or device and files a related claim for payment may be sued under the FCA even though the claim itself was not false in describing the service or drug provided to the patient, because each submission for reimbursement carries with it a certification that the provider did not take any such kickbacks. See, e.g., United States ex rel. McNutt v. Haleyville Med. Supplies , Inc. , 423 F.3d 1256, 1259 (11th Cir. 2005); United States ex rel. Thompson v. Columbia/HCA Healthcare Corp. , 125 F.3d 899, 902 (5th Cir. 1997). Under the old FCA, however, some courts rejected FCA claims where the recipient of the kickback was a different person than the one filing the claim ' for example, an unwitting hospital that submitted a claim and certification for services rendered by one of its doctors who took a kickback from a medical device company. See, e.g., United States ex rel. Hutcheson v. Blackstone Med., Inc., 2010 WL 938361, at *15 (D. Mass. Mar. 12, 2010).

Congress has responded to this line of cases by adding a provision (to be codified as a new subsection of 42 U.S.C. ' 1320a-7b(j)) specifying that “a claim that includes items or services resulting from” a kickback (or certain other violations) “constitutes a false or fraudulent claim for purposes of” the FCA. It thus appears that, under the new law, a pharmaceutical company or medical device manufacturer whose employee pays a kickback to a health care provider for use of a drug or device could be exposed to liability under the FCA for any claims submitted for reimbursement of the product, regardless of whether the hospital submitting the claim was aware of the kickback or the company was aware of the submission.

Improper Retention of Payments

Another change expands liability under the so-called “reverse false claims” provision of the FCA for knowingly retaining overpayments received from Medicare or Medicaid. This follows a significant expansion of the reverse false claims provision in the Fraud Enforcement and Recovery Act of 2009 (FERA). Before FERA, the FCA created liability for affirmatively making a false record or statement to conceal, avoid, or decrease an obligation to pay the government. In FERA, Congress eliminated the requirement of an affirmative false statement to the government, broadening the scope of liability to cover the knowing retention of government funds. The March 2010 legislation adds a provision to the Social Security Act (42 U.S.C. ” 1301 et seq.) stating that an overpayment received from Medicare or Medicaid is an actionable “obligation” under the FCA after the deadline for reporting and returning the overpayment expires.

FCA Liability of Private Insurers

Another PPACA provision relevant to the FCA affects the health care “Exchanges” that the PPACA establishes to provide options to individuals for purchasing health insurance. This amendment makes private insurers offering plans within the Exchange subject to the FCA if the plans include federal funds. FCA violations based on this provision carry potentially severe penalties of up to six times the actual damages to the government.

New Whistleblower Law

Publicly traded companies, including those in the life sciences, may soon face even greater exposure to whistleblower suits if financial regulatory reform is enacted. Both Houses of Congress have proposed legislation that would authorize the SEC to pay an award to whistleblowers of up to 30% in any judicial or administrative action brought by the Commission that results in more than $1 million in sanctions. This legislation has passed the House and the Senate and was awaiting action by the conference at press time.

Conclusion

The life science industries truly are in the cross-hairs of the government's increased reliance on whistleblowers. Whereas since 1986 whistleblower suits have netted $24 billion, in 2009 alone the penalties resulting from qui tam actions reached $2.4 billion. Congress's reforms are apt to spur more qui tam suits and awards. Companies in the life science industries need to pay renewed attention to compliance, including sales and marketing policies and procedures, training, internal reviews, and audits to prevent the increased exposure to whistleblower actions from translating into greater civil and criminal liability.

Jacqueline C. Wolff ([email protected]), a member of Covington & Burling LLP's White Collar Defense and Investigation Group, is a former federal prosecutor and a member of this newsletter's Board of Editors. Jonathan Marcus ([email protected]), a member of the firm's Appellate and Supreme Court Practice Group, is a former Assistant to the Solicitor General. The authors thank Andrew Lamb, an associate at the firm, for his assistance.