Recently the U.S. Court of Appeals for the First Circuit issued an opinion that has the potential to significantly change the outcome of qui tam (or whistleblower) lawsuits that are filed against pharmaceutical and medical device makers who are defending kickback charges.
The case involves Susan Hutcheson (relator) and Blackstone Medical, Inc.
The issue involved in the case is whether a company can be charged for violating the False Claims Act, when an innocent third party (such as a hospital or pharmacy) seeks reimbursement from Medicare or Medicaid for a product or prescription, when they were unaware that a kickback was made to a doctor to induce the sale of that product for which the reimbursement was sought.
In the past, courts have ruled that the False Claims Act is not violated if a pharmacy or hospital does not know that a prescription was only written because a drugmaker gave a kickback to a doctor.
For example, the U.S. District Court in Boston recently ruled against former Pfizer executive Peter Rost, who charged the drugmaker with marketing the Genotropin human growth hormone for unapproved uses. Specifically, the court decided against Rost in part because a pharmacist could not have known that a doctor wrote a prescription due to a kickback from a drugmaker.
Following this line of reasoning, the U.S. District Court dismissed Hutcheson’s qui tam suit in favor of Blackstone. In doing so, the district court protected company’s rights against whistleblowers, who frequently argue that a violation under the False Claims Act occurs once reimbursement is sought from Medicaid or Medicare.
However, the First Circuit remanded the case back to the district court to decide whether a drug or device maker remains liable under the False Claims Act when a pharmacy or hospital (innocent party) was unaware that a kickback was made to a doctor to induce the sale of a product for which reimbursement was sought from Medicare and Medicaid.
Background
Susan Hutcheson (relator) was employed by Blackstone Medical, Inc. as a Regional Manager from January 2004 until she was terminated in January 2006. She filed this qui tam action against Blackstone on September 29, 2006.
In her complaint filed in 2008, Hutcheson alleged that Blackstone paid kickbacks to doctors across the country so they would use its products in certain spinal surgeries. These kickbacks, Hutcheson alleged, included “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.”
She further alleged that Blackstone’s management supervised a kickback scheme and “knew that Medicare, Medicaid, and other federal program beneficiaries represent a significant percentage of spine-surgery patients,” and that as a result of the kickbacks, doctors across the country had performed spinal surgeries on Medicare and Medicaid patients using Blackstone’s devices.
At the time Hutcheson filed her complaint, the False Claims Act (FCA) imposed liability on any person who either “knowingly presents, or causes to be presented to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval,” or “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”
A person acts “knowingly” if he or she “(1) had actual knowledge of the information; (2) acts in deliberate ignorance of the truth or falsity of the information; or (3) acts in reckless disregard of the truth or falsity of the information.” The FCA also stated that the term “knowingly” requires “no proof of specific intent to defraud.” Although the statute was later amended, the court refered to the provisions in force at the time of filing the complaint.
Legal Arguments
Hutcheson argued that compliance with the Anti-Kickback Statute (AKS) is a condition of receiving payment from federally-funded healthcare programs, including Medicare, Medicaid, and TRICARE. The AKS prohibits the payment and receipt of kickbacks in return for either procuring or recommending the procurement of a good, facility, or item to be paid in whole or in part by a federal healthcare program.
Hutcheson alleged that through its kickback scheme, Blackstone “knowingly cause[d]” healthcare providers, including hospitals and physicians, to present or submit materially “false or fraudulent” claims for payment to federal healthcare programs.
Hutcheson and the United States argued that a claim is “false or fraudulent” under the FCA if it does not meet a material precondition of payment. They argued that compliance with the AKS is a precondition for Medicare reimbursement and thus that Blackstone, in providing the alleged kickbacks, caused the hospitals and physicians at issue in this suit to submit false or fraudulent claims.
In making this argument, Hutcheson and the United States invoked both the specific terms of provider agreements and hospital cost reports as well as elements of the broader statutory scheme. They argued, moreover, that the hospital and physician claims at issue in this suit were materially false or fraudulent because the alleged kickbacks would have been capable of influencing Medicare’s decision whether to pay the claims had it been aware of them.
Blackstone argued in response that a claim can only be false or fraudulent under the FCA if it (1) misstates facts, (2) incorrectly certifies compliance with a statute or regulation, or (3) does not meet an express condition of payment stated in a statute or regulation. Blackstone argued that the claims at issue did not meet any of these criteria. It argued that Hutcheson neither alleged that the claims contain factual misstatements, nor identified an express certification or an express condition of payment from a statute or regulation that would disallow payment in light of the alleged kickbacks.
Blackstone also argued that even if the claims were false or fraudulent, they were not materially false or fraudulent because the claims made by hospitals and the services provided by physicians were not influenced by kickbacks.
The district court held that Hutcheson’s allegations did not state a claim under the FCA and dismissed the case. It held that the hospital claims were not false or fraudulent, and that while the doctor claims were false or fraudulent, those claims were not materially false or fraudulent. The First Circuit however reversed the circuit court and remanded for further consideration.
First Circuit Decision
After reviewing the facts and the district court’s analysis, the First Circuit rejected the two purported limitations on FCA liability Blackstone advanced. First, the court rejected the argument that, in the absence of an express legal representation or factual misstatement, a claim can only be false or fraudulent if it fails to comply with a precondition of payment expressly stated in a statute or regulation.
Second, the court rejected the argument that a submitting entity’s representations about its own legal compliance cannot incorporate an implied representation concerning the behavior of non-submitting entities. The court reasoned that these purported limitations do not appear in the text of the FCA and are inconsistent with federal case law.
The court reasoned that the categorical limitation Blackstone advances does not appear in the text of the statute and is inconsistent with both the statutory text and binding case law. The court recognized that the FCA imposes liability on any person who “knowingly presents, or causes to be presented” to the government “a false or fraudulent claim for payment or approval,” or “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”
The Court noted that when a 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. The FCA statute makes no distinction between how non-submitting and submitting entities may render the underlying claim or statements false or fraudulent. The Court also recognized prior cases, in which they made clear that unlawful acts by non-submitting entities may give rise to a false or fraudulent claim even if the claim is submitted by an innocent party.
Consequently, the First Circuit noted that none of the cases cited by Blackstone “addressed the possibility of imposing FCA liability on a defendant who had caused another entity to present a materially false or fraudulent claim for payment to the government.”
They noted that the Supreme Court has long held that a non-submitting entity may be liable under the FCA for knowingly causing a submitting entity to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s unlawful conduct.
The court noted how prior cases do not hold that a submitting entity’s representations concerning its own conduct somehow immunize a non-submitting entity from liability under the “causes” clauses of the FCA, and that Blackstone did not cite any other decision from the Supreme court or the First Circuit that says that.
Conclusion
The ruling from the First Circuit only means the case will not be dismissed on its pleadings. The plaintiff (whistleblower) still has a long way to go to prove the liability, and a trial or decision could take up to two years. Nevertheless, Stephen Sheller, an attorney in Philadelphia who represents whistleblowers noted that the ruling means companies can no longer play games “and use somebody indirectly to accomplish their dirty work to avoid false claims.
Sheller further added that ruling meant that companies “can’t just simply pay off a doctor to write prescriptions and then when the pharmacy fills it, Medicaid and Medicare can’t recover.”
Jeb White of Nolan & Auerbach, which has also brought whistleblower lawsuits against the pharmaceutical industry, noted that, “this decision is a game-changer, for it rejects a lot of the judicially-created obstacles for legitimate FCA cases.”