The scope and use of the federal healthcare program exclusion authority continues to evolve. Over the past few weeks, a federal district court upheld the exclusion of three former pharmaceutical industry executives based on their responsible corporate officer doctrine convictions. The Department of Health and Human Services Office of the Inspector General (OIG) announced another unprecedented exclusion, this time against a former pharmaceutical company shareholder. Congress repealed a mandate that state Medicaid programs exclude a wide swath of individuals and entities based on affiliations with federally sanctioned entities, which had already had the effect of complicating settlements of healthcare fraud cases. These developments present a sobering picture for individuals working in the healthcare industry and emphasize the importance of responding to the OIG's request for comment on its guidance on the effect of federal health program exclusion.

Court upholds RCOD-based exclusions

In Friedman et. al v. Sebelius (1:09-cv-02028-ESH), a judge in the federal district for the District of Columbia affirmed the OIG's decision to exclude three former pharmaceutical industry executives from participation in all federal healthcare programs for 12 years. The Court concluded that OIG has the authority to exclude these individuals based on their guilty pleas to misdemeanor misbranding under the "responsible corporate officer" doctrine even though these convictions did not require, and the case did not include, any evidence of personal wrongdoing or intent by the excluded executives. In doing so, the Court affirmed the OIG's assertion that the language of its statutory exclusion authority should be interpreted extraordinarily broadly and allows the OIG to exclude the executives convicted of a non-conspiracy offense based on someone else's misconduct. The Court similarly validated the OIG's authority to impose extensive exclusion periods beyond the statutory period treating as evidence sanctions imposed on the company, and settlement payments made by the company despite explicit provisions in the civil settlement agreement denying liability. The Court determined that the lack of personal culpability by the excluded executives did not render unreasonable their 12 -year bar on participation in any federal healthcare programs. The decision is likely to be viewed by the OIG as strengthening significantly its hand and discretion to pursue individuals under the responsible corporate officer doctrine in a number of corporate contexts. In particular, the OIG is likely to treat this decision as an affirmation of its ability to pursue exclusion of executives who did not have knowledge of the corporate misconduct at issue. In addition, OIG will likely interpret the Friedman decision as a confirmation that it has the authority, as articulated in the OIG's recently issued guidance on imposition of exclusion of company officers and managing employees under Section 1128(b)(15) of the Social Security Act, to exclude individuals based on mere allegations in civil and criminal investigations.

OIG excludes pharmaceutical company shareholder

As explained in the Hogan Lovells US LLP alert in October 2010, the OIG's guidance on the use of section (b)(15) indicated that the OIG would seek to exclude the owners, officers, and managing employees of an excluded or convicted entity regardless of whether the individuals themselves have been convicted or even charged in the underlying case. Within weeks of this guidance, the OIG excluded the former Chairman of the Board and Chief Executive Office of a specialty pharmacy company, who was uncharged in the prosecution leading to the conviction of a corporate subsidiary. Such actions may foreshadow the fate of many other healthcare industry owners, executives, and managers who may previously have assumed that avoiding criminal prosecution ended their personal exposure. Indeed, at a recent American Bar Association Conference, Gregory Demske, Assistant Inspector General for Legal Affairs, characterized this exclusion as a "preview of things to come."

Congress repeals Medicaid exclusion mandate

One silver lining came with the enacted of Medicare and Medicaid Extenders Act of 2010 (H.R. 4994), signed into law on December 15, which repealed section 6502 of the Patient Protection and Affordable Care Act. The repealed provision would have mandated state Medicaid exclusion of individuals and entities that owned or managed an entity that had not returned Medicaid overpayments, had been suspended or excluded from Medicaid, or had been affiliated with an individual or entity that had been excluded from the program. This sweeping broad provision would have dictated that states exclude individuals and entities from their Medicaid programs based on an affiliation alone, even under circumstances where the federal government was not pursuing exclusion. The repeal of this provision brings welcome relief, especially for those corporations and individuals that had negotiated the exclusion of a subsidiary company as part of a settlement with the Justice Department. That said, the recent congressional action should not be understood as a rejection of aggressive exclusion efforts. Federal legislation (H.R. 6130), which passed the U.S. House of Representatives by unanimous consent and is pending before the lame duck Senate, would grant the OIG expanded exclusion authority to reach individuals who have no current relationship with the sanctioned entity, as well as individuals and entities in the same corporate structure as the sanctioned entity.

Comment period allows feedback on exclusion efforts

These recent developments are part of continued efforts by the OIG to use the principles underlying the responsible corporate officer doctrine to exclude owners, officers, and managing employees, effectively ending careers of individuals based on the acts of others. Fear of exclusion may lead some to increase their investment in compliance training, auditing, and monitoring as the OIG envisions. Another potential outcome of this expansion of exclusion efforts is that the risk associated with accepting leadership positions in FDA regulated entities — drugs, devices, and food — has become so high that the very types of risk-averse individuals that the OIG would want to run these companies will choose other career paths.

The Department of Health and Human Services Office of the Inspector General (OIG) has solicited information and recommendations for supplementing its Special Advisory Bulletin on the Effect of Exclusion from Participation in Federal Healthcare Programs. 75 Fed. Reg. 57039 (September 17, 2010). This comment period, which closes on January 17, offers a timely opportunity both to clarify how industry implements exclusion decisions and to highlight for the government the potential harms associated with an exclusion policy that leave diligent, compliance-minded, risk-averse individuals less likely to remain in the healthcare industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.