United States: Civil False Claims Act: Sixth Circuit Rejects DOJ Efforts to Equate Regulatory Non-Compliance with False Claims Act Liability

For the second time in two weeks, an appellate court has injected a dose of reality into False Claims Act ("FCA") jurisprudence. Following closely on the heels of the Seventh Circuit's blanket rejection of the Justice Department's preferred "gross trebling" methodology, which led to inflated recoveries in FCA cases (see FraudMail Alert No. 13-03-25), the Sixth Circuit issued a forceful decision greatly limiting the application of the FCA in so-called "false certification" cases based on alleged regulatory non-compliance. See United States ex rel. Hobbs v. MedQuest Assocs., No. 11-6520, 2013 WL 1285590 (6th Cir. Apr. 1, 2013). In MedQuest, the Sixth Circuit reversed the district court's entry of summary judgment and vacated the $11 million judgment that went along with it because the liability was based on regulatory non-compliance that was a "condition of participation" in Medicare, but not a "condition of payment" of Medicare claims made by MedQuest. As a result, while expressing no tolerance for the defendant's Medicare program violations—characterizing them as "clearly . . . at odds with the goals and aims of the Medicare program in several respects"—the Sixth Circuit ruled that the government cannot use the FCA to enforce or punish that type of conduct and instead should use available administrative remedies. The Sixth Circuit made clear that regulatory violations that are violations of "conditions of participation"—even if serious and intentional—are not enough to establish an FCA violation and do not "mandate the extraordinary remedies of the FCA."

The MedQuest opinion reaffirms the Sixth Circuit's recent holdings that FCA liability requires a clear violation of a condition of payment. See United States ex rel. Williams v. Renal Care Group, Inc., No. 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012); United States ex rel. Chesbrough v. VPA, PC, 655 F.3d 461 (6th Cir. 2011). See also FraudMail Alert Nos. 12-10-11 and 11-08-31. The court has now clearly held that this "condition of payment" requirement must be applied in every false certification FCA case, separate and apart from any "materiality" requirement. See John T. Boese, The Past, Present, and Future of "Materiality" Under the False Claims Act, 3 ST. LOUIS U. J. OF HEALTH L. & POL'Y 291 (2010).

Background in MedQuest

The underlying case was initiated by a qui tam relator who was a former employee of MedQuest, a company that provides certain medical diagnostic testing at various facilities. The Justice Department intervened in the suit and alleged that MedQuest violated Medicare requirements by (1) allowing unapproved physicians to supervise certain testing procedures, and (2) continuing to bill under the prior owner's Independent Diagnostic Testing Facility billing number.

The district court granted summary judgment in favor of the government on both express and implied certification theories of FCA liability, and it entered judgment for over $11 million. The Sixth Circuit reversed the judgment in full.

The Sixth Circuit's Application of the Prerequisite to Payment Requirement

The government in MedQuest did not question that the diagnostic services had been provided or assert that the bills for such services were inflated. As a result, there was no allegation of a factually false claim for payment by MedQuest. Instead, the conduct that rendered the claims for Medicare reimbursement false—according to the government's theory—was that MedQuest had failed to comply with certain Medicare requirements specified in the regulations and that the claims for payment to Medicare were false on account of this regulatory non-compliance. In the FCA world, this type of theory is known as a "legally false" or "false certification" case. In these types of cases, FCA liability depends on an analysis of the regulatory provisions violated to see whether the regulation makes compliance a prerequisite to (or a condition of) payment of the claim. Rejecting the Justice Department's assertions to the contrary, the Sixth Circuit held that the regulatory violations—while clear and, in some instances, intentional—could not give rise to FCA liability because payment was not conditioned on compliance with them.

With respect to the "use of unapproved physicians" allegation, the district court had imposed FCA liability on the grounds that, in its enrollment application with Medicare, MedQuest had expressly falsely certified that it would "abide by the Medicare laws, regulations and program instructions." On review, the Sixth Circuit observed that neither this regulation—nor any other identified by the government—made compliance with the "approved physician" requirement a condition of payment. The Sixth Circuit also disagreed with the government's assertion that MedQuest implicitly falsely certified compliance with the approved physician requirement each time it submitted a claim for payment for diagnostic tests conducted under the supervision of unapproved physicians. Here, too, the appellate court held that payment of the claims was conditioned on the services being "reasonable and necessary," which required the services to be conducted under the direct supervision of a physician—approved or not. Since the government failed to identify any regulation that conditioned payment on the physician being approved, the failure to comply with that requirement could not result in FCA liability.

The appellate court observed that its determination that FCA liability does not extend to regulatory violations that are not conditions of payment is fully in accord with Sixth Circuit precedent and decisions from other circuits:

Recently, this court reaffirmed its view that "[t]he False Claims Act is not a vehicle to police technical compliance with complex federal regulations" when it determined that statements and requirements in a dialysis provider's Medicare application did not permit suit under the FCA. Williams, 696 F.3d at 532. Like our sister circuits, we recognize the need for an "active role" to be played by actors outside the federal government in the enforcement of the Medicare statute, see Mikes, 274 F.3d at 699-700, and we recognize that the FCA (through qui tam suits or otherwise) retains an important role in the Medicare context. But where, as in this case, the violations would not "natural[ly] tend[ ] to influence" CMS's decision to pay on the claims, United States ex rel. A+ Homecare, Inc. v. Medshares Mgmt. Grp., Inc., 400 F.3d 428, 444-45 (6th Cir. 2005), the "blunt[ness]" of the FCA's hefty fines and penalties makes them an inappropriate tool for ensuring compliance with technical and local program requirements like the special supervision requirements at issue in this case. See Mikes, 274 F.3d at 699.

MedQuest, 2013 WL 1285590, at *9.

The Sixth Circuit applied a similar analysis and reached the same result with respect to the government's second claim—that MedQuest submitted false claims when it used the former owner's facility billing number after the transfer of ownership. At most, according to the appellate court, MedQuest failed to update its enrollment information after the transfer of stock ownership of the facility, but this failure was not a condition of payment. Although the appellate court recognized that providers should be responsive to known goals of the Medicare program, the government's failure to cite any regulation governing payment was fatal to its FCA claim because:

the FCA does not impose liability for providers' failure to anticipate needs of the program that have not been promulgated in regulations conditioning payment on compliance, in addition to providers' obligations to navigate the already-complicated scheme of regulations. In the absence of a regulation conditioning payment on an accurate, updated enrollment form reflecting current ownership, and without support for the proposition that a purchaser of a corporate practice is not legally entitled to use that corporation's billing number, MedQuest cannot be held liable under the FCA.

Id. at *10.

The Sixth Circuit's opinion in MedQuest is another attempt to restore some sanity to what has become an FCA liability free-for-all, where relators and even the government seek to use the FCA to police and punish regulatory non-compliance. The FCA—a powerful tool capable of imposing harsh sanctions and collateral consequences including suspension and debarment—was not intended to reach every instance of regulatory non-compliance. The Sixth Circuit's rationale makes clear that regulatory non-compliance can only result in FCA liability where the failure to comply with the regulation is a clear prerequisite to payment by the government.

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