United States: $1.2 Billion Medicaid Fraud Penalty Award Reversed And Claim Dismissed In Arkansas Appeal

Last Updated: March 25 2014
Article by Kenneth J. Wilbur

In another decision narrowing the scope of state Medicaid fraud statutes, on March 20, 2014, the Supreme Court of Arkansas, in Ortho-McNeil-Janssen Pharmaceuticals, Inc. v. State of Arkansas, No. CV-12-1058, unanimously reversed and dismissed a $1.19 billion award under the Arkansas Medicaid Fraud False Claims Act (MFFCA), and reversed and remanded for a new trial a related $11.4 million award under the Arkansas Deceptive Trade Practices Act (DTPA). In reversing a Medicaid fraud claim predicated on statements not made in the context of an actual claim for payment from Medicaid, the Arkansas decision parallels the Supreme Court of Louisiana's decision in Caldwell ex rel State of Louisiana v. Janssen Pharmaceutical, Inc., (No. 2012-C-2447, No. 2012-C-2466), see related article.

The Arkansas decision turned on the interpretation of Ark. Code Ann. § 20-77-902, which provides:

A person shall be liable to the State of Arkansas, through the Attorney General, for a civil penalty and restitution if he or she: ... (8) Knowingly makes or causes to be made or induces or seeks to induce the making of any false statement or representation of a material fact: (A) With respect to the conditions or operation of any institution, facility, or entity in order that the institution, facility, or entity may qualify either upon initial certification or upon recertification as a hospital, rural primary care hospital, skilled nursing facility, nursing facility, intermediate care facility for the mentally retarded, home health agency, or other entity for which certification is required; or (B) With respect to information required pursuant to applicable federal and state law, rules, regulations, and provider agreements[.]

The State alleged that Janssen had violated a general FDA labeling regulation, 21 C.F.R. § 201.57(e), by including in a "Dear Health Care Provider" letter information that was inconsistent with Risperdal's approved package insert. Despite having stipulated that it had no evidence that a single prescription had been written or dollar of Medicaid funds spent as a result of the alleged falsity, the State argued that Janssen had made a false statement "with respect information required pursuant to applicable federal ... regulations," under § 20-77-902(8)(B). The $1.19 billion trial award was predicated on imposing a $5000 penalty for each of the 238,874 prescriptions written or refilled during the relevant time period.

The unanimous 7-0 decision on the MFFCA claim is set forth in two opinions, a four justice majority and a three justice concurrence, with the concurring justices dissenting on the DTPA claim. The opinion of the four-justice majority focuses the absence of any division of § 20-77-902(8) into an (A) or (B) when the statute was enacted in 1993 as Act No. 1299. Attributing the ambiguity with respect to the scope of (B) to clerical errors by the Arkansas Code Revision Commission in codifying the statue, the majority found that subsection (B) did not make violation of any federal regulation actionable under the MFFCA, but was limited in scope to statements that violated state or federal regulations made in conjunction with the functions addressed in (A): the certification or certification of health-care facilities. The three concurring justices reached this same result interpreting the statute as codified, without reference to the original format of Act 1299.

The division of the Court on the related DTPA claim turned on an evidentiary issue. In support of its claim that the Dear Health Care Provider letter was false, deceptive or unconscionable under the DTPA, the State introduced an informal Warning Letter from officials in FDA's Division of Drug Marketing, Advertising and Communications (DDMAC) stating that DDMAC considered certain statements in the Dear Health Care Provider letter "false or misleading" (a regulatory term of art) due to alleged deviations from the substance of the product's FDA-approved package insert. The Dear Health Care Provider letter was found misleading, and a $2500 penalty was imposed on each of the 4,569 copies of the letter distributed in Arkansas.

In reversing the $11.4 million DTPA award, four members of the court held that the DDMAC warning letter was inadmissible, highly prejudicial hearsay that fell outside the public records hearsay exception, Ark. R. Evid. 803(8)(iv), because it was the product of a specific investigation of a particular complaint. In dissent, three members of the Court would have permitted the DTPA award to stand, arguing that the Warning Letter was the product of DDMAC's regularly conducted and regularly recorded activities. As a result, the DTPA award was reversed and remanded for a new trial in which the Warning Letter would be inadmissible. In remanding, the Court did not reach a number of evidentiary, preemption, First Amendment, and excessive-fines issues that had been raised as challenges to the MFFCA and DTPA claims. It also reversed an award of attorneys' fees and costs in excess of $180 million.

The decision is important since it reaffirms the principle that for a statement to give rise to a Medicaid false claim cause of action, the statement must be made in support of a claim for payment, not merely concern a product that is made the subject of a reimbursement claim. The ruling on the Warning Letter is also significant. Such letters, while highly prejudicial, are a common part of an informal dialog between FDA and its regulated entities on specific issues of concern. They do not even rise to the level of formal agency action, let alone qualify as the kind of routine agency record, such as a periodic water quality report, intended to be covered by the business records hearsay exception.

Drinker Biddle represented Janssen in this matter.

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.

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Kenneth J. Wilbur
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