Decision Opens Door to Challenge of Agency Guidance in False Claims Cases
On November 5, 2019, the United States District Court for the Eastern District of Pennsylvania ruled on a motion to dismiss a False Claims Act (FCA) qui tam suit filed by the United States Department of Justice, long after it declined to intervene in the case. The ruling is the most recent opinion to expound upon the government's ability to exercise its prerogative to dismiss a qui tam suit. But it is equally if not more noteworthy for its treatment of two other issues: whether and to what extent sub-regulatory agency guidance documents should be given the force of law; and the application of the Supreme Court's holding on the materiality of non-compliance with legal or contractual requirements. The effect of all three of these holdings could have repercussions for defendants in FCA suits.
The case came before the court in an unusual procedural posture. The relator, Dr. Jesse Polansky, brought a qui tam action alleging that the defendant, Executive Health Resources, et al., a vendor to hospitals of payment certification services, conducted reviews that improperly designated patients as inpatient instead of outpatient to "exploit the difference in reimbursement rates for inpatient and outpatient services" under the Medicare program.1
After the initial pleadings and discovery, the trial court decided that the most efficient way of trying the numerous claims involved in the suit was to conduct a bellwether trial on a select number of the claims. For pretrial management, the case was divided into two phases. Phase 1 would adjudicate claims submitted before October 2013.2 Phase 2 would be the "Two Midnight" phase, which would adjudicate claims that were submitted after Centers for Medicare and Medicaid (CMS) promulgated a rule—the Two-Midnight Rule—that governs how hospitals should determine whether a Medicare patient should be designated as a hospital inpatient.3 The Two Midnight Rule requires that, to admit an individual as an inpatient, the admitting physician expects that the patient's stay will cross two midnights.
The trial plan was proceeding smoothly until Dr. Polansky committed two unforced errors. First, he tardily disclosed that he had taken from his prior employment at CMS a DVD containing 14,000 documents, including some that were relevant to his claims.4 Second, Dr. Polansky tried to change the way the claims were selected for the bellwether trial, without providing a satisfactory explanation as to why he did so. The court clearly was not pleased that the many hours it took to settle on a process for choosing the bellwether claims was ignored without any good reason.5 The court explained that the relator's "behavior was material and plays a role in the final disposition of the case."6
After Dr. Polansky's blunders, the government notified the court that it planned to move to dismiss the case, as is its right under the FCA.7 After negotiations with the relator, however, the government decided to allow him to move forward, on the condition that he would proceed on a narrower set of claims. But, the government ended up reversing that decision when the relator backtracked on his offer to narrow his claims. The government then did move to dismiss the complaint under 31 U.S.C. § 3730(c)(2)(A), and that motion was before the court, along with motions for summary judgment filed by the defendants, when the court ruled on November 5, 2019.
Holding on the Motion to Dismiss
The first holding of Polansky addresses squarely the issue presented by the government's motion: when is dismissal appropriate under § 3730(c)(2)(A)? The court granted the motion after a protracted discussion of the standard of review applicable to such a motion. The courts have adopted two approaches. A "rational relationship" test is applied in the Ninth and Tenth Circuits which "requires that the government identify (1) a valid government purpose supporting dismissal; and (2) a rational relation between dismissal and accomplishment of the asserted purpose."8 If the government's motion satisfies those two prongs, the burden shifts to the relator to demonstrate that the government's purpose in seeking dismissal is "fraudulent, arbitrary, and capricious, or illegal."9 Though the rational relationship test is not particularly rigorous, the D.C. Circuit uses an even more permissive "unfettered discretion"10 standard under which the court gives broad discretion to the government to dismiss, based on a reading of the language of the FCA which "suggests the absence of judicial constraint."11
Ultimately, the court declined to hold which standard is correct, instead finding that the government had satisfied the more stringent rational relationship test by showing that preservation of litigation resources was rationally related to its motion to dismiss and that the relator had not demonstrated that this determination was arbitrary.
The court then offered a second justification for dismissal of part of the case on defendant's motion for summary judgment. Seizing upon the recent Supreme Court decision in Azar v Allina Health Services, the court held that many of the claims at issue were untenable as false claims under the FCA because the purported falsity was based on sub-regulatory guidance that CMS had adopted without going through the rigor of a formal rulemaking process.
In Allina, the Supreme Court held that a Medicare policy had to be vacated because it was not promulgated through the notice-and-comment process dictated by statute.12 The policy affected how the Medicare program calculates the "Medicare fraction" used to calculate additional payments made to hospitals that serve a disproportionate number of low-income patients. CMS first issued a final rule saying that Medicare Part C patients (who tend to be wealthier) were included in the calculation, but that rule was vacated after legal challenges. The agency then proposed a new rule for notice-and-comment. In the gap after the original rule was vacated, but before the new rule was published, the agency posted guidance on its website saying that it would include Part C patients in the calculations. That website guidance was at issue in Allina. 13 The Supreme Court held that under the Medicare Act, any "rule, requirement, or other statement of policy that establishes or changes a substantive legal standard" must go through a formal 60-day notice-and-comment process.14 Because the CMS guidance had not been promulgated in that manner, it could not be given effect.
The Polansky court applied the same logic to CMS's guidance15 about how to determine hospital inpatient status. Before promulgation of the Two Midnight Rule, CMS published guidance in manuals for the provider community, rather than going through formal notice and comment. The Polansky court concluded that the guidance on determining inpatient status was a "substantive legal standard," because it affected the right to, or the amount of, Medicare reimbursement. As such, it required formal notice and comment before it could be given effect.16
The Supreme Court opinion in Allina is significant in its own right. That significance is underscored by the court's application of the holding in Allina to the facts in Polansky. The court's ruling in Polansky demonstrates that the Allina rule could have a powerful impact in other Medicare fraud cases brought under the FCA.
The third, and final, part of the opinion offers yet another reason that Dr. Polansky's claims should not proceed. The court—in a passage that could be considered obiter dictum—opined that Dr. Polansky' claims do not survive summary judgment because the relator failed to show that the defendant's allegedly fraudulent conduct was "material to any payment decision by the government."17 As the Supreme Court held in United Health Servs., Inc. v. Escobar, 136 S. Ct. 1989 (2016), materiality under the FCA is a "rigorous" requirement aimed at preventing the FCA from becoming an all-purpose anti-fraud statute.18 The court in Polanksy found that the relator had failed, in two ways, to demonstrate that the defendants' claims were materially false or fraudulent. First, the government's decision not to intervene and to seek dismissal tends to undermine a showing of materiality (though, according to the court, that is not dispositive).19 Second, even though the government has been well aware of these allegations against the defendants, the government continued to pay claims from the defendants under the Medicare program.20
The Polansky decision, gives force and effect to the Supreme Court's materiality jurisprudence in Escobar, picking up a thread from other cases that have looked to the actions of the affected agency in paying or denying the payment of claims after learning of the allegedly fraudulent conduct.
Polansky and Allina are in accord with a push by the current Administration to reduce regulatory burden on industry, and to limit sub-regulatory policy-making by Executive Branch agencies. In 2018, the Department of Justice released a memorandum (commonly called "the Brand memo," after then-Associate Attorney General Rachel Brand) that directed Department attorneys not to rely upon informal agency guidance as binding law in affirmative civil cases brought by the Department of Justice.21 Taken together, the move by DOJ to eschew reliance on sub-regulatory agency guidance documents, and the Supreme Court's holding that such guidance—where it purports to establish or change a substantive legal standard affecting Medicare coverage—should not be given any force or effect, points the way for defendants in FCA litigation to challenge the invocation of such guidance as the basis for imposing liability under the FCA.
1 Jesse Polansky M.D., M.P.H. v. Exec. Health Res., Inc., 2019 WL 5790061, at *1 (E.D. Pa. 2019)
2 Id at *2.
3 Two Midnight Rule, 78 Fed. Reg. 50, 496 (Aug. 19, 2013) (codified as amended 42 C.F.R. § 412(d)(1)).
4 Polansky at *3.
5 The defendant eventually moved for sanctions because of these blunders. Id.
6 Polansky at *2.
7 False Claims Act, 31 U.S.C. §§ 3729-3733 (1863).
8 Polansky at *6 (quoting Sequoia Orange Co. v Baird-Neece Packing Corp., 151 F.3d 1139, 1145 (9th Cir. 1998).
10 Swift v. United States, 318 F.3d 250, 251 (D.C. Cir. 2003).
12 See 42 U.S.C. § 1395hh(a)(2).
13 See Azar v. Allina Health Services, 139 S. Ct. 1804 (2019).
14 Polansky at *12 (quoting The Medicare Act, 42 U.S.C. § 1395hh(a)(2)).
15 Specifically, Heath Insurance for the Aged Hospital Manual (1968) § 210; Medicare Hospital Manual (1981) §210; and Medicare Hospital Manual (1989) § 210.
16 Polansky at *14 (quoting Allina Health Services v. Price, 863 F.3d 937, 943 (D.C. Cir. 2017)).
17 The court notes that the Phase 2 claims (the Two Midnight claims) also may not survive summary judgement, but there hasn't been enough discovery to determine that for sure. Id at *17.
18 United Health Servs., Inc. v. Escobar, 136 S. Ct. 1989, 2003 (2016).
19 Polansky at *18.
20 Id at *19.
21 Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases (Jan. 25, 2018) ("Brand Memo"), available at https://www.justice.gov/file/1028756/download.
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