Discovery
Return of Privileged Materials Required Due to "Callous Disregard" of Federal Prosecutors
Kathryn Isted
In Harbor Healthcare System, L.P. v. United States, 5 F.4th 593 (5th Cir. 2021), the court of appeals ruled that the district court abused its discretion in refusing to exercise its equitable jurisdiction over a healthcare provider's motion for return of property, in which the provider sought the return of privileged materials seized by the United States during a pre-indictment criminal investigation led by the U.S. Attorney's Office for the Eastern District of Texas. On May 18, 2017, the government executed search warrants on Harbor Healthcare System (Harbor), seizing hundreds of boxes of paper records and 3.59 terabytes of data contained in multiple computers, hard drives, mobile devices and email accounts. The materials seized included the computer, email account, iPhone and paper documents of Eric Sprott, Harbor's general counsel and director of compliance, and consequently, contained substantial information protected by the attorney-client privilege and work product doctrine. The government assembled a "filter team" from "another division of the Eastern District" to review the seized materials for privileged information. After Harbor repeatedly sought the return of its privileged documents from the government to no avail, Harbor initiated an action in the U.S. District Court for the Southern District of Texas on Sept. 7, 2018, and filed a motion for the return of property under Rule 41(g) of the Federal Rules of Criminal Procedure.
In that action, at the district court's insistence, the parties proposed a "privilege-screening plan." During the test phase of that plan, Harbor identified 3,843 emails from Sprott's account as privileged and discovered that "a significant number of privileged documents" had already been transferred from the government's filter team to its civil and criminal investigators. Meanwhile, the government moved to dismiss Harbor's action on the grounds that the district court lacked equitable jurisdiction, arguing that Harbor had not "demonstrate[d] any irreparable harm to its legitimate property interests" and that the Rule 41(g) motion was mooted by the privilege-screening plan. The district court granted the motion, declining to continue exercising its equitable jurisdiction and dismissing Harbor's action.
The court of appeals reversed, finding the district court erred in its application of the Richey v. Smith, 515 F.2d 1239, 1242-43 (5th Cir. 1975) factors for evaluating pre-indictment motions for return of property, which include: "(1) [W]hether the motion for return of property accurately alleges that the government agents ... displayed 'a callous disregard for the rights of [the plaintiff]'; (2) [W]hether the plaintiff has an individual interest in and need for the material whose return he seeks; (3) [W]hether the plaintiff would be irreparably injured by the denial of the return of the property and (4) [W]hether the plaintiff has an adequate remedy at law for the redress of his grievance."
As to the first factor, the court of appeals found the government showed a "callous disregard" for Harbor's rights because it knew that Sprott's office and computer contained privileged materials when it executed the search warrants, yet it "did not seek express prior authorization from the issuing Magistrate Judge for the seizure of attorney-client privileged materials." The court of appeals also found the government disregarded Harbor's rights after the search when it refused to return or destroy materials it agreed were privileged. In addressing the second factor, the court of appeals rejected the district court's determination that Harbor lacked a "practical need for access to the copies of the documents retained by the government." Rather, the court of appeals concluded that Harbor needed the copies held by the government to be returned or destroyed in order to protect its "great privacy interest" in its privileged information. As to the third factor, the court of appeals found that the government's "ongoing intrusion on Harbor's privacy constitutes an irreparable injury that can be cured only by Rule 41(g) relief." Finally, in finding for Harbor on the fourth factor, the court of appeals rejected the government's contention that Harbor had an adequate remedy at law through a potential motion to suppress admission of the privileged information in a possible criminal proceeding. The court of appeals explained that there may never be criminal proceedings and, regardless, such a motion would not remedy the government's ongoing intrusion on Harbor's privacy.
Enforcement
False Claims Act Complaint Against "Sophisticated" Medicaid Plan Allowed to Proceed
Shannon Britton Hartsfield
Molina Healthcare of Illinois (Molina) was a Managed Care Organization (MCO) that received a per-patient capitated payment from the Illinois Medicaid program to provide certain services. These services included, among other things, certain professional services delivered within a skilled nursing facility to Molina's Medicaid beneficiaries receiving nursing facility services. The services were supposed by be rendered by "SNFists," who are medical professionals focused on providing and coordinating medical care for individuals residing in a nursing facility. Molina provided SNFist services through a subcontract with GenMed. GenMed eventually terminated its contract with Molina due to a payment dispute, yet Molina continued to receive capitation payments from the state without providing SNFist services, either directly or through another subcontractor.
As an MCO, Molina had a risk-based contract in which it agreed to receive a per-enrollee fee, and in exchange, Molina assumed the risk that its cost of providing services could exceed those fees. For a two-year period after the termination of the GenMed agreement, Molina did not deliver SNFist services, yet it continued to receive the full capitation amount for those SNFist services from the Illinois Medicaid program.
GenMed's founder, Thomas Prose, was aware of this situation and filed a qui tam complaint under the False Claims Act (FCA) and its state law corollary. The lower court dismissed the case for failure to state a claim because it found that the relator's complaint failed to sufficiently allege that Molina knew that the failure to provide SNFist services was material. On Aug. 19, 2021, the U.S. Court of Appeals for the Seventh Circuit, in United States ex rel. Prose v. Molina Healthcare of Ill., Inc., 10 F. 4th 765 (7th Cir. 2021), reversed and remanded for further proceedings based on the finding that "as a sophisticated player in the medical-services industry, Molina was aware that these kinds of services play a material role in the delivery of Medicaid benefits."
The court noted that a complaint in a suit brought under the FCA must include particular information regarding the fraud in order to survive. The court found that Prose's detailed allegations were adequate to state a claim under the FCA and sufficiently alerted Molina regarding the details of a false claim. The fact that Prose did not have details that would be available only in Molina's files did not defeat the complaint. The lower court found that Prose's allegations were inadequate to allege that Molina knew that the SNFist services were material to the government's payment. The appellate court determined that, as a "highly sophisticated member of the medical-services industry," Molina knew that capitation rates were designed to reimburse providers for services rendered and that the SNFist services were the reason why the capitation rate was as high as it was. Because the complaint contained sufficient allegations that Molina was aware that its higher capitation rate hinged, in large part, on the provision of SNFist services, the court held that the relator could proceed with the complaint.
A False Claim's Mathematical Probability Is Insufficient to State a Claim
Sydney Kanjuparamban
In Estate of Helmly v. Bethany Hospice and Paliative Care of Coastal Ga., LLC, No. 11624, 2021 WL 1609823 (11th Cir. Ap. 26, 2021), the court of appeals affirmed the Southern District of Georgia's dismissal of an FCA case for failure to plead the claim with sufficient particularity. The relators alleged that Bethany Hospice operated an illegal kickback referral scheme in which the organization paid doctors for illegal patient referrals, then submitted claims for those patients to Medicare for reimbursement. The relators demonstrated that nearly all of Bethany Hospice's patients received Medicare coverage but did not identify any specific claims submitted to the government. While the court acknowledged that the Rule 9(b) pleading threshold does not always require a sample fraudulent claim, it noted that the relators also failed to provide any facts demonstrating "personal knowledge or level of participation that can give rise of some indicia of reliability" absent a sample fraudulent claim. The relators' descriptions of Bethany Hospice's business model and proportion of Medicare patients were insufficient without some concrete examples. The court affirmed the dismissal of the compliant for failure to allege the submission of an actual false claim with particularity, warning litigants that "[r]elators cannot rely on mathematical probability to conclude that [a defendant] surely must have submitted a false claim at some point."
Safeco Scienter Standard Applies to False Claims Act
Eddie Williams III
In United States ex rel. v. SuperValu, Inc., 9 F. 4th 455 (7th Cir. 2021), the court of appeal held that the scienter standard announced by the U.S. Supreme Court in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (2007), applies with equal force to the FCA's scienter provision. The relators filed this qui tam action, alleging that the defendant knowingly filed false reports of its pharmacies' usual and customary drug prices when it sought reimbursements under Medicare and Medicaid. The Medicaid regulations define "usual and customary price" as the price that pharmacy charges to the general public. 42 C.F.R. § 447.512(b). SuperValu interpreted its retail cash prices as its usual and customary drug prices rather than the lower, price-matched amounts that it charged customers under its discount drug program. SuperValu asserted that most of its customers would not be charged the lower, price-matched cost and, therefore, the discounted price was not the drug price charged to the general public. Although the district court held that SuperValu's discounted prices did fall within the definition of usual and customary price, and that the company should have reported those prices, the court applied the Safeco scienter standard and concluded that SuperValu did not have any liability under the FCA.
The FCA imposes civil liability on any person who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval." 31 U.S.C. § 3729(a)(1)(A). The FCA defines knowingly to "mean that a person, with respect to information (i) has actual knowledge of the information, (ii) acts in deliberate ignorance of the truth or falsity of the information, or (iii) acts in reckless disregard of the truth or falsity of the information." 31 U.S.C. § 3729(b)(1)(A). In Safeco, the Supreme Court utilized a two-step inquiry for determining reckless disregard. Specifically, it was stated that a person who acts under an incorrect interpretation of the relevant statute or regulation does not act with reckless disregard if 1) the interpretation is objectively reasonable and 2) no authoritative guidance cautioned the person against it. Safeco, 551 U.S. at 70. The failure to meet this standard would preclude a finding of knowing violations.
Therefore, using the Safeco scienter standard, the court held that SuperValu's interpretation of usual and customary price was objectively reasonable because it was not inconsistent with the text of the usual and customary definition. In addition, the court ruled that there was no authoritative guidance that warned SuperValu away from its interpretation of the definition of usual and customary price. Consequently, the court held that the relators had not shown that SuperValu acted knowingly in violation of the FCA.
FCA and AKS Claim Founded on Free Pharmaceutical Product Education Dismissed
Nathan A. Adams IV
In United States v. Eli Lilly and Co., No. 19-40906, 2021 WL 2821116 (5th Cir. July 7, 2021), the court of appeals affirmed dismissal of the appellants' qui tam action under the FCA, alleging violations of the Anti-Kickback Statute (AKS) by pharmaceutical companies. The complaints in the Eli Lilly and Bayer cases allege that the pharmaceutical companies illegally provided free product-education services from nurses in order to induce healthcare providers to prescribe their products in violation of AKS and certain state laws. Roughly one year after declining to intervene in the cases, the government advised the appellants that it intended to move to dismiss the complaints based on such concerns as to whether there was sufficient factual and legal support to prove violations of the AKS and the costs and burdens for the U.S. if the qui tam actions were to continue. The FCA allows the government to assert control over qui tam litigation through such procedural mechanisms as intervention, settlement and the power to veto voluntary settlements.
The court recognized an already existing circuit split over what is required for the government to dismiss a case under 31 U.S.C. § 3730. The District of Columbia Circuit accords the government unfettered discretion to dismiss qui tam lawsuits. The Ninth and Tenth Circuits adopted a rational-relation test for reviewing the government's motion to dismiss a qui tam lawsuit. The Seventh Circuit applies a standard informed by Federal Rule of Civil Procedure 41. Rejecting the D.C. Circuit's test, the Fifth Circuit focused on the right to a "hearing" in 31 U.S.C. § 3730(c)(2)(A) to require something more than a forum for the appellant to convince the government not to dismiss the case, but declined to decide the precise bounds of the government's discretion under the circumstances because, in the court's judgment, the appellant received such a hearing preceding dismissal. The appellant argued that there had been an absence of an evidentiary hearing in violation of procedural due process, but the court of appeals determined that the district court had not precluded an evidentiary hearing and that, instead, the appellant consciously and strategically chose not to offer evidence at the hearing. Without deciding that the Ninth and Tenth Circuits' rational-relation test applies, the court determined that the government satisfied the test.
The rational-relation test requires the government first to show that there is a valid government purpose and a rational relation between dismissal and accomplishment of that purpose. The court decided that the government made this showing by arguing that the allegations in the qui tam complaint lack sufficient merit to justify the cost of investigation and prosecution, and additional litigation would undermine practices that benefit federal healthcare programs by providing patients with greater access to product education and support. The burden shifted to the appellants to show that the government's motion to dismiss was fraudulent, arbitrary, and capricious or illegal. The court ruled that the appellants did not meet this burden by alleging animus against them.
Implausible Kickback Allegations Against Hospital Dismissed
Jennifer C. Lee
In U.S. ex rel. O'Bier v. TidalHealth Nanticoke, Inc., No. 1:19-CV-687-SB, 2021 WL 1895049 (D. Del. May 11, 2021), the court granted the defendant's motion to dismiss the relator's allegations that defendants violated the FCA by billing for services that were not medically necessary and submitting claims in violation of the AKS, the Stark Law and Medicare's "freedom of choice" rule. The relator argued that the hospital referred patients to her competitors in return for illegal kickbacks, and refused to refer patients to the relator and billed Medicare for breathing devices that were not medically necessary. The court granted the defendant's motion to dismiss because the defendant's allegations were not plausible. The court further noted that it would typically allow the relator to replead her claims with additional detail, but the relator acknowledged that she could not provide any additional evidence. Therefore, the court ultimately dismissed the case with prejudice.
Alleged Offer of Free Massage for Medicare-Covered Therapy States Claim Under AKS
Nathan A. Adams IV
In U.S. ex rel. Snider v. Centers for Pain Control, Inc., No. 2:18-cv-210, 2021 WL 1783314 (N.D. Ind. May 5, 2021), Dr. Dion Snider alleged that the defendants induced Medicare and Medicaid patients to purchase trigger point therapy with the incentive of a free massage, thereby violating the AKS, FCA, and Indiana False Claims and Whistleblower Protection Act (IFCA). Snider, a chiropractor, worked for the Center for Pain Control (CPC), took notice of flyers for prospective patients advertising the free massages, and allegedly informed CPC that it should include a disclaimer that the free messages did not apply to Medicaid and Medicare beneficiaries. Snider alleged that the defendants retaliated against him by first refusing to pay him, then terminating him because he objected to their practice and pattern of violating the AKS. The defendants moved to dismiss Snider's FCA and IFCA claims on the grounds they lacked requisite particularity. The defendants also attacked Snider's retaliation claim on the theory that the complaint did not discuss treatment provided to Medicare or Medicaid beneficiaries, did not allege that he discussed any prior or potential claim being submitted for payment to the government, and did not discuss any actual transactions or patient records. The court denied the defendants' motion to dismiss. Snider pleaded that the defendants knowingly and willfully offered free massage therapy by claiming that they created a flyer advertising free massages in exchange for the purchase of trigger point therapy. He also alleged that he put the defendants on notice of the unlawful practice and they refused to pay, then terminated him as a result; he identified six patients not charged for a massage that they received on the same date they purchased trigger point therapy; and he pleaded that 90 percent of CPC's patients were Medicare or Medicaid beneficiaries.
FDA Issues New Draft Guidance on Compounding by Hospitals and Health Systems
Charles A. Weiss
In October 2021, the U.S. Food and Drug Administration (FDA) issued a new draft guidance document concerning pharmaceutical compounding by hospitals and health systems. This draft guidance replaces the agency's prior draft guidance issued in April 2016, and follows comments received in the months following from hospital systems, trade associations and members of the public. As discussed below, the new draft guidance liberalizes some criteria and imposes new standards for others.
Background
In general, the distinction between pharmaceutical manufacturing and pharmaceutical compounding served as the dividing line between federally regulated activities (manufacturing) and those subject to regulation only by state boards of pharmacy (compounding). While many activities are clearly on one side or the other, a gray area has always existed between them. From time to time, the FDA would assert its authority over activities perceived by some to fall outside the appropriate scope of federal regulation. Thus, Congress provided in 1997 a new section of the Food, Drug, and Cosmetic Act (FD&C Act) - Section 503A - setting forth criteria under which compounding activities would be exempted from certain sections of the act. Most significantly, compounding pharmacies operating within the bounds of Section 503A were exempt from the obligation to comply with current good manufacturing practices (cGMP).
Following the New England Compounding Center tragedy in 2012, which resulted in more than 60 deaths from fungal meningitis in patients administered contaminated steroid injections made in a compounding pharmacy located in Massachusetts, Congress in 2013 passed the Drug Quality and Security Act, which created the new Section 503B of the FD&C Act. This section required compounding pharmacies acting as "outsourcing facilities" to comply with cGMP and subjected them to FDA oversight and inspection.
With the new statute in place, the traditional line between pharmaceutical manufacturing and pharmaceutical compounding is augmented by a new distinction between 503A compounding and 503B outsourcing. Accordingly, the FDA provides guidance on when a compounding facility is outside its purview under 503A, or at minimum, when it is within a zone of activities that will qualify for its exercise of enforcement discretion, even if the facility might not strictly comply with the restrictions of 503A.
2016 Draft Guidance for Hospital and Health System Pharmacies
In 2016, the FDA released a draft guidance document concerning "Hospital and Health System Compounding" that set forth conditions under which FDA would exercise its enforcement discretion with respect to compounding pharmacies controlled by hospitals and health systems. Among the requirements was a restriction on distributing compounded drug products beyond a 1-mile radius of the pharmacy. The FDA justified this restriction by appeal to patient safety, and to prompt hospitals to obtain compounded products from regulated Section 503B outsourcing facilities instead of preparing them in their in-house Section 503A compounding pharmacies:
The 1-mile radius in our policy is intended to distinguish a hospital campus from a larger health system. [C]ertain characteristics of hospital pharmacies distinguish them from conventional manufacturers. However, a health system pharmacy that compounds drug products without patient-specific prescriptions for facilities within its health system across a broader geographic area could function as a large manufacturing operation, but without the necessary standards to assure drug quality. If such a pharmacy contaminates or otherwise adulterates or misbrands a compounded drug, the drug has the potential to harm many patients. Outsourcing facilities, which are subject to CGMP requirements and other conditions that help to assure drug quality [i.e., Section 503B outsourcing facilities] can compound and distribute drug products to healthcare facilities nationwide without first receiving prescriptions for identified individual patients.
The 2016 guidance also offered a definition of "health system" for purposes of determining when related facilities could be served by a central compounding pharmacy that was not registered as an outsourcing facility under Section 503B:
FDA regards a health system as collection of hospitals that are owned and operated by the same entity and that share access to databases with drug order information for their patients. There is no definition of "health system" that applies to all sections of the FD&C Act. However, this is the definition of a "health system" used in section 506F of the Act concerning hospital repackaging of drugs in shortage.
The 1-mile radius provision drew near-unanimous opposition from large hospital systems and trade associations that commented on the 2016 guidance. They pointed out that consolidating pharmaceutical compounding in a central pharmacy increased patient safety by ensuring that compounding operations could be carried out by specially trained pharmacists using the best available equipment. By contrast, pharmacists in smaller hospitals within a larger system might not have the training, experience, or equipment to perform at a similarly high level, nor would smaller hospitals be able to maintain the type of full-time coverage possible with centralized operations.
2021 Draft Guidance for Hospital and Health System Pharmacies
The FDA took note of the hospital industry's objections to the 1-mile radius requirement in the 2016 draft guidance, and explained in its press release accompanying the 2021 draft guidance that it was not continuing that requirement:
[T]he agency has received many comments on this proposed policy, including regarding a provision about FDA's intent not to take action if a hospital or health system pharmacy distributes compounded drugs to healthcare facilities within a one-mile radius, that are owned and controlled by the same entity that owns and controls the pharmacy. Stakeholders commented that the proposed one-mile policy was not reflective of the structure of health systems, many of which operate under a centralized compounding model and may service facilities at other sites located outside a one-mile radius without similar compounding capabilities.
While deleting the 1-mile radius standard, the 2021 draft guidance introduces a new limitation on the amount of time that may pass between dispatch of a compounded drug from the pharmacy and administration of that drug to the patient:
The compounded drug products are used or discarded within 24 hours of transfer out of the pharmacy.
The FDA's justification of this seemingly arbitrary time limit - which is not tied to any validated expiration date or beyond-use date that may have been established by the hospital pharmacy's stability and sterility testing, U.S. Pharmacopeia (USP) standards, or any other science-based measures - again appears to reflect an intent to drive hospitals toward use of Section 503B outsourcing facilities as much as possible:
[The 24-hour] limit mitigates concerns about the amount and scope of distribution of the compounded drug product. FDA selected 24 hours as the window within which compounded drug products be used or discarded because the Agency has heard from stakeholders that non-patient-specific drugs are needed for emergency uses. FDA anticipates that non-patient-specific compounded drugs that are kept on hand for longer periods can and should be obtained from outsourcing facilities because outsourcing facilities can compound and distribute drugs without receiving patient-specific prescriptions and, because they are subject to CGMPs, conduct appropriate stability tests and have more robust sterility assurance practices.
The 2021 guidance also adopts a new definition of "health system" as follows:
For the purposes of this guidance, the term health system means an organization that includes at least one hospital and at least one group of physicians that provides comprehensive care (including primary and specialty care) who are connected with each other and with the hospital through common ownership or joint management.
This definition no longer includes the requirement that a qualifying system must "share access to databases with drug order information for their patients." The elimination of this criterion should help systems that have grown by consolidation but that have not yet integrated their electronic health records.
The 2021 guidance also adds a new section that identifies risk-based factors the FDA will look to in determining the need for regulatory action, explaining that its compliance and enforcement resources would ordinarily be directed to noncompliant activities associated with indicia of potential harm to patients or the conduct of large-scale drug manufacturing:
- Evidence of poor compounding practices or lack of sterility assurance. For example, the pharmacy compounds drug products under insanitary conditions, such as microbial contamination, performing aseptic manipulations with exposed hair or skin, and exposing sterile drug products and materials to lower than ISO 5 quality air.
- Non-patient-specific compounded drug products not for emergency uses. Drug products are compounded and sent out of the pharmacy before the receipt of a patient-specific prescription in an amount that exceeds the amount needed for emergency situations (e.g., immediate administration for unplanned procedures in emergency or operating rooms).
- Routine, large amounts of non-patient-specific compounded drug products. The pharmacy routinely compounds a large total number of compounded drug products that are sent out of the pharmacy before the receipt of valid prescriptions or orders for individually identified patients.
- Routine interstate distribution of large amounts of non-patient-specific compounded drug products. The pharmacy routinely engages in interstate distribution of large amounts of compounded drug products, including distribution within the hospital or health system, without first receiving valid prescriptions for individually identified patients, particularly when the hospital or health system pharmacy is not located near a state border or when it distributes such products to multiple states.
- No procedures to obtain non-patient-specific compounded drug products from an outsourcing facility. The hospital or health system lacks procedures to obtain non-patient specific compounded drug products from an outsourcing facility where such products are available and appropriate.
With the exception of the last item, these are generally common-sense standards that come as no surprise. The last item, i.e., the lack of procedures to satisfy routine and predictable needs for compounded drug products from a Section 503B outsourcing facility, is again reflective of the FDA's intent to reduce the volume of drugs that are compounded in Section 503A facilities in favor of regulated Section 503B facilities. The 2021 guidance is explicit on this point: "FDA encourages hospitals and health systems to obtain any non-patient-specific compounded drug products they may need from outsourcing facilities where that is possible, and to consider registering their pharmacies as outsourcing facilities."
Finally, the 2021 draft guidance carries forward without material change from the 2016 draft guidance or other Section 503A guidance documents several uncontroversial provisions. For example, the 2021 draft guidance 1) restates the requirement that administration of compounded drugs must be based on a valid prescription for an identified patient, 2) again provides that enforcement discretion will not be applied to hospital pharmacies acting outside the bounds of Section 503A that compound drugs for outpatient use, and 3) admonishes against using compounded drug products in place of a substantially identical FDA-approved product that is commercially available.
As with draft guidance documents generally, the FDA is soliciting comments from stakeholders concerning the 2021 draft guidance. Comments may be submitted electronically to docket FDA-2016-D-0271-0080, and should be received by December 6, 2021.
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