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Health care is highly regulated, making the potential for regulatory noncompliance a concern of prudent health care providers. Two published opinions from 2008 help clarify the legal consequences that may result from a health care provider's failure to comply with all of its regulatory obligations. Both cases involve the False Claims Act (FCA), a federal statute that imposes liability and penalties for the knowing submission of false or fraudulent claims for payment to the federal government.
In Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008), the U.S. Supreme Court defined the circumstances under which a government contractor (which includes all Medicare-enrolled health care providers) can be held liable under the FCA for creating a false or fraudulent document for purposes of getting a claim paid by the federal government. In United States ex rel. Connor v. Salina Regional Health Center, Inc., 543 F.3d 1211 (10th Cir. 2008), the U.S. Court of Appeals for the Tenth Circuit held that a hospital's failure to meet all of the regulatory conditions for participation in Medicare does not necessarily create a basis for liability under the FCA.
The False Claims Act and Health Care Providers
Application, Violation and Penalties
Although originally drafted to combat defense contractor fraud, the FCA has become central to the federal government's efforts to deter and sanction health care fraud. The FCA applies to more than traditional notions of fraud, as it is often used to police noncompliance with the myriad of rules and regulations related to federal health care programs such as Medicare and Medicaid. A health care provider violates the FCA if it knowingly (i) submits a false claim for payment to the federal government, (ii) creates or uses a false record to get a false claim paid by the federal government, or (iii) conspires to defraud the federal government by getting false claims paid. The FCA extends to both claims that a provider submits itself and to claims that it "causes to be submitted" to the federal government.
To violate the FCA, the provider must knowingly submit false claims—accidental or negligent billing errors are not actionable. The FCA defines "knowingly" to include actual knowledge, reckless disregard or deliberate ignorance of the falsity of the claim. If found liable under the FCA, the court will impose on the defendant a penalty of three times the amount of the false claims, plus an additional penalty of between $5,500 and $11,000 per false claim. For health care providers who submit a high volume of modest dollar amount claims, the penalties under the FCA can be significant.
Whistleblower Provisions
The FCA includes some rather unique whistleblower provisions. Under the FCA, a person—called a relator—with information about a fraud on the government can file a lawsuit on behalf of the government that alleges violations of the FCA. The suit is filed ex parte and under seal, and the relator is required to provide to the U.S. Department of Justice (DOJ) all information that the relator has in his possession about the alleged false claims.
Cases brought by relators are called qui tam actions. The DOJ has 60 days (extensions can be granted for good cause and are typically obtained) to determine if it wants to intervene in the case. If the DOJ intervenes, the government takes control of the case and litigates the case to conclusion. If the DOJ declines to intervene, the relator is permitted to litigate the case independently, essentially acting as a private attorney general.
According to the DOJ, the government intervenes in less than one-quarter of the cases brought by relators. Since many relators are employees of the companies against which their allegations are made, the FCA prohibits retaliation against an individual relator or others who cooperate in the government's investigation of alleged violations of the FCA. As an incentive, the relator is entitled to up to 30 percent of any judgment or settlement—plus recovery of his attorney's fees.
Nearly all heath care providers submit claims for payment to the federal government through their participation in the Medicare program. As such, it is not surprising that the majority of court decisions and civil settlements under the FCA in recent years have involved health care companies. According to the DOJ, 83 percent of the dollars recovered in false claim cases and settlements in federal fiscal year 2008 involved health care companies.
False Claim Cases: Factually False vs. Legally False
According to the Tenth Circuit, cases under the FCA can be grouped into two general categories: cases that involve claims that are "factually false" and cases that involve claims that are "legally false."
Cases involving factually false claims typically involve the submission of bills or claims to the government that are false, inaccurate or otherwise fraudulent. These are the stereotypical fraud-against-the-government cases. In the health care setting such cases can involve conduct such as improper coding, billing for services not rendered, incorrect coding, billing for fictitious patients and falsified medical record documentation. Cases involving factually false claims include cases where the false information is included on the claim itself as well as cases where false documents are created to support a claim.
False claim cases involving legally false claims typically involve allegations that the defendant failed to meet an applicable law or regulation in connection with a service that was billed to the government. In these cases, the claims submitted to the government are accurate, but the claims are deemed to be false because the defendant failed to meet one of the regulations or other requirements related to the services at issue.
In the Tenth Circuit, legally false claims can be based upon two theories: express certification or implied certification. In an express certification case, the defendant is alleged to have falsely certified that it was in compliance with a statute or regulation (typically as part of the claims submission process). In an implied certification case, the court considers whether compliance with a statute or regulation is a prerequisite for payment from the government, even in the absence of an express certification by the defendant that it was in compliance with the law. In both express and implied certification cases, one key issue is whether compliance with the applicable regulation was material to the government's decision to pay a claim.
In 2008, both the Supreme Court and the Tenth Circuit published opinions that confirm that not every instance of noncompliance or a false statement creates liability under the FCA. Rather, the FCA only imposes liability where regulatory noncompliance or a false statement results in a fraud on the federal government.
Allison Engine Co., Inc. v. United States ex rel. Sanders
In Allison Engine, the Supreme Court held that to be liable under the FCA, the defendant must either present (or cause to be presented) a false claim to the government or create a false record with the intent that the government pay a claim based upon the false record. While Allison Engine involves military defense contractors and not health care providers, the implications of the Supreme Court's holding are important to health care providers because it clarifies what type of conduct triggers liability under the FCA.
Facts of the Case
The U.S. Navy entered into contracts with two shipbuilder companies for the construction of battleships. The shipbuilder companies subcontracted with Allison Engine and other companies for the construction of electric generators for the ships. After the battleships were complete, two former employees of a subcontractor filed a qui tam complaint alleging that the generators were defective, leaked oil and failed to meet Navy contract specifications. The United States declined to intervene in the case.
At trial, relators presented evidence, inter alia, that Allison Engine submitted invoices to the shipbuilder companies and that the invoices were paid with government funds. The relators also presented evidence that Allison Engine submitted certificates of conformance to the shipbuilder companies that certified that the generators were manufactured in accordance with Navy specifications. The relators did not, however, present evidence that the defendants' or shipbuilder companies' invoices were submitted to the Navy or that Allison Engine's certificates of conformance were submitted to the Navy.
Supreme Court Reverses Sixth Circuit Decision
The district court granted judgment as a matter of law for Allison Engine on all claims because the relators presented no evidence that a false claim or false record had been presented to the Navy, and, therefore, no reasonable jury could find that the FCA was violated. The U.S. Court of Appeals for the Sixth Circuit affirmed the dismissal of the claims involving the presentment of false claims (i.e., violations of 31 U.S.C. § 3729(a)(1)), but reversed the dismissal of the claims involving the use of a false record to get a false claim paid and conspiracy (i.e., violations of 31 U.S.C. § 3729(a)(2), (3)). The Sixth Circuit concluded that where a false record is used to get a false claim paid, the FCA does not require proof that the false claim or record was presented to the government as long as it is established that the false claim was paid from government funds. The Supreme Court granted certiorari and unanimously reversed the Sixth Circuit.
The Supreme Court held that a subcontractor violates the FCA if the subcontractor submits a false statement to a prime contractor and the subcontractor intends for the false statement to be used by the general contractor to get the government to pay its claim. The Court also held that if a subcontractor submits a false statement to a prime contractor, but does not intend for the government to rely on the false statement as a condition for payment, then the subcontractor is not liable under the FCA. The Court explained that the FCA imposes liability where a defendant used a false statement "to get" a false claim "paid or approved by the Government." The term "to get" denotes purpose, and therefore the defendant must intend for the federal government itself to pay the false claim.
Potentially more important than the Court's holding is the Court's rejection of the government's argument about the breadth of the FCA. The government argued that to establish liability under the FCA, it only needs to prove that "a false statement resulted in the use of government funds to pay a false or fraudulent claim." The Court rejected that argument on the basis that getting a false claim "paid" by the government is different from getting a false claim paid using government funds. The Court reasoned that the government's proposed interpretation of the FCA would expand the FCA beyond its intended role of combating fraud against the government.
Implications for Health Care Providers
Even though Allison Engine involved defense contactors, the case has potentially significant implications for health care providers. The central holding—that to violate the FCA the person creating a false record must intend for the false record to be used to mislead the government—is relevant in many health care situations. Importantly, the Supreme Court made clear that a false record created for a purpose other than to defraud the government does not trigger liability under the FCA. For example, in United States ex rel. Bonnie Sterling v. Health Insurance Plan Of Greater New York, Inc., the U.S. District Court for the Southern District of New York held that false data provided to a private accreditation agency in order to obtain accreditation does not violate the FCA, even though accreditation is a predicate for Medicare enrollment. Under the reasoning of Allison Engine, allegedly false statements made by health care providers to private parties (health plans, state licensure agencies, private contractors) do not implicate the FCA unless it can be shown that the false statements were intended to cause the federal government to pay a claim. Similarly, a provider's false internal documents (e.g., false timesheets, false medical record documentation, false inventory entries) do not create liability unless there is evidence that the false documents were intended to defraud the government.
United States ex rel. Connor v. Salina Regional Health Center, Inc.
In Salina Regional, the Tenth Circuit held that a hospital's alleged noncompliance with Medicare's conditions for participation was not a basis to impose liability under the FCA. The Tenth Circuit also made clear that materiality is a necessary element of any case brought under the FCA involving allegations of regulatory noncompliance.
Facts of the Case
Salina Regional Medical Center is a hospital in rural Kansas. An ophthalmologist that was a former member of the hospital's medical staff filed a qui tam action against the hospital alleging, inter alia, that the hospital submitted false claims to Medicare because the hospital did not meet all of the Medicare conditions for participation. The United States declined to intervene in the case.
The relator argued that the hospital expressly certified that it was in compliance with all Medicare regulations when the hospital's chief financial officer signed the certification statement attached to the hospital's cost report. The relator further alleged that the hospital was not, in fact, in compliance with all Medicare regulations and, therefore, all Medicare claims were legally false.
Tenth Circuit Affirms District Court Decision
The district court dismissed the complaint for failure to state a claim. The Tenth Circuit affirmed.
In rejecting the relator's arguments, the Tenth Circuit made some broad and significant conclusions about the application of the FCA to Medicare providers. The Tenth Circuit held that the language included in a Medicare cost report certification does not include an express statement that Medicare payment is conditioned upon perfect compliance with any particular law or regulation. Rather than focusing on the cost report certification language, the Tenth Circuit held that the proper analysis was to look at the regulatory scheme and to determine whether compliance with the relevant regulations is material to the government's decision to pay: "If the government would have paid the claims despite knowing that the contractor failed to comply with certain regulations, then there is no false claim." In this context, the Tenth Circuit expressly stated that it was adopting a materiality requirement for cases brought under a false certification theory.
Having found that the FCA requires that compliance with a given regulation be material to the government's decision to pay generally, the Tenth Circuit concluded that perfect compliance with the Medicare conditions of participation is not material to Medicare's decision to pay. The Tenth Circuit reached this holding by concluding that there is a difference between Medicare conditions for program participation and Medicare conditions of payment. Regulations concerning participation in the Medicare program are prerequisites for continued enrollment in the Medicare program, and the sanction for failure to comply with such conditions is termination from the program. In contrast, regulations concerning payment conditions are prerequisites for Medicare payment, and the sanction for failure to comply is nonpayment. In making this distinction, the Tenth Circuit concluded that administrative agencies, not the federal courts, are better suited to address disputes related to Medicare enrollment conditions.
Implications for Health Care Providers
Salina Regional is a noteworthy case because the Tenth Circuit addressed a key question about the application of the FCA to Medicare conditions of participation. Historically, health care providers have understood that it is essential to be in compliance with the Medicare participation standards, because failure to comply with those standards can result in termination of the provider's enrollment in Medicare. But, there has been uncertainty about whether providers who fall out of compliance with Medicare participation standards can also be sanctioned under the FCA. The Tenth Circuit has made clear that such noncompliance is not a basis for liability under the FCA.
The Tenth Circuit's decision applies a common sense approach to liability under the FCA in the highly regulated health care environment. Medicare participation standards are quite extensive and detailed. For example, the participation standards for hospitals include requirements such as permissible types of door latches and the hours of operation of the hospital's laboratory. If a hospital is inspected and is found not to meet certain participation standards, the hospital is given an opportunity to cure the deficiency, and if the hospital fails to do so, its enrollment in Medicare is terminated. During this process, the government continues to pay the hospital's Medicare claims, reflecting Congress' determination that Medicare payment is properly made even when a hospital is not in compliance with all participation standards.
In contrast, Medicare regulations also contain a number of requirements that must be met in order for payment to be made for a service furnished to a Medicare beneficiary. For example, a home health agency must obtain physician certification that the home health services are medically necessary in order to be reimbursed for furnishing such services to a Medicare beneficiary. If a home health agency bills Medicare without obtaining the physician certification, then the resulting Medicare payments are in error. In Salina Regional, the Tenth Circuit made the reasonable conclusion that if a Medicare payment is properly made notwithstanding a failure to meet a regulatory provision, there is no liability under the FCA. But if a Medicare payment may not be properly made because of the failure to meet a regulatory provision, then there is potential liability under the FCA. This outcome is consistent with the structure of the Medicare program—some regulations relate to enrollment (and are policed by surveys and terminations) and others relate to payment (and are policed by payment denials and potential liability under the FCA).
Conclusion
There are many regulations governing the U.S. health care system, and the sanctions for failing to be in compliance with all applicable regulations can be severe. In 2008, the courts brought some clarity to the issue of when significant penalties under the FCA can be imposed for noncompliance. In Allison Engine, the Supreme Court held that there is liability under the FCA for creating a false record only if the creator of the false document intended to mislead the government (and not a private party). In Salina Regional, the Tenth Circuit held that noncompliance with a Medicare regulation triggers liability under the FCA only if compliance with the regulation is material to the government's payment decision, and that Medicare enrollment standards are not payment conditions. These two cases highlight the fact that not every act of regulatory noncompliance creates a basis for the imposition of liability and penalties under the FCA. These opinions should be useful to attorneys counseling clients who are faced with allegations of noncompliance.