Two Significant Types of False Claims Act Cases Get Second Wind

Some of the biggest qui tam cases settled by the Department of Justice have alleged that pharmaceutical and device manufacturers illegally paid kickbacks to physicians in order to have them prescribe drugs or use certain medical devices. For example, as part of its $328,000,000 settlement with Bristol-Myers Squibb in 2007, the U.S. settled claims that the company paid kickbacks to increase prescriptions of its products. Part of the $2.3 billion settlement with Pfizer in 2009 was also to resolve kickback claims. But some recent district court decisions of the U.S. District Court in Boston—the district with the U.S. Attorney’s office that has been among the most aggressive in pursuing these types of cases—had dealt near fatal blows to these types of cases. For example, in the long-standing case brought by whistleblower Peter Rost, a U.S. District court judge in Boston ruled that Mr. Rost’s allegations against Pfizer ought to be dismissed because the pharmacist that made the “false claim”—the claim for payment for the prescription—did not know that the prescription itself had been influenced by a kickback. In another qui tam case called U.S. ex rel. Hutcheson v. Blackstone Medical, Inc., a different judge from the same court similarly ruled that relators’ kickback allegations should be dismissed, in part, because the party that submitted the claim was not the party that engaged in the illegal, fraudulent behavior.

Now, in a decision overruling the district court’s opinion in Hutcheson, the U.S. Court of Appeals for the First Circuit has ruled that a drug or device maker remains liable under the False Claims Act for paying kickbacks to physicians to prescribe a drug or use a device even when the claim for payment for that drug or device is made by an innocent third-party, such as a pharmacist or hospital. Specifically, the Court found that
“[t]he Supreme Court has long held that a non-submitting entity may be liable under the FCA for knowingly causing a submitting entity to submit a false or fraudulent claim, and it has not conditioned this liability on whether the submitting entity knew or should have known about a non-submitting entity’s lawful conduct.” It ruled, “unlawful acts by non-submitting entities may give rise to a false or fraudulent claim even if the claim is submitted by an innocent party.”

The First Circuit’s Hutcheson opinion is also notable for several other reasons. First, the Court found that a claim could be considered false or fraudulent if the underlying behavior that influenced the claim violated the terms of a contract—in this case, the physicians’ provider agreements and the hospitals’ cost reports. Those agreements certified compliance with anti-kickback provisions. Despite this language, the district court had ruled that a claim could not be false merely because the behavior that influenced it violated certain contractual provisions. Rather, the court found that the relator had to show that the regulation or statute that was violated explicitly prevented the government from paying a claim based on the illegal behavior. The First Circuit rejected this reasoning, holding that because the claims were made due to schemes that violated the language of provider and hospital agreements, they could be considered false.

Finally, and equally significantly, the First Circuit found that even though the claims were paid pursuant to a DRG—a diagnostic-related group code—the fact that they had been made due to kickbacks could be material, meaning knowledge about the fraudulent activity could have influenced Medicare’s decision to pay the claim. When a hospital submits a claim for a procedure, it assigns the procedure a DRG code, and Medicare pays the claim based on what it has determined is the appropriate amount for such procedures. The separate aspects of the procedure are not line-itemed or paid for separately. Defendants have successfully argued in the past, as in the decision from the U.S. District Court for Illinois in U.S. ex rel. Kennedy v. Aventis Pharmaceuticals, that because Medicare just pays for the entire in-patient procedure pursuant to the code, it does not matter that certain aspects of the procedure (for example, the decision to use a particular device or to use a particular drug as part of the procedure in an off-label manner) were caused by illegal or fraudulent conduct. As stated, the First Circuit rejected this reasoning, stating, “We cannot say that, as a matter of law, the alleged misrepresentations in the hospital and the physician claims were not capable of influencing Medicare’s decision to pay the claims.”

In one swoop, then, Hutcheson breathes new life back into at least two significant types of FCA cases: those based on kickbacks and those alleging fraudulent conduct that leads to the off-label use of drugs or the use of devices in in-patient hospital procedures. It also broadens the notion of “conditions of payment” to validate FCA cases that are based on violations of contracts, including, in the health care context, provider agreements and hospital cost reports.

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Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.