By Shauna Itri
The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), (“AKS”) arose out of congressional concern that remuneration provided to those who can influence health care decisions would result in goods and services being provided that are medically unnecessary, of poor quality, or harmful to a vulnerable patient population. To protect the integrity of the Medicare and Medicaid programs from these harms, Congress enacted a prohibition against the payment of kickbacks in any form. First enacted in 1972, Congress strengthened the statute in 1977 and 1987 to ensure that kickbacks masquerading as legitimate transactions did not evade its reach.
The AKS prohibits any person or entity from offering, making, soliciting, or accepting remuneration, in cash or in kind, directly or indirectly, to induce or reward any person for purchasing, ordering, or recommending or arranging for the purchasing or ordering of federally funded medical goods or services:
(i) Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind–
(a) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or
(b) in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program,
shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.
(ii) Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person–
(a) to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or
(b) to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program,
shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.
42 U.S.C. §§ 1320a-7b(b). Violation of the statute can also subject the perpetrator to exclusion from participation in federal health care programs and, effective August 6, 1997, civil monetary penalties of $50,000 per violation and three times the amount of remuneration paid, regardless of whether any part of the remuneration is for a legitimate purpose. 42 U.S.C. §§ 1320a-7(b)(7) and 42 U.S.C. §§ 1320a-7a(a)(7).
The legislative and administrative history of the AKS safe harbors indicate that anything of value should be considered remuneration. In promulgating final rules on the AKS, the Office of the Inspector General of the Department of Health and Human Services stated that “the meaning of two of its [the AKS statute’s] terms deserve comment (1) ‘any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind;’ and (2) ‘to induce.’ These terms demonstrate congressional intent to create a very broadly worded prohibition.” 56 FR 35952 (1991).
The OIG continued,
Congress’s intent in placing the term “remuneration” in the statute in 1977 was to cover the transferring of anything of value in any form or manner whatsoever. The statute’s language makes clear that illegal payments are prohibited beyond merely “bribes,” “kickbacks,” and “rebates,” which were the three terms used in the original 1972 statute. The language “directly or indirectly, overtly or covertly, in cash or in kind” makes clear that the form or manner of the payment includes indirect, covert, and in kind transactions …. The meaning of the term “to induce,” which describes the intent of those who offer or pay remuneration in paragraph (2) of the statute, is found in the ordinary dictionary definition: “to lead or move by influence or persuasion”
Id. (citing The American Heritage Dictionary (2d College Ed. 1982)).
As the sponsor of the bill explained,
[K]ickbacks are wrong no matter how a transaction might be constructed to obscure the true purpose of a payment … We are in a complex area where right and wrong are often clouded with shades of gray. In such situations, the committee stresses the need to recognize that the substance rather than simply the form of a transaction should be controlling.
123 Cong. Rec. 30,280 (1977).
An opportunity to bill or earn money is remuneration that could induce a person “to channel potential Medicare payments towards a particular recipient.” Bay State Ambulance & Hosp. Rental Serv., 874 F.2d at 29; see also, United States ex rel. Fry v. Health Alliance of Greater Cincinnati, 2008 U.S. Dist. LEXIS 102411, * 17-*23 (S.D. Ohio Dec. 18, 2008) (accepting the government’s argument that an opportunity to bill is remuneration and that a doctor being “handed a stream of patients … is like receiving a voucher.”).
As the Court wrote in Fry,
Giving a person an opportunity to earn money may well be an inducement to that person to channel potential Medicare payments towards a particular recipient … Congress’s intent in placing the term ‘remuneration’ in the statute in 1977 was to cover the transferring of anything of value in any form or manner whatsoever. Id. at 21-23 (internal citations omitted).
Furthermore, a person who offers or pays remuneration to another person violates the Anti-kickback Act so long as one purpose of the offer or payment is to induce Medicare or Medicaid patient referrals. United States v. Borrasi, 639 F.3d 774 (7th Cir. 2011) (“We join our sister circuits in holding that if part of the payment compensated past referrals or induced future referrals, that portion of the payment violates [the Anti-kickback Act]”).
Specific intent is not required to establish a violation of the AKS. That is, “a person need not have actual knowledge of [the AKS] or specific intent to commit a violation of [the AKS].” 42 U.S.C. § l 320(a)-7b(h)).
A “Federal health care program” is defined at 42 U.S.C. § 1320a-7b(f) as any plan or program providing health benefits funded, whether directly or indirectly, by the United States Government. The Anti-Kickback Statute applies to claims submitted to Medicare, Medicaid, and the other government payers listed in this case. 42 C.F.R. § 405.207.
Violations of the Anti-Kickback Statute Forms the Basis of False Claims Act Liability
Congress has long viewed the elimination of kickbacks as central to any efforts to combat Medicare and Medicaid fraud and abuse. See United States v. Greber, 760 F.2d 68, 70-71 (3d. Cir. 1985). Because kickback schemes negatively affect the integrity of federal health care programs, the United States has a strong interest in ensuring the continued viability of False Claims Act (“FCA”) actions to deter and redress health care fraud predicated upon kickbacks. United States ex rel. Charles Wilkins and Daryl Willis v. United Health Group, Inc. et al., (3d Cir. Oct. 2010)(No. 10-2747) (Brief for the United States as Amicus Curie Supporting Appellant)(“Amicus Brief”).
To protect against the erosion of patient care and patient safety, courts uniformly agree that compliance with the AKS is a material condition of payment under the Medicare/Medicaid programs.
These and other courts have held that a person or entity who violates the and causes another to submit claims to the government has violated the FCA regardless of what form the claim or statement takes. Many of these courts have reasoned that the claims are false, and thus violate the FCA, because there is a false certification – either express or implied – as to compliance with the AKS each time a claim is submitted.
Moreover, the AKS was recently amended to expressly state what these courts had already held, namely, that a violation of the AKS constitutes a “false or fraudulent” claim under the FCA. 42 U.S.C. § 1320(a)-7b(g).
Meeting the Materiality Requirement of the False Claims Act in Cases Brought by Qui Tam Whistleblowers
The False Claims Act’s Materiality Requirement
Under the express language of the False Claims Act (“FCA”), material means having a “natural tendency to influence or be capable of influencing” the government’s decision to pay a claim. 31 U.S.C. § 3729(a)(4).
The Escobar Decision
Under the recent Supreme Court case of United Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2002-2003 (2016), a false statement is material if “either (1) a reasonable person would likely attach importance to it or (2) the defendant knew or should have known that the government would attach importance to it.” Miller, 840 F.3d at 503 (citing Escobar). In other words, the focus of the analysis is whether the false statement or violation had the natural tendency to “affect a reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision.” Miller, 840 F.3d at 503 (citing Escobar); see also United States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 110 (1st Cir. 2016).
Escobar endorsed a multi-factored approach in analyzing materiality and made clear that no one factor is disposition. In determining whether the violation is material, courts may consider a variety of factors including, but not necessarily limited to, “whether the provision violated is expressly labeled as a condition of payment, whether the violation is significant or ‘minor or insubstantial,’ whether the violation goes to the ‘essence of the bargain’ and whether the government took action in this or other cases where the government had knowledge of similar violations.” United States’ Statement of Interest, at 5 (United States. ex rel. Williams v. City of Brockton, No. 1:12-12193-IT (D. Mass. Sept. 19, 2016)) (internal quotation marks and citations omitted).
Applying the Escobar Standard in a Qui Tam Case Involving Fraud on the FDA
In a whistleblower case involving alleged fraud on the FDA, the questions are whether the misleading statements to the FDA influenced or were capable of influencing the FDA’s approval of the devices or in delaying a recall, and whether FDA approval (or lack thereof) would affect a “reasonable government funding decision or if the defendant had reason to know it would affect a government funding decision.” Miller, 840 F.3d at 503.
The first question – whether the false statements were capable of influencing the FDA approval – is easily proven if the drug or device is recalled. The recall is highly probative evidence that, had the FDA known the truth about the drug or device at the outset, the FDA would not have granted approval.
The second question – regarding the link between withdrawal of FDA approval and the government’s decision to pay – is essentially irrefutable: CMS will not pay for devices which do not have valid FDA approval. See 42 C.F.R. § 411.15(o); 42 C.F.R. § 405.211(C); see Medicare Program; Revised Process for Making Medicare National Coverage Determinations, 2003 WL 22213011, 68 FR 55634-01 (Sept. 26, 2003). Moreover, if a device is not reimbursable, the medical and hospital costs of the related surgery are also not reimbursable. 42 C.F.R. § 405.207 (“[P]ayment is not made for medical and hospital services that are related to the use of a device that is not covered because CMS determines that the device is not ‘reasonable’ and ‘necessary’ . . . or because it is excluded from coverage for other reasons”).
With the right set of facts, a qui tam whistleblower suing under the False Claims Act can easily meet the materiality requirement set forth by the Supreme Court in Escobar.
While many defendants may assert that fraudulent inducement is not a viable theory of liability in a qui tam case under the False Claims Act (“FCA”), the truth is that the plentiful and better-reasoned authorities to consider this issue support FCA liability for defrauding the FDA. See United States v. Pfizer, Inc., 2016 WL 807363, at **8-10 (E.D. Pa. Mar. 1, 2016) (relator’s allegations that defendant submitted a false and misleading application to the FDA were upheld as sufficient under the False Claims Act); United States ex rel. Krahling v. Merck & Co., 44 F. Supp. 3d 581, 593 (E.D. Pa. 2014) (denying defendant’s motion to dismiss relator’s FCA case alleging fraud-on-the-FDA related to the efficacy of its mumps vaccine); United States’ Statement of Interest, at 3 (Krahling, No. 2:10-cv-4374 (E.D. Pa. May 20, 2013)) (“[T]he False Claims Act expressly authorizes private citizens to bring suits on behalf of the Government, and carving out an exception for suits arising from allegations of fraud on the FDA or conduct in violation of FDA regulations is not supported by the statutory text or case law and is inconsistent with the purposes of the False Claims Act”).
Liability under the FCA for fraud in the inducement is established when eligibility to receive funds under a government program was procured by misstatements or other misleading actions. See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016); Baycol, 732 F.3d at 876. In these cases, “FCA liability attaches to each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” Miller, 840 F.3d at 498 (internal quotation marks omitted).
In Miller, relators alleged that a college fraudulently induced the Department of Education to provide funding by falsely promising to keep accurate grade and attendance records. Construing the evidence in favor of relators, the Miller court found that defendant’s promise to keep accurate grade and attendance records influenced the government’s decision to provide funding. Id. at 503.
The theory has been used in FCA cases with regard to fraudulently inducing a variety of different government agencies’ actions: the Department of Defense to enter into contracts for the purchase of a drug, see Baycol, 732 F.3d at 876; the Department of Education to obtain federal subsidies, United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006); and the Department of Energy for the award of a subcontract, Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 (4th Cir. 1999).
Turning back to FDA-specific authorities, courts have held that FCA liability can be predicated based on a defendant’s alleged promotion of a device not approved by the FDA. United States ex rel. Bui v. Vascular Solutions, Inc., No. 1:10-cv-00883 (W.D Tex. March 7, 2013) (denying motion to dismiss where defendant promoted product for use not approved by the FDA); United States ex rel. Colquitt v. Abbott Labs, 2012 WL1081453, at *31 (N.D. Tex. March 30, 2012) (denying motion to dismiss and finding relator stated FCA claims because defendant promoted devices for non-FDA-approved uses). Commenting on these two qui tam cases in connection with the fraud-on-the-FDA theory being litigated in the Krahling case cited above, the Department of Justice has observed that “[t]here is nothing unique about a case involving false statements to the FDA that would warrant creating a special rule precluding such cases from going forward. To the contrary, allowing relators to prosecute such False Claims Act suits (as long as sufficiently pleaded) serves the primary purpose of the qui tam provisions.”
Fraudulent inducement has long been recognized as a viable legal theory in qui tam cases brought by whistleblowers under the False Claims Act. The evolution of this theory into cases where the FDA has been defrauded is a positive development for whistleblowers.
 It is well established that fraud at the outset of a series of dealings with the government can render all subsequent claims false under the FCA. See S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274 (“each and every claim submitted under a contract, loan guarantee, or other agreement with was originally obtained by means of false statements or other corrupt or fraudulent conduct . . . constitutes a false claim”).
Federal Rule of Civil Procedure Rule 9(b)
Relators in qui tam cases under the False Claims Act (“FCA”) face considerable challenges in meeting pleading requirements in many circuits, including the 8th Circuit.
The Rule 9(b) standard in the Eighth Circuit is well described by the Court in United States ex rel. Joshi v. St. Luke’s Hospital, Inc., 441 F.3d 552 (8th Cir. 2006):
Because the FCA is an anti-fraud statute, complaints alleging violations of the FCA must comply with Rule 9(b). Under Rule 9(b), the circumstances constituting fraud … shall be stated with particularity. Rule 9(b)’s particularity requirement demands a higher degree of notice than that required for other claims, and is intended to enable the defendant to respond specifically and quickly to the potentially damaging allegations. To satisfy the particularity requirement of Rule 9(b), the complaint must plead such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the who, what, where, when, and how of the alleged fraud.
Id. at 556 (citations and internal quotation marks omitted). In meeting this burden, a Relator need not plead details of any specific false claims, as long as there is sufficient indicia of reliability that false claims were submitted. See United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 917-918 (8th Cir. 2014). When considering a motion to dismiss, the Court must view the Complaint in the light most favorable to Relator, and the facts alleged in the Complaint must be accepted as true. Hamm v. Gruse, 15 F.3d 110, 112 (8th Cir. 1994).
Recognizing that the FCA is to be applied broadly and flexibly to reach all types of whistleblower fraud that cause financial loss to the government, the Supreme Court, when evaluating claims under the Act, has “consistently refused to accept a rigid, restrictive reading.” United States v. Neifert-White Co., 390 U.S. 228, 233 (1968). Attempts to cabin a Relator’s claims into judicially-created categories would result in exactly the kind of “rigid, restrictive reading” Congress has cautioned against and the Supreme Court “has consistently refused” to adopt. Id. at 232.
To survive a motion to dismiss under Rule 12(b)(6), a Realtor’s complaint need only “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007)). In making this determination, the court accepts the Relator’s allegations as true and draws all reasonable inferences in favor of Relator. Crooks v. Lynch, 557 F.3d 846, 848 (8th Cir. 2009). Accordingly, when reviewing a defendant’s motion to dismiss under Rule 12(b)(6), it is error to either ignore reasonable inferences supported by the allegations in the complaint or to draw any inferences in the defendant’s favor. See Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009).
The pleading standards in the 8th Circuit are similar to the pleading rules in many other circuits. In short, Relators in qui tam cases under the False Claims Act face considerable challenges in reaching the discovery aspect of litigation. Engaging a whistleblower lawyer with considerable experience is critical to meeting the pleading rules.
Liability under the False Claims Act (“FCA”) for fraud in the inducement is established when eligibility to receive funds under a government program was procured by misstatements or other misleading actions. Courts have repeatedly held fraudulent inducement is a viable theory of liability under the FCA. See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016) (citations omitted); In re Baycol Prods. Litig., 732 F.3d 869, 876 (8th Cir. 2013). In these whistleblower cases, “FCA liability attaches to ‘each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” See United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016) (citations omitted).
It is well established that fraud at the outset of a series of dealings with the government can render all subsequent claims false under the FCA. See S. Rep. No. 99-345, at 9, reprinted in 1986 U.S.C.C.A.N. at 5274 (“each and every claim submitted under a contract, loan guarantee, or other agreement with was originally obtained by means of false statements or other corrupt or fraudulent conduct . . . constitutes a false claim”).
Fraudulent Inducement Qui Tam Case Examples
The fraudulent inducement theory has been used in FCA cases with regard to fraudulently inducing a variety of different government agencies’ actions: the Department of Defense to enter into contracts for the purchase of a drug, see In re Baycol Prods. Litig., 732 F.3d 869, 876 (8th Cir. 2013); the Department of Education to obtain federal subsidies, United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006); and the Department of Energy for the award of a subcontract, Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 (4th Cir. 1999).
In the 8th Circuit case of United States ex rel. Miller v. Weston Educ., Inc., 840 F.3d 494, 498 (8th Cir. 2016), relators allege that a college fraudulently induced the Department of Education to provide funding by falsely promising to keep accurate grade and attendance records. The Miller court found that defendant’s promise to keep accurate grade and attendance records influenced the government’s decision to provide funding and denied defendant’s motion to dismiss. Id. at 503.
Fraud-on-the-FDA under the False Claims Act
In addition, the theory had been relied on to support FCA liability for fraud-on-the-FDA. Courts have found FCA violations based on defrauding the FDA. See United States ex rel. Brown and Vezeau v. Pfizer, Inc., 2016 WL 807363, *8-10 (E.D. Pa. 2016) (relator’s allegations that defendant submitted a false and misleading application to the FDA were upheld as sufficient under the False Claims Act); United States ex rel. Krahling v. Merck & Co., Inc., 2014 WL 4407969, *6-7 (E.D. Pa 2014) (denying defendant’s motion to dismiss relator’s FCA case alleging fraud-on-the-FDA related to the efficacy of its mumps vaccine); Krahling, Statement of Interest from the United States Department of Justice (“the False Claims Act expressly authorizes private citizens to bring suits on behalf of the Government, and carving out an exception for suits arising from allegations of fraud on the FDA or conduct in violation of FDA regulations is not supported by the statutory text or case law and is inconsistent with the purposes of the False Claims Act”).
By Susan Thomas
In addition to the big qui tam case against UnitedHealth Group that has received so much press recently, there is a similar whistleblower case pending in federal court in Texas alleging False Claims Act (“FCA”) claims against a medical coding company, Censeo Health, L.L.C., and several Medicare Advantage organizations (“MAOs”). Similar to the allegations in UnitedHealth Group, Censeo is alleged to have provided unsupported diagnostic codes and inaccurate risk adjustment data for the purpose of improperly inflating capitated payments to the coding company’s clients, Medicare Advantage organizations. U.S. ex rel. Ramsey-Ledesma v. Censeo Health, L.L.C., 3:14-CV-00118-M (N.D. Tx).
Medicare Advantage Organizations and Capitation Payments
The Censeo case follows a recognized theory of FCA liability for false claims presented to MAOs, where false claims result in MAOs receiving increased capitation payments from the government. Since capitation payments are largely driven by the diagnosis of chronic medical conditions, an MAO that claims it has a beneficiary with diabetes and relays this information to CMS will almost certainly lead to a substantially increased capitation payment to account for the anticipated increased costs of treating that beneficiary.
Falsely stating risk conditions or diagnosis codes leads to increased payments by the government because the capitated payments per member are adjusted based on what is called “risk adjustment data.” The capitated payments are prospective, meaning CMS uses risk adjustment data from the prior year to establish payment amount for the following year. 42 C.F.R. §§ 422.308(c), (e), 422.310(g). CMS’s model assumes that MAOs with higher-risk insureds will be required to pay more for their insureds’ medical care. Thus, MAOs with more high-risk insureds are compensated at a higher level than MAOs whose insureds are comparatively healthier.
Diagnosis Code Guidelines for Medicare Advantage Organizations
CMS guidelines require that MAOs use accurate diagnosis codes, following ICD-9-CM Guidelines for Coding and Reporting. See Medicare Managed Care Manual Ch. 7. The diagnosis codes must be supported by properly documented medical records, see 42 C.F.R. § 422.310(e), and the MAOs must certify that the risk adjustment data provided to CMS, including diagnosis codes, is accurate, complete, and truthful, based on an MAO’s “best knowledge, information, and belief.” See 42 C.F.R. § 422.504(l).
MAOs are permitted to subcontract with third-party vendors, such as medical coding companies, to ascertain and report their patients’ risk adjustment data. As the New York Times recently reported, “[t]he realization that medical records could be mined for extra money appears to have given rise to a cottage industry of consulting firms offering to screen patient histories and look for indications of long-term health problems that could be used to increase Medicare reimbursements.” Walsh, M.W., Scheme Tied to UnitedHealth Overbilled Medicare for Years, Suit Says, New York Times, Feb. 16, 2017.
Censeo Whistleblower Allegations
As part of the scheme that the whistleblower in Censeo alleges, Censeo allegedly hired unqualified physicians to perform in-home assessments of members of Censeo’s MAO clients and diagnose high-risk conditions. The problems arise, according to this former coding employee, because Censeo pushed the doctors to identify high-risk conditions based on little more than historical data provided by the patients themselves. U.S. ex rel. Ramsey-Ledesma v. Censeo Health, L.L.C., 3:14-CV-00118-M, 2016 WL 5661644, at *2 (N.D. Tex. Sept. 30, 2016).
The company was also alleged to have provided these inexperienced medical coders and physicians with assessment forms that had been prepopulated with patient information, including medical and prescription medication histories. Id. at *4. Relator alleges that Censeo instructed those physicians to diagnose high-risk conditions based on information provided in the prepopulated assessment forms and during cursory physical examinations they conducted of members, which lasted only 45 minutes to an hour. Id. Some of these reported conditions were not true diagnoses, but instead simply showed the self-reported conditions or information that the coder gleaned from the medical history, which also included unconfirmed self-reported conditions and severity judgments generally not supported by laboratory results or diagnostic testing. Id. at *5.
As one example, the whistleblower alleged that Censeo instructed physicians to diagnose chronic obstructive pulmonary disease (“COPD”) based on nothing more than the doctor’s observations that the MAO member used oxygen or had a chronic cough. Physicians were allegedly pressured to code high-risk conditions through incentive payments and other employment conditions. Id. at *5.
Employees or patients who observe these types of fraudulent practices, which overburden government healthcare programs and potentially make those programs unsustainable, are in the best position to report these violations and allow the government to address that costly fraud and corruption in the industry.
By David Filbert and Daniel Miller
On February 16, 2017, the Senate Finance Committee held a confirmation hearing for Seema Verma to become the nation’s next Administrator of the Centers for Medicare and Medicaid Services (“CMS”). During her testimony, Senators raised wide-ranging questions about the best ways to maintain the quality of the Medicare and Medicaid programs while ensuring the programs’ financial stability. Ms. Verma stated throughout the hearing that she would try all options and methods to protect and enhance the healthcare programs.
When it came time for Senator Chuck Grassley to ask questions, he wanted to know about Ms. Verma’s commitment to the False Claims Act (“FCA”) and fighting fraud in the programs. He said, “Coming from an Administration that wants to drain the swamp, I would expect changes to be made under your leadership…”. Senator Grassley then prefaced his questions by mentioning discussions he has had with CMS in which the agency said it doesn’t have much authority to do anything against frauds in its own programs even if the frauds are in clear violation of the law. This comment surprised the Senator, who then requested that Ms. Verma take a look into the CMS’ interpretation of its authority to stop fraud. Grassley said that oftentimes money is taken wrongly from the programs and there is no way to get it back.
Senator Grassley said there are “a lot of tools available to the government to fight fraud…the most effective one is the False Claims Act.” He then pointed out that since 1987, the Department of Justice has used the FCA to recover almost $34 billion just from health care fraud alone, and that cooperation between the Justice Department and CMS is very important in these cases. Senator Grassley asked Ms. Verma if she would commit to proactively cooperating with the Department of Justice in fraud cases and to fully support the use of the FCA to combat fraud on government healthcare programs. Ms. Verma said “…I will absolutely do that.” She applauded Senator Grassley’s efforts on the FCA, which has been “…an integral component of preventing fraud and recovering dollars when there is fraud.” So it seems at the outset, even before her administration begins at CMS, that Ms. Verma will look to the FCA as one of her options to support and protect the Medicare and Medicaid programs.
Ms. Seema Verma is the President and founder of SVC, Inc., a national health policy consulting company, and was the architect of the Healthy Indiana Plan (HIP), the nation’s first consumer directed Medicaid program. She has worked for years in Indiana with Governors Mitch Daniels and Mike Pence managing the state’s Medicaid program and has been a consultant with extensive experience redesigning Medicaid programs in other states. She holds a Masters of Public Health Degree from Johns Hopkins University and was nominated to serve as CMS Administrator on November 29, 2016. “CMS is the world’s largest health insurer, covering over one-third of the U.S. population through Medicare and Medicaid alone. It has a budget of over one trillion dollars and it processes over 1.2 billion claims a year for services provided to some of our nation’s most vulnerable citizens.”
Ms. Verma’s nomination was voted out of the Senate Finance Committee on March 2, 2017. A vote for confirmation from the full Senate will occur in the coming days.
 Senate Finance Committee Hearing, February 16, 2017. Senator Grassley portion of video begins at time mark 46:48 https://www.c-span.org/video/?423823-1/cms-administrator-nominee-seema-verma-testifies-confirmation-hearing
 Senator Orin Hatch press release on Confirmation Hearing of Seema Verma, February 16, 2017. https://www.finance.senate.gov/chairmans-news/hatch-statement-at-finance-confirmation-hearing-for-cms-administrator
Laboratories May be Liable under the False Claims Act for Submitting Claims for Screening Tests to Medicare
By Russell Paul
Laboratory tests are not medically necessary when they do not “determine a disease or illness. . . or medically or surgically manage an illness.” Strand Analytical Labs., LLC v. Burwell, 2015 WL 4603258, at *17 (S.D. Ind. July 30, 2015) (“The plain meaning of the words diagnose and treat do not include the broader concept of ‘contribute meaningfully.’ Rather, the terms ‘diagnose’ or ‘treat’ convey that the service must determine a disease or illness, which the . . . test admittedly does not; or medically or surgically manage an illness, which the Secretary concluded the . . . test did not do.”).
Screening Tests and Medicare Reimbursement
Screening, in medicine, is a strategy used to identify an unrecognized disease in individuals without signs or symptoms, and Medicare generally does not pay for screening tests. As the Medicare Claims Process Manual clearly provides, “[t]ests that are performed in the absence of signs, symptoms, complaints, personal history of disease, or injury are not covered except when there is a statutory provision that explicitly covers tests for screening as described.” Other Medicare guidance reinforces that screening tests are generally not covered:
Screening tests, examinations, and therapies for which the beneficiary has no symptoms or documented conditions, with the exception of certain screening tests, examinations, and therapies as described below under Exceptions (Items and Services That May Be Covered)[.]
Local Coverage Determination (“LCD”) L35000 (effective October 1, 2015 for various jurisdictions), which governs molecular pathology laboratory procedures, succinctly states the Medicare standard:
Screening services such as presymptomatic genetic tests and services used to detect an undiagnosed disease or disease predisposition are not a Medicare benefit and are not covered. Similarly, Medicare may not reimburse the costs of tests/examinations that assess the risk of a condition unless the risk assessment clearly and directly effects the management of the patient.
Thus, whenever the lab test at issue is not related to any existing symptom or complaint, it might be used to screen for existing disease or to predict the likelihood of future disease. Such a test would not be considered medically necessary and would not covered by Medicare, and a lab submitting a claim for such a test may be liable under the False Claims Act (“FCA”).
“Reasonable and Necessary” Medical Service Factors
Chapter 13 of the Medicare Program Integrity Manual (“MPIM”) sets out factors for evaluating whether a specific service is “reasonable and necessary.” MPIM § 13.5.1 provides that for a service to be considered “reasonable and necessary,” it must be “[f]urnished in accordance with accepted standards of medical practice for the diagnosis or treatment of the patient’s condition or to improve the function of a malformed body member.” MPIM § 13.7.1 states that the strongest evidence of medical necessity is, in order, of strength,
- Published authoritative evidence derived from definitive randomized clinical trials or other definitive studies, and
- General acceptance by the medical community (standard of practice), as supported by sound medical evidence based on:
- Scientific data or research studies published in peer-reviewed medical journals;
- Consensus of expert medical opinion (i.e., recognized authorities in the field); or
- Medical opinion derived from consultations with medical associations or other health care experts.
Furthermore, Section 13.7.1 of the MPIM expressly rejects self-interested research as the basis for concluding that a service is reasonable and necessary:
Acceptance by individual health care providers, or even a limited group of health care providers, normally does not indicate general acceptance by the medical community. Testimonials indicating such limited acceptance, and limited case studies distributed by sponsors with financial interest in the outcome, are not sufficient evidence of general acceptance by the medical community. The broad range of available evidence must be considered and its quality shall be evaluated before a conclusion is reached.
MPIM §13.7.1 (emphasis added).
Thus, one must look to studies, data and recognized authorities in the field to determine whether a lab test is relevant to the diagnosis of a patient’s current condition, to medically or surgically manage an illness or to improve the function of a malformed body member. If it is not, it may be for screening or predictive purposes and as such, is not covered by Medicare. A lab that submits a claim for such a test may be liable under the FCA.
 Medicare Claims Processing Manual, CMS Pub. 100-4, Laboratory Services, Ch. 16, § 10 (Apr. 29, 2016), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c16.pdf.
 CMS, Items and Services That Are Not Covered Under the Medicare Program, at 5, available at https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/Downloads/Items-and-Services-Not-Covered-Under-Medicare-Booklet-ICN906765.pdf (emphasis added).
 Medicare Program Integrity Manual (Mar. 7, 2014), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/pim83c13.pdf.
By Russell Paul
In Part I of this blog series, we discussed when lab tests are considered “reasonable and necessary” under the False Claims Act (“FCA”) and therefore reimbursable by government health insurers such as Medicare and Medicaid, as well as a laboratory’s responsibility for ensuring that lab tests submitted for reimbursement are properly justified by the patient’s diagnosis. In this blog post, we will discuss the documentation that labs are required to maintain and supply in order to prove that the claims they submit for payment are covered under government health insurer regulations and the FCA.
Government Healthcare Regulations for Lab Test Documentation
Medicare regulations require a lab to document that its tests for a given patient are medically necessary and allow it to request more information from the doctor in order to meet this requirement. The relevant regulation provides:
(i) Ordering the service. The physician . . . who orders the service must maintain documentation of medical necessity in the beneficiary’s medical record.
(ii) Submitting the claim. The entity submitting the claim must maintain the following documentation:
(A) The documentation that it receives from the ordering physician or nonphysician practitioner.
(B) The documentation that the information that it submitted with the claim accurately reflects the information it received from the ordering physician or nonphysician practitioner.
(iii) Requesting additional information. The entity submitting the claim may request additional diagnostic and other medical information to document that the services it bills are reasonable and necessary. If the entity requests additional documentation, it must request material relevant to the medical necessity of the specific test(s), taking into consideration current rules and regulations on patient confidentiality.
Sub-section (iii) above authorizes a lab to “request additional diagnostic and other medical information to document that the services it bills are reasonable and necessary.” 42 C.F.R. § § 410.32(d)(2)(iii) (emphasis added). This provision plainly requires that labs review the ICD diagnostic codes submitted by physicians to ensure that the ordered tests(s) are medically necessary. If a lab was not required to review the information provided by the ordering physician, then there would be no reason for an express authorization to request additional information to substantiate medical necessity. Sub-section 410.32(d)(2)(iii) plainly contemplates the demand for further information to ensure that the documentation explicitly evidences the medically necessity of the tests. Indeed, this requirement set forth in 42 C.F.R. § 410.32(d)(2)(iii) is repeated verbatim under the heading “Medical necessity” in § 410.32(d)(3)(iii), showing that the lab, which is the entity submitting the claim, must ensure the medical necessity of that claim.
Furthermore, Local Coverage Determination (“LCD”) L35000 (effective October 1, 2015 for various jurisdictions) also requires a lab to review the diagnosis given and ensure that its tests are warranted:
. . . the medical record must contain documentation that the testing is expected to influence treatment of the condition toward which the testing is directed. The laboratory or billing provider must have on file the physician requisition which sets forth the diagnosis or condition (ICD10-CM code) that warrants the test(s).
(emphasis added). Thus, if the ICD code assigned to the patient does not justify the test, then the lab necessarily does not have on file “the physician requisition…that warrants the test.”
“Medical Necessity” Case Examples
Courts around the country have confirmed that Government healthcare programs may require labs and other billing entities to maintain and supply documentation that justifies payment of the lab test or other service provided when a separate provider, such as a doctor, orders the test or service. In KGV Easy Leasing Corp. v. Sebelius, 2011 WL 490990 (9th Cir. 2011), a medical diagnostic testing lab appealed the district court’s decision upholding the Secretary of the Department of Health and Human Services’ (the “Secretary”) determination that its lab tests were not reimbursable by Medicare because it failed to demonstrate that the tests were medically reasonable and necessary. The Ninth Circuit affirmed, holding that the lab never “established medical necessity.” Id. at *1. The lab “never presented evidence that supplemented the information contained on its order forms” and “provided no evidence that the referring physician was also the treating physician, or that the test results were later used to help manage the patient’s medical conditions.” Id. (emphases added).
Likewise, in Gulfcoast Med. Supply, Inc. v. Sec’y, Dep’t of Health & Human Servs., 468 F.3d 1347 (11th Cir. 2006), a motorized wheelchair supplier brought an action against the Secretary challenging the Secretary’s decision that Medicare had overpaid that supplier for wheelchairs. The supplier argued that the “certificate of medical necessity” (CMN) signed by a physician was by itself sufficient to establish that the wheelchair was necessary for the patient and that the supplier need not submit any additional medical documentation beyond the CMN to prove medical reasonableness and necessity of the wheelchairs and be paid. The Eleventh Circuit disagreed, holding that “when the Medicare Act is read as a whole, it unambiguously permits carriers and the Secretary to require suppliers to submit evidence of medical necessity beyond a CMN.” Id. at 1352; see also Maximum Comfort Inc. v. Sec’y of Health & Human Servs., 512 F.3d 1081, 1087-1088 (9th Cir. 2007) (“[T]he Secretary may require, as a condition of reimbursement to an equipment supplier, information in addition to that provided by the certificate of medical necessity” to substantiate supplier’s claims for Medicare reimbursement); MacKenzie Med. Supply, Inc. v. Leavitt, 506 F.3d 341, 347 (4th Cir. 2007) (same); Druding v. Care Alternatives, Inc., 164 F. Supp. 3d 621, 631 (D.N.J. 2016) (“[E]ven if Defendant [hospice] has provided for each patient a certification signed by a physician, the claim [by the hospice] is not reimbursable if the patient’s medical record does not contain clinical information that supports the terminal prognosis.”).
Thus, when the lab test performed by the lab is wholly unrelated to and not justified by the diagnosis given by a doctor, the lab cannot submit a claim for payment for that test to the Government, and the lab may be liable under the FCA for doing so.
By Russell Paul
This article addresses the liability of a diagnostic testing laboratory under the False Claims Act (“FCA”) for conducting lab tests that are ordered by a doctor and submitting claims for payment to government health insurers, such as Medicare and Medicaid, for those lab tests when those tests are not medically necessary to diagnose an illness in the patient or treat the patient’s current medical condition.
“Reasonable and Necessary” Medical Services
The keystone requirement for reimbursement under federal healthcare programs is that only claims for “reasonable and necessary” medical services are covered. 42 U.S.C. § 1395y(a)(1)(A) (“[N]o payment may be made under part A or part B of this subchapter for any expenses incurred for items or services. . . which. . . are not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member.”). This general rule applies to tests performed by laboratories. See generally United States. ex rel. Hobbs v. MedQuest Assocs., Inc., 711 F.3d 707, 715 (6th Cir. 2013) (applying the “reasonable and necessary” standard to diagnostic tests); United States v. Palin, 2016 WL 5941931, at *6 (W.D. Va. Aug. 2, 2016) (same).
A physician includes a diagnostic code, previously known as an ICD-9 code and currently known as an ICD-10 code, on a test requisition form to indicate the current health status of the patient in an attempt to justify the medical necessity of the ordered test(s). An ICD-10 code correlates with a specific condition from which the patient is currently suffering that purportedly warrants performance of the ordered test(s).
Medicare rules and regulations make it clear that tests that are not justified by an appropriate diagnosis are not considered medically necessary and are not reimbursable. For example, the Medicare Claims Process Manual clearly provides, “[t]ests that are performed in the absence of signs, symptoms, complaints, personal history of disease, or injury are not covered except when there is a statutory provision that explicitly covers tests for screening as described.” Additionally, Medicare regulations provide that diagnostic lab tests “must be ordered by the physician who is treating the beneficiary, that is, the physician who furnishes a consultation or treats a beneficiary for a specific medical problem and who uses the results in the management of the beneficiary’s specific medical problem.” 42 C.F.R. § 410.32(a) (emphasis added). Likewise, the Medicare Benefit Policy Manual provides that “[c]linical laboratory services must be ordered and used promptly by the physician who is treating the beneficiary.” These requirements make clear that only tests performed in connection with an appropriate diagnosis (correlated with a specific ICD code) and whose results will be used to treat the patient are reimbursable as “reasonable and necessary” by Medicare.
Lab Tests Must Be Justified By the Diagnosis
In order to ensure that labs do not submit claims for reimbursement for tests when the patient has diagnoses that are random or unrelated to the test and, thus, do not support the medical necessity of the test, the Centers for Medicare and Medicaid Services (“CMS”) publishes a comprehensive guide that provides the specific ICD code “for which Medicare provides the presumption of medical necessity,” i.e. codes for which Medicare provides the presumption of coverage. For example, a presumption of medical necessity exists for certain HIV testing (CPT codes 87536 and 87539) when performed on patients for whom various ICD codes that correlate with HIV, hepatitis, or other similar illnesses are submitted. Id. at 33-34. While CMS has not published required diagnosis codes for the many thousands of tests that labs may administer, the fact that is has done so for certain tests exemplifies its requirement that the diagnosis (conveyed in the form of an ICD code) must specifically justify the test performed for the lab to be reimbursed.
The Lab Is Responsible for Ensuring that the Diagnosis Justifies the Test
The lab – and not the physician or other medical provider who ordered the test – is the entity that actual submits claims to the Government and receives reimbursements. Providers may only bill Government healthcare programs for “reasonable and necessary” medical services, and in submitting claims, providers must certify the medical necessity of the services for which they are seeking reimbursement. In submitting reimbursement claim form CMS-1500 to obtain reimbursement from Medicare or other Federal health care programs, laboratories expressly certify on the back of the form “that the services shown on [the] form were medically indicated and necessary for the health of the patient.” Thus, each time a claim for payment is submitted to a Federal healthcare program, the provider expressly certifies that the services performed were medically justified. See United States ex rel. Riley v. St. Luke’s Episcopal Hosp., 355 F.3d 370, 376 (5th Cir. 2004) (“[C]aims for medically unnecessary treatment are actionable under the FCA.”).
A lab cannot submit to the Government and be paid for a test no matter what diagnosis the doctor gave the patient. See generally United States ex rel. Merena v. SmithKline Beecham Corp., 205 F.3d 97, 99 (3d Cir. 2000) (explaining that the Government reached a settlement agreement with a lab to resolve FCA claims based on allegations that the lab “submitted bills—and received payment—for tests that were medically unnecessary”); Garcia v. Sebelius, 2011 WL 5434426, at *7 (C.D. Cal. Nov. 8, 2011) (“The Secretary’s regulatory scheme places the burden of establishing the medical necessity of diagnostic tests on the entity submitting the claim.”). A lab – like all providers – may only submit claims that satisfy Medicare’s “reasonable and necessary” standard. See Meridian Lab. Corp. v. Sebelius, 2012 WL 3112066, at *1 (W.D.N.C. July 31, 2012) (explaining that “tests are subject to the ‘reasonable and necessary’ requirements found in the Medicare Act”).
Labs are not just pass through entities for a doctor’s orders. If the doctor gives a diagnosis to justify the test that is unrelated to and disconnected from the test, and if the results of the test are not specifically used by the doctor in treating the patient, then the lab cannot perform and bill for the test. In fact, CMS has adopted a comprehensive regulatory scheme that governs laboratory testing (except research) performed on humans through the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”). CLIA, in 42 C.F.R. § 493.1249, which describes quality assurance requirements for labs, imposes an affirmative pre-analytic obligation on laboratories to monitor the medical necessity and completeness of test request information solicited and obtained by the laboratory. CMS describes this laboratory obligation as “monitoring the medical necessity and completeness of test request information solicited and obtained by the laboratory.” Medicare, Medicaid, and CLIA Programs; Laboratory Requirements Relating to Quality Systems and Certain Personnel Qualifications, 68 FR 3640-01, 2003 WL 158514, at 3641 (Jan. 24, 2013) (emphasis added). Thus, CLIA ensures that the lab is not simply a pass through entity for a doctor’s order without any obligations of its own to ensure the medical necessity of its tests. Labs have an affirmative obligation to examine the doctor’s test ordering information and only perform and bill for the test if it is properly justified by the diagnosis.
 See also 42 C.F.R. § 410.32(d)(3)(i) (providing that upon request, a lab must provide CMS with the ICD code provided by the ordering physician); CMS, Clinical Diagnostic Laboratory Services, at 3-4 (Jan. 2016) available at www.cms.gov/Medicare/Coverage/CoverageGenInfo/Downloads/manual201601_ICD10.pdf (providing “codes for those lab test services for which Medicare provides the presumption of medical necessity”).
 Medicare Claims Processing Manual, CMS Pub. 100-4, Laboratory Services, Ch. 16, § 10 (Apr. 29, 2016), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/clm104c16.pdf.
 Medicare Benefit Policy Manual, Covered Medical and Other Health Services Ch. 15 § 80.1 (Oct. 13, 2016), available at https://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/Downloads/bp102c15.pdf.
 See CMS, Clinical Diagnostic Laboratory Services (Jan. 2016), available at https://www.cms.gov/Medicare/Coverage/CoverageGenInfo/Downloads/manual201601_ICD10.pdf.
 The CLIA regulations include federal standards applicable to all U.S. facilities or sites that test human specimens for health assessment or to diagnose, prevent, or treat disease. The Division of Laboratory Services, within the Survey and Certification Group, under the Center for Clinical Standards and Quality (CCSQ), has the responsibility for implementing the CLIA Program. CLIA considers all entities that perform even one test on “materials derived from the human body for the purpose of providing information for the diagnosis, prevention or treatment of any disease or impairment of, or the assessment of the health of, human beings” to be governed by CLIA and must register with the CLIA program. See https://wwwn.cdc.gov/clia/.