Circuit Court Endorses Tri-Partite Inquiry in Analyzing Medical Necessity Under the False Claims Act

On May 1, 2017, in United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481 (3d Cir. 2017), the United States Court of Appeals for the Third Circuit endorsed a tri-partite approach in analyzing the medical necessity theory of liability under the False Claims Act.  While the Third Circuit ultimately affirmed the lower court’s dismissal of the case, the Court’s three-step approach provided clarity as to how to analyze medical necessity under the False Claims Act.

The relator in Petratos alleged that the drug manufacturer, Genentech, suppressed data about the negative side effects of its oncology drug, Avastin, which in turn caused physicians to submit claims to Medicare that were not “reasonable and necessary.”  855 F.3d at 485.  The lower court dismissed the relator’s claim, reasoning that “medically ‘reasonable and necessary’ is a determination made by the relevant [government] agency, not individual doctors.”  Id. at 486.  The Third Circuit disagreed, and held that the medical necessity of an FDA-approved product is a “process involving the FDA, CMS, and individual doctors.”  Id. at 487 (emphasis in original).

Tri-Partite Medical Necessity Analysis

In reaching its holding, the Petratos Court noted the role of each entity involved in the tri-partite medical necessity analysis:

-FDA – Whether the drug is FDA approved is one important consideration for CMS in determining whether it is “reasonable and necessary.” Id. at 487-88.

-CMS – “[T]he ‘reasonable and necessary’ determination does not end with FDA approval. The claim at issue must also be ‘reasonable and necessary for [the] individual patient’ based on “accepted standards of medical practice and the medical circumstances of the individual case.” Id. at 487-88 (emphasis in original) (citing Medicare Benefit Policy Manual, ch. 15, §50.4.3).

-Individual Physicians – Ultimately, CMS relies on the medical judgment of individual physicians in deciding whether to pay claims. Id. at 488.  The Court notes that “the doctors are best suited to evaluate each patient and determine whether a treatment is ‘reasonable and necessary.’” Id. at 489 (citation omitted).

The Court reasoned that from a “practical perspective” this three-part analysis “makes sense” and gave the following hypothetical example of a physician prescribing an FDA-approved drug for an on-label use that would still be considered medically unnecessary:

Avastin is approved by the FDA to treat patients with metastatic colorectal cancer and such prescriptions are reimbursable by CMS.  But if a doctor determined that a colorectal cancer patient had five hours to live and would best be treated with palliative care, then prescribing Avastin in that situation many not be “reasonable and necessary.”

Id. at 489.

The Circuit Court Affirmed Dismissal on Other Grounds

Although the Petratos Court disagreed with the lower court’s interpretation of the medical necessity standard, the Court ultimately affirmed the dismissal of the case on materiality grounds.  Id. at 489.  In Petratos, the relator did not dispute that, had the government known of the defendant’s suppression of adverse safety data, the government still would have paid the claims.  Id. at 489-93.  Consistent with the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Petratos Court held that this concession was dispositive of the materiality analysis and that it doomed the relator’s claims.  Id.

The Precedential Effect of the Circuit Court’s Decision

The Petratos decision serves as binding precedent in the Third Circuit.  For example, on May 31, 2017, the United States District Court for the District of New Jersey denied defendant Janssen’s motion to dismiss, in part by relying on Petratos.  United States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Citing Petratos, the District Court for the District of New Jersey upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. at *5.