Health Law Daily Wrap Up, FALSE CLAIMS ACT—D.S.C.: Court’s findings mixed on FCA violations, (Mar 24, 2017)

By Jessica Y. Washington, J.D.

The U.S. District Court for the District of South Carolina, Charleston Division, found that a party’s first amended complaint alleging violation of the False Claims Act (FCA) against a health care consultant (consultant) and two laboratory companies (labs), is sufficient, in part, to withstand portions of the consultant’s motion to dismiss but is insufficient, in part, to survive other portions of the dismissal motion. Specifically, the court granted the consultant’s motion to dismiss with regard to claims alleging payment of inflated packaging fees to physicians to induce referrals (P&H fees), systematic billing for medically unnecessary tests, and retention of proceeds to which the consultant was not entitled. However, the court denied the consultants motion to dismiss claims alleging kickbacks related to payment of "speaking fees" to physicians who signed up to be in the consultant’s speaker’s bureau and waiver of private insurance co-payments and deductible payments; making or using false records or statements material to payment or approval of false claims; and conspiracy to commit FCA violations (U.S. ex rel. Lutz v. Berkeley Heartlab, Inc., March 23, 2017, Gergel, R.).

Background. The first amended complaint alleged the consultant violated the following FCA provisions: (1) presenting false claims in violation of 31 U.S.C. § 3729(a)(1)(A); (2) making or using false records or statements material to payment or approval of false claims in violation of Sec. 3729(a)(1)(B); (3) retention of proceeds to which not entitled in violation of Secs. 3729(a)(1)(G); and (4) conspiracy to commit violations under Sec. 3729(a)(1)(C). The complaint further alleged that the consultant committed the FCA violations through its participation in five illegal schemes, including two related to kickbacks (the waiver of private insurance co-payments and deductible payments and payment of "speaking fees" to physicians who signed up to be in the consultant’s speaker’s bureau); payment of inflated packaging fees to physicians to induce referrals (P&H fees); and systematic billing for medically unnecessary tests.

In its motion to dismiss, the consultant argued (1) the first amended complaint was barred relative to P&H fees and unnecessary tests by Sec. 3730(b)(5) (the first-to-file bar); (2) the party bringing the first amended complaint did not have Article III standing to pursue any FCA claims against the consultant on which the Government has intervened (the Government filed a Complaint in Intervention in the matter, alleging that the consultant induced medically unnecessary testing and paid, or caused the payment of, unlawful kickbacks in the form of processing and handling fees to physicians); and (3) the first amended complaint failed to meet the pleading requirements of Rules 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure.

First-to-file bar and Article III standing for government intervened claims. In the party’s original complaint, the court found that the allegations related to P&H fees and unnecessary tests were barred by the first-to-file rule. Relative to the first amended complaint, the party conceded that he did not seek reconsideration of the court’s prior order on the matter and that he only included the claims in the first amended complaint in order to preserve his rights on appeal. In view of this, the court dismissed these claims. The Government intervened relative to the claims related to P&H fees, unnecessary tests, the consultant’s commission agreements with the labs, and a conspiracy to violate the FCA. The court found that the Government’s intervention complaint was the operative complaint as to all intervened claims, and accordingly, the Government held primary responsibility for prosecuting the action and was not bound by an act of the original relator. However, the relator retained the right to continue as a party to the action.

Pleading fraud with particularity-Rule 9(b) and 12(b)(6). The court dismissed the non-intervened claims in the original complaint for failure to plead fraud with particularity. The party filed the first amended complaint to cure these deficiencies. The consultant argued that the first amended complaint failed to allege the following claims with particularity: (1) the speaker’s bureau kickback scheme; (2) the waiver of co-payments/deductibles kickback scheme; (3) making or using false records or statements material to payment or approval of false claims under Sec. 3729(a)(1)(B); (4) retention of proceeds to which not entitled under Sec. 3729(a)(1)(G); and conspiracy to commit violations under Sec. 3729(a)(1)(C).

Anti-kickback statute. The court found that the first amended complaint satisfies the "who, what when, where, and how" of the alleged fraud relative to the kickback scheme, and, therefore, the allegations were sufficient to survive the motion to dismiss under Rule 9(b) and Rule 12(b)(6).

False records. The court found that the first amended complaint clearly alleges that the consultant caused false records material to false claims to be made and/or used and that the consultant’s creation of false records is the necessary, foreseeable, and obvious consequence of the consultant’s use of materials that highlighted the laboratories’ no-balance billing practices to induce referrals from physicians. The court found that the first amended complaint survived the motion to dismiss on this claim.

Retention of proceeds. The court found that the first amended complaint failed to provide any legal support for the proposition that the consultant had an obligation to return funds to the government simply because it knew the funds were fraudulently obtained and that the government was the original source of the funds. The court further noted that the Medicaid program requirement that a provider return overpayments to the government within 60 days of discovering the overpayment is the type of obligation contemplated by 31 U.S.C. § 3729(a)(1)(G). Accordingly, the court granted the consultant’s motion to dismiss this claim.

Conspiracy. The first amended complaint alleged that (1) the consultant entered into agreements with two labs to violate the FCA by paying kickbacks to physicians to induce referrals for government-paid business via co-payment and deductible waivers and speaker fees; and (2) the consultant used this agreed-upon kickback scheme to market the labs’ tests to physicians. The court found that the first amended complaint adequately alleged that the consultant entered into an agreement with the specific intent to defraud the government and completed the act in furtherance of that conspiracy. Therefore, the court denied the consultant’s motion to dismiss on this claim.

The case is No. 9:14-cv-00230-RMG.

Attorneys: Donald H. Caldwell, Jr., U.S. Attorney's Office, for the United States. Christopher M. Kovach (Barnwell Whaley Patterson and Helms LLC) and Joseph P. Griffith, Jr. (Joe Griffith Law Firm, LLC) for Bluewave Healthcare Consultants, Inc. Brian P. Dunphy (Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC) for Berkeley HeartLab, Inc.

Companies: Bluewave Healthcare Consultants, Inc.; Berkeley HeartLab, Inc.

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