Courts of Appeals Continue to Limit the Government’s Aggressive False Claims Act Theories

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This spring saw two significant victories for health care providers in the federal courts of appeals. In both cases, the courts rejected an aggressive government theory under the False Claims Act (FCA), the first related to damages calculation and the second related to liability.

On March 21, 2013, the Seventh Circuit Court of Appeals overturned a $2.7 million damages award against Anchor Mortgage Corporation,1 holding that the district court improperly calculated treble damages under the FCA. The Seventh Circuit now joins the majority of its sister circuit courts in determining that FCA damages should be calculated using a “net trebling” method, rather than a “gross trebling” method. Under the gross trebling method the government advocated, FCA damages would have been calculated by first trebling the false claim amount and then deducting the value of the goods or services provided, leading to significantly larger damage awards than the “net trebling approach,” which accounts for any recouped losses prior to trebling.

On April 1, 2013, the Sixth Circuit Court of Appeals overturned an $11.1 million judgment against MedQuest Associates, Inc. and three of its Nashville-area subsidiaries for alleged violations of the False Claims Act (FCA).2 Echoing its October 2012 opinion in Renal Care3 that overturned an $82.6 million judgment, the Court in MedQuest, reaffirmed that “[t]he False Claims Act is not a vehicle to police technical compliance with complex federal regulations.” In doing so, the Court rejected both government theories, holding that MedQuest was neither liable for its failure to comply with physician supervision regulations nor liable for its failure to satisfy Medicare enrollment regulations. For both claims, the Court found that MedQuest’s failures were violations of conditions of participation, which cannot give rise to FCA liability, rather than conditions of payment, which can give rise to such liability.

Anchor Mortgage

In Anchor Mortgage, the district court determined that the company and its CEO lied when applying for federal guarantees of 11 loans. In calculating the damages award, the district judge added the amounts the United States had paid to lenders under the guarantees and trebled the total. The district judge then subtracted any amounts that had been realized from selling the properties that secured the loan, resulting in $326,729.15 in damages.

The Seventh Circuit affirmed the judgment of FCA liability but “reversed to the extent it adopts the gross trebling approach” to calculate damages. Writing for the Court, Judge Frank Easterbrook noted that although the FCA does not specify whether the gross trebling or net trebling approach should be used, it also does not “signal a departure from the norm,” and the norm is net trebling in civil litigation, including treble-damages actions under the Clayton Act. The Justice Department relied on the Supreme Court’s decision in United States v. Bornstein 423 U.S. 303 (1976), in support of the gross trebling approach, which is the precedent followed by the Ninth Circuit Court of Appeals. Judge Easterbrook determined that the Bornstein decision “unambiguously uses the contract measure of loss, supporting a net trebling approach” based upon Footnote 13 in the opinion. Although the Ninth Circuit has adopted the gross trebling approach, Judge Easterbrook cited the Second, Sixth, D.C., and Federal Circuits in observing that appellate decisions generally favor the net trebling approach.


(1) Physician Supervision Claims

For contrast MRI and CT scans performed at independent diagnostic testing facilities (IDTFs), Medicare regulations require direct or personal supervision by one of the IDTF's supervising physicians. CIGNA, MedQuest’s Medicare carrier at the time, imposed an additional requirement that the supervising physicians be board certified in radiology or be approved by CIGNA as having sufficient training and experience in radiology to supervise procedures. MedQuest listed three CIGNA approved supervising physicians on its enrollment file. The government alleged that MedQuest used physicians who were not reported on its enrollment file 4 and were not board certified in radiology or approved by CIGNA to directly supervise contrast scans.

To support its claim, the government asserted “express certification” and “implied certification” theories under the FCA. Under the express certification theory, the government argued that MedQuest certified compliance with Medicare regulations as a condition of government payment, yet knowingly failed to comply with the regulations. MedQuest violated its express certification that the physicians listed on its enrollment file would supervise such testing. Under the implied certification theory, the government argued that MedQuest impliedly certified that the Medicare claims submitted for testing at its Nashville-area IDTFs were based upon diagnostic testing that conformed to Medicare regulations and policies regarding physician supervision. Based upon 42 C.F.R. § 410.33(b)(2), the district court determined that “the requisite physician supervision is a condition of payment of claims.”

In overturning the lower court’s decision, the Sixth Circuit determined that the requisite physician supervision was in fact a condition of participation, which could not support an FCA claim. The Court noted that “[a] conclusion that compliance with the supervising-physician requirements is a condition of payment is only possible by weaving together isolated phrases from several sections in the complex scheme of Medicare regulations,” a cut-and-paste approach the Court deemed inappropriate. The Court further noted that “it is not reasonable to expect Medicare providers to attempt such an approach to statutory interpretation in their efforts to comply with the FCA.” Moreover, the Court determined that the express certification theory failed because MedQuest’s certification in its enrollment application that it would “abide by the Medicare laws, regulations and program instructions” does not contain language conditioning payment on compliance with any particular law or regulation. In addition, the Court determined that “the falsity of a claim is determined at the time of the submission” and the government presented no proof that MedQuest intended to violate Medicare regulations at the time that it applied for enrollment in the Medicare program.

The Sixth Circuit also dismissed the government’s implied certification theory that the claims submitted by MedQuest violated conditions of payment because the tests were not “reasonable and necessary,” a primary prerequisite to Medicare payment. The Court concluded that the direct supervision provided during contrast procedures was sufficient for the claims to meet the “reasonable and necessary” requirement and satisfy the conditions for payment. Although the supervising physicians did not meet CIGNA’s additional requirements, those additional requirements did not affect whether the tests were “reasonable and necessary” for purposes of payment.

(2) Medicare Enrollment Claims

Changes of ownership involving IDTFs must be reported within 30 days of the change to the appropriate Medicare contractor.5 MedQuest acquired via stock purchase a physician practice, which became one of the subsidiaries involved in the FCA litigation. After the acquisition, MedQuest operated the location as an IDTF, but it continued using the physician’s Medicare number and failed to notify CIGNA of the change of ownership until 18 months after the acquisition. The government alleged that MedQuest’s failure to notify CIGNA of the change of ownership and the continued use of the physician’s Medicare number constituted violations of the FCA. The district court again determined that these actions were violations of Medicare conditions of payment based upon 42 C.F.R. § 410.33(a), which states that “carriers will pay for diagnostic procedures under the physician fee schedule only when performed by a physician, a group practice of physicians, . . . or an [IDTF].” Because the IDTF was not enrolled and approved as an IDTF by Medicare, it was not entitled to be paid for tests.

The Sixth Circuit again overturned the district court’s ruling, finding that MedQuest’s actions constituted violations of conditions of participation, not conditions of payment. The Court noted that Section 410.33(a) does not require Medicare enrollment and approval for an entity to be an IDTF. As such, because the facility was being operated as an IDTF, it met the condition of payment contained in Section 410.33(a). In dismissing the government’s claim, the Court emphasized that the facility was already enrolled in the Medicare program, albeit as a physician practice, and that “at most, [this case] represents a failure to update enrollment information, which we have held is not a violation of a condition of payment.” ***

Both Anchor Mortgage and MedQuest symbolize some courts’ growing resistance to the more aggressive applications of the FCA. The Sixth Circuit’s opinion in MedQuest is particularly notable as it continues that Circuit’s trend of reining in the government’s most tenuous theories of FCA liability for healthcare providers. While acknowledging the FCA’s role in enforcing Medicare regulations, the Sixth Circuit made clear that “the bluntness of the FCA’s hefty fines and penalties makes them an inappropriate tool for ensuring compliance with technical and local program requirements.” Those are welcome words to health care providers that may face FCA liability while attempting to navigate the complex Medicare regulatory scheme.

For additional information, please contact Ty Howard, Jack Selden, or one of the other attorneys in the Health Care or White Collar Defense practice groups at Bradley.

1 United States v. Anchor Mortg. Corp., -- F.3d -- , 2013 WL 1150213 (7th Cir. Mar. 21, 2013).

2 United States ex rel. Hobbs v. MedQuest Assoc., Inc., -- F.3d --, 2013 WL 1285590 (6th Cir. Apr. 1, 2013).

3 United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518 (6th Cir. 2012).

4 Medicare regulations allow physicians not listed on a provider’s CMS-855 form to provide services for locum tenens coverage. Locum tenens means a physician who is temporarily covering for another physician and is identified on a claim submitted to Medicare by attaching a modifier to the claim which identifies it to Medicare. Accordingly, the fact that MedQuest was using the services of these locum tenens physicians was not at issue; rather, the issue was that the locum tenens physicians were not board certified in radiology or approved by CIGNA.

5 The Court noted that 42 C.F.R. § 410.33(g), which sets forth the notice procedures for a change of ownership of an IDTF, was not enacted at the time of the violations claimed by the government.