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“What were you thinking?” Internal Communications as Evidence of Willful Disregard under the False Claims Act

on Tuesday, 18 July 2017 in Health Law Alert: Andrew D. Kloeckner, Editor

A recent Eleventh Circuit Court of Appeals decision opens the door to a broader view of False Claims Act (“FCA”) liability. The Court’s decision in U.S. ex rel. Phalp v Lincare Holdings, Inc., issued in May 2017, looked more deeply into a Medicare supplier’s subjective state of mind than is usual in FCA cases, including a review of the defendant’s internal e-mails.  This level of inquiry, if adopted by other courts, will raise new risks for Medicare providers and suppliers.

Relators may be able to use the opinion to prolong qui tam beyond summary judgment.  The case suggests relators will likely review target companies’ internal communications in future actions.  Health care providers and suppliers, accordingly, should undertake an internal review when, for example, they discover an overpayment and consider invoking a self-disclosure protocol.

The allegations in ex rel. Phalp arose from a qui tam complaint that adopted a “false certification” theory.  The defendant, Lincare, initially became a Medicare DME supplier to supply beneficiaries with oxygen and other equipment related to chronic obstructive pulmonary disease.  Each beneficiary properly executed an authorization or assignment of benefits (“AOB”) to Lincare.  The AOB forms were generic, agreeing to rent or purchase “certain medical equipment, products, supplies, prescription drugs and/or associated services” from Lincare.  Based on these AOBs, Lincare properly billed Medicare for these items.

Lincare later expanded its business to diabetic testing supplies, advertising this service to its existing customers, many of whom bought those supplies as well.  Lincare did not procure new AOBs specific to diabetic testing supplies, but instead relied on the original, generic AOB to bill Medicare for both oxygen and diabetic supplies.  The claim forms that Lincare filed included a certification that Lincare was in compliance with all regulations.  Based on this allegedly false certification (along with another theory not discussed here), two Lincare salesmen filed a qui tam action under the FCA.

Eventually, Lincare sought summary judgment dismissing the relators’ action, asserting that no evidence supported an essential element of the relators’ FCA claim ― that Lincare knew or should have known it was filing defective claims.  It was uncontested that, at the time the claims were submitted, the regulations and guidance did not indicate that a Medicare supplier should secure a separate AOB for each type of supply it billed to the program.  The district court granted Lincare summary judgment and dismissed the action on that grounds alone, holding that “relators must show that there is no reasonable interpretation of the law that would make the allegedly false statement true.”  The district court did not make any subjective inquiry into the defendant’s state of mind.

When the regulations and manuals support multiple interpretations, a provider who files a claim based on a reasonable interpretation of the guidance does not violate the FCA.  This has led some commentators to suggest that “ignorance of the law” may be an excuse for filing a false claim.  This is not accurate, however.  Rather, courts recognize that the government is required to publish the law, and that a provider cannot violate (or comply with) a non-existent rule.  This is as far as the district court’s analysis went in ex rel. Phalp.

There is, however, a subjective element to the knowledge analysis, which the Eleventh Circuit criticized the district court for neglecting.  In the context of inadequate regulatory guidance, a Medicare supplier or provider must inquire whether its interpretation of the available guidance is appropriate.  Failure to make this inquiry may constitute “reckless disregard” that satisfies the knowledge element for FCA liability.  Federal courts have long considered evidence that suppliers and providers were subjectively aware that they had been “warned away” from a given interpretation, as a basis to find reckless disregard.

What was novel in the Eleventh Circuit’s analysis was the level of inquiry it brought to bear on the defendant’s subjective awareness.  The Court stated that reckless disregard may be demonstrated by evidence of “the ‘ostrich’ type situation [where] an individual has buried his head in the sand and failed to make simple inquiries.”  Relying solely on an objective analysis of the regulations might allow a defendant to manufacture a “reasonable” interpretation of an ambiguous regulation after the fact, despite knowing at the time that the claims were filed improperly.  The Court accordingly reviewed the district court record for evidence indicating the state of mind of Lincare’s personnel, including e-mails between managers, which it discussed in some detail.  Ultimately, the Court found that those e-mails were insufficient to support a finding of reckless disregard and affirmed the district court’s grant of summary judgment for the defendant.

Despite the positive outcome for the defendant in this case, the Eleventh Circuit’s analysis provides new ammunition for relators in FCA qui tam suits.  Accordingly, providers and suppliers should consider how their internal communications could be used against them.  The take-away from ex rel. Phalp is that internal communications will be potentially more important in the future, and should factor into any assessment of potential FCA exposure.

Thomas S. Dean


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