Reduced Qui Tam Exposure for Firms That Fail to Self-Report?

A number of Medicare providers have settled reverse-false-claims allegations based on their failure to self-disclose overpayments in alleged violation of 42 U.S.C. ' 1320a-7b(a)(3), including multi-million dollar settlements by Eisenhower Medicare Center in California, Lovelace Health Systems in New Mexico, and Allina Health System in Minnesota

For example, Allina, a multi-hospital health system, settled reverse-false- claims allegations for $16 million. The Allina settlement occurred after it allegedly learned of billing errors from an internal audit, but supposedly did not then take appropriate action. According to a DOJ press release, although Allina 'repaid the specific claims identified as erroneous in the audits, it did nothing to ensure that other false claims were repaid ' ” The government maintains that Allina incurred False Claims Act liability for failing to determine and disclose the full extent of its alleged Medicare overpayment liability.

A number of relators have filed qui tam actions against Medicare provid-ers, alleging that the providers retained Medicare overpayments about which they came to learn, asserting liability under the reverse- false-claims provision. They have argued that 42 U.S.C. ' 1320a-7b(a)(3) created an 'obligation' on Medicare providers to pay money to the government because the statute arguably makes it a felony for providers not to self-disclose. The government has also adopted this theory in False Claims Act litigation. See, eg, Plaintiffs' Response to Defendants' Motion to Dismiss, United States ex rel. Alderson v. Quorum Health Group, Inc., No. 99-413 (M.D. Fla. June 7, 1999). Now, at least one district judge has rejected the theory in an analogous context.

The Hoyte Case

In Hoyte v. American Red Cross, 2006 WL 1971710 (D.D.C. July 14, 2006), the relator accused the American Red Cross (Red Cross) of failing to make self-disclosures required by a Consent Order between the government and the agency. The Consent Order resolved allegations that the Red Cross had mishandled blood products in violation of FDA regulations. It required the Red Cross to follow certain specified procedures in handling blood products, and report to the FDA violations of FDA regulations and of certain additional blood-handling obligations created by the Consent Order. The Consent Order expressly authorized the FDA to impose fines and penalties for violations of its provisions.

The relator in Hoyte alleged that the Red Cross violated the Consent Order when it allegedly failed to disclose to the FDA that it had collected and used certain blood products that may have been contaminated. According to the relator, the Red Cross declined to self-disclose in order to avoid imposition of fines and penalties in violation of the 'reverse false claims' provisions of the False Claims Act. As noted, this provision imposes liability on one who 'knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.' 31 U.S.C. ' 3729(a)(7).

In an important interpretation of the reverse false claims provision, the district court granted the Red Cross's motion to dismiss. Judge Paul Friedman ruled that the relator had not alleged that the Red Cross was under an obligation to pay money at the time it allegedly failed to self-disclose the violations. According to the district court, the term 'obligation' 'means a present, existing debt or liability, owed at the time the alleged false statement is made, and not some future or contingent liability.' 2006 WL at *5. The statute 'contains no terms modifying ['obligation'] such that it can be interpreted as a future obligation, or potential obligation, or otherwise taken out of its present tense context.' The district court also relied upon legislative history which explained that the reverse-false-claims provision was intended to impose liability on those who make 'a material misrepresentation to avoid paying money owed the Government,' clearly placing the obligation in the past tense.'

Although the FDA allegedly could have imposed liability on the Red Cross, it had not yet done so. Consequently, the Red Cross was under no existing 'obligation' to pay money at the time of its alleged failure to self-report. The district court emphasized that any obligation of the Red Cross to pay money to the government was contingent on too many discretionary government decisions. The decision whether to impose sanctions rested exclusively with the FDA, and the FDA was under no duty to seek sanctions.

Failure to Self-Report Overpayments

The Hoyte decision may provide a defense to health care providers accused of violations of 42 U.S.C. ' 1320a-7b(a)(3). This awkwardly worded provision of the Medicare Act makes it a felony for one who:

' having knowledge of the occurrence of any event affecting ' his initial or continued right to any such [Federal health care program] benefit or payment ' conceals or fails to disclose such event with an intent fraudulently to secure such benefit or payment either in a greater amount or quantity than is due or when no such benefit or payment is authorized '

According to the government, under this provision, it is a felony for a Medicare or Medicaid provider to fail to disclose that it has been overpaid once it comes to learn of an overpayment, even the provider was completely blameless in being overpaid.

The district court's decision in Hoyte, however, undermines the theory that a provider's failure to self-report under 42 U.S.C. ' 1320a-7b(a)(3) results in civil liability under the reverse-false-claims provision. As noted, the Hoyte court held that there is civil reverse false claims liability only if there is a pre-existing obligation to pay money, and that the contingent possibility that the government may exercise its prosecutorial discretion is not enough to create such an obligation. That is, whether a Medicare provider has an obligation to pay money depends under 42 U.S.C. ' 1320a-7b(a)(3) depends on too many contingencies concerning
government enforcement decisions. Moreover, the statute does not require the refunding of any overpayments ' at most, it requires the disclosure of the receipt of overpayments. The government may elect not to recoup the overpayment even after a disclosure is made. For all these reasons, some providers have argued that courts should not impose civil reverse-false-claims liability as a re-sult of an alleged failure to disclose Medicare overpayments in alleged violation of 42 U.S.C. ' 1320a-7b(a)(3).

Wider Implications

Although companies generally are not obligated to self-report regulatory violations or overpayments, some government contracts, statutes and regulations do require such self-reports. Those who allegedly violate a self-reporting obligation may be subject to accusations that they are civilly liable for reverse false claims. Hoyte, however, provides contractors a defense inasmuch as it requires that a company be under a pre-existing obligation to pay money to the government before reverse -false-claims liability is triggered.

Jesse A. Witten ([email protected]) is a partner at Ropes & Gray LLP in Washington, DC, where he specializes in defending companies accused of Medicare fraud.

A recent decision of the U.S. District Court for the District of Columbia limited the reach of the 'reverse false claims' provision of the civil False Claims Act, 31 U.S.C.
' 3730(a)(7). This opinion, if followed by other courts, will reduce the risk of civil False Claims Act liability for companies accused of failing to self-report regulatory violations in settings where self-disclosure is required.

Background

In the jargon of the civil False Claims Act, one who 'knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government,' can be subject to 'reverse false claim' liability. See 31 U.S.C. ' 3729(a)(7). Either the government or a private relator can accuse a company of a reverse false claim. And reverse false claims actions can be expensive.

A number of Medicare providers have settled reverse-false-claims allegations based on their failure to self-disclose overpayments in alleged violation of 42 U.S.C. ' 1320a-7b(a)(3), including multi-million dollar settlements by Eisenhower Medicare Center in California, Lovelace Health Systems in New Mexico, and Allina Health System in Minnesota

For example, Allina, a multi-hospital health system, settled reverse-false- claims allegations for $16 million. The Allina settlement occurred after it allegedly learned of billing errors from an internal audit, but supposedly did not then take appropriate action. According to a DOJ press release, although Allina 'repaid the specific claims identified as erroneous in the audits, it did nothing to ensure that other false claims were repaid ' ” The government maintains that Allina incurred False Claims Act liability for failing to determine and disclose the full extent of its alleged Medicare overpayment liability.

A number of relators have filed qui tam actions against Medicare provid-ers, alleging that the providers retained Medicare overpayments about which they came to learn, asserting liability under the reverse- false-claims provision. They have argued that 42 U.S.C. ' 1320a-7b(a)(3) created an 'obligation' on Medicare providers to pay money to the government because the statute arguably makes it a felony for providers not to self-disclose. The government has also adopted this theory in False Claims Act litigation. See, eg, Plaintiffs' Response to Defendants' Motion to Dismiss, United States ex rel. Alderson v. Quorum Health Group, Inc., No. 99-413 (M.D. Fla. June 7, 1999). Now, at least one district judge has rejected the theory in an analogous context.

The Hoyte Case

In Hoyte v. American Red Cross, 2006 WL 1971710 (D.D.C. July 14, 2006), the relator accused the American Red Cross (Red Cross) of failing to make self-disclosures required by a Consent Order between the government and the agency. The Consent Order resolved allegations that the Red Cross had mishandled blood products in violation of FDA regulations. It required the Red Cross to follow certain specified procedures in handling blood products, and report to the FDA violations of FDA regulations and of certain additional blood-handling obligations created by the Consent Order. The Consent Order expressly authorized the FDA to impose fines and penalties for violations of its provisions.

The relator in Hoyte alleged that the Red Cross violated the Consent Order when it allegedly failed to disclose to the FDA that it had collected and used certain blood products that may have been contaminated. According to the relator, the Red Cross declined to self-disclose in order to avoid imposition of fines and penalties in violation of the 'reverse false claims' provisions of the False Claims Act. As noted, this provision imposes liability on one who 'knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.' 31 U.S.C. ' 3729(a)(7).

In an important interpretation of the reverse false claims provision, the district court granted the Red Cross's motion to dismiss. Judge Paul Friedman ruled that the relator had not alleged that the Red Cross was under an obligation to pay money at the time it allegedly failed to self-disclose the violations. According to the district court, the term 'obligation' 'means a present, existing debt or liability, owed at the time the alleged false statement is made, and not some future or contingent liability.' 2006 WL at *5. The statute 'contains no terms modifying ['obligation'] such that it can be interpreted as a future obligation, or potential obligation, or otherwise taken out of its present tense context.' The district court also relied upon legislative history which explained that the reverse-false-claims provision was intended to impose liability on those who make 'a material misrepresentation to avoid paying money owed the Government,' clearly placing the obligation in the past tense.'

Although the FDA allegedly could have imposed liability on the Red Cross, it had not yet done so. Consequently, the Red Cross was under no existing 'obligation' to pay money at the time of its alleged failure to self-report. The district court emphasized that any obligation of the Red Cross to pay money to the government was contingent on too many discretionary government decisions. The decision whether to impose sanctions rested exclusively with the FDA, and the FDA was under no duty to seek sanctions.

Failure to Self-Report Overpayments

The Hoyte decision may provide a defense to health care providers accused of violations of 42 U.S.C. ' 1320a-7b(a)(3). This awkwardly worded provision of the Medicare Act makes it a felony for one who:

' having knowledge of the occurrence of any event affecting ' his initial or continued right to any such [Federal health care program] benefit or payment ' conceals or fails to disclose such event with an intent fraudulently to secure such benefit or payment either in a greater amount or quantity than is due or when no such benefit or payment is authorized '

According to the government, under this provision, it is a felony for a Medicare or Medicaid provider to fail to disclose that it has been overpaid once it comes to learn of an overpayment, even the provider was completely blameless in being overpaid.

The district court's decision in Hoyte, however, undermines the theory that a provider's failure to self-report under 42 U.S.C. ' 1320a-7b(a)(3) results in civil liability under the reverse-false-claims provision. As noted, the Hoyte court held that there is civil reverse false claims liability only if there is a pre-existing obligation to pay money, and that the contingent possibility that the government may exercise its prosecutorial discretion is not enough to create such an obligation. That is, whether a Medicare provider has an obligation to pay money depends under 42 U.S.C. ' 1320a-7b(a)(3) depends on too many contingencies concerning
government enforcement decisions. Moreover, the statute does not require the refunding of any overpayments ' at most, it requires the disclosure of the receipt of overpayments. The government may elect not to recoup the overpayment even after a disclosure is made. For all these reasons, some providers have argued that courts should not impose civil reverse-false-claims liability as a re-sult of an alleged failure to disclose Medicare overpayments in alleged violation of 42 U.S.C. ' 1320a-7b(a)(3).

Wider Implications

Although companies generally are not obligated to self-report regulatory violations or overpayments, some government contracts, statutes and regulations do require such self-reports. Those who allegedly violate a self-reporting obligation may be subject to accusations that they are civilly liable for reverse false claims. Hoyte, however, provides contractors a defense inasmuch as it requires that a company be under a pre-existing obligation to pay money to the government before reverse -false-claims liability is triggered.

Jesse A. Witten ([email protected]) is a partner at Ropes & Gray LLP in Washington, DC, where he specializes in defending companies accused of Medicare fraud.