Erroneous Country of Origin Determinations May Result in Significant FCA Penalties for Medical Device Companies

Country of origin labeling issues can be exceedingly complex, as we have noted before. Several manufacturers have recently paid multi-million dollar settlements for alleged misstatements about their products’ country of origin, under the Trade Agreements Act (TAA) and False Claims Act (FCA). As described by Reed Smith attorneys Larry Sher, Larry Block and Jeffrey Orenstein in “Medical Device Companies Face Severe FCA Penalties for TAA Violations,” the TAA requires that entities selling certain products to the U.S. government be responsible for identifying the products’ country of origin and ensuring that it is either the United States or one of the designated countries with which the United States has special trade agreements. Falsely certifying products as being TAA-compliant can result in sizeable civil and criminal penalties for entities under the FCA, and can attract attention both from purported whistleblowers and the Department of Justice.

To read the client alert, click here.

Insurance Coverage for False Claims Act Lawsuits?

The number of qui tam actions brought under the False Claims Act (FCA) has increased dramatically over the past several years, as the incentives for bringing such claims have grown.

Reed Smith attorneys Brian Himmel and Natalie Metropulos have authored “Insuring Against FCA Suits in the Health Care Industry” in Corporate Counsel discussing the steps that health care service providers should take to insure themselves against allegations of FCA violations. Recommendations include assessing current insurance coverage for defending and resolving such claims, and additional types of policies that can provide FCA coverage.

To read the article, click here.

OIG Warns About Ineligibility of Health Care Program Beneficiaries for Pharmaceutical Coupon Programs

The Office of Inspector General (OIG) of the Department of Health & Human Services issued a Special Advisory Bulletin (SAB) on September 19, 2014 discussing the coupon programs employed by many pharmaceutical manufacturers to reduce or entirely eliminate patient copayments to obtain brand-name drugs. As mentioned on our Health Industry Washington Watch blog, the SAB cautions that there are several risks associated with manufacturers utilizing such coupon programs, and that the manufacturers must make efforts to prevent federal health care program beneficiaries from using the coupons if they wish to avoid these risks. Among the potential issues that can arise from an improperly-regulated coupon program are violations of the Anti-Kickback Statute (when programs – which qualify as remuneration – are purposely paid with the intent to encourage the use of items or services payable by a federal health care program) and False Claims Act (when a claim includes items or services resulting from a kickback violation). While the SAB’s focus is on manufacturer coupon practices, in a footnote, the OIG states that pharmacies accepting coupons for Part D copayments may also be subject to these sanctions.

To read the entire post, click here.

First Amendment, False Claims, and Off-Label Promotion Allegations

The Drug & Device Law blog recently posted an analysis of an interesting case, United States ex rel. Solis v. Millennium Pharmaceuticals, Inc., that takes an issue the government has fought in the past – off-label promotion – and attempts to provide a link between it and the false claims issues that relators bring under the government’s name. Solis asserts that the dissemination of certain published medical articles on the part of the defendant constituted off-label promotion and resulted in the submission of false claims for federal reimbursement.

As Reed Smith partner Jim Beck discusses in his post, False Claims Act (FCA) litigation may provide drug and medical device counsel with ample opportunity to cite the First Amendment as a means of defense. The defense in Solis – supported in an amicus curiae brief filed by the Pharmaceutical Research and Manufacturers of America– argues that the dissemination of the medical articles was not “false” in that it did not present incorrect or misleading information, was protected by First Amendment, and did not lead to the submission of any false claims.

Do You Know Where Your Pharmaceuticals Are From? Navigating the "Country of Origin" Question for Pharmaceutical Products

Drug and medical device manufacturers are often faced with difficult — and sometimes unexpected — challenges in sorting out the country of origin for their products, which are often sourced, processed and manufactured in multiple countries.

One would think it would be easy to answer the question, “What is a pharmaceutical product’s ‘country of origin’?” Unfortunately, as Jeffrey Orenstein and Lorraine Campos point out in “Origin of the Pieces: How to Determine a Pharmaceutical Product’s ‘Country of Origin,’” the answer to this question is not as simple as many would think – and the correct answer can depend on who is asking. Jeff and Lorraine’s article is published in the Spring 2014 edition of the Public Contract Law Journal.

Manufacturer, Group Payment Organization, and Physician Financial Information Slated For Disclosure, May Spur False Claims Act Activity

As mentioned on our Health Industry Washington Watch blog, pharmaceutical and medical device manufacturers and group purchasing organizations (GPO) are currently in the process of submitting detailed 2013 payment and investment interest data to the Centers for Medicare & Medicaid Services. The submission of this data, as dictated by the Physician Payment Sunshine Act, is intended to highlight certain financial relationships between the manufacturers and GPOs and physicians. With some exceptions, this data will become public by September 1, 2014, at which time the Department of Health and Human Services’ Office of the Inspector General, Department of Justice, and relators’ attorneys will likely analyze the data to initiate investigations and support complaints under the federal False Claims Act. To read the entire post, click here.

Proposed Rule Would Reward Medicare Fraud Tipsters up to $9.9 Million, Revise Medicare Provider Enrollment Regulations

This post was written by Scot T. Hasselman, Andrew C. Bernasconi, Susan A. Edwards and Debra A. McCurdy.

Yesterday the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that would dramatically increase the potential reward to an individual who provides a tip leading to the recovery of Medicare funds from a current maximum of $1,000 to a maximum of $9.9 million under the Medicare Incentive Reward Program.  Since 1998, an individual providing information regarding potential Medicare fraud and abuse to the Department of Health & Human Services’ Office of the Inspector General or the Medicare contractor with jurisdiction over the suspected fraudulent provider or supplier may be eligible to receive 10 percent of the Medicare funds ultimately collected from the tip, or $1,000, whichever is less.  Pursuant to the proposed rule CMS issued yesterday, an individual furnishing information that otherwise satisfies the requirements set forth in 42 C.F.R. § 420.405 would be eligible to receive 15 percent of a recovery up to $66 million.  Therefore, a tipster could receive up to a $9.9 million reward for any information provided regarding suspected Medicare fraud and abuse.

In the proposed Medicare Incentive Reward Program rule, CMS explains that it “tentatively project[s] a net increase in recoveries of $24.5 million per year as a result of the proposed changes.”  In addition, CMS notes that it is modeling the proposed Incentive Reward Program changes on a “highly successful” Internal Revenue Services (IRS) reward program that returned “far greater sums than the existing Medicare [Incentive Reward Program].”  Notably, since the implementation of the current Medicare Incentive Reward Program in July 1998, CMS has collected only $3.5 million; in contrast, between 2007 and 2012, the IRS has collected almost $1.6 billion through its reward program.  CMS states in the preamble that it proposes to clarify that it will not pay an award if the same or substantially similar information was the basis for a relators share in a qui tam lawsuit under the federal False Claims Act or a state False Claims Act, or is the basis for a pending state or federal False Claims Act suit.  However, the proposed regulatory language that would codify this change, found at proposed 42 C.F.R. § 420.405(b)(3), does not specify that this provision would apply to state False Claims Acts.

The proposed rule also would pay the reward amount only to the first individual who makes a report.  In addition, among other proposed changes to the regulations found at 42 C.F.R. § 420.405, CMS proposes to emphasize that it has exclusive discretion in determining the amount of a reward and whether the reward criteria are met.  The existing regulation provides for numerous other exceptions and conditions and generally excludes federal and state law enforcement officials, federal government employees, and federal contractors, from eligibility.

CMS also proposes several revisions to Medicare’s provider enrollment regulations, such as:

  • Allowing CMS to deny the enrollment of providers, suppliers, and owners affiliated with an entity that has unpaid Medicare debt;
  • Expanding the instances under which a felony conviction can serve as a basis for denial or revocation of a provider or supplier's enrollment;
  • Enabling CMS to revoke Medicare billing privileges if it determines that the provider or supplier has a pattern or practice of submitting claims for services that fail to meet Medicare requirements; and
  • Limiting the ability of ambulance suppliers to “backbill” for services performed prior to enrollment.

The proposed rule will be published in the April 29, 2013 edition of the Federal Register, and comments will be accepted for 60 days thereafter.


Whistleblower Cannot Rely on Stolen Patient Records

This post was written by Andrew Bernasconi & Nathan Fennessy.

A recent decision by the United States District Court for the Southern District of Ohio may make it much harder for qui tam relators to rely upon stolen medical records or patient information in False Claims Act (“FCA”) whistleblower actions. See Cabotage v. Ohio Hospital for Psychiatry, No. 11-cv-50 (S.D. Ohio July 27, 2012). In Cabotage, the district court held that a registered nurse was not permitted to support her allegations of FCA violations by relying on confidential protected health information that she surreptitiously removed from the hospital where she was employed.

The nurse in Cabotage purportedly removed the confidential protected health information as part of an “investigation” of alleged fraudulent conduct by the Medical Director. She subsequently provided this information to an investigator from the Department of Health and Human Services, but the agency declined to pursue a claim. After the nurse was terminated for other reasons, she commenced an action against her former employer under the FCA whistleblower provisions and the Ohio Whistleblower’s Act. During the course of discovery, the hospital learned about the nurse’s removal of confidential protected health information. After repeated requests to return the information were declined, the hospital filed a Motion for Return of Confidential Health Information.

The district court denied the motion on the grounds that the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) did not vest the court with jurisdiction to provide the remedy sought by the hospital. The court concluded, however, that it possessed inherent authority to issue an order preventing the nurse from using the confidential information in the instant action because the information was confidential, potentially privileged, and had been obtained outside the discovery process governed by the court.

The court’s decision is qualified and stops short of creating a new rule applicable to whistleblower cases, but nonetheless provides a step in the right direction for defendants facing whistleblowers who have inappropriately used or taken confidential information from their employer.


FCA Qui Tam Relator Sanctioned for Destroying Evidence on Company-Issued Laptop

This post was written by Andrew Bernasconi and Nathan Fennessy.

In yet another reminder about the importance of maintaining evidence on company-issued laptops, blackberries, or other electronic devices; the United States District Court for the Northern District of California recently sanctioned a qui tam relator for destroying more than 10,000 documents on his company-issued laptop. Moore v. Gilead Sciences, Inc., No. C 07-03850 SI, 2012 WL 669531 (N.D. Cal. Feb. 29, 2012).

To read the full post on Reed Smith's Global Regulatory Enforcement Law Blog, click here.

In-House Relator? The 2nd Circuit Considers Whether To Put the False Claims Act Between Attorneys and Their Clients

This post was written by Matthew R. Sheldon and Alexander Y. Thomas.

The Second Circuit Court of Appeals is reviewing a lower court decision disqualifying a former in-house attorney from acting as a False Claims Act qui tam relator against his former employer. The relator was formerly general counsel to Unilab, a subsidiary of Quest Diagnostics Inc. The qui tam suit alleged that Unilab violated the Federal Health Care Anti-Kickback Act by engaging in a fraudulent scheme to increase medical testing referrals under the Medicare and Medicaid programs. To read the full post on Reed Smith's Global Regulatory Enforcement Law Blog, click here.


Stark Law Developments Will Challenge Health Care Attorneys

Despite the many years since enactment, counseling health care clients on the broad and complex federal physician self-referral law, commonly called the Stark Law, will become increasingly difficult. Although originally enacted in 1989 to create "bright line" to demark improper physician self-referred laboratory services, and expanded in 1993 to cover a wide range of "designated health services" reimbursable under Medicare, the contours of the Stark Law continue to evolve and new uncertainties emerge.

The significant damages that can result from a Stark Law violation — most particularly the prospect under the False Claims Act for recovery of three times the Medicare reimbursement paid as a result of a prohibited referral — has caused the Stark Law to attract increasing attention from U.S. Attorneys offices and the private qui tam relator bar.

In his article "Stark Law Developments Will Challenge Health Care Attorneys," published in The Legal Intelligencer, Reed Smith Partner Karl Thallner discusses recent developments demonstrating the difficulties in counseling health care clients on the application of the Stark Law, as well as with selecting a course of action when a Stark Law violation has been discovered.

Significant Amendment to the Federal False Claims Act

This post was written by Scot T. Hasselman, Andrew C. Bernasconi and Nathan Fennessy.

On May 20, 2009, the President signed into law the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which will implement significant changes to the federal False Claims Act (“FCA”). The amendments to the FCA will significantly expand the scope of FCA liability, provide for new investigative tools, and make it easier for qui tam relators to bring and maintain FCA suits on behalf of the government.

The House and Senate both passed the bill with overwhelming majorities before the President signed FERA into law. While the new law is primarily targeted at potential fraud involving recipients of economic stimulus funds in the financial services industry, it also includes some very significant changes to the liability provisions of the federal False Claims Act affecting members of the health care industry.  To read Reed Smith's full alert, please click here.

Members of the health care industry should be concerned about the new definition of “obligation,” which applies to retained overpayments. While the new law only imposes liability for a knowing and improper “retention” of an overpayment, it is unclear exactly when FCA liability would attach for retention of such an overpayment. Currently, Medicare providers such as hospitals and skilled nursing facilities reconcile their accounting at the end of the fiscal year to determine whether Medicare overpaid them for services, and then return the overpayment (certain providers continue to cost report - even under prospective payment systems). The Senate Judiciary Committee report suggests that the Senate bill’s revision was not intended to interfere with this process and does not “create liability for a simple retention of an overpayment that is permitted by a statutory or regulatory process for reconciliation.” While this legislative history provides some guidance in interpreting intent of the statute, courts are not necessarily bound by the legislative history and there is not necessarily a guarantee that courts interpreting the definition of “obligation” will agree that the retention of an overpayment permitted by statute will prevent FCA liability.

In addition, while courts have generally held that potential FCA liability extends to Medicaid claims (or at least the federal share), commentary and arguments in several decisions have raised the possibility that claims to Medicaid may not satisfy the requirements of an action under the federal FCA. However, the new revisions were intended, at least in part, to dispel the notion that court decisions can be read to restrict FCA liability from attaching to Medicaid claims. The Committee report makes it clear that the revisions in § 3729(a)(2) were intended to clarify that FCA liability extends to “all false claims submitted to State administered Medicaid programs.”

Sweeping Changes to the Federal False Claims Act are on the Horizon

This post was written by Scot T. Hasselman, Andrew C. Bernasconi, and Nathan R. Fennessy.

On April 28, both the U.S. Senate and the U.S. House of Representatives took steps that would provide sweeping changes to the federal False Claims Act ("FCA"). The bills would significantly expand the scope of FCA liability while at the same time make it easier for qui tam relators to bring and maintain FCA suits on behalf of the government.

In short, the bills are answers to a DOJ and relator’s counsel "wish list" that would eliminate 20 years of hard-fought defense jurisprudence. In addition, the House bill, for example, would eliminate the public disclosure jurisdictional bar and defense, which could allow a sworn federal agent to utilize information obtained in the course of official investigations to file FCA lawsuits as a relator, and to receive a portion of any financial recovery. The House bill would also eliminate any basic pleading standards by relators and allow relators’s attorneys to file fishing expeditions without any substantive basis of allegation. 

For additional information, please see Reed Smith's full alert.

Federal Acquisition Regulation Council Final Rule Affects Life Sciences Government Contracts

This post was written by Lorraine Mullings Campos and Steven D. Tibbets.

On December 12, 2008 the Federal Acquisition Regulation (“FAR”) Council’s Final Rule – which applies to all federal government contracts in amounts greater than $5 million and more than 120 days in duration, including small business and commercial item contracts -- went into effect, requiring all federal contractors to disclose wrongdoing to the federal government, including certain violations of federal law, and violations of the False Claims Act. Specifically, contractors must “timely” disclose, in writing and to the Inspector General and the contracting officer (in that order), whenever, in connection with the award, performance, or closeout of a contract, the contractor has “credible evidence” that a principal, employee, agent, or subcontractor has committed a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations under Title 18 of the U.S. Code, or a violation of the False Claims Act.

In addition, the rule requires contractors to establish a “business ethics awareness and compliance program,” as well as an “internal control system” with certain attributes. In addition, significant overpayments by the government must be disclosed to the contracting officer. Failure to disclose violations of federal criminal law or violations of the False Claims Act may lead to criminal sanctions, civil penalties, suspension, or debarment.

Click here to view an an alert highlighting this and other major issues likely to impact government contracts businesses in the coming months and years.

Current Issues Under The Civil False Claims Act: Worthless Services, Off-Label Use, and More

This post was written by Elizabeth Carder-Thompson and Andrew L. Hurst.

A dizzying array of civil and criminal provisions address false or fraudulent representations made to, and false claims filed with, Medicare, Medicaid, and state and federal health care programs. This attached article, first published by the American Health Lawyers Association, briefly identifies relevant criminal and civil provisions relating to these issues, and then focuses more closely on recent uses of the civil False Claims Act (“FCA”) in government investigations of health care providers, suppliers, and manufacturers, including a section on state false claims legislation. Finally, it discusses the issue of distinguishing overpayments from false claims and provide information on the voluntary disclosure program of the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (HHS).

Life Sciences Industry Members Who Contract With Government Should Note Recent Amendment to the Federal Acquisition Regulation

This post was written by Lorraine M. Campos, Gregory S. Jacobs and Brett D. Gerson.

On November 12, 2008, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council issued an amendment to the Federal Acquisition Regulation (“FAR”) to establish: (1) mandatory disclosure requirements for certain violations of federal criminal law and the False Claims Act; (2) requirements for contractors to establish and maintain specific internal controls to detect, prevent, and disclose improper conduct in connection with the award or performance of any government contract or subcontract; and (3) new causes for suspension and debarment. See 73 Fed. Reg. 219, 67,064 (Nov. 12, 2008). The final rule went into effect December 12, 2008, and applies to all federal government contracts in amounts greater than $5 million and more than 120 days in duration, including small business and commercial item contracts. Certain exceptions are discussed in the attached.