EDNY Judge Nina Gershon analyzed several False Claims Act issues in United States ex rel. Omni Healthcare Inc. v. McKesson Corp., ruling on first-to-file, Rule 9(b), and statute of limitations issues.

Relator Omni Healthcare alleged that defendants improperly used “overfill” in vials of injectable drugs. “Overfill” is the amount of a drug in excess of the amount indicated on the label, typically included so the provider can withdraw a full dose from the vial. Relator alleged that defendants wrongfully broke into the vials, harvested the overfill, and then sold syringes with the overfill to providers who then billed the government.

Identify of Defendants Drives First-To-File Ruling

The Court initially addressed whether relator’s second amended complaint should be dismissed under the first-to-file rule, based on an earlier-filed case that also addressed alleged fraudulent repackaging of overfill. The Court reviewed Second Circuit law holding that a later-filed action is related and therefore barred if it “incorporate[s] the same material elements of fraud as the earlier action.” The Court concluded that the Omni Healthcare allegations were only related as to the one defendant that was a defendant in the earlier action, and dismissed the complaint only as against that defendant. The Court held that “the first-to-file bar would not reach a subsequent qui tam action otherwise alleging the same material elements of fraud, but alleging those elements concerning different defendants.” A later complaint is related if the earlier complaint equips the Government to investigate the fraud, and the Court determined that to be “‘equipped’ to investigate a fraud, the government must know whom to investigate.”

2017 Chorches Decisions Defeats Rule 9(b) Challenge

Defendants next asserted that the complaint did not satisfy the particularity requirement for pleading fraud under Rule 9(b), because it lacked allegations about the content of the false claims, who submitted them, and when they were submitted. Judge Gershon denied this argument based on the 2017 Second Circuit decision in United States ex rel. Chorches v. Am. Med. Response, Inc., which was discussed here. The Court held that “such information is not required where, as here, the relator’s allegations create a strong inference that specific false claims were submitted.”

Statute of Limitations Bars Claims Against Added Defendants

Omni Healthcare conceded that, to satisfy the False Claims Act six year statute of limitations, the new allegations in its second amended complaint would be timely only if they related back to its earlier-filed first amended complaint. The Court noted that the False Claims Act specifically allows a timely complaint to satisfy the statute of limitations even though the named defendants were deprived of notice while the complaint was sealed. New claims against defendants named by Omni Healthcare in the first amended complaint were therefore timely. The second amended complaint, however, had added five additional defendants, and the Court held that claims against these defendants were untimely. “The statute of limitations, like the first-to-file rule, encourages relators to come forward promptly with information to help the government uncover fraud … This purpose would be undermined if a relator were permitted to add additional defendants years later—and potentially after the government has declined to intervene.”

Judge Gershon’s rulings highlight the importance of naming all False Claims Act defendants as early as possible to avoid procedural dismissals.

In federal criminal investigations, corporate health care providers have faced a Department of Justice increasingly focused on individuals, one that has limited or foreclosed cooperation credit for corporations not providing complete information on all individual involvement. At a conference in late November, Deputy Attorney General Rod Rosenstein outlined a modification of these stringent guidelines, to some extent for criminal prosecutions cases but more significantly for civil cases.

The 2015 Yates Memorandum established DOJ’s policy on individual accountability for corporate wrongdoing. This policy provided that corporations must provide all relevant facts about individuals to be eligible for any cooperation credit; criminal and civil investigations should focus on individuals from inception; no corporate resolution will provide protection from criminal or civil liability for any individuals; and considerations for civil suits against individuals should go beyond ability to pay, stressing deterrence and accountability.

Rosenstein first highlighted the consistencies of the new approach with the Yates Memorandum, as pursuing individuals responsible for wrongdoing is still a top DOJ priority. Any company seeking cooperation credit must identify all individuals substantially involved in or responsible for the criminal conduct. However, “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.” In criminal cases, this will allow cooperation credit without identifying every person involved, as long as the company discloses individuals who played significant roles or who authorized the misconduct.

Rosenstein said the changes were driven in large part by DOJ’s affirmative civil enforcement cases, where the changes are more substantial. The primary goal of these cases is to recover money, and DOJ found the Yates Memorandum’s “all or nothing” approach to cooperation counterproductive in civil cases. “When criminal liability is not at issue, our attorneys need flexibility to accept settlements that remedy the harm and deter future violations, so they can move on to other cases. … Our civil litigators simply cannot take the time to pursue civil cases against every individual employee who may be liable for misconduct.”

The new policy gives DOJ civil attorneys the discretion to offer some credit even if a company does not qualify for the maximum credit that comes with identifying every individual substantially involved in or responsible for the misconduct, as long as the company meaningfully assists the government’s investigation and does not conceal wrongdoing. DOJ civil lawyers can negotiate civil releases for individuals who do not warrant additional investigation and, importantly, can consider an individual’s ability to pay in deciding whether to pursue a civil judgment. Rosenstein said these “commonsense reforms” would return to DOJ civil attorneys the discretion they previously exercised in civil cases, to “use their resources most efficiently to achieve their enforcement mission.”

The practical implications of this change will play out over time. Rosenstein’s language suggests that a significant dividing line will be whether individual U.S. Attorney’s Offices view the conduct at issue as a joint criminal-civil matter or as a civil matter without a parallel criminal case. In the former, the only change may be an understanding that the company may be able to streamline the number of people that are the focus of investigation and disclosure. In a purely civil investigation or case, however, Rosenstein’s language indicates significant discretion will be given to DOJ civil attorneys to work out practical settlements that aim towards monetary recoveries for the government and victims, as well as an efficient use of resources to maximize recovery across all cases. In at least the purely civil cases, Rosenstein’s comments offer significant arguments to defense counsel to propose and advocate the practical resolution of government investigations and cases.

 

As recounted in our recent analysis of the 2018-19 New York State Budget (“Enacted Budget”), the Enacted Budget included new restrictions on fiscal intermediaries participating in the Consumer Directed Personal Assistance Program (“CDPAP”) designed to prevent the dissemination of “false or misleading” advertisements.  Effective April 1, 2018, the newly enacted § 365-f(4-c) of the New York Social Services Law requires fiscal intermediaries to seek pre-approval for advertisements directed at Medicaid program recipients before they are released, and imposes escalating penalties for non-compliance – including revocation of the fiscal intermediary’s license to provide services after two or more false or misleading advertisements are distributed.

By way of background, the CDPAP program is a Medicaid program that allows chronically ill or physically disabled individuals to exercise a greater degree of control and choice with respect to the provision of essential services ranging from assistance with activities of daily living (ADLs) to skilled nursing services.  The program – which allows recipients to hire almost anyone other than their spouse, child or parent to provide these services – provides a marked level of independence over traditional home care models where recipients must accept whatever provider is sent by the program’s vendor.  In addition to freedom of choice, CDPAP aides are able to perform a host of services that ordinarily can only be performed by nurses or certified home health aides.

Unlike traditional home care models, CDPAP aides are employed by the consumer.  Fiscal intermediaries help consumers facilitate their role as employer by: providing wage and benefit processing for consumer directed personal assistants; processing income tax and other required wage withholdings; complying with workers’ compensation, disability and unemployment requirements; maintaining personnel records; ensuring health status of assistants prior to service delivery; maintaining records of service authorizations or reauthorizations; and monitoring the consumer’s/designated representative’s ability to fulfill the consumer’s responsibilities under the program.

On June 26, 2018, the Consumer Directed Personal Assistance Association of New York State, Inc. and various  fiscal intermediary members (collectively plaintiffs) filed a complaint against the New York State Department of Health (DOH) and its Commissioner Howard Zucker (Commissioner) (collectively defendants) in the Northern District of New York, alleging in sum and substance that § 365-f(4-c) violates their right to commercial free speech as protected by the New York and United States Constitutions.  Plaintiffs sought a temporary and permanent injunction enjoining defendants from implementing the new restrictions and a declaration that § 365-f(4-c) is unconstitutional.  See Consumer Directed Personal Assistance Association of New York State, Inc. et al v. Zucker et al, Index. No. 1:18-cv-00746.

More specifically, the plaintiffs allege that the advertisements regarding CDPAP are protected commercial speech because they concern a lawful activity and express the plaintiffs’ support for self-direction and consumer choice provided by the program and the requirement that they submit their advertisements for approval burdens, restricts and otherwise infringes upon those rights.  plaintiffs also claim that the DOH lacks a substantial interest in reviewing the advertisements and that prior approval of advertisements does not advance any legitimate governmental interest – particularly in light of the fact that the state already has laws governing false and deceptive advertising (i.e., General Business Law § 349).  Furthermore, the plaintiffs maintain that even if the DOH had a legitimate interest in preventing false and misleading advertisements, requiring prior approval is not sufficiently narrowly tailored to serve that interest.

As explained below, because plaintiffs moved for, and were denied, a preliminary injunction – prohibiting the DOH from implementing § 365-f(4-c)  until the legality of the new law can be fully decided – we now more or less know how this case will ultimately be decided.  In this case, as in all cases where preliminary relief is sought, it does not bode well for plaintiffs that the court denied the preliminary injunction, given that such relief is only withheld where the movant fails to establish a clear or substantial likelihood that they will ultimately be able to succeed on the merits.

In concluding that plaintiffs failed to establish a sufficient likelihood of success, the court applied the four-part inquiry laid out by the Supreme Court in Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557 (1980)), to determine whether § 365-f(4-c) is an impermissible regulation of commercial free speech in violation the First Amendment: “[1] whether the expression is protected by the First Amendment. For commercial speech to come within that provision, it at least must concern lawful activity and not be misleading. Next, we ask [2] whether the asserted governmental interest is substantial. If both inquiries yield positive answers, we must determine [3] whether the regulation directly advances the governmental interest asserted, and [4] whether it is not more extensive than is necessary to serve that interest.”

The parties did not dispute the first element.  With respect to the second element, the plaintiffs argued that had the State’s true purpose been to regulate false or misleading advertisement, such a purpose would be substantial, but here the true purpose for instituting the new restrictions was to decrease awareness of the CDPAP program in order to limit the State’s own expenditures on the program.  According to the plaintiffs, the evidence of the DOH’s ulterior motive was evident from the fact that the restrictions were passed as part of the Enacted Budget.  The court was not distracted by this argument, finding instead that where, as here, the statute’s intentions are facially obvious they need not consider such “extra-textual ‘evidence.’”  Even if the court had considered the issue, the fact that the restrictions were passed as part of the 2018-19 Executive Budget is hardly evidence that the restrictions are fiscally motivated.  Indeed, the Governor traditionally uses the budget process to advance his policy agenda, and the inclusion of § 365-f(4-c) appears to be no exception to that rule.  It is also worth noting that requiring vendors of Medicaid services to submit advertisements for approval is not a new phenomenon in New York.  Indeed, Managed Long Term Care plans have long been subject to such requirements – both as part of their contracts with the State and in regulation.  We are unaware of any claim that such a program was intended to, or has resulted in a decrease in enrollment in these plans.

The court also gave short shrift to the plaintiffs’ arguments regarding the fourth element – whether the restrictions were more extensive than necessary.  Although the plaintiffs and the court would agree that less restrictive means are available, the standard does not require that the Legislature implore the least restrictive means conceivable, only one that is reasonable and in proportion to the interest to be served.

Ultimately, the resolution of this case will likely turn on the evidence marshaled by both sides in support of the third element – whether the regulation directly advances the State’s interest in preventing false and misleading advertising by CDPAP fiscal intermediaries.  As noted by the court, for purposes of this element, “a governmental body seeking to sustain a restriction on commercial speech must demonstrate that the harms it recites are real and that its restriction will in fact alleviate them to a material degree.”  The State need not “produce empirical data . . . accompanied by a surfeit of background information” in order to meet its burden in this respect, and can rely instead on “reference to studies and anecdotes pertaining to different locales altogether.”

Here, the DOH tendered an affidavit of Donna Frescatore, the Medicaid Director of New York State and Deputy Commissioner of DOH to meet its burden.  Deputy Commissioner Frescatore noted, inter alia, that CDPAP recipients must be able to rely on the materials they receive to evaluate and choose the best available options and that false and misleading advertising not only complicates this process, it often leads ineligible individuals to request services, burdening local authorities.  Mrs. Frescatore also identified a host of “[e]xamples of advertisements that misstate, misrepresent, or overstate what the [Fiscal Intermediaries] and CDPAP provide have: [1] failed to explain that Medicaid eligibility is required to receive services; [2] suggested that CDPAP pays people to stay at home; [3] stressed that no training is required, without explaining that the consumer is responsible for training their assistants through CDPAP; [4] failed to explain that the service has to be a Medicaid covered service to be obtained through CDPAP; and [5] included services like dog walking and escort services when in actuality, such services are rarely, if ever,. . . covered by Medicaid.”

At oral argument, the DOH confirmed to the court that these were examples of advertisements that the DOH had actually seen – a contention they will now have to prove.  Should the DOH be unable to substantiate these claims, they may well find themselves unable to meet their burden on this issue.  Indeed, the court noted that while these representations are sufficient standing alone at this early point in the litigation, a different result may be warranted upon a more fully developed record.  For now, we will have to await the completion of discovery and the likely filing of a summary judgment motion(s) to know how this case will ultimately come down, a process that generally takes eight months to a year to complete in the Northern District of New York.

Having failed to secure the desired preliminary injunction, § 365-f(4-c) remains the law of the land.  In September of 2018, the DOH issued specific guidance on the program for all advertising by fiscal intermediaries on or after November 1, 2018.  According to the guidance, “inaccurate descriptions of the CDPAP program or the roles and responsibilities of CDPAP participants, designated representatives, fiscal intermediaries, and/or aides will be considered false or misleading.”  The guidance further prohibits cold-calling and door-to-door solicitation.

Advertisements may be submitted by email, however if the advertisement is a website, a hard-copy must also be submitted.  The DOH will have thirty days to review the advertisements, the advertisements may not be utilized by the provider until approved by the DOH or thirty days has passed without response from the DOH.  In the event an adverse decision is issued, the fiscal intermediary will have thirty days to appeal the decision, if the decision is upheld, however, the fiscal intermediary will be required to pay a penalty.

Advertising materials that were used prior to November 1, 2018 are not required to be submitted for review.  That being said, however, providers have the option of submitting such materials by December 31, 2018 for review and inclusion in the DOH’s “amnesty” program.  In the event that voluntarily submitted advertisement is found to be false or misleading the fiscal intermediary will be required to discontinue use of the advertisement within thirty days, but the advertisement will not count for purposes of determining whether to revoke the fiscal intermediary’s license for distributing two or more false or misleading advertisements.

If you have any questions or would like additional information on any of the above referenced issues, please do not hesitate to contact Farrell Fritz’s Regulatory & Government Relations Practice Group at 518.313.1450 or NYSRGR@FarrellFritz.com.

 

Last week, in LeadingAge New York, Inc. v. Shah, the New York Court of Appeals addressed Department of Health regulations limiting executive compensation and administrative expenditures by healthcare providers receiving state funds. The Court upheld limits related to state funding, but struck down a limit that applied regardless of the source of funding.

In 2012, Governor Cuomo directed agencies providing state funding to service providers to regulate provider use of state funds for executive compensation and administrative costs. DOH responded with regulations restricting state-funded expenditures on administrative expenses and executive compensation for certain defined “covered providers.”

The regulations had two “hard caps,” one limiting administrative expenses to 15% of covered operating expenses paid with State funds, and one limiting the use of State funds for executive compensation to $199,000, absent a waiver. The regulations also had one “soft cap,” providing for penalties to a covered provider if executive compensation exceeded $199,000 from any source of funding, with specified exceptions concerning comparable provider compensation and board approval. Covered executives included those for whom salary and benefits were administrative expenses, and excluded clinical and program personnel.

Several petitioners challenged the regulations, including nursing homes, assisted-living programs, home-care agencies and trade associations.

The Court of Appeals grounded its decision in the separation of powers doctrine, which requires that “the Legislature make the critical policy decisions, while the executive branch’s responsibility is to implement those policies.” Chief Judge DiFiore looked to the Court’s prior decision in Boreali v. Axelrod for guidance in finding “the difficult-to-define line between administrative rule-making and legislative policy-making.”

The Court first reviewed the function of DOH, which manages state funds earmarked for public health, oversees the Medicaid program, and contracts with private entities. The Court said that DOH carries out these functions with the goal of ensuring that the limited public funding available be directed as efficiently as possible toward high-quality services.

The Court concluded that the hard cap regulations on both administrative expenses and executive compensation did not exceed DOH’s authority. The Legislature directed that DOH oversee the efficient expenditure of state health care funds. The hard caps are tied to the specific goal of efficiently directing state funds toward quality medical care for the public by limiting the extent to which state funds may be used for non-service-related salaries and disproportionately high administrative budgets. The Court found the hard cap regulations to be directly tied to the Legislative policy goal without subverting it in favor of unrelated public policy interests.

In contrast, the Court struck down the soft cap regulation, which restricted executive compensation over $199,000 regardless of funding source, because it represented “an unauthorized excursion by DOH beyond the parameters set by the Legislature.” The Court found that while the hard cap regulations capped the use of public funding, the soft cap imposed an overall cap on executive compensation, regardless of the funding source. “The soft cap thus pursues a policy consideration – limited executive compensation – that is not clearly connected to the objectives outlined by the Legislature but represents a distinct ‘value judgment.’” The soft cap restriction on executive compensation was not “sufficiently tethered” to the enabling legislation which largely concerned state funding. The Court concluded that the soft cap regulation exceeded DOH’s administrative authority as it envisioned the additional goal of limiting executive compensation as a matter of public policy.

All members of the Court of Appeals agreed that the hard cap on administrative expenditures was permissible, but the dissenting Judges differed on executive compensation.  Judge Garcia would have stricken both hard and soft caps on executive compensation, because they represented a “policy choice about reasonable compensation aimed at influencing corporate behavior,” which is “law-making beyond DOH’s regulatory authority.”  In contrast, Judge Wilson would had found both limits to be permissible.  He criticized the majority’s reliance on Boreali, and saw the proper analysis to be whether the regulation exceeded the executive power.  He would have used that rationale to uphold the hard cap on executive compensation, and also would have found the soft cap permissible because it advance the statutory goals of preventing providers from circumventing the hard cap and advising providers the State may allocate taxpayer funds away from undesireable or inefficient vendors and toward competitors who provide superior value.

At least where State funds are at issue, LeadingAge provides the Governor and executive agencies with broad authority to police and restrict the use of State funding.

 

            New York State does not require hospitals to insure medical malpractice claims, either through the purchase of commercial medical malpractice insurance or the establishment of an adequately funded self-insurance program.  New York has never required such insurance.  There are many hospitals which did not insure medical malpractice claims in the past, and a number that currently do not.

            Historically, the lack of insurance was often a matter of choice.  A number of community hospitals in the New York City area did not insure medical practice claims because they believed they would always be able to pay claims out of operations.  Others chose not to insure because they believed the lack of insurance improved their negotiating position with medical malpractice plaintiffs.  The hospitals would warn plaintiffs to settle their claims for what the hospitals considered reasonable amounts. If they did not, the hospitals would tell them that they would not be able to pay their claims and might have to resort to chapter 11 bankruptcy, where their malpractice claims would be general unsecured claims and receive pennies on the dollar.

            Attending physicians typically have malpractice insurance that covers claims against them individually for services they perform at the hospitals where they practice.  But physicians who are full-time employees of hospitals often do not have any individual malpractice insurance coverage; rather, they are dependent on their employers for it.

            Some hospitals, after “going bare” for a period of time and experiencing a large number of malpractice claims, are unable to purchase commercial medical malpractice insurance.  It is unclear whether they could have taken advantage of state programs established to enable them to purchase insurance for themselves and/or their physicians.  Although some of these hospitals set up self-insured programs, the programs were often inadequately funded.  When the hospitals experienced financial difficulties, the self-insurance reserves would often be used, in whole or in substantial part, to fund operating expenses.

            The lack of medical malpractice insurance or adequate self-insurance, needless to say, can be tragic for patients.  Patients may well be uninformed when admitted to a hospital that it is without medical malpractice insurance coverage or a sufficiently funded self-insurance program to fully compensate them if they are negligently injured during treatment or surgery.  Narratives of serious injuries caused by medical malpractice make for difficult reading, and an even worse ending if they cannot recover the damages to which they are entitled.

            Lack of malpractice insurance further raises issues for trade creditors, service providers and other unsecured creditors of the hospitals if the hospitals experience financial difficulties and file chapter 11.  Serious uninsured medical malpractice claims and large numbers of such claims, when added to the claims of other creditors, can greatly reduce the recovery of both malpractice claimants and business creditors in the chapter 11 cases of these hospitals.

            For more information, please contact Marty Bunin at 646-329-1982 or MBunin@FarrellFritz.com

In United States ex rel. Wood v. Allergan, Inc., the Second Circuit addressed the issue of whether a violation of the False Claims Act’s “first-to-file” rule compels dismissal of an action or whether it can be cured by the filing of an amended or supplemental pleading. The Court’s acceptance of the interlocutory appeal was addressed here in a post last year. In August, the Second Circuit reversed the District Court, holding that a violation of the first-to-file bar cannot be remedied by amending or supplementing the complaint.

Relator John Wood brought FCA claims against Allegan, a pharmaceutical company that develops and manufactures eye care prescription drugs. Wood alleged that Allergan violated the FCA and the Anti-Kickback Statute by providing large quantities of free medical products to physicians to entice them to prescribe Allergan drugs. When Wood brought his action, two other actions alleging similar FCA violations were pending.

The Initial Qui Tam Complaint Violated the “First-to-File” Bar

The FCA’s “first-to-file” rule states that once a qui tam action has been brought, no person other than the Government may intervene or bring a related action based on the same facts. The first-to-file rule ensures that only one relator shares in the Government’s recovery and encourages potential relators to file their claims promptly. Because two prior actions were pending when Wood filed his qui tam complaint, it ran afoul of the first-to-file bar.

The Wood complaint, however, was under seal, and while it remained under seal, the two prior actions were dismissed. When the government declined to intervene in the Wood action and the case was unsealed, there were no longer any prior-filed pending actions. Wood thereafter filed a third amended complaint. Allergan moved to dismiss on several grounds, including the “first-to-file” bar, because when the Wood qui tam complaint was commenced, there were two pending actions alleging the same factual allegations.

The Second Circuit first held that the first-to-file rule applied, rejecting Wood’s argument that the earlier actions failed to adequately allege an FCA claim. Even if Wood’s allegations were broader than the prior complaints, the claims were related, as the alleged schemes were sufficiently similar, and the Government would have been equipped to investigate them. In addition, the Court rejected as unworkable the argument that the Judge in a later-filed case could address the sufficiency of an earlier-filed case pending before a different Judge, potentially even before the first Judge had done so.

An Amended Pleading Cannot “Cure” a First-to-File Violation

In Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, the Supreme Court had held that “an earlier suit bars a later suit while the earlier suit remains undecided but ceases to bar that suit once it is dismissed,” dismissing the later filed action without prejudice. Wood therefore would have been able to commence a new action once the two prior actions had been dismissed. However, due to the passage of time, statutes of limitation would have barred a new action.  Wood argued that the first-to-file bar could be “cured” by amending or supplementing the complaint after dismissal of the earlier actions. Other Circuits have split on this question.

The Second Circuit followed a D.C. Circuit decision to hold that Wood’s “action was incurably flawed from the moment he filed it.” The Court found that the plain language of the FCA provides that no individual may bring a related action when an FCA action is pending, and that the plain language required dismissal. The Court determined that Wood’s position—a first-to-file violation can be cured by a later amendment—is inconsistent with the language of the statute. The Court reasoned that the statute bars a person from bringing a related action when a prior FCA action is pending; it does not provide for the second action to be stayed until the first-filed action is no longer pending. An amended or supplemented pleading could not change the fact that Wood brought the action when another related action was pending.

The Court also posited several inefficiencies from Wood’s suggested approach: inequities among Relators with later-filed complaints depending on the happenstance of when their complaint was dismissed or whether their case was stayed; questions as to which later-filed case would proceed; and a potential lineup of later-filed cases waiting to take the place of a dismissed earlier action. Finally, the Court found support in legislative history, indicating that the primary, if not sole, purpose of the first-to-file rule is to help the Government uncover and fight fraud. The Court found it unlikely that Congress would have invited an inefficient process prone to anomalous outcomes, dependent on the chance considerations of one Court’s backlog and another Court’s timeliness of dismissal.

This Second Circuit decision, following the D.C. Circuit, now conflicts with a First Circuit decision finding the argument that amendment cannot cure a first-to-file violation to be “untenable.”  The Supreme Court may be called on to decide this Circuit split.

As the battle over the future of the Affordable Care Act (the “ACA”) continues, New York State scored a big victory earlier this month with the federal court decision of UnitedHealthcare of New York, Inc., et al. v. Vullo.

The controversy centered on New York State’s risk adjustment program, which is designed to prevent insurers from competing for only the healthiest enrollees. The program requires insurers with enrollees of above-average health for any given plan year to make payments into a common fund.   Those funds are, in turn, used to subsidize insurers who incurred higher claim costs due to having enrollees of below-average health.

 

From 1993 through 2013, New York State had its own risk adjustment program. When the ACA was enacted in 2010, it called for the development of a federal risk adjustment program (the “FRAP”), which the Department of Health and Human Services (“HHS”) was authorized to develop. Although states meeting certain requirements are permitted to administer the FRAP themselves, New York State opted to have HHS implement the FRAP on its behalf.

 

In 2016, HHS published an interim final rule addressing the implementation of the FRAP, wherein HHS acknowledged that certain issuers, including some new and smaller issuers, owed substantial risk adjustment charges that they did not anticipate and encouraged states to examine local approaches to ease these growing pains in the new health insurance market landscape. In response, the New York State Superintendent of Financial Services promulgated an emergency regulation allowing the Superintendent to collect up to 30% of the funds received by carriers in New York State from the FRAP and to redistribute such funds to other carriers in the State pursuant to a State-specific risk adjustment methodology.

The plaintiffs in the action were health insurance companies who offer insurance policies in New York State and who have been, and expect to continue to be, the recipients of risk adjustment payments under the FRAP. The plaintiffs objected to New York State’s emergency regulation, which in part required insurers to turn over funds they had received from the FRAP to the Superintendent so the Superintendent could redistribute such funds to other insurers in New York. The insurers’ primary argument was that the New York State regulation is preempted by the ACA.

 

The District Court for the Southern District of New York found that, under the plain language of the ACA, state regulations are not preempted unless they “prevent the application” of the ACA, which the New York State regulation does not do. The Court further found that there was nothing in the ACA requiring New York State to obtain HHS approval of its emergency regulation. Moreover, statements made by HHS and the Centers for Medicare and Medicaid Services made clear that states are intended to have an ongoing role in risk adjustment policies. All of this, according to the Court, was evidence that the ACA does not preempt the New York State regulation. Accordingly, the Court dismissed the action, allowing the Superintendent to redistribute the FRAP funds paid to New York insurers as the Superintendent deems appropriate.

The recent New York Court of Appeals decision in Stega v. New York Downtown Hospital provides strong support for defamation claims arising out of witness testimony in investigations and quasi-judicial hearings. In Stega, the Court held that statements made in administrative proceedings that allegedly defame a person are not absolutely immune where the person has no recourse to challenge the accusations.

The plaintiff, Dr. Jeanetta Stega, a medical scientist and employee of New York Downtown Hospital, was chair of the hospital’s Institutional Review Board (IRB). She assisted Dr. Leonard Farber in arranging a clinical trial of a compound Luminant Bio-Sciences had developed to treat patients with metastatic cancer, which included human subjects. Dr. Stega recused herself from the Downtown Hospital IRB decision approving the trial.

The clinical study went awry as conflicts developed between Dr. Farber and Luminant. Dr. Farber made several allegations against Dr. Stega, including that she had stolen Luminent study money from him, that she had taken funds that did not belong to her, and that the drug compound was toxic and unsafe for patients. Downtown Hospital accused plaintiff of taking funds that did not belong to her and engaging in a conflict of interest by seeking IRB approval when she was a member of the IRB board. Downtown Hospital terminated Dr. Stega after concluding that she had violated the hospital’s conflict of interest policy and improperly taken Luminent money.

Dr. Stega submitted a complaint to the FDA. FDA inspectors interviewed Dr. Stega as well as officials from Downtown Hospital. The FDA inspection report included statements from the Downtown Hospital Acting Chief Medical Officer, Dr. Stephen Friedman, that Dr. Stega was terminated because she channeled Luminent funds to a research group using her home address and added patients to the study that the IRB would not approve, and because the IRB and their approvals were tainted.

After becoming aware of the FDA inspection report, Dr. Stega commenced a defamation action against Downtown Hospital, Dr. Friedman, and others.   Defendants contended that Dr. Friedman’s statements were protected by an absolute privilege because the FDA inspection was a quasi-judicial proceeding.

The Court of Appeals, in a decision by Judge Fahey, held that the statements were not protected by absolute privilege. The Court held that, for absolute immunity to apply in a quasi-judicial context, the process must make available a remedy for the allegedly defamed party to challenge the defamatory statements. The Court focused on the fact that Dr. Stega was not entitled to participate in the FDA’s review and therefore could not challenge Dr. Friedman’s accusations against her. As the FDA investigation process did not provide Dr. Stega with procedural safeguards to contest what was said against her, absolute privilege did not apply. In the Court’s words, “The absolute privilege against defamation applied to communications in certain administrative proceedings is not a license to destroy a person’s character by means of false, defamatory statements.”

Judges Rivera and Garcia dissented, arguing that whether an absolute privilege applies in a quasi-judicial proceeding depends on the nature of the proceedings rather than the status of the subject of the communication. Judge Rivera opined that the majority decision undermined the public policy of encouraging greater openness in communications with government officials. The dissenters would have applied absolute immunity, on the ground that the statements were made in a quasi-judicial proceeding, a federal investigation regarding clinical trials involving human subjects and treatment of life-threatening conditions.   The interesting oral argument before the Court of Appeals can be found here.

For the question of whether absolute immunity applies, the Stega decision places the focus on the allegedly defamed person rather than the nature of the proceedings.  Witnesses who are giving statements or testimony in administrative proceedings and investigations should be counseled to take care in what they say and how they say it, as absolute immunity may not protect them if their comments lead to a defamation claim.

In a decision last week that could affect $12 billion that insurers assert is owed by the federal government, the Federal Circuit decided that HHS was not required to pay amounts required by statute because Congress had repealed or suspended those obligations through riders to appropriations bills. In Moda Health Plan, Inc. v. United States, the Federal Circuit rejected one insurer’s claim that it was statutorily and contractually owed close to $210 million under the government risk corridors program.

The Patient Protection and Affordable Care Act (“ACA”) established health benefit exchanges in each state for individuals and small groups to purchase health coverage. Insurers, however, faced significant risk if they offered plans in the exchange, because they lacked reliable data to estimate the cost of providing care for an expanding pool of individuals seeking coverage. To mitigate that risk and discourage insurers from setting higher premiums to offset that risk, the ACA established the risk corridors program.

Under the risk corridors program, participating plans whose costs of coverage exceeded the premiums received would be paid a share of their excess costs by HHS (“payments out”), and plans whose premiums exceeded their costs would pay to HHS a share of their profits (“payments in”). HHS promulgated regulations providing that health plans would receive payments in from HHS or make payments out to HHS in the formulas set forth in the statute. Congress, however, provided in riders to appropriations bills that none of the funds appropriated for HHS in fiscal years 2015 through 2017 could be used for payments under the risk corridors program. The Congressional purpose was to make the risk corridor program budget neutral, so that HHS would not pay out more than it collected under the program. CMS reported that in the three year period of 2014-2016, payments in to HHS fell short of payments out by more than $12 billion. For that reason, HHS paid only prorated portions of the payments out to insurers.

Moda Health Plans sued under the Tucker Act, seeking almost $210 million, constituting the unpaid amounts it claimed it was owed under the risk corridors program under the ACA. Moda argued that the ACA itself obligated HHS to pay insurers the full amount under the risk corridors program, regardless of the amount of payments in, and that HHS breached its contractual agreement to pay the full amount required by the statute. The Federal Circuit rejected both arguments.

The Court agreed with Moda that the ACA obligated the government to pay the full amount of the risk corridors payments, but held that the Congressional appropriations riders effected a suspension of that obligation for each of the relevant years. The Court first held that the statute was mandatory with respect to payments out, and could not be read to require such payments to be budget neutral. Thus, the plain language of the statute created an obligation of the government to pay the full amount for payments out under the risk corridors program.

The Court held, however, that through HHS appropriations riders, Congress repealed or suspended the obligation to make any payments out if they exceeded payments in. Repeals by implication are generally disfavored, but the Court held that the appropriations riders adequately expressed Congress’s intent to suspend payments on the risk corridors program beyond the sum of payments in. Congress clearly indicated its intent to limit the funding of payments out to payments in, thus requiring the risk corridors program to be budget neutral. As a result, no taxpayer funds would be used for the risk corridors payments, and the government would not pay out more than it collected from insurers under the program.

The Federal Circuit also rejected Moda’s claim for HHS’s breach of an implied-in-fact contract. Absent clear indication, legislation and regulation cannot establish the government’s intent to bind itself in a contract. The Court held that the overall scheme of the risk corridors program lacked the trappings of a contractual arrangement.

The Moda Health Plan decision may affect billions of dollars that insurers claim they are owed by the federal government. The Supreme Court may be the next stop for the risk corridors program issues decide by the Federal Circuit, and the Justices may have yet another chance to examine the Affordable Care Act and Congressional intent.

EDNY Judge Brian Cogan recently addressed the False Claims Act public disclosure bar and original source rule in a decision based on a qui tam Relator’s claims that defendants marketed a test to measure the levels of a certain hormone knowing that the test was flawed. In United States ex rel. Patriarca v. Siemens Healthcare Diagnostics, Inc., Relator alleged that Medicare suffered significant losses because medical professionals ordered treatments based on the test’s inaccurate results.

The Background of PTH Testing

Judge Cogen started his opinion with a lengthy discussion of the medicine that led to Relator’s complaint. Patients with chronic kidney disease may have high levels of parathyroid hormone (“PTH”), which can lead to bone disease. Vitamin D analogs are used to treat high levels of PTH, but overdosing of these analogs can lead to serious health consequences. Accurate diagnosis of PTH levels is therefore critical.

In 1987, Nichols Diagnostics produced a PTH test, the “IRMA Test,” that was performed manually and required a several-hour long incubation period. The test was approved by the FDA and became the industry standard.

The Siemens Test, used to measure PTH levels, was a Second Generation PTH test, measuring the whole PTH molecule and large fragments of the molecule. The Siemens Test was purportedly aligned with the IRMA test. Third Generation tests report only the level of whole PTH molecules and omit the fragments, so Second Generation tests report PTH levels roughly twice that of Third Generation tests.

Later versions of the Nichols Tests “drifted” upward, consistently overstating patient’s PTH levels, leading to medically unnecessary prescriptions and surgeries. After a qui tam action relating to the tests’ inaccuracy and a substantial settlement with the government, Nichols withdrew its tests from the market.

In his qui tam complaint, filed in 2011, Relator alleged the Siemens Test had materially “drifted” from the IRMA test. Relator based his allegation primarily on separate parallel experiments he conducted. Relator compared the Siemens Test to the PTH test developed by his own company, the Scantibodies Test, a Third Generation test.

Public Disclosures of PTH Testing Issues

In the 2006 Souberbielle Study, European scientists studied various PTH tests, including the Siemens Test, compared them to the IRMA Test, and published their findings. The study concluded, among other things, that the values yielded by Second Generation tests varied widely. The study also determined that clinicians should monitor a patient’s PTH levels over a series of tests, as opposed to making clinical decisions on the basis of a single finding. The study also showed a significant differential between the Siemens and Scantibodies Tests.

An article published in 2007 noted that: (1) industry guidelines were based on the IRMA Test; (2) the absolute results obtained from various PTH tests varied from those of the IRMA Test; and (3) the 2006 Souberbielle Study documented this variability. Based on these observations, the author recommended that nephrologists use a single laboratory for results and look at trends in PTH as opposed to single values.

A 2009 study published by the relator who brought the successful Nichols qui tam action disclosed the results of parallel testing of various PTH tests. The study concluded that the Siemens Test generated results that were on average 36% higher than the Scantibodies Test. This was nearly the same differential as that disclosed in the 2006 Souberbielle Study.

Relator argued in his qui tam complaint that the upward drift he observed in the Siemens Test caused physicians to prescribe hundreds of millions of dollars of medically unnecessary Vitamin D, and to conduct untold numbers of medically unnecessary parathyroidectomies. Relator also alleged that Medicare paid for a portion of the cost of the Siemens Test, for prescribed Vitamin D and its analogs, and for surgeries related to elevated PTH levels.

The Public Disclosure Bar

Judge Cogan first addressed the FCA’s public disclosure bar, which bars claims for conduct that has already been made public. The bar discourages “opportunistic plaintiffs” with no significant information of their own who may bring “parasitic lawsuits.”

Prior to the 2010 FCA amendments, the public disclosure bar applied where a qui tam action was “based upon the public disclosure of allegations or transactions.” The Second Circuit and the majority of circuits had held that a relator’s claim was “based upon” the public disclosure if the allegations in the complaint were “substantially similar” to the publicly disclosed information. The 2010 FCA amendment generally followed this majority approach and identified the inquiry as whether “substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed.”

The Second Circuit has applied a broad view of the public disclosure bar. Under that standard, earlier disclosures will bar a relator’s claim if they were sufficient to set the government squarely upon the trail of the alleged fraud. The bar is triggered if material elements of the fraud have been publicly disclosed, and does not require that the alleged fraud, itself, have been disclosed. Also, merely providing more specific details about what happened or translating technical information into digestible form does not negate substantial similarity. Public disclosures under the FCA include the news media and disclosures in scientific and scholarly journals.

After summarizing this caselaw, the Court held that before the Relator filed his complaint: (1) the variation between PTH tests was widely known; (2) physicians were advised to adjust their course of treatment accordingly; (3) Second Generation tests, such as the Siemens Test, were known to yield higher absolute results than Third Generation tests, such as the Scantibodies Test; and 4) the average difference between the Siemens and Scantibodies tests had been published in several studies. As a result, the public disclosure bar applied to Relator’s claims.

The Original Source Rule

Having decided that the public disclosure bar applied, the Court examined whether Relator qualified as an “original source” despite the earlier public disclosures. The FCA definition of “original source” was amended in 2010.

Under the pre-amendment version of the FCA, an original source was “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.” Under the 2010 version, an “original source” is an individual who “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.”

Judge Cogan outlined various approaches Courts have taken in deciding whether a Relator is an original source: the new information “materially adds to what has already been revealed through public disclosures” (First Circuit); the Relator’s “key facts” are not “already thoroughly revealed” (Eighth Circuit); Relator’s information must “add value” (D.C. Circuit); Relator must bring “more than expertise or a novel analysis to the table” (S.D.N.Y.).

The Court determined that Relator was not an original source. First, over the course of years, the Siemens and Scantibodies tests had been repeatedly compared to each other in a number of published studies. Second, Relator’s findings did not materially depart from earlier ones and were not sufficiently or qualitatively different from the publicly disclosed information. The Court dismissed Relator’s complaint.

The last several years have brought increasing numbers of qui tam actions brought by Relators who are aware of the potentially significant recoveries those actions can bring. The public disclosure bar and the original source rule provide qui tam defendants with arguments to fend off these cases if they are brought by opportunistic relators who are seeking to trade on public information.