Source: https://www.fraudwhistleblowersblog.com/2018/08/
Timestamp: 2019-04-22 14:36:40+00:00

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The United States Court of Appeals for the Sixth Circuit recently ruled on a case involving 5 defendants accused of health care fraud in their operation of a jointly-owned urinalysis company.
Urinalysis is frequently used by drug treatment centers and behavioral health hospitals as a way to monitor recovering addicts’ progress toward sobriety and track permissible medications. Given the increased number of drug treatment facilities, there has also been an increase in the demand for urinalysis testing. As a result of the fact that these particular urinalysis tests are meant to track progress, physicians prefer to get those results very soon after collection in order to tailor their treatments.
The 5 defendants in United States v. Bertram recognized a need for urinalysis testing in rural Kentucky and jointly formed PremierTox. Two of the defendants were physicians already operating a substance abuse treatment company (SelfRefind), one of the defendants previously worked for that company, and two additional defendants owned a drug testing service. Together, they formed and opened PremierTox and began accepting specimens for testing from Selfrefind and other treatment facilities. However, the company began to accept frozen samples without yet having the proper equipment to test frozen samples. Once they obtained the correct equipment, the equipment malfunctioned. The result was that PremierTox did not test samples for more than seven to ten months after collection. PremierTox then sent insurers the bills for the testing without indicating the date of collection. PremierTox submitted these claims despite the fact that the results were of little to no use to the ordering physicians.
The defendants argued that they had provided the services they billed for, they never made any material misrepresentations, and they did not omit any information that the doctors requested. The court disagreed. It held that when PremierTox submitted bills for services rendered many months after they were requested, the defendants knew that the tests were no longer medically necessary and failed to inform the doctors of this fact. The court found that the defendants knowingly concealed material facts which constituted a scheme to defraud. The court affirmed the defendants’ convictions.
Urinalysis testing is clearly on the government’s radar, and it will be interesting to see additional cases brought by the government or whistleblowers that are critical of testing companies looking to cash in on the opioid epidemic.
In United States ex rel. Rose v. Pjh Stephens Inst., the United States Court of Appeals for the Ninth Circuit affirmed the district court’s order denying Defendant’s motion for summary judgment, and determined that the two part test created in States ex rel. Escobar for showing implied false certification under the False Claims Act is mandatory.
To bring a qui tam action under the False Claims Act, relators have to establish the following four elements: (1) an implied or expressed false statement or fraudulent course of conduct, (2) made with the intent or knowledge of wrongdoing, (3) that was material, causing (4) the government to pay out money or forfeit moneys due. Ebeid ex rel. Unisted States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010). In 2010, Ebeid established that implied false certification could be proven simply by showing that defendant requested payment from the government, said payment was dependent on compliance with a law, rule, or regulation, and defendant was not compliant. However, in 2016 Escobar laid out its own two part test for implied falsity: (1) defendant must make specific representations about the services provided and (2) defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. States ex rel. Escobar, 136 S. Ct. 1989 (2016). The emergence of this test that required defendants to do more than simply request payment caused confusion as to what the standard for implied falsity should be.
The Ninth Circuit was forced to decide this quandary in United States ex rel. Rose v. Pjh Stephens Inst., on August 24, 2018. In Rose, the Academy of Art University is accused of violating the False Claims Act by providing bonuses and docking admissions representatives’ pay up to $30,000 based upon their enrollment numbers from 2006-2010. These allegations brought by former admissions representatives violates the incentive compensation ban which prohibits schools from providing any incentive payments based on securing enrollments or financial aid to any person engaged in admissions activities. 20. U.S.C. The University agreed to abide by this ban in order to qualify for federal funding under Title IV of the Higher Education Act.
The Court of Appeals decided that in order to prove implied falsity, Escobar’s two part test must be met. Using this standard the Court determined that the Defendant met this standard as the University failed to disclose its noncompliance with the incentive compensation ban even though they continued to receive federal financial aid.
The three judge panel agreed with the decision to mandate Escobar’s two part test in regards to implied falsity, however, Judge Smith disagreed with the majority’s analysis of materiality. Material is defined under the False Claims Act as having a natural tendency to influence, or be capable of influencing, the payment or receipt of payment. 31. US.C. § 3729(b)(4). Concerning materiality for implied falsity, materiality was dependent on whether the falsity was relevant to the government’s decision to confer a benefit. United States ex rel. Hendow v. Univ of Pheonix, 461 F.3d 1174 (9th Cir. 2006). Judge Graber and Judge Zipps agreed that this test was met due to the Department of Education’s past enforcement of the incentive compensation ban and the substantial size of the incentive payments. Judge Smith argued that his fellow judges applied the wrong standard of materiality since Escobar introduced a more rigorous standard that looks to the effect on the behavior of the recipient of the alleged misrepresentation. He concluded that he would reverse and the district court’s materiality finding “because the majority failed to recognize that Hendow’s materiality holding is no longer good law after Escobar,” and remand the case for additional discovery.
After Escobar was decided in 2016, the standard for proving implied false certification under the False Claims Act was unclear. Escobar determined that in order for implied falsity to be found, the defendant must make specific representations about goods or services, and their failure to disclose noncompliance makes those representations misleading half-truths. However, the court in Escobar did not specifically say that Ebeid’s standard which only required realtors to point to the fact that defendant request payment while being noncompliant was no longer good law. On August 24th, 2017, the Court of Appeals for the Ninth Circuit settled this debate in Rose, and determined that Escobar’s two part test was indeed mandatory. The question as to materiality is still ongoing and will undoubtedly be the topic of litigation in the future.
Post Acute Medical, LLC and its affiliated entities, operators of long‑term care and rehabilitation hospitals across the country (collectively, “PAM”) have agreed to pay the United States, Texas, and Louisiana more than $13 million dollars to resolve claims that it violated the False Claims Act and similar state laws. The government alleged that the company submitted claims to Medicare and Medicaid that resulted from violations of the Anti-Kickback Statute and the Stark Law.
PAM is based in Enola, Pennsylvania, but it operates more than two dozen long-term care and rehabilitation hospitals in several states including Texas, Louisiana, Arkansas, Nevada, Oklahoma, and Pennsylvania. According to the Department of Justice, detailed in a press release on August 15, 2018, PAM entered into numerous physician-services contracts on behalf of its hospitals dating back to PAM’s creation in 2006. Although these physician-services contracts were supposedly to retain physicians as medical directors or in other administrative positions, the DOJ alleged that the company’s payments for these contracts were actually intended to induce physician to refer patients to PAM’s facilities. These physician-services contracts often take the form of administrative stipends or compensation for additional duties, but when examined closely, the recipients are performing very limited or zero additional responsibilities.
In addition to the sham administrative stipends, the DOJ alleged that the company also entered into “reciprocal referral relationships” with unaffiliated healthcare providers such as home health companies. Under that alleged scheme, the DOJ believed that PAM referred patients to other providers with the understanding that those providers would refer other patients to PAM’s facilities. These arrangements violate the Stark and Anti-Kickback laws.
Alleged kickbacks and improper physician relationships threaten the impartiality of medical decision-making process, and as such, the DOJ stated that it is committed to preventing illegal financial relationships that undermine the federal health care programs.
The settlement resolves allegations originally brought by a qui tam whistleblower, Douglas Johnson. The underlying case is United States ex rel. Johnson v. Post Acute Medical, LLC et al., Civil Action No. 17-cv-1269 (M.D. Pa.).
Under the settlement agreement, PAM will pay $13,031,502 to the United States, $114,016 to Texas, and $22,482 to Louisiana. The whistleblower will receive $2,345,670 as his share of the federal government’s recovery in this case. As a part of resolving the matter, PAM has also entered in to the five-year Corporate Integrity Agreement with the HHS OIG. They are also required to undertake an arrangements review that is to be conducted by an Independent Review Organization.
The United States recently filed a False Claims Act Complaint in Intervention against Florida-based compounding pharmacy Patient Care America (“PCA”), two PCA employees, as well as Riordan Lewis & Haden, Inc. (“RLH”), the private equity (“PE”) firm that acquired PCA and helped manage the company. United States ex rel. Medrano, et al. v. Patient Care America, et al., 15-62617 (S.D. FL.) The scheme alleged by the government was a common one: the payment of kickbacks for referrals of expensive compound drugs, which were often paid for by TriCare. What was uncommon was the government’s focus on a PE firm. Following the filing of the Complaint in Intervention, RLH, along with other defendants, filed Motions to Dismiss. The government’s recently filed response brief opposing the Motions to Dismiss provides further insight into the interplay between the FCA and private equity investments in healthcare.
In opposing RLH’s Motion to Dismiss, the government focused on the fact that RLH was not a “passive investor,” but rather an active participant in PCA’s management, involved in PCA’s move to the compounding pharmacy space, and even oversaw PCA’s CEO. RLH was also an experienced healthcare investor. RLH quickly became aware of how much of PCA’s revenue came from TriCare and that much of PCA’s revenue was paid out in the form of commissions to independent contractor sales representatives, a violation of the Anti-Kickback Statute.
While the facts in the PCA matter may seem unique, they may be more common than a financial layperson would expect. Private equity transactions nearly always operate under a “buy to sell” model. The PE firm (or a consortium of firms investing together) effectuate a leveraged buyout (“LBO”) of the target company, using massive amounts of debt to finance the acquisition. The cash flow from the acquired company is then expected to service the debt from the LBO.
PE firms believe that by acquiring the company and taking over its management they can drive profitability, allowing them to sell the company at a later date (typically around four to six years after the LBO) at a substantial profit. The problem with the managerial facet of the private equity model is that the more the PE firm takes over operations, the more likely it is that they may face FCA liability. The risk is particularly acute in highly regulated industries like healthcare.
As noted above, PE firms operate under a “buy to sell” model. They are, virtually by definition, not passive investors; to the contrary, PE firms are usually highly active managers of their portfolio companies. This is not a mutual fund but a company taking over equity and management. These sorts of transactions are called “takeovers” for good reason. PE firms do not just pore over balance sheets but often get involved in various managerial tasks, from marketing strategy to compliance oversight. By providing managerial knowhow, the PE firm can take the reins and build a more profitable company that can then be sold at a handsome profit.
Either individually or with partner PE firms, a PE firm will tend to own a majority of the company’s equity. Few PE firms will take the risk of such a sizable investment in an illiquid asset unless they hold a controlling portion of the company’s voting shares. Accordingly, PE firms tend to have multiple seats on the acquired company’s board, have full power (given their equity stake) to hire and fire executives, and may also take part in management decisions outside the scope of the board.
Individual PE firms also frequently focus on certain industries. As the RLH matter shows, if a PE firm is familiar with a certain industry it will be difficult for the firm to claim that it was ignorant of the regulatory mandates governing that industry, either in relation to its pre-LBO due diligence or its subsequent managerial role. That is likely to be particularly apt in the case of healthcare and the Anti-Kickback Statute, a broad law that any healthcare investor would be expected to be intimately familiar with.
Given that the lifeblood of private equity is the LBO, the financial structure at play makes a PE firm an attractive target for FCA enforcement. PE firms may siphon off much of a company’s profits in the form of distributions (e.g., dividends) and fees (e.g., monitoring fees paid to the PE firm for advising and managing the company). As the PCA matter shows, at least in some cases, the government may think twice about allowing PE firms to profit off of fraud without facing liability.
Further, in light of the substantial debt service from an LBO (which commonly involves interest rates from 6% to 15%) much of the remaining cash flow from an acquired company is sent to debt investors. This creates a dynamic where the target company may be unable to fund anything approaching a fair settlement with the government. The ill-gotten gains have already been funneled out of the company to investors. Perhaps more obviously, PE firms tend to have deep pockets and access to additional capital, making them particularly appealing targets when damages are substantial and the entity in which they have invested is strapped for cash.
Ultimately, as private equity continues to invest in industries which have high FCA exposure like healthcare, it may be that cases like PCA become more common. More robust due diligence by private equity firms should be the norm moving forward. After all, once the PE firm takes over and enters the company’s driver’s seat, it should come as no surprise if the government seeks to hold the driver liable.
William M. McSwain, Esquire was nominated by President Donald J. Trump to be the 39th U.S. Attorney for the Eastern District of Pennsylvania. The Eastern District of Pennsylvania is one of the original 13 federal judiciary districts created by the Judiciary Act of 1789. It is also one of the nation’s largest districts covering over 4,700 square miles with over five million people residing within the district. The U.S. Attorney was unanimously confirmed and assumed his office on April 6, 2018. Mr. McSwain has reported he is in the process of revamping his Office which is not unusual after a change in administration. To that end, he has announced new initiatives and new hires, along with a change of supervisory attorneys throughout the Office.
Since his installation as U.S. Attorney, McSwain has vowed to bring more prosecutions of every kind within his nine county district. In accordance with earlier pronouncements, McSwain announced on Wednesday, August 1, 2018, that he is establishing an “Affirmative Civil Enforcement Strike Force” to “investigate and prosecute the abuse of government programs – including health care and procurement fraud.” Significantly, the Strike Force will investigate and litigate cases brought under the now 32 year old Federal False Claims Act. Similarly in 2007, the DOJ launched a Medicaid Fraud Strike Force in efforts to combat health care fraud, waste, and abuse. It has charged nearly 2,000 defendants since its enactment.
Recently, McSwain’s Office settled a case involving two pharmacy owners and the False Claims Act – the type of case the new Strike Force aims to handle. The Eastern District of Pennsylvania was one of the first U.S. Attorneys’ Offices in the nation to investigate and prosecute vigorously both procurement fraud and health care fraud cases. This had often been done with the assistance of qui tam relators and their counsel, under the False Claims Act. Mr. McSwain has signaled to the public that he wishes to build upon and expand the Office’s historic franchise in this area.
The Office’s Civil Division Chief Gregory B. David stated the new strike force “will continue the civil division’s long history of successfully combating fraud and enforcing important federal laws through civil investigations and actions.” McSwain explained the ACE Strike Force will assist our talented attorneys by supplying “additional firepower to focus on these critical matters.” The Strike Force will be led by Assistant U.S. Attorney John T. Crutchlow and supervised by ACE veteran litigators Gregory David and Deputy Civil Chief Charlene Keller Fullmer.
On July 23, 2018, the Governor of Puerto Rico, The Honorable Ricardo Rosselló, signed House Bill 1627 into law, which establishes Puerto Rico’s version of the federal False Claims Act. Puerto Rico’s new law is called “The Fraudulent Claims to Programs, Contracts, and Services of the Government of Puerto Rico Act.” This is a significant development for Puerto Rico. The act creates a civil recovery method when false claims are submitted to the government of Puerto Rico. It also allows for a statutory reward for whistleblowers and allows for the recovery of costs and attorneys’ fees for those who file successful qui tam suits under the act.
Governor Rosselló’s press release specifically touts the measure as a method to prevent Medicaid fraud and secure federal healthcare funds for Puerto Rico. The law creates a Medicaid Fraud Control Unit at the Puerto Rico Department of Justice. Further, it outlines the duties of the new Fraud Unit as well as the required structure of the unit. The unit will be headed by a director, be comprised of a team of experienced lawyers, and have assigned auditors to monitor and review records.
Due to the fact that Congress conditioned 1.2 billion dollars for Puerto Rico’s Medicaid program on the territory taking affirmative steps to create a Medicaid Fraud Control Unit, the enactment of the law grants Puerto Rico additional federal funds to be used for healthcare. Governor Rosselló commented that this additional money will benefit the over 600,000 Puerto Rican Medicaid beneficiaries.
Significantly, the new law is not limited to Medicaid fraud; it also applies to other types of claims made to and contracts entered into by the Puerto Rican government. While Chapter Three of the law specifically considers Medicaid fraud, Chapter Four provides for “fraudulent claims” generally. The law is more expansive under Chapter Four, and it applies to any false or fraudulent claim made to any government program.
The broad drafting of the law is especially noteworthy given the fact that Puerto Rico is still actively recovering from Hurricanes Irma and Maria. The scale and scope of the catastrophe in Puerto Rico after Hurricane Maria was unprecedented. Experts have estimated that recovery efforts will total in excess of $95 billion dollars. The government of Puerto Rico is currently entering into contracts with third parties for the repair, restoration, and recreation of various critical infrastructures such as Puerto Rico’s electrical power grid and wastewater system. Having a mechanism through which the territory can recover from individuals or corporations who knowingly defraud the government allows Puerto Rico to protect itself from bad actors seeking to take advantage of recovery efforts.
Under the law, the Relator or Whistleblower is entitled to receive no less than fifteen percent (15%) but not more than twenty-five percent (25%) of the proceeds of the action or settlement of the claim when the Puerto Rican government elects to intervene. In instances where Puerto Rico declines to intervene, the Relator is entitled to no less than twenty-five percent (25%) and no more than thirty percent (30%) of the recovery. The law also provides for a limited recovery of a fixed ten percent (10%) for those individuals who file a complaint based on information was easily accessible to the public.
The law further states that when the Government and/or Relator prevail, the court may impose additional costs on the defendant for reasonable litigation expenses and attorneys’ fees. The compensation provisions of the law are a signal that Puerto Rico is actively encouraging its residents with knowledge of fraud to come forward.
The Fraudulent Claims to Programs, Contracts, and Services of the Government of Puerto Rico Act also considers jurisdiction for future complaints. It states that the Court of First Instance, Superior Court of San Juan will be the primary and exclusive forum for filing causes of action under the act. It will be interesting to watch the implementation of this law.
According to the Puerto Rican Office of Legislative Services, as of July 31, 2018, there has not yet been a formal English translation of the law. The office stated that it will be approximately 5-6 months before an official English translation is made publically available. In order to read the full text of the law, for purposes of this article, we used an online translation program and consulted a native Puerto Rican who is fluent in Spanish.

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