Source: https://fca.hoganlovellsabc.com/2019-and-the-road-ahead/lessons-from-polansky-the-continuing-assault-on-sub-regulatory-guidance
Timestamp: 2020-02-22 22:42:20
Document Index: 255006946

Matched Legal Cases: ['§ 3730', '§ 412', '§ 3729', '§ 1395', '§ 1395', '§ 210', '§210', '§ 210']

On November 5, 2019, the United States District Court for the Eastern District of Pennsylvania ruled on a motion to dismiss a False Claims Act (FCA) qui tam suit filed by the United States DOJ long after it declined to intervene in the case. The ruling is the most recent opinion to expound upon the government’s ability to exercise its prerogative to dismiss a qui tam suit (which is discussed at length in “Riding the Relator Roller Coaster: DOJ’s Efforts to Curtail Declined Qui Tam Litigation” infra). But it is equally, if not more, noteworthy for its treatment of two other issues: whether and to what extent sub-regulatory agency guidance documents should be given the force of law and the application of the Supreme Court’s holding on the materiality of noncompliance with legal or contractual requirements. The effect of all three of these holdings could have repercussions for defendants in FCA suits.
Podcast participants: Mike Theis, Clara Troyer
The case began when relator Dr. Jesse Polansky brought a qui tam action alleging that Executive Health Resources, a vendor to hospitals of coding services, conducted reviews that improperly designated patients as inpatient instead of outpatient to “exploit[] the difference in reimbursement rates for inpatient and outpatient services” under the Medicare program.1
For pretrial management, the case was divided into two phases. Phase 1 would adjudicate claims submitted before October 2013.2 Phase 2 would adjudicate claims that were submitted after Centers for Medicare and Medicaid (CMS) promulgated a rule – the Two-Midnight Rule – that governs how hospitals should determine whether a Medicare patient should be designated as a hospital inpatient.3
The trial plan was proceeding smoothly until Dr. Polansky committed two unforced errors. First, he tardily disclosed he had taken from his prior employment at CMS a DVD containing 14,000 documents, including some that were relevant to his claims.4 Second, Dr. Polansky tried to change the way the claims were selected for the bellwether trial, without providing a satisfactory explanation as to why he did so.5 The court explained the relator’s “behavior was material and plays a role in the final disposition of this case.”6
After Dr. Polansky’s blunders, the government notified the court that it planned to move to dismiss the case under 31 U.S.C. 3730(c)(2)(A).7 After negotiations with the relator, however, the government decided to allow him to move forward, on the condition that he would proceed on a narrower set of claims. But the government ended up reversing that decision when the relator backtracked on his offer to narrow his claims. The government then did move to dismiss the complaint under 31 U.S.C. 3730(c)(2)(A) and that motion was before the court, along with motions for summary judgment filed by the defendants, when the court ruled on November 5, 2019.
The first holding of Polansky addresses squarely the issue presented by the government’s motion: when is dismissal appropriate under § 3730(c)(2)(A)? After a protracted discussion, the court granted the motion without deciding which of two competing standards – the rational relationship test applied in the Ninth and Tenth Circuits or the “unfettered discretion” standard applied by the D.C. Circuit – applied.8 The court found the government had satisfied the more stringent of the two, the “rational relationship” test, by showing that preservation of litigation resources was rationally related to its motion to dismiss and that the relator had not demonstrated this determination was arbitrary.9
The court then offered a second justification for dismissal of part of the case on defendants’ motion for summary judgment. Seizing upon the recent Supreme Court decision in Azar v Allina Health Services, the court held that many of the claims at issue were untenable as false claims under the FCA because the purported falsity was based on sub-regulatory guidance that CMS had adopted without going through the rigor of a formal rulemaking process.
In Allina, the Supreme Court held that a Medicare policy had to be vacated because it was not promulgated through the notice-and-comment process dictated by statute.10 The policy affected how the Medicare program calculates the “Medicare fraction” used to calculate additional payments made to hospitals that serve a disproportionate number of low-income patients. CMS first issued a final rule saying Medicare Part C patients (who tend to be wealthier) were included in the calculation, but the rule was vacated after legal challenges. The agency then proposed a new rule for notice-and-comment. In the gap after the original rule was vacated, but before the new rule was published, the agency posted guidance on its website saying it would include Part C patients in the calculations. The website guidance was at issue in Allina.11 The Supreme Court held that under the Medicare Act, any “rule, requirement, or other statement of policy…that establishes or changes a substantive legal standard” must go through a formal 60-day notice-and-comment process.12 Because the CMS guidance had not been promulgated in that manner, it could not be given effect.
The Polansky court applied the same logic to CMS’s guidance13 about how to determine hospital inpatient status. Before promulgation of the Two Midnight Rule, CMS published guidance in manuals for the provider community rather than going through formal notice and comment. The Polansky court concluded that the guidance on determining inpatient status was a “substantive legal standard,” because it affected the right to, or the amount of, Medicare reimbursement. As such, it required formal notice and comment before it could be given effect.14
The Supreme Court opinion in Allina is significant in its own right. The significance is underscored by the court’s application of the holding in Allina to the facts in Polansky. The court’s ruling in Polansky demonstrates the Allina rule could have a powerful impact on other Medicare fraud cases brought under the FCA.
The third and final part of the opinion offers yet another reason Dr. Polansky’s claims should not proceed. The court – in a passage that could be considered obiter dictum – opined that Dr. Polansky’s claims do not survive summary judgment because the relator failed to show the defendant’s allegedly fraudulent conduct was material to any payment decision by the government.15 As the Supreme Court held in United Health Servs., Inc. v. Escobar, 136 S. Ct. 1989 (2016), materiality under the FCA is a “rigorous” requirement aimed at preventing the FCA from becoming an all-purpose anti-fraud statute.16 The court in Polanksy found that the relator had failed in two ways to demonstrate the defendants’ claims were materially false or fraudulent. First, the government’s decision not to intervene and to seek dismissal tends to undermine a showing of materiality (though, according to the court, that is not dispositive).17 Second, even though the government has been well aware of these allegations against the defendants, the government continued to pay claims from the defendants under the Medicare program.18
The Polansky decision gives force and effect to the Supreme Court’s materiality jurisprudence in Escobar, picking up a thread from other cases that have looked to the actions of the affected agency in paying or denying the payment of claims after learning of the allegedly fraudulent conduct.
Polansky and Allina are in accord with a push by the current administration to reduce regulatory burden on industry, and to limit sub-regulatory policymaking by executive branch agencies. In 2018, the Department of Justice released a memorandum (commonly called “the Brand memo,” after then- Associate Attorney General Rachel Brand) that directed department attorneys not to rely upon informal agency guidance as binding law in affirmative civil cases brought by the DOJ.19 Taken together, the move by the DOJ to eschew reliance on sub-regulatory agency guidance documents, and the Supreme Court’s holding that such guidance – where it purports to establish or change a substantive legal standard affecting Medicare coverage – should not be given any force or effect, points the way for defendants in FCA litigation to challenge the invocation of such guidance as the basis for imposing liability under the FCA.
1. Polansky v. Exec. Health Res., Inc., No. 12-CV-4239, 2019 WL 5790061, at *1 (E.D. Pa. Nov. 5, 2019).
2. Id at *2.
3. Two Midnight Rule, 78 Fed. Reg. 50, 496 (Aug. 19, 2013) (codified as amended 42 C.F.R. § 412(d)(1) and requiring that, to admit an individual as an inpatient, the admitting physician expects that the patient’s stay will cross two midnights.).
4. Polansky at *3.
5. The defendants eventually moved for sanctions because of these blunders. Id.
6. Polansky at *2.
7. False Claims Act, 31 U.S.C. §§ 3729-3733 (1863).
8. The two standards are discussed at length in “Riding the Relator Roller Coaster: DOJ’s Efforts to Curtail Declined Qui Tam Litigation” infra.
9. Polansky at *8.
10. See 42 U.S.C. § 1395hh(a)(2).
11. See Azar v. Allina Health Servs., 139 S. Ct. 1804 (2019).
12. Polansky at *12 (quoting The Medicare Act, 42 U.S.C. § 1395hh(a)(2)).
13. Specifically, Heath Insurance for the Aged Hospital Manual (1968) § 210; Medicare Hospital Manual (1981) §210; and Medicare Hospital Manual (1989) § 210.
14. Polansky at *14 (quoting Allina Health Servs. v. Price, 863 F.3d 937, 943 (D.C. Cir. 2017)).
15. The court notes that the Phase 2 claims (the Two Midnight claims) also may not survive summary judgement, but there hasn’t been enough discovery to determine that forsure. Id at *17.
16. United Health Servs., Inc. v. Escobar, 136 S. Ct. 1989, 2003 (2016).
17. Polansky at *18.
18. Id at *19.
19. Limiting Use of Agency Guidance Documents in Affirmative Civil Enforcement Cases (Jan. 25, 2018) (“Brand Memo”), available at https://www.justice.gov/file/1028756/download.