2012 January Dba Health Law Speech

PRACTICAL CONSIDERATIONS
IN DEFENDING AGAINST
HEALTHCARE FRAUD AND ABUSE ACTIONS
STARK LAW, THE ANTI-KICKBACK STATUE,
THE FALSE CLAIMS ACT/QUI TAM ACTIONS

_____________________________________

MartinMerritt PLLC
100 Crescent Court
Suite 700
Dallas, Texas 75201
(214) 459-3131
(214) 459-3010 (Fax)
(214) 952-1279 (Cell)
Martin@DallasPhysicianLaw.com
____________________________________

DALLAS BAR ASSOCIATION
HEALTH LAW SECTION
January 18, 2012

MartinMerritt PLLC Health Care Fraud and Abuse Dallas Bar Assn Health Law Section Page 1

Martin Merritt
Attorney At Law

MartinMerritt PLLC
100 Crescent Court
Suite 700
Dallas, Texas 75201
(214) 459-3131
(214) 459-3010 (Fax)
(214) 952-1279 (Cell)

Practice Focus: Martin Merritt is a member of the Health Law Section of the Dallas Bar Association and the Health
Law Section of the State Bar of Texas. MartinMerritt PLLC is a boutique practice, which focuses on the needs of
Physicians in Stark Law/Anti-Kickback Statute Compliance, False Claims Act Litigation, Contracts and Leases,
Medical Business Law, Malpractice Defense, Medical Ethics, Business Litigation, Pharmaceutical Litigation, MDL
Actions. Lead counsel in over 2000 medical cases. Over 100 first-chair jury trials and administrative law hearings
involving ethics, benefit reviews, eligibility, and whether a physician’s course of treatment was reasonable and
necessary, met the applicable standard of care, the amount charged was usual and customary in Dallas County and/or
that the coding was appropriate for the treatment provided. Cases include defense of physicians in medical
malpractice, ethics violations, and pharmaceutical defense in MDL class action opt-out cases. As a witness, Martin
has testified in open court over 100 times on behalf of clients. First Chair Jury Trial experience in Medical
Malpractice, Wrongful Death, Paralysis Injury, Products Liability, Contracts, Negligence, Premise Liability, DTPA,
Breach of Contract, Breach of Warranty, Personal Injury, Workers Compensation, Federal Statutory Law, State
Regulatory Law, Real Estate. At least a dozen $1 million and multi million dollar (net present value) recoveries
actually received on behalf of clients. Over $500 million dollars in medical malpractice and Pharmaceutical claims
defended. Volunteer Legal Director of StarkLaw.org, a national website devoted to helping healthcare providers find
answers to compliance issues, or referral to a health lawyer in their state. Martin has also served as a Prosecutor for
the Texas Commission for Lawyer Discipline.
Books Authored:

Texas Motion Practice Handbook, Vols. I-II, 1600 pp., (updated annually), Knowles Publishing Co., Fort Worth,
Texas (1992-2005)(Best-selling treatise and form book, Texas Civil Trial Procedure and Evidence. Chapters include
Summary Judgment, Default Judgment, Motions to Recuse Judges, Motions to Disqualify Counsel, New Trials,
Dismissal for Want of Prosecution, Sanctions, Discovery Motions.) This book and the annual updates required
reporting on every major development in civil procedure each year during the publication run.

Texas Bar Journal Articles and MCLE Presentations:

“Practical Considerations in Defending Stark Law, Anti-Kickback, False Claims Act, and Qui Tam Actions,” Dallas Bar
Association, Health Law Section, (Jan. 2012) “Medicare Set-Asides Under the Secondary Payor Act,” National Business
Institute, (Dec. 2010); “Federal Practice Update,” National Business Institute (Feb. 2001) “Fry is Out, But What is the Test?
The Foundation for Expert Testimony in Federal Trials after Daubert”, 57 Tex. Bar. J. Vol. 7, pp. 710-715, (July 1994);“Texas
Summary Judgment Evidence,” 53 Tex. B. J. Vol. 1, p. 24, (January 1990); “Prejudgment interest in Wrongful Death, Personal
Injury and Property Damage Actions,” Texas Trial Lawyer’s Forum, Vol. 2., No. 2 p 21-23 (1992); “A Critical Analysis of Irving
Younger’s Ten Commandments of Cross Examination,” Texas Trial Lawyers Forum Vol. 28, No. 1. pp.11-16 (1994); “Rule
165a. Dismissal for Want of Prosecution” 60 Tex. Bar.J. Vol 6, pp. 555-559 (June 1997);” Summary Judgments in Texas,”


Dallas Bar Assn. Friday MCLE Clinic, (May 1990); “Responding to Adverse Pretrial and Trial Motions,” Texas Trial Lawyers
Association MCLE Seminar, Dallas and San Antonio, (Feb. 1994); “Demonstrative Aides in Civil Trials,” National Business
Institute Seminar, (Feb. 1994); “Motion Practice Pointers,” Plano Bar Association, (July 1995); “Case Intake and Investigation,”
Institute for Paralegal Education, Seminar, (Sept. 1994) “Cross Examination, Getting the Most out of Depositions,” Texas Trial
Lawyers Assoc., Seminar, (Sept 1996); Guardian Ad Litem Practice and Procedure,” University of Houston Bar Foundation.

shareholders, as we have seen with decisions
Part I: Government made by CEO’s of managed care organizations.
Fifty years ago, the AMA didn’t really need to
Enforcement of Health Care choose which was worse– Scylla or Charybdis– in
Fraud and Abuse Laws. the 1950's the AMA had fairly well erased
By Martin Merritt capitalism from the picture. Both the
Martin@DallasPhysicianLaw.com pharmaceutical industry and the health care
delivery industry had come to respect the AMA’s
1. Fraud vs. Abuse. Sources of Federal Health power to enact state laws which made the
Care Fraud and Abuse Laws: The AMA Code corporate practice of medicine a crime, or simply
of Medical Ethics made it impossible, by negative implication, for
corporations to qualify for a license to deliver
The health care system in the United health care. See, Claymon, Jennifer, “Corporate
States has been described as the world’s largest, Practice of Medicine and Non-Profits,” UT School
costliest health care bureaucracy, engulfed by red of Law Health Law Conference, (April 2009.) See,
tape and maddening complexity, in which Garcia v. Texas State Board of Medical
“[i]nsurers cheat patients and doctors; patients Examiners, 384 F. Supp. 434, 437-38 (W.D. Tex.
cheat doctors and insurers; doctors cheat insurers 1974). So powerful was the AMA, even
and patients; and all cheat the federal and state Pharmaceutical companies didn’t dare advertise
governments.” See, Bartlett, Donald; Steele, directly to consumers, as the AMA did not want
James, Critical Condition– How Health Care in anyone, other than a physician, telling patients
America Became Big Business and Bad Medicine, what drug to buy.
New York: Doubleday (2004.) This wasn’t
always the case. Medicare “Fraud and Abuse” regulations
are the bane of physicians and the healthcare
In America, throughout most of the 20th industry. Not only are the regulations impossible
century, the nation’s physicians held virtually to find for the average physician, the frustration is
unchallenged economic, moral, and political sway compounded by the seemingly inescapable
over the regulation what we now call the “health conclusion that the federal government is more
care industry.” See, e.g., Mahar, Maggie, Money interested in the appearance of reform, than in
Driven Medicine, New York: Harper -Collins actually enforcing a code which in any way
2006. Gazing out over the horizon, physicians reduces the deficit. Consider, as a stunning
saw trouble in the form of both government example, that in 2003, when Medicare Part D was
(socialist) and corporate (capitalist) takeover of passed, the pharmaceutical industry was able to
medicine. The problem with socialist medicine is secure a provision that forbids CMS (Medicare)
that it is thought to kill both innovation and the from negotiating volume discounts when
human spirit, as we observed in the case of the purchasing drugs. Hence, the Veteran’s
Soviet Union, while corporations were thought to Administration (and virtually everyone else) pays
place too much emphasis on the needs of on average, 58% less than Medicare for the same


drugs. While physicians and providers spend incentive,” to perhaps over-treat. In fact the only
countless resources attempting to comply with thing standing in the way, would be the state-by-
fraud and abuse laws, Every nickle that the US state versions of the AMA Code of Medical
Treasury has ever recovered under the FCA has Ethics.
been squandered in a single year by operation of As federal spending on Medicare doubled,
this “no haggle” provision in Medicare Part D. In then tripled, over the decade between the 70's and
other words, all this effort is wasted. 80's, the federal government snatched the AMA
Code of ethics from the hands of doctors, and
To be sure in the formative years of both turned a few sections into a multi-billion dollar
private and public health insurance, just like the civil and criminal litigation leviathan called
pharmaceutical industry, the AMA insisted neither “fraud and abuse.” (State laws, based upon
corporate “Blue Shield” plans, nor the new federal law, are used to enforce Medicaid and in
Medicare program should attempt to extract some cases, private health plan fraud and abuse.
“purchasing power” discounts. See, Mahar, Although important, state laws are not covered in
Maggie, Money Driven Medicine, New York: this paper.)
Harper-Collins (2006). The difference is this,
while there were those in 1965 who thought we Today, physicians and providers stand in
could actually afford to pay full sticker price for the eye of the storm. In their reception areas, all
everything, by 2003, no one was under any such may seem calm– but behind the scenes, every
misapprehension about our ability to pay full price medical decision, and every business decision,
for Medicare Part D. Yet we did it anyway. every medical office lease, equipment rental,
medical supply contract, employment contract,
In 1965, (as Congress debated enacting partnership, joint venture, real estate transaction,
Titles XVIII and XIX of the Social Security Act,) every investment, gift, discount, as well as every
the AMA turned its full attention toward what code entered, and every waiver of co-payment–
would happen if the federal government got into carries with it the threat of a federal
the business of providing for, (and regulating) investigation, and potential liability of millions of
the practice of medicine. The AMA was dollars, (and possibly a felony conviction.)
particularly concerned not only that their members Meanwhile, the real criminals are hauling freight
continue to be paid a “reasonable” fee for loads of government cash out of the treasury, with
“necessary” services, but also about government little fear of being caught (under the government’s
regulators (who were laymen) instructing or p l a n o f “ p a y, t h e n c h a s e . ” ) S e e ,
second-guessing the reasonableness and necessity http://oig.hhs.gov/fraud/fugitives/
of medical services. index.asp.

“Failure” is not, as JFK opined, always To say that the rules and regulations
and “orphan.” When spending got out of control, against healthcare fraud and abuse are “difficult to
congress had no trouble figuring out who, or what master,” would be a gross understatement.
(other than congress,) we should blame– fraud Because regulators are being asked to regulate
and abuse. It is fair to say the AMA saw this something they don’t understand, they tend to
coming– but not in their wildest dreams did they over write. It also appears the W.H.O. is destined
imagine the true scope of the storm which was to to write a ICD code for every cell in the human
become modern federal “fraud and abuse” law. To body. This tendency to overwrite is especially
some extent, the AMA succeeded in preserving noticeable, as one begins to delve into the
(for a while) the “fee for service” model of provisions of 42. U.S.C., and 42 C.F.R, which
reimbursement. However, with that came the have been described as “among the most
recognition that physicians had a “perverse completely impenetrable texts within human


experience.” See, Rehab’h Ass’n of Va. v. know which law actually applies.)
Kozlowski, 42 F.3d 1444, 1450 (4th Cir. 1994.)
See, Baumann, et al., Healthcare Fraud and I will tell you this, no “official” (or
Abuse, p. 200, ABA Health Law Section Press, unofficial) compendium of federal fraud and
2002. abuse regulations exists. See, Tully, Federal Anti-
Kickback Law, 1500:0607 (BNA’s Health and
Yet, RAC auditor/bounty hunters, with Business Series, 2001.) In fact we Stark lawyers
comparatively little more training that one might have learned to become our own book binders,
gain from a cereal box are being asked to review (with three-ring binders as our chief weaponry
medical charts of physicians with years of medical against chaos.)
training and experience. (RAC auditors are This isn’t to say that the government is
supposed to be looking for “over” and “under” hiding the ball, or trying to keep the rules a secret.
payment errors. Not surprisingly, – 96% of the Far from it– they simply cannot write a rule that
errors found by RAC auditors favor the also effectively takes everything into account.
government.) See, http://www.
ahima.org/resources/rac.aspx. Recognizing this, CMS and the OIG do
attempt to set out what will be prosecuted by the
government on their respective web sites. But “the
government” is not one entity. It is a collection of
(a) The Five Primary Federal Fraud and agencies and offices. Not every agency agrees on
Abuse Prevention Statutes. enforcement, nor do they necessarily talk to one
another. Personnel vary widely from region to
The 4th Circuit’s observation that “Fraud region with regard to knowledge on the subject
and Abuse” rules constitute an “impenetrable being regulated. The government bridged the gap
text,” is a bit misleading. There is no “text.” In in knowledge between regulators, and the
fact, the landscape looks as if we handed a regulated by producing operational manuals
machine gun to a group of regulators who have which guide agents in day-to-day operations.
never seen a gun before, and told them to shoot
anything they don’t recognize as harmless. The The trouble is, these operational manuals
“rules” against fraud and abuse are literally are not statutes, which are written after public
scattered out everywhere. The rules are found in hearings, debate and input from the industry.
actual statutes, under 42 U.S.C. and in regulations Often, the people in charge of enforcement have
filed under 42 CFR. Then there are the Bulletins, never read the actual statutes, and certainly no
Fraud Alerts (“Special” and un-Special) idea what constitutes reasonable and necessary
Memoranda, Opinion Letters, regular letters, medical practices. This is not to impugn the
(“Open” and un-Open,) some of which end up in integrity of employees of HHS, CMS, or OIG.
the Federal Register, some of which end up in Many are highly skilled, highly trained and highly
the OIG, HHS and CMS websites, and others are knowledgeable. Even those who are less
simply tucked away in some manual– calling to experienced are good, sincere, hard-working
mind the final scene of Raiders of the Lost Ark. people doing the best they can, given the fact that
The rest, are what I call “Legend and Lore,” based they are non-physicians, who have been given the
upon what someone thought they understood, or task of enforcing the AMA Code of Medical
even heard a government official say in a town Ethics against licensed physicians who are often
hall meeting on the subject of what would lead to faced with the impossible task of treating patients
enforcement activity. (This all tends to explain who, themselves, are not always forthright in
why most of my clients simply call the whole relaying their own histories . (In further defense of
collection, “Stark Law,” and leave it to me to these federal agents, they do see some fairly


outrageously bad actors, which tends to erode for two reasons (1) in response to the ballooning
blind faith that absent a firm hand, mankind will federal budget, (2) growing public awareness that
behave itself.) defense and medical contractors were “gaming”
the system. Contractors with less than stellar
Add to this, the army or RAC auditors, abilities, services, or products were jumping in
and qui tam relators, who are paid a percentage front of higher quality providers simply by paying
bounty to find even the slightest error (which may the highest kickbacks. The AKS was at first a
disqualify billions of dollars in reimbursements,) misdemeanor criminal statute, then upgraded to a
and an environment of KGB-style terror reigns. felony, and finally, a civil money penalty
Because qui tam actions are filed under seal, provision was added. Although the AKS applied
medical providers have no idea, (sometimes for to any government contractor, its major provisions
years,) that they have been sued, what they may were taken from AMA Ethics Code provisions on
be accused of, when unsealing will happen, or “Fee Splitting” (Rules 6.02-6.04.) In the 1980's
which of their employees, suppliers, neighbors or the spirit of deregulation caused the OIG to craft
friends have turned them in.) a number of Safe Harbors, under 42 CFR
1001.952 (a)-(u) which apply to the most common
Nevertheless, the OIG lists on its website types of arrangements.
and its “Roadmap for Physicians,” the five
primary Medicare fraud and abuse prevention
statues, that will be the subject of enforcement First, the AKS prohibits paying cash or
actions: (1) the False Claims Act, 31 U.S.C.§§ items of value for referrals. Second, the AKS
prevents “in kind” kickbacks by outlawing
3729–3733, (2) the Anti-kickback Statute, 42
referrals between providers who have any kind of
U.S.C.§ 1320a-7b(b), (3) the Physician Self-
financial relationship with one another.
Referral (Stark) Law,42 U.S.C.§ 1395nn (4) the
Obviously, not every relationship contains a
Civil Monetary Penalty Statute , 42 U.S.C.§
“kickback,” and cost savings can be realized from
1320a-7a and (5) the Exclusionary Statute 42
pooling of capital. The safe harbors were designed
U.S.C.§ 1320a-7 . These statues and rules work
to permit relationships which carried little risk of
together, both by cross-reference, cross
abuse. It would be very difficult to write a safe
incorporation, and with a great deal of overlap.
harbor for every possible arrangement, just as it
Understand, there are actually more than 50
would be difficult to write a product liability rule
federal statues which could be employed– and if
for each individual product manufactured. Instead,
a client does something really dishonest, he may
if a relationship is subject to a safe harbor,
have every federal agency from the FBI, the postal
providers must meet the requirements. If an
inspector to the department of defense in his
arrangement doesn’t have a published safe harbor,
lobby– but for the OIG, more than 5 is simply
that doesn’t mean the AKS has been violated.
overkill. The five are:
Instead, the parties would likely be required to
(1) The False Claims Act Congress passed the demonstrate by analogy, that no kickback is
False Claims Act on March 2, 1863, 12 Stat. 696. involved, (usually by comparing the FMV of the
(31 U.S.C. §§ 3729–3733, also called the "Lincoln thing involved, and the amount paid for it. If the
Law.") The FCA imposes liability on persons and two are not equal, there may be a kickback.)
companies (typically federal contractors) who
(3) “Stark Law.” The Prohibition Against
defraud governmental programs. A false claim
Physician Self-Referral,42 U.S.C.§ 1395nn. In
may be a “reverse false claim”– meaning a false
1989, Congressman Pete Stark sponsored a special
statement about how much one owe’s the
rule prohibiting certain Medicare referrals, which
government (IRS matters are excluded.)
only applied to physicians, and only to certain
(2) The Anti-kickback Statute, 42 U.S.C.§ specific items of expense. In order to understand
1320a-7b(b). Congress passed the AKS in 1972 why this was thought necessary, given the obvious


overlap between Stark Law and the AKS, (and soon found out how difficult it is to “un-ring a
why most physicians feel betrayed by continued bell,” (for had they not, themselves declared it
enforcement of the rule,) we must pull back the unethical for a physician to earn income from
lense, in order to gain a broader historical outside referrals.) As a consequence, (and in a
perspective. twist of fate too strange for fiction,) the
Over the course of the 20th century, government passed the Stark Act, which
American physicians, through the AMA, tried essentially declared that physicians are the only
mightily to fend off not only the government, but entrepreneurs who may not earn passive income
also corporate intrusion– which they termed, the from the investment in outside diagnostic
“corporate practice of medicine.” (Little realizing facilities.
one would lead directly to the other, as spending Unlike the AKS, the Stark Act is a strict
on health care tripled between 1970 and 1980, liability statute, which applies only to physicians
thanks to Medicare.) What the AMA objected to and only to referrals for Designated Health
was “for anyone else, such as an investor, to make Services to providers where they, or a close family
a return from a physician’s labor.” See, Starr, Paul member has a financial relationship. Stark Law
The Social Transformation of American Medicine has safe harbors found in the main statute and as
(New York: Basic Books, 1982.) So the AMA constantly tinkered with by the OIG and HHS in
decided to erase capitalism from the picture. If 42 C.F.R. § 411.351, et seq., and a various
medicine required capital beyond that which assortment of bulletins and advisories.
doctors could provide, it would have to be (4) the Civil Monetary Penalty Statute , 42
contributed gratis by the community, (instead of U.S.C.§ 1320a-7a. Civil penalties range from
investors looking for a profit.) Id. Nonetheless, the $10,000 to $50,000 and may be assessed on a per
AMA was wise enough to realize, as the legal incident, per person, or per day of non-ompliance,
maxim goes: he who seeks equity, must do equity. as set forth in the Act.
If the AMA were to have any credibility against
critics who charged the AMA’s lofty ideals were (5) The Exclusionary Statue. 42 U.S.C.§ 1320a-
“financially convenient,” physicians would need 7. Under the Social Security Act, exclusion is
to “practice what they preached.” And so the mandatory for certain acts, and permissive in
AMA adopted rules prohibiting their own others. Conviction for Criminal offenses, for fraud
membership from earing passive income from in billing, or the criminal neglect or abuse of
financial investment of capital. This was patients can result in automatic exclusion for five
accomplished by AMA Rule 8.03, which declared years. The government is mindful that exclusion
it “unethical” for a physician to earn a profit from may have a detrimental effect upon the
the referral of a patient to an outside clinic, which availability of health care. Often, solutions aimed
the physician also owned. Physicians happily at compliance are employed specifically to avoid
accepted this trade-off, but only for so long as the harsh remedy of exclusion. If a person has
everyone played by the rules. But in the 70's and been excluded, OIG regulations state that an
80's, the walls which held corporate interests at excluded person may not be employed by a
bay was finally breached. Private investors provider, if any federal dollars are used to
(often by pretending to be “non-profit” entities,) compensate the excluded person. Thus, it is
began earing a profit from physician’s referrals. extremely important for providers to carefully
screen employees.
Physicians responded (rightly or
wrongly,) by taking the position that because the
goal posts had been moved, they were free to (b) Is it “Fraud,” or “Abuse.”
disregard their own rules– with impunity. Whether a practice is “fraudulent” or
Practically overnight, it seemed, every physician merely “abusive,” goes hand in hand with the
also owned a diagnostics laboratory. The AMA question: will a pattern of conduct result in


criminal action, or simply civil money penalties? example, a physician may perfectly fit the AKS
The answer isn’t entirely simple to provide. A “safe harbor” for referrals of patients to a hospital
practice or scheme will normally fall within a where he has ownership interest in the entire
continuum, or range of mental states– from hospital. However, if it can be shown that the
innocence, to negligence, gross negligence, intent behind the practice was to refer patients
conscious indifference, willful ignorance, who don’t really need the treatment, then that is
knowing, or intent to defraud. It is usually not “fraud,” even though he has complied with a safe
necessary that a provider “know” or “intend” to harbor.
violate a law, it is sufficient that the provider
knowingly engage in an act that is forbidden.
2. What is the government trying to prevent?
Some behavior is designated a “crime,” The government is primarily concerned with two
(malum prohibitum) even though it isn’t actually things: (a) “Fee Splitting,” or receiving
immoral, or “fraud,” (malum in se.) One example “Kickbacks” for referrals, including “self-
is taking kickbacks (especially “in-kind”) for referrals,” and (b) billing the government for
referrals, where the patient did actually need the things, when you don’t have a right to be paid.
treatment. This isn’t so much immoral as it is,
simply a crime, because congress, through the (a) Fee Splitting, Kickbacks and Self
AKS says it is. Perhaps in recognition of the fact Referrals.
that some behaviors are always morally wrong, Fee Splitting and Kickbacks have always been
(stealing) while others are wrong because a statute medically unethical. See, AMA Code of Medical
says so, (accepting office space at below market Ethics Rule 6.02 (Doctors can’t pay for referrals);
rates, then referring cases to the landlord); Rule 6.03 (“Clinics, laboratories, hospitals, or
whether a provider will be prosecuted criminally other health care facilities that compensate
vs. civilly under a statute like the AKS, (which physicians for referral of patients are engaged in
calls for either,) often depends upon the evidence, fees splitting which is unethical; Rule 6.04 (A
(including past “run-ins” with enforcement) that physician may not accept any kind of payment or
demonstrates the provider knew his activity was compensation for prescribing drugs or devices
illegal, but did it anyway. While the violation is from the manufacturer.) Fee splitting is not illegal
complete by knowingly engaging in behavior, in other businesses. As stated in the main rule:
(thus, legally sufficient) juries are often slow to “Rule 6.02: Payment by or to a physician solely
convict doctors and professionals of a crime, for the referral of a patient is fee splitting and is
absent such aggravating factors,(only then is the unethical. A physician may not accept payment of
charge factually sufficient to support conviction.) any kind, in any form, from any source, such as a
It is up to a prosecutor to decide which pharmaceutical company or pharmacist, an optical
charge, or allegation to bring, based upon the company, or the manufacturer of medical
strength of the evidence. It is up to the jury to appliances and devices, for prescribing or
decide if the charge or allegation is true. referring a patient to said source. In each case, the
In practice, “Fraud or Abuse” is usually payment violates the requirement to deal honestly
prosecuted as a crime for behaviors which are with patients and colleagues. The patient relies
fairly close to “stealing.” See, Hooper, Patrick, upon the advice of the physician on matters of
Health Care Fraud And Abuse, Los Angeles: referral. All referrals and prescriptions must be
ABA Health Law Section, pp. 197-251 (2001) based on the skill and quality of the physician to
“Abuse,” is more or less synonymous with whom the patient has been referred or the quality
“medically unethical”. . . but without the intent to and efficacy of the drug or product prescribed.
defraud or steal. Further, even a practice that
falls within a “safe harbor” could still be
“fraudulent,” depending upon “intent.” For Self Referral (Stark Law) Stark Law is taken


from AMA “Conflict of Interest” Rule 8.032 (and the Amgen case cited in Part II. This includes:
its predecessors) which held, “In general, a (1) charging for services that were never
physician should not refer a patient to a facility performed, (if intentional, this is just plain
outside of their office, where they do not provide fraud,”)
the service or care, when they have an ownership
or investment interest in the facility.” A major (2) “Upcoding,” which can be a form of fraud,
difference between Stark Law and the AKS, lies (depending upon intent,) in which a provider
in the fact that under Stark Law, any referral for deliberately assigns a higher reimbursement code
DHS’s (where a financial relationship exists than it deserves,
involving a referring physician,) is per se illegal– (3) “Unbundling,” which is abusive, because the
there need not be a colorable “kickback” involved. government says it is: charging for a service that
A defendant (who need not be a physician) under should have been included in a bundle, rather than
the AKS may escape liability by proving there separately, (Although note: In U.S. v. Krizek , a
actually was no kickback, (either under a safe psychiatrist was sued for $80 million, $245k in
harbor, or simply as a matter of mathematical alleged actual damages, because he did not
fact.) Because Stark Law has its basis in both “fee unbundle an hours worth of time into smaller
splitting” and “conflict of interest” ethical rules, units.)
physicians are simply held to the higher ethical (4) Failing to disclose discounts or price
standard– this is also true because of a peculiar reductions, either when the government is basing
circumstance: the patient’s limited concern over payment on the belief a provider paid full price
the cost of treatment authorized. for supplies, or if the if a physician routinely
The OIG explains this in its “Roadmap waives 20% co-pays. This often considered
for Physicians,” because the government (and not “fraud,” and not simply abuse.
the patient) is paying the bill, the usual market (5) Claiming expenses when they weren’t
forces do not apply. (Patients simply do what they incurred, including selling free samples of
are told without regard to cost.) Both the patient prescriptions, then billing the government as
and the government must be assured that the though the provider actually purchased the drugs
referral is being made solely on the basis of for resale.
reasonable medical necessity, (not because the
(6) Billing for work done by an excluded provider.
physician owns the imaging center) and to the
most capable provider– not simply to the provider (7) And the catch all– “false certification.” This
who is the “highest bidder.” occurs when the provider falsely certifies to the
government that the provider has complied with
all laws and regulations entitling the provider to a
payment (Stark Law and the AKS for starters,
(b) Billing the Government, When Provider and more and more so, the Civil Monetary
Didn’t Have a Right to Payment. Penalties Statute and the Exclusionary State have
Under this broad heading falls almost added false certification definitions ) when if fact,
everything else that will get you in trouble with the provider has not.
the government, subjected to a RAC audit claim 3. Damages and Penalties.
for reimbursement, (or sued by a qui tam relator Violations of “fraud and abuse”
on behalf of the government.) Items in this regulations carry heavy penalties, which often
category may either be forbidden by a federal rule, bear no relationship to the damage done. If the
(which for the most part are made unethical under government is billed for services for a patient who
AMA Rules 2.035, 2.09, 2.19, 4.04, 4.06, 8.03) or has been referred in violation of Stark Law or the
may be something that smacks of fraud, (even if AKS, then every single bill can be considered a
HHS is yet to pass a rule on the subject,) such as “False Claim” under the False Claims Act, and


subject to a penalty for each claim submitted. This (i.e., “knows” about the claim), the provider must
is how in the Krizeck case, a physician earing return the payment within (a) 60 days, or (b) the
$100,000.00 per year ended up with a lawsuit for date the corresponding cost report is due.
$82 million. ($10,000 fine for each of 8,000
claims submitted.) In addition, a provider may be
excluded from the program under the 5. The Holder Memorandum.
“Exclusionary Statute.” It is worthy of note, the To the actual participants, how one felt
government does not need to prove that the about the Fall of Jericho might largely have
services were not reasonably necessary. It is depended up which side one was standing when
enough that the referral was poisoned in some the walls crumbled. As for the rest of us, we
way, and if so, the patient receives the care for would really rather see disputes resolved before
free, the government receives the benefit of the they become a war of annihilation. The
treatment without paying for it, and the provider government, unlike qui tam relators, also has a
must pay a substantial penalty for each claim vested interest in the survival of the regulated, and
submitted. is therefore, often more interested in compliance,
than convictions. (CMS simply cannot shut down
the only hospital in a region, no matter how badly
4. FERA it is mismanaged. See, e.g., The problem with
With the Fraud Enforcement and Recovery Act of D a l l a s ’ P a r k l a n d .
2009 (“FERA”), the federal government’s “most http://dallashealthcare.blogspot.com/)
potent weapon” to fight fraud against the United As for smaller providers, in 1999, the
States became even stronger. Since its inception, “Holder Memorandum” was issued by the Deputy
the False Claims Act has punished anyone who Attorney General, Eric Holder, to all United
knowingly submits a “false” claim for payment to States Attorneys, and government civil
the United States. A claim is “false” when the enforcement lawyers, aimed at providing guidance
person or entity who submits the claim is not for both US Attorneys and trial attorneys in the
entitled to be paid. In the healthcare context, the Civil Division of the US Government. The
most basic example of a false claim is a provider Holder Memorandum instructed government
who intentionally submits claims for services that lawyer to use the “sledge hammer” of fraud and
were never provided. Penalties under the False abuse laws under the FCA in a fair and
Claims Act are severe, and include treble damages responsible manner. The gist of the Holder
(three times the amount of claims improperly Memorandum was to encourage government
paid), administrative sanctions, and potential lawyers to (1) not treat everyone as unrepentant
exclusion from participation in federal healthcare felons, unless they act like unrepentant felons, (2)
programs. In some cases, criminal liability is also remember the difference between “knowingly”
a possibility. false statements, (which are illegal) and false
“Unknowingly” submitting a false claim statements by mistake, (which are not) (3) take
does not violate the False Claims Act – at least not into account how much notice was provided of a
prior to FERA. With FERA, Congress amended position taken by the government, (was the
the False Claims Act to cover the knowing provider they warned? Had the government been
retention of payments received pursuant to a false prosecuting prior to the enforcement in a
claim (a “reverse” false claim), even when the particular case) (4) consider how bad the conduct
false claim was not knowingly submitted. The was, and was it institution-wide, or just one bad
Patient Protection and Affordable Care Act of actor? (5) consider cooperation and willingness to
2011 further strengthened FERA by adding the comply in assessing punishment, (6) try to resolve
“60 Day Rule.” Under the rule, once a provider the case by “contact letters” rather than sue first,
“identifies” a payment to which it is not entitled (7) consider alternative remedies tailored to the


situation, (8) consider ability to pay in accessing following are examples of questionable features,
civil money penalties, and fines (8) don’t railroad which separately or taken together may result in a
people who can’t afford attorneys, just because it business arrangement that violates the anti-
is easy, (9) don’t shut peoples business down kickback statute. Please note that this is not
(unless they really deserve it) while attempting to intended as an exhaustive list, but rather gives
investigate and ferret out abuse. examples of indicators of potentially unlawful
To be consistent with my observation activity.
regarding those memoranda I consider “bad” for (1) Investors are chosen because they are in a
my clients, note that the Holder Memorandum, position to make referrals.
(though “good” for clients,) is not a statute or (2) Physicians who are expected to make a large
even a regulation. It is an internal memo, number of referrals may be offered a greater
circulated within the government, which was then investment opportunity in the joint venture than
republished in the appendicies to books, such as those anticipated to make fewer referrals.
Health Care Fraud and Abuse, Bauman, L. ABA
Books, (2002.) The point being, we health (3) Physician investors may be actively
lawyers literally hang on every word published by encouraged to make referrals to the joint venture,
the government. and may be encouraged to divest their ownership
interest if they fail to sustain an ``acceptable''
I include the Holder Memorandum also to level of referrals.
compare and contrast government actions from
qui tam lawsuits. Notice that the government will (4) The joint venture tracks its sources of
notify a defendant and take into account various referrals, and distributes this information to the
social concerns, before imposing penalty. In qui investors.
tam actions, there is no pre-lawsuit discussion, in (5) Investors may be required to divest their
fact a defendant may not know he has been sued ownership interest if they cease to practice in the
for years. Qui tam relators do not have any service area, for example, if they move, become
interest in the continued viability of a target– they disabled or retire.
don’t care if they kill the host. Therefore, if a
potential defendant gets wind of the fact he may
The point of this is not to provide an
be sued, he may wish to consider the value of self
exhaustive treatise on what the government is
reporting– whatever the government might do, it
looking for, but to give you an idea that a great
is certainly preferable to total war.
deal of information is out there, which you need to
know if you advise clients in federal fraud and
6. OIG Bulletins, Open Letters, and abuse compliance.
Memoranda
In the decade of the 2000's, the OIG 7. Steps for Staying out of Trouble with the
issued a number of internal bulletins and Government
memoranda which were eventually published after
the fact, to help guide providers as to what the
government is looking for, when it comes to As attorneys advising clients in the area
certain practices, such as “joint ventures,” office of healthcare fraud and abuse, Rule #1 : Any
space, etc, under the title, “What to look for” for advice you provide a client, based upon the facts
example, with Joint Ventures; he has given you, may provide a defense to a
(See,http://oig.hhs.gov/fraud/docs/alertsandbulle “knowing” violation. Ordinarily, communications
tins/121994.html): between attorney and client are privileged.
However, that privilege belongs to the client, and
“Suspect Joint Ventures: What To Look For To
he may (and likely will) waive it. In fact, as the
help you identify these suspect joint ventures, the


U.S. v. Campbell case, (Cited in Part II) alleged wrongdoing compared with the rule being
demonstrates, one of the first things a client will enforced.
do is report to the government that “my lawyer (B) Do whatever the “Safe Harbor,” the
said this was legal.” In the Campbell case, the regulation, fraud alert, or bulletin says you are
attorneys responded, “the client didn’t tell us supposed to do.
everything.” We don’t need to look at the
crime/fraud exception to privilege, because the (C) Document efforts to comply. If the
client just waived privilege. Knowing this, regulation requires payment of “Fair Market
Rule#2: Document everything. Your opinion Value” for something, hire a consultant to tell you
letter should state in clear terms every fact upon what FMV is. Don’ t just pick a number out of
which your opinion is based, and that no other thin air.
facts have been given or considered. Doctors have (D) Haggle. The opposite of just picking a
long held to the heuristic maxim: “If it didn’t get number out of the clear blue sky, as a “give and
written down, it didn’t happen.” What you must take” negotiation. This includes not only the price,
not do is get caught in this trap: If you “lie, and for example, of office space, but also the
agree with the client,” as to what he now claims amenities, and use of common areas and facilities.
he told you– he gets off the hook for millions of This can sometimes be difficult where the seller
dollars, but if you tell the truth, (he didn’t give me doesn’t really care what it is paid. (For example,
all the facts) the opposite result happens. If you where a lessor of office space would be happy
find yourself in this dilemma, the best advice I can with $1 a year in lease payment.)
give you is , (1) Do not lie to the FBI, (2) Hire the
best ethics lawyer you can find.
(E) Be prepared to defend the number. The
Advising clients is “art” not “science.” dollar amount of and arms length transaction is
Even the official OIG bulletins carry a disclaimer, usually a range of numbers between x and y. Be
“Don’t rely on us to know what we are talking prepared to show why the number is what it is.
about. The statutes and regulations are the law. For example, if more fringe benefits are included,
You are responsible for following the law, not the number should reflect that.
what we say the law is. ” (Well, that’s
comforting!) The point being, you must know all (2) Drafting the Contract. Track the language of
the rules and regulations, as well as anything the the regulation or Safe Harbor in the contract.
government has written on a subject. With that Legally, it may make no difference what the
warning in mind, here are a few ideas I think we contract says. However, putting the language in
can all agree on. the contract does show that the parties where
trying to comply, and more importantly, may be of
(1) Before an arrangement is in place. If you are great evidentiary value in negating the “scienter”
fortunate enough to be involved before an or “knowing violation” element of the
arrangement is in place: government’s case. Therefore, for example, if the
(A) Read and understand not only the statues, regulation requires that the price struck in the
but also everything the government has written on bargain does not include the “value of referrals,”
a particular practice or arrangement. As the contract should expressly state that the parties
mentioned earlier, the rules and regulations are agree to this very thing.
difficult to locate or digest. This problem is (3) Post Contract Behavior. After the contract
compounded by the fact that congress, and is in place, educate the client in the following
virtually every lesser agency (from a problem areas:
Constitutional law standpoint) is constantly
tinkering with the questions of what is actually (A) Conversations Kill. Particularly in my
illegal. If your client is facing enforcement practice, which is restricted to physicians– no one
action, pay very close attention to the dates of the needs to know the doctor’s business, except the


doctor, and maybe the office manager. Instruct that the doctor may have been paid above the fair
you clients to keep the circle of people who know market value for the services actually rendered
your client’s business to a “need to know,” and the excess payments could violate the self-
absolute minimum. Instruct those people to keep referral constraints of the Stark Act. The violation
their mouths shut! Qui tam relators are of Stark caused the Medicare claims to be false,
everywhere. Especially disgruntled former thus exposing the hospital and doctor to False
employees. They cannot blow the whistle on what Claims Act liability. While the doctor was
they don’t know. I am not saying, “actively ultimately exonerated in a jury trial, this case
encourage fraud.” That is illegal. What I am nonetheless demonstrates the risks associated with
saying, is if there is open talk about everything the employment, and agreements that are not
practice does, but there is a “black box” around a operationally enforced.
particular transaction, people notice, and what to
investigate. Better to keep quiet about all financial
relationships. Part II: Qui Tam Actions
(B) Educate the Sales Team. Physicians and Under the False Claims Act,
licensed healthcare professionals all know the
AMA Code of Ethics. Licensed professionals 2011 Judicial Year in Review.
know in their bones when something is when The False Claims Act
something is wrong. Don’ t assume the sales team
does. It is amazing the number of qui tam cases
which reveal the marketing team has no concept A. Introduction:
about medical ethics. Reign them in early and Congress passed the False Claims Act on
often. March 2, 1863, 12 Stat. 696. (31 U.S.C. §§
(C) That’s Not Funny! There should be a “no 3729–3733, also called the "Lincoln Law.") The
jokes” policy in place. Especially in emails. In the FCA imposes liability on persons and companies
era of Electronic Discovery, and entire cottage (typically federal contractors) who defraud
industry has sprung up, with providers, such as governmental programs. The law includes a "qui
Hudson Legal, who will assemble and army of tam" provision that allows people who are not
lawyers, many recent graduates of law schools, at affiliated with the government to file actions on
a rate of $20 per hour to pour over emails, looking behalf of the government (informally called
for something that constitutes a “Hot Doc.” The "whistleblowing"). Persons filing under the Act
Neurontin case, cited below in Part II, might have stand to receive a portion (usually about 15–25
been a little easier to defend, if the marketing percent) of any recovered damages. Claims under
team hadn’t taken to calling the drug, “Snake the law have typically involved health care,
Oil.” military, or other government spending programs.
(D) Do the Work Called for Under the The government has recovered nearly $22 billion
Contract. For example, if the a clinic or hospital under the False Claims Act between 1987 (after
retains a physician as a medical director, and the the significant 1986 amendments) and 2008.
contract price is based upon, say 5 hours a month, The Justice Department secured more
then the physician and the clinic or hospital must than $3 billion in settlements and judgments in
document the time was actually worked. In U.S. civil cases involving fraud against the government
v. Campbell, a case in federal court in New Jersey, in the fiscal year ending Sept. 30, 2011.
the court ruled that a False Claims Act suit could http://www.justice.gov/opa/pr/2011/December/1
proceed against a doctor who entered into a part- 1-civ-1665.html. This is the second year in a row
time employment relationship with a hospital but that the department has surpassed $3 billion in
was not required to actually perform the services recoveries under the False Claims Act, bringing
identified in the contract. Thus, the court decided


the total since January 2009 to $8.7 billion – the presented a false claim for payment or approval;
largest three-year total in the Justice Department’s (2) Knowingly making, using, or causing to be
history. Id. made or used, a false record or statement material
to a false or fraudulent claim;
“Qui tam” is an abbreviated form of the (3) Conspiring to commit any violation of the
Latin legal phrase qui tam pro domino rege quam False Claims Act;
pro se ipso in hac parte sequitur ("he who brings (4) Falsely certifying the type or amount of
a case on behalf of our lord the King, as well as property to be used by the Government;
for himself") In a qui tam action, the citizen filing
suit is called a "relator." As an exception to the (5) Certifying receipt of property on a document
general legal rule of standing, courts have held without completely knowing that the information
that qui tam relators are "partially assigned" a is true;
portion of the government's legal injury, thereby (6) Knowingly buying Government property from
allowing relators to proceed with their suits. an unauthorized officer of the Government, and;
The private plaintiff qui tam provisions (7) Knowingly making, using, or causing to be
were thought necessary because the federal made or used a false record to avoid, or decrease
government lacked the resources to detect and an obligation to pay or transmit property to the
deter fraud. (On the other hand, it seemed Government.
blissfully simple to “fight greed with greed.”) See, 31 U.S.C. § 3729.
One small tweak in the law was necessary
To establish a violation, a plaintiff "must
however, and is one which has become significant
show that defendants (1) made a claim, (2) to the
in the defense of qui tam cases in modern times.
United States government, (3) that is false or
The problem simply was there was no prohibition
fraudulent, (4) knowing of its falsity, and (5)
against the “parasitic” practice of filing a claim
seeking payment from the federal treasury." U.S.
for a part of the recovery after the qui tam relator
ex rel. Mikes v. Strauss, 274 F.3d 687, 695 (2d
learned of the fraud from sources such as reading
Cir. 2001) The FCA defines "knowingly" as
reports of criminal indictments by the federal
having "actual knowledge," or acting in
government. (Remember the whole point of a qui
"deliberate ignorance" or with "reckless
tam provision in the FCA was that the government
disregard" of truth or falsity. 31 U.S.C. § 3729(b)
lacked the resources to detect the fraud in the first
(2005). Thus, the requisite intent is more than
place.) Today, the “Public disclosure” rule bars
negligence or innocent mistake. Mikes, 274 F.3d
the filing of a qui tam action if the government, or
at 703 . Put another way, "knowingly" presenting
the public, is already aware of the practice, unless
a false claim "does not mean the claim is incorrect
the relator was the original source of the
as a matter of proper accounting, but rather means
information. The defense forms a major part of
it is a lie." Id. (citation omitted).
the body of cases in 2011 cited below. The Patient
Protection and Affordable Care Act, 124 Stat. Most, if not all of the opinions cited here
119, amended the public disclosure bar, as are qui tam actions. The most important thing, (or
discussed in Shindler Elevator v. US ex rel Kirk, things) to understand about the False Claims Act
131 S.Ct. 1885 (2011). is (1) the United States government does not
need the False Claims Act in order to recover
The False Claims Act establishes liability
damages or penalties and usually doesn’t use the
when any person or entity improperly receives
courts. (There are literally dozens of federal
from or avoids payment (reverse false claims) to
statutes that can accomplish this, including the
the Federal government (tax fraud is excepted).
exclusionary statute and the civil monetary
The Act prohibits:
penalties statute,) usually the government handles
(1) Knowingly presenting, or causing to be enforcement administratively, and will often use


the courts as a last resort. (2) qui tam relators must court for “good cause” may, (and normally)
use the False Claims Act and meet the grants a number of extensions that can last years.
requirements of the Act, or the claim and the (Thus, a defendant may be the target of a hundred
lawsuit must fail. This is important because any million-dollar lawsuit, and be completely unaware
defense which is valid and results in dismissal of it for years.) How long does the government
against the first relator to file, is a bar against any have to decide? Case law construing the "good
other relator. cause" requirement of 31 U.S.C. § 3730(c)(3) is
scarce. At least one court has found that the
requirement was implemented to protect the
interest of relators. In U.S. ex rel. Stone v.
Rockwell Intern. Corp., 950 F.Supp. 1046 (D.Col.
1996), the Court reviewed the Senate Report
regarding the 1986 amendment to the False
B. Procedure
Claims Act, which implemented the "good cause"
requirement for government intervention. The
(1) Sealing. Qui tam relators suits are filed under 1986 amendments altered the reward provisions of
seal, and may remain under seal for years, pending the False Claims Act, permitting relators to
the government’s decision to intervene. Under 31 recover 25 to 30 percent of the alleged fraud if
U.S.C. §§ 3730(b)(4) and (c)(3), if the they proceeded alone, but only 15 to 25 percent if
Government elects not to proceed by taking over the government intervened. Id. at 1048-49. Given
a qui tam action, the Plaintiffs-Relators "shall the new reward provisions, the Stone court noted,
have the right to conduct the action." Although the "[g]overnment intervention late in the proceedings
Government is entitled under such circumstances may be unfair to a relator who has expended
to be served with copies of all pleadings and considerable resources to advance the case and
certain discovery material, there is no express then loses up to half of the reward for bringing the
right to keep files sealed from the Defendant action." Id. at 1049.
indefinitely. U.S. v. CACI International Inc., 885
F. Supp. 80, 81 (S.D.N.Y. 1995). That being said,
(3) The “First to File Rule
the statute does not specifically address whether
file materials beyond the complaint are to be "When a person brings an action under [the qui
unsealed once the Court enters its order. Several tam] subsection, no person other than the
courts, after having considered this issue, have Government may intervene or bring a related
found that a court has the authority to retain the action based on the facts underlying the pending
filed documents under seal, or conversely, to action." 31 U.S.C. § 3730(b)(5). This rule carries
make them fully available to the parties. See e.g., hidden implications. Unlike class action cases,
U.S. ex. Rel. Howard v. Lockheed Martin Corp., there is no hearing to determine the relator’s
No. 1:99-285, 2007 WL 1513999, *2 (S.D. Ohio ability to represent the government. Even where a
May 22, 2007); U.S. ex rel. Yannacopolous v. case may have merit, if the relator fails to select
General Dynamics, 457 F. Supp.2d 854, 858 experienced counsel, there may be only one qui
(N.D. Ill.2006); U.S. ex rel. Health Outcomes tam action. Thus, motions to dismiss become
Technologies v. Hallmark Health System, Inc., crucial.
349 F. Supp. 2d 170, 173 (D. Mass. 2004).
(4) Motions to Dismiss.
(2) The Decision to Intervene.
Although the Statue allows the Once the government makes a decision on
government 60 days to decide to intervene, the intervention, (“yes,” or “no,”) then the case is


unsealed and the defendant is served. The first to weigh mixed fact and law issues in a 12.b.1
responsive pleading will normally contain the motion to a greater degree than under 12.b.6. See,
12.b.1, an Iqbal/Twombly 12.b.6 motion and/or a Osborn v. United States, 918 F.2d 724, 729-30 &
Rule 9.b motion, although subject matter n.6 (8th Cir. 1990) ("Because at issue in a factual
jurisdiction. None of these allege the defendant 12(b)(1) motion is the trial court's jurisdiction —
“didn’t do it.” Instead, these motions seek its very power to hear the case — there is
dismissal because the plaintiff didn’t plead substantial authority that the trial court is free to
enough facts to remain in court. weigh the evidence and satisfy itself as to the
existence of its power to hear the case.")
(ii) Rule 9(b) Pleading Fraud with Particularity
It is well established that the heightened
pleading requirements of Fed. R. Civ. P. 9(b)
apply to claims brought under the False Claims
Act. This requires pleading “who, what when,
(i) 12.b.1 Motion to Dismiss for Lack of Subject where.” See Gagne, 565 F.3d at 45. Although
Matter Jurisdiction Rule 9(b) may be satisfied where "some questions
remain unanswered [but] the complaint as a whole
is sufficiently particular to pass muster under the
Under the False Claims Act ("FCA"), federal FCA," id. at 46, quoting United States ex rel. Rost
courts lack jurisdiction over a qui tam action if the v. Pfizer, Inc., 507 F.3d 720, 732 (1st Cir. 2007),
allegations in a relator's complaint have been "Karvelas requires the complaint to provide,
publicly disclosed in a federal hearing, in a federal among other fraud specifics, `details concerning
report or audit, or in the news media — unless the the dates of the claims, the content of the forms or
relator is an original source of the information. bills submitted, their identification numbers, [and]
(The relator does not lose the ability to sue, by the amount of money charged to the government.'"
going to the government agency before filing Gagne, 565 F.3d at 46, quoting Karvelas, 360
suit.) See,31 U.S.C. § 3730(e)(4)(A), which F.3d at 233.
provides:
(iii) Rule 12.b.6. Iqbal/Twombly
“No court shall have jurisdiction over an action
Before 2009, the only reason to file a 12.6.b
under this section based upon the public
motion would have been if the Complaint were
disclosure of allegations or transactions in a
perhaps written in crayon, or otherwise,
criminal, civil, or administrative hearing, in a
embarrassingly childlike. That all changed with
congressional, administrative, or Government
Iqbal. To satisfy Fed. R. Civ. P. 12(b)(6), "a
Accounting Office report, hearing, audit, or
complaint must contain sufficient factual matter,
investigation, or from the news media, unless the
accepted as true, to `state a claim to relief that is
action is brought by the Attorney General of the
plausible on its face.'" Ashcroft v. Iqbal, 129 S. Ct.
person bringing the action is an original source of
1937, 1949 (2009); Bell Atlantic Corp. v.
the information.
Twombly, 550 U.S. 544, 570 (2007). Iqbal and
Tombly mark a dramatic departure from prior
On March 23, 2010, 31 U.S.C. § federal practice, (for example, the 2002 version
3730(e)(4) was amended, but the legislation is of the Federal Procedure Hornbook by Wright
silent as to retroactivity. See Section 10104(j)(2) & Miller dismissed as “insignificant,” and
of the Patient Protection and Affordable Care Act, devoted less than a page to the subject of
Pub. L. 111-148, 124 Stat. 119; Schindler dismissal for failure to state a claim upon which
Elevator Corp. v. United States ex rel. Kirk, 131 relief could be granted.)
S. Ct. 1885, 1889 n.1 (2011). Courts are permitted Why the sudden change? The


Iqbal/Twombly decisions were specifically Cases?
designed to address growing concerns that (1) Notwithstanding the practical benefits of
absent a strengthened rule 12(b)(6), summary a strengthened dismissal practice, k,.Whistle
judgment would be the first chance a court might blower relators may have particular difficulty
have to dismiss a claim, (2) summary judgment meeting the “who, what , when, where” standard
normally could only be determined after under rule 9, and the “plausibility” standard under
discovery had been fully developed, (3) given the Iqbal, because the relator may either be a
modern practice of electronically saving every “stranger” to the transaction, or a former
document which would then be discoverable, (4) employee who has no access to the records. There
the costs of discovery, even if the defense were to may also be confidentiality issues under ethics
be successful, would constitute at best, a Pyrrhic rules and HIPAA. Courts are still in the process
victory. Thus, Iqbal/Twombly motions have of figuring out how to comply with the Supreme
become a powerful tool for defendants who seek Court’s opinions in Iqbal/Twombly and Congress’
dismissal of cases, before the keys to discovery express instructions that the False Claims Act is to
have been handed over. be treated as an important tool of government.
One of the most abrupt paradigm shifts Some solutions have been to relax the standard for
from the old “notice pleading” rules, under pleading where the relator has no way to comply,
Iqbal/Twombly is the new concentration upon the or to permit limited discovery. The Fifth Circuit
distinction between pleading facts vs. conclusions. recently noted that the standard for stating a claim
Any litigator worth his salt, is familiar with for relief with particularity is lower in the FCA
evidentiary prohibitions against conclusory context than it is in the securities or common law
testimony. After Iqbal/Twombly parties must also fraud contexts. See, United States ex rel. Grubbs
apply the same standard to pleadings. The v. Kanneganti, 565 F.3d 180, 185 (5th Cir.
Supreme Court has declared post Iqbal/Twombly 2009)(Noting that in medical FCA cases, the
that the trial court is to disregard any conclusions Defendant will often be in sole possession of the
contained in the pleadings when determining necessary medical records.)
whether the Complaint states a plausible claim for If dismissal is granted, the relator may be
relief. Compliance with Iqbal/Twombly, in most permitted to replead, depending upon a number of
cases, is not so much a matter of substance, as it factors, as set out in Rule 15 and the cases that
is a matter of form, but in FCA cases, the burden follow.
can be quite difficult to overcome.
The most striking difference between
government initiated enforcement and qui tam
Why? Because the “one-two-punch” of actions lies the fact that the government has great
the application of Iqbal/Twombly– plus the need to ensure the continued survival of the
heightened pleading standard under Rule 9(b)– , industry being regulated, and a great deal of
even where the evidence of a fraudulent scheme is concern, as set out in the Holder Memorandum,
so strong that “fraud must be occurring” courts whether or not jobs will be lost due to an
have dismissed FCA cases where the relator could excessive penalty. Qui tam relators have no such
not state with specificity “who, what, when, and concern or duty.
where” false clams were actually presented. See, (5) Issues related to Settlement.
US ex rel NATHAN v. Takeda Pharmaceuticals
(ist. Court, ED Virginia, Case No. 1:09-cv-1086 Unlike Class Action lawsuits, the
(September 6, 2011)(Discussed in Part II) plaintiff/relator need not prove fitness to represent
the government. This does not imply that the
relator is free to settle a case as it sees fit. Under
the federal False Claims Act, a person may bring
(iv.) A Reduced Burden in Whistle Blower an action "in the name of the Government"


seeking civil remedies for fraud against the United became one of the top selling drugs in the world.
States. 31 U.S.C. § 3730(b)(1). Id. "The action Sales rose from fewer than 50,000 prescriptions in
may be dismissed only if the court and the 1995 to more than 1.4 million in 2004. The
Attorney General give written consent to the success of the drug was due to the illegal activities
dismissal and their reasons for consenting." . of Parke-Davis, Warner-Lambert and Pfizer,
Thus, the government has "an absolute veto power companies that undertook a nationwide effort to
over voluntary settlements in qui tam False unlawfully market this drug for off-label uses for
Claims Act suits." Searcy v. Philips Elecs. N. Am. which there was little or no scientific evidence of
Corp., 117 F.3d 154, 158 (5th Cir. 1997); accord efficacy. The Food, Drug and Cosmetic Act
United States v. Health Possibilities, P.S.C., 207 (FDCA) prohibits such off-label marketing by
F.3d 335, 339 (6th Cir. 2000). This veto power is pharmaceutical companies. See 21 U.S.C. §
necessary because: 355(a).
Dubbed "snake oil" by Pfizer's own sales team,
“relators can manipulate settlements in ways Neurontin was promoted through a publication
that unfairly enrich them and reduce benefits to strategy that suppressed negative clinical trials
the government . ... In qui tam litigation, [ there is and showcased positive ones. Pfizer also
a danger that a relator can boost the value of sponsored continuing medical education programs
settlement by bargaining away claims on behalf of and detailed doctors to promote off-label uses of
the United States . ... If the government decides the drug. Eventually Warner-Lambert pled guilty
the settlement isn't worth the cost, § 3730(b)(1) to criminal violations of the FDCA and paid civil
allows the government to resist these tactics and fines and criminal penalties totaling $430 million.
protect its ability to prosecute matters in the Multi-district litigation (MDL) that consolidates
future. for pretrial purposes Neurontin-related civil
Searcy, 117 F.3d at 160. Without this veto power, lawsuits brought nationwide. One group of MDL
the public relator would "retain sole authority to cases consists of products liability actions
broadly bargain away government claims." Health claiming that Neurontin caused someone to
Possibilities, 207 F.3d at 340. The government commit or attempt to commit suicide. Another
may veto a settlement agreement that it believes group of cases involves lawsuits related to the
provides too broad a release by refusing to sales and marketing of Neurontin. Kaiser
consent pursuant 31 U.S.C. § 3730(b)(1). Foundation Health Plan and Kaiser Foundation
Hospitals (collectively, "Kaiser"), bring this case
against Pfizer, Inc. and Warner-Lambert Company
SELECTED CASES REPORTED IN 2011: (collectively, "Pfizer"), alleging violations of the
Racketeer Influenced and Corrupt Organizations
Act (RICO) and the California Unfair
IN RE NEURONTIN MARKETING AND
Competition Law ("UCL"). See 18 U.S.C. §
SALES PRACTICES LITIGATION
1962(c) (RICO); Cal. Bus. & Prof. Code § 17200
THIS DOCUMENT RELATES TO: KAISER (UCL). Kaiser spent about $200 million on
FOUNDATION HEALTH PLAN, INC., et al. Neurontin from 1996 to 2004. After a five-week
v. PFIZER, INC., et al. Civil Action No. trial, on March 25, 2010 a federal jury found that
04-cv-10739-PBS. U. S. District Court, D. Pfizer engaged in a RICO enterprise that
Massachusetts. (August 31, 2011.) committed mail and wire fraud by fraudulently
marketing Neurontin for off-label conditions such
as bipolar disorder, neuropathic pain, and
Opinion Excepts: Approved by the Food and
migraine, and at doses greater than 1800 mg/day.
Drug Administration (FDA) in 1993 as a
The jury found for defendants with respect to
secondary treatment for epilepsy, Neurontin
plaintiffs' claims of fraudulent promotion of


Neurontin for nociceptive pain. The jury rendered the Information are true.").) As a result of its
a verdict in plaintiffs' favor on the remaining guilty plea, Warner-Lambert agreed to pay a $240
claims in the amount of $47,363,092. The statute million criminal fine. (Id.) The guilty plea
requires the Court to treble the award to included an admission that the company promoted
$142,089,276. 18 U.S.C. § 1964(c). the sale and use of Neurontin for the off-label
In 1994, Parke-Davis estimated that Neurontin indications of neuropathic pain, bipolar disorder,
would generate $500 million in profits over the and migraine through the use of sales
duration of its patent. In a memorandum representatives, medical liaisons, advisory board
circulated within Parke-Davis, one executive meetings, consultants meetings, and
suggested a "strategic swerve" to increase the teleconferences.
earning potential of Neurontin. Some of the As early as 1994, Parke-Davis identified Kaiser as
strategies explored included marketing the drug a potentially lucrative target for its marketing
for epilepsy monotherapy, bipolar disorder and campaign. Defendants conducted marketing
social phobia, and neuropathic pain. Defendants largely through three tactics: direct marketing to
adopted these new strategies, which turned out to physicians, publication of positive Neurontin
be stunningly successful: in 2003 alone, articles in medical journals and suppression of
Neurontin sales exceeded $2 billion. Beginning in negative trials, and the sponsorship of CME
1995, Parke-Davis began developing strategies to events attended by physicians.
market Neurontin for off-label conditions, that is, The Court finds that fraudulent marketing
conditions not included on the official label activities took place during the following time
approved by the FDA. The company was periods for each indication: (1) bipolar disorder:
interested in Neurontin's potential psychiatric July 1998 through December 2004; (2)
uses, despite the uncertainty about its efficacy in neuropathic pain: November 1997 through
treating bipolar disorder. December 2004; (3) migraine: April 1999 through
December 2004; and (4) doses greater than 1800
Dr. David Franklin, the whistleblower in the mg/day: November 1997 through December 2004.
initial Neurontin litigation in 1996, testified about Beginning in July 1998 when Parke-Davis
the direct marketing of Neurontin to physicians obtained (and began to suppress) the negative
for off-label uses. Dr. Franklin was hired in 1996 results of the Pande trial, the defendants engaged
as a medical liaison for Parke-Davis. As part of in the fraudulent marketing of Neurontin for the
his job he was provided training on off-label treatment of bipolar disorder. In addition to
marketing of Neurontin. ("[I]t was our job to . . . fraudulent detailing, Pfizer sponsored at least two
actually talk to physicians and sell Neurontin for fraudulent supplements, engaged in a fraudulent
off-label indications.").) His job was "99 percent publication strategy by publishing only positive
focused on off-label promotion." On May 13, information and suppressing negative; conducted
2004 the Department of Justice filed a criminal at least two fraudulent continuing medical
information charging Warner-Lambert with illegal education programs; and made a fraudulent
off-label promotion of Neurontin. The same day, misrepresentation, through a half-truth, in
Pfizer caused Warner-Lambert (which it owned) published reviews.
to plead guilty to two felony counts of marketing
Neurontin for various unapproved uses, including
painful diabetic neuropathy, bipolar disorder, Holding: On the one remaining claim (a
reflex sympathetic dystrophy (RSD), and migraine particular California statute) the court held The
headaches. (stating that "Warner-Lambert Court finds the defendants liable under the
expressly and unequivocally admits that it California Unfair Competition Law for conduct
committed the crimes charged in the Information. related to the following off-label conditions: (1)
Warner-Lambert agrees that the facts set forth in bipolar disorder; (2) neuropathic pain; (3)


migraine; and (4) doses greater than 1800 mg/day. unapproved uses, including painful diabetic
neuropathy, bipolar disorder, reflex sympathetic
dystrophy (RSD), and migraine headaches. In that
Notes: plea, "Warner-Lambert expressly and
1. The pharmaceutical industry has been so unequivocally admits that it committed the crimes
successful controlling members of congress (and charged in the Information. Warner-Lambert
the FDA, by calling upon members of congress to agrees that the facts set forth in the Information
reign in the FDA) See, Mundy, Alice Dispensing are true." Although this is not a FCA case,
with the Truth, The Dramatic Story Behind the (because the Federal Government did not pay this
Battle over Fen-Phen, New York: St. Martin’s claim for drug benefit,) the Neurontin scandal
Press (2001), that the industry seems to have been illustrates the growing tendency of private
totally blind-sided by the fact that law companies, such as the Kaiser Family of HMO’s
enforcement (OIG) play by a different set of rules. to file suit on state whistleblower grounds. (There
Unlike virtually every other health care enterprise, were two classes of Neurontin cases, the product
(most of whom are scared to death of the federal liability MDL cases relating to suicide, and this
government) the pharmaceutical industry seems type of case, for false marketing claims. Here, the
astonished that they cannot do anything they wish, whistleblower was a doctor hired to market the
regardless of the rules. To be fair, the interests of drug.) While lacking the federal statutes and civil
the pharmaceutical industry is not easily separable monetary penalty provisions, these companies are
from the interests of everyday working filing state law claims alleging they were
Americans. Teacher’s retirement plans, municipal fraudulently induced to pay claims which were
worker’s plans, mutual funds, and almost every false or fraudulent, and they want there money
other individual American investor are the actual back. This is the “findings of fact and
owners of pharmaceutical companies. We cannot conclusions of law” memorandum supporting the
complain about “them,” without complaining order of payment of $95 million in restitution to
about “us.” Kaiser, (in addition to the treble damages of $147
Questions: million awarded by the jury) who was bilked into
paying for a drug referred to as “snake oil.”Kaiser
sought to prove that it spent too much money on
1. Is the Federal False Claims Act the only the off-label prescription of the drug. Defense
means by which a whistleblower could bring countered the physician’s prescription could be
action against a billion dollar industry? due to any of a number of factors. The defense
2. For the Plaintiffs’ bar, what advantages do Qui also countered that the drug actually was effective
Tam whistleblower cases have over traditional for off-label use. Further, the defense argues the
class action and MDL mass tort lawsuits? statute of limitations precluded recovery.
3. How important is it to a Defendant to knock The Court order defendants to pay restitution to
out the Qui Tam relator from any case that could the Kaiser Foundation Health Plan in the amount
be brought by the government? of $95,286,518.
Notes: 2. The advantage of FCA cases over class action
and mass tort cases lies in the fact that there is
only one plaintiff (not thousands.) The damages
1. This case illustrates that you do not need awarded often bear no relationship to the harm
(though it certainly helps) a federal statute to win done. (A technical defect in the provision of
hundreds of millions of dollars in a whistleblower services and products may result in huge awards,
case. Pfizer caused its subsidiary, even if the services or product was good for the
Warner-Lambert to plead guilty to two felony patient.) Further, the United States is the real
counts of marketing Neurontin for various party in interest, and the injury is complete by the


2012 January Dba Health Law Speech

2012 January Dba Health Law Speech

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