White Collar Posts

The Government Pushes The False Claims Act Envelope; Government Contractors Push Back

March 1, 2016

In recent weeks, corporations have pushed back against Departments of Justice (DOJ) and Health and Human Service (HHS) efforts to expand False Claims Act (FCA) remedies to conduct beyond the FCA’s explicit reach. In the District of Columbia, a major health insurer has gone on the offense to convince the district court to declare that recent agency announcements about refunding government “overpayments” go well beyond the boundaries set by Congress in the Patient Protection and Affordable Care Act (PPACA). And, in the Sixth Circuit, a government contractor won an appeal of the district court’s order of full contract breach damages in a case where fractional, actual damages could readily be calculated. Yet a huge incentive exists for DOJ to push the FCA envelope: DOJ’s recently released 2015 Civil Division fraud recoveries – totaling over $3.5 billion – establish a six-year trend of recoveries in excess of $3 billion annually. 

Case 1: Sixth Circuit Rejects “Fairyland” FCA Damages

We’ll report on the Sixth Circuit case first because the decision was both pithy and entertaining for those of us who follow FCA cases. In United States ex rel. Wall v. Circle C Constr., LLC, DOJ brought an FCA suit in Tennessee against Circle C, an electrical subcontractor of 42 army warehouses, for falsely certifying that its employees were paid Davis-Bacon Act wages when they were actually paid below-market rates. The government argued that the electrical subcontractor’s underpayment “tainted” the entire contract, entitling it to actual damages equal to the full contract breach damages for the electrical work on all 42 warehouses and trebling. The district court agreed.

The Sixth Circuit Court of Appeals reversed, rejecting the government’s argument that the electrical services were worthless because of the tainted wage underpayments and reasoning that the electrical services certainly had value – “in all of these warehouses, the government turns on the lights every day.” The court distinguished the underpaid Davis-Bacon Act wages from cases where no award less than full breach damages could provide a remedy, e.g., helicopters with defective transmissions or uniforms manufactured by Indonesian child laborers, and held that the government’s actual damages were limited to what the government bargained for and did not receive – the amount of wages underpaid. In words that may have application to other types of FCA cases, the court explained:

Actual damages by definition are grounded in reality. And in the real world the government could not forever withhold all payments to a contractor for work on several dozen warehouses, and yet have the work continue to completion and the government continue to use the warehouses to this day. The damage the government seeks to recover here are fairyland rather than actual. 

Case 2: A Challenge to CMS Parts C and D “Final Rule” Reverse False Claims

The second case we report on is a more difficult read and still in the early stages of litigation, yet it has the potential to impact all Medicaid and Medicare providers who routinely receive overpayments. On January 29, 2016, UnitedHealthcare Insurance Company and related insurance companies (UHC) brought a declaratory and injunctive relief action against HHS. UHC contends that HHS in its 2014 Final Rule improperly broadened Congress’ explicit language requiring Medicare Part C (Medicare Advantage) and D providers to report and refund “identified” overpayments by its rule-making to extend that requirement to overpayments that providers determined or should have determined through the exercise of reasonable diligence.

As background, in 2010, PPACA required that provider overpayments must be reported and returned within 60 days of being “identified.”  PPACA provides that a retained overpayment can constitute an “obligation[ ] to pay” the government under the FCA and subject to FCA penalties and treble damages. In the Part C/D Final Rule, the HHS Centers for Medicare and Medicaid Services (CMS) stated that an overpayment is “identified,” triggering a 60-day reporting and refunding requirement, when a provider has “determined, or should have determined through the exercise of reasonable diligence,” that it has received an overpayment.  

UHC objects in part because CMS’s use of “should have determined” when defining “identified” applies a negligence standard as the trigger for refunding an overpayment on pain of FCA damages and penalties. PPACA specifically incorporated the FCA’s “knowing” standard, often interpreted to include “recklessness,” which is a harder-to-meet standard for FCA liability than mere negligence. UHC also objects to the phrase “reasonable diligence,” which was not defined by the agency in the Final Rule and had not been offered for comment to the public. UHC contends that CMS provided only the ambiguous statement that “at a minimum, reasonable diligence would include proactive compliance activities conducted in good faith by qualified individuals to monitor for the receipt of overpayments.” 

In asking the district court to set aside the Part C/D Final Rule, UHC argues:

CMS thus transformed its proposed rule for creating an obligation that could lead to penalties under the FCA from a recklessness standard (that many commenters feared was itself too harsh) to a negligence standard, without any notice to commenters that it was considering such a standard or any meaningful explanation why, and without a word on how such a standard could be squared with the language of [PPACA].

The government’s response to UHC’s complaint is due in late March.

It is noteworthy that on February 12, 2016, after UHC filed its suit, CMS announced its Final Rule applicable to overpayments under Medicare Parts A and B, applying this same negligence standard, but giving providers some relief by inserting a quantification requirement. In the Part A/B Final Rule, CMS stated that a person (provider) has “identified an overpayment when the person has, or should have through the exercise of reasonable diligence, determined” that the person has received the overpayment and quantified its amount. CMS did not leave open-ended the time period for quantifying an overpayment; in the Part A/B Final Rule, CMS announced that a six-month period to conduct an investigation established “reasonable diligence” and, therefore, reporting would be required within 60 days of a six-month investigation period or within eight months in total. 

By adding a requirement that the overpayment amount be – or reasonably should have been – quantified prior to the obligation to report and refund, CMS addressed in the Part A/B Final Rule concerns raised by providers after last year’s decision in U.S. ex rel Kane v. Continuum Health Partners, et al. In that case, the court held that FCA liability began to run when the Medicaid provider in that case was “put on notice of a potential overpayment, rather than the moment when an overpayment is conclusively ascertained.” 

While it appears that the UHC filing regarding the Part C/D Final Rule and CMS’s release of the Part A/B Final Rule crossed in the mail, UHC’s challenge of the Part C/D Final Rule takes the providers’ concerns a step further by challenging the “should have determined” negligence standard that CMS has unilaterally grafted onto PPACA.

So, as we understand it, the state of play for providers facing possible overpayments is:

• Medicare Parts A and B:  Overpayments must be reported and refunded within 60 days of when a provider has, or should have through the exercise of reasonable diligence, determined that the provider has received the overpayment and quantified its amount, but that no more than six months should be taken to exercise reasonable diligence.
• Medicare Parts C and D:  Overpayments must be reported and refunded within 60 days of when a provider has determined, or should have determined through the exercise of reasonable diligence, that it has received an overpayment.
• Medicaid:  In the absence of a CMS rule regarding Medicaid overpayments and by applying the Kane decision to jurisdictions other than the Southern District of New York, overpayments must be reported and refunded within 60 days of when a provider is put on notice that a claim may have been overpaid, not from when the overpayment is calculated with certainty.

We will continue to follow the UHC case -- its outcome will certainly affect all Medicare providers, not just those under Parts C and D, and should also provide guidance to Medicaid providers in the absence of any CMS Medicaid-specific rule.