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Can a health care provider be liable for making a false claim to the United States government if the claim is presented to a third-party insurer, not the government itself? Can there be liability even if the inaccuracy in the claim had no effect on the decision to pay the claim?

The answer is yes, according to a recent Seventh Circuit ruling in United States ex rel. Garbe v. Kmart Corporation, No. 15-1502 (7th Cir. May 27, 2016). The ruling addressed these questions by interpreting the Fraud Enforcement and Recovery Act of 2009 (FERA) amendments to the False Claims Act (FCA). FERA was the first substantial amendment to the FCA since 1986. FERA significantly expanded the scope of liability for individuals and entities that receive government funds, including health care providers and suppliers receiving federal funds through Medicare or Medicaid. It also instituted a number of important procedural changes in the FCA.

Background

Pharmacist James Garbe began working at a Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy and received a surprise: the competitor pharmacy charged his Medicare Part D third-party private insurer much less than Kmart ordinarily charged for the same prescription. When Garbe began inspecting Kmart’s pharmacy reimbursement claim, he discovered that Kmart routinely charges customers with insurance – whether private or public – higher prices than customers who paid out of pocket. Not all cash customers were charged the same price; people in Kmart’s “discount programs” paid much less. The investigation also revealed that nearly all cash customers received the lower discount program prices. Significantly, those discount program sales were ignored when Kmart calculated its “usual and customary” prices for its generic drugs for purposes of reimbursement. This omission was significant. For example, district court documents showed that Kmart allegedly sold a 30-day supply of a generic version of Zocor for $5 but told the federal Centers for Medicare and Medicaid Services (CMS) that the usual and customary price was $152.97.

Garbe shared his discovery with the government and filed a qui tam suit in the U.S. District Court for the Southern District of Illinois on July 12, 2008. The government declined to intervene. After a flurry of motions, the district court granted partial summary judgment in Garbe’s favor on some issues and denied it to Kmart on others. The Seventh Circuit accepted an interlocutory appeal from the district court’s rulings.

The court's ruling and key takeaways

FCA liability under FERA attaches to any false claim to any entity implementing a government program or using government funds

At the outset, the Seventh Circuit rejected Kmart’s argument that FERA contained any presentment requirement to the government. Thus, for any transactions to which FERA applies, a relator is not required to show that any statement was delivered to any government employee or entity. Rather, FCA liability attaches to any false claim to any entity – public or private – implementing a government program or a program using government funds. Health care providers should be aware of FERA’s elimination of the presentment requirement and the resulting expansion of potential FCA liability.

FERA amendments do not require any government payment decision

The Seventh Circuit similarly rejected Kmart’s argument that Garbe had not raised a genuine issue of fact on materiality for purposes of the FCA because he offered no evidence that the alleged overcharges were capable of affecting the government’s payment decision. The Seventh Circuit instead held that “FERA’s materiality rule requires only that the false record or statement influence the ‘payment or receipt of money or property’ – no governmental decision is required.” Thus, a relator is required to show only that a defendant’s allegedly false claims were material to a defendant’s receipt of more money than it should have received. Under FERA’s expansion of the FCA’s materiality definition, health care providers should be aware that any inaccuracy can be material if it is deemed capable of influencing payment, even if the claims would have been paid despite the alleged inaccuracy.

FERA applies to all cases –not claims – pending on or before June 7, 2008

The Seventh Circuit also rejected Kmart’s argument that FERA applied only to requests for reimbursement that were pending on or after June 7, 2008. Kmart maintained that three other courts of appeals – the Eleventh, Fifth, and Ninth Circuits – agreed with its position. The Seventh Circuit, however, noted that other circuit courts’ discussion on this point was relegated to footnotes and agreed with Garbe, holding that FERA amendments applied to all cases pending on or before June 7, 2008. Because there is now an apparent circuit split regarding whether FERA amendments apply to cases (and not simply claims) pending after June 2008, this negatively impacts the potential defenses (e.g., materiality and presentment) available to health care providers in an FCA case and potentially increases the amount of any monetary recovery.

Discount pricing should be included in “usual and customary pricing” reporting

The Seventh Circuit rejected Kmart’s contention that the term “general public,” as found in the definition of CMS’s “usual and customary pricing,” excludes customers who join a discount program. The Seventh Circuit pointed out that unless state regulations provide otherwise, the usual and customary price is defined as the “cash price offered to the general public.” Moreover, the Seventh Circuit said that “[t]he CMS Manual has long noted that ‘where a pharmacy offers a lower price to its customers throughout a benefit year’ the lower price is considered the ‘usual and customary price’ rather than a ‘one time lower cash price,’” even where the cash purchaser uses a discount card. Health care providers considering enacting – or continuing -- similar discount pricing and CMS reporting policies are forewarned that the Seventh’s Circuit precedent has the potential to result in significant FCA litigation and liability.

For questions regarding the Seventh Circuit’s ruling, other FCA issues, and the role our attorneys can play in developing effective compliance strategies individually tailored for your company’s needs, please contact one of the attorneys listed below.
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