by Neil V. Getnick and Richard J. Dircks
American Bar Association National Institute on the Civil False Claims Act and Qui Tam Enforcement (1998)
The past year has proven to be highly active in the field of False Claims Act (“FCA” or the “Act”) litigation, especially in the area of health care fraud. Fiscal year 1997 exhibited both record filings of new qui tam actions and record recoveries for the federal government.1 Of the new cases filed, more than half involved health care fraud.2 The FCA has been referred to as the federal government’s “primary tool” in recovering the vast sums that are lost each year to health care fraud.3
The increased utilization of the FCA against fraudulent business practices has elicited varied and often conflicting reactions to the Act. This division in the health care field manifested itself earlier this year when the executive and legislative branches were pursuing, or at least considering, opposite goals with respect to the FCA — at the same time that the Department of Justice was preparing to unseal a monumental FCA action that may net huge sums of ill-gotten gains for the federal government,4 both houses of Congress were contemplating bills which effectively stripped the FCA of its strength as an anti-fraud tool in the field of health care.5
Meanwhile, two potentially far-reaching judicial decisions were handed down addressing liability issues under the FCA. The first involves the question of whether civil fines can trigger double jeopardy. The second addresses use of the FCA in connection with the Medicare anti-kickback and self-referral laws. This paper will look at those decisions and discuss what implications their respective holdings are likely to have on qui tam litigation under the FCA.
II. THE FCA AND THE DOUBLE JEOPARDY CLAUSE
In 1986, Congress acted to significantly strengthen the FCA, including its qui tam provisions.6 The ultimate utilization of this newly empowered Act was called into question, however, with the Supreme Court’s 1989 decision on the issue of double jeopardy.
A. United States v. Halper, 490 U.S. 435, 109 S. Ct. 1892, 104 L. Ed. 2d 487 (1989).
Irwin Halper worked as a manager of New City Medical Laboratories, Inc., a company which provided medical services in New York City for patients eligible for benefits under Medicare. In that capacity, Halper submitted to Blue Cross and Blue Shield of Greater New York, a fiscal intermediary for Medicare, 65 separate false claims for reimbursements for services rendered. Each false claim resulted in a $9 overpayment — Blue Cross overpaid New City a total of $585; Blue Cross passed these overcharges along to the Federal Government.
In April 1985, Halper was indicted on 65 counts of violating the criminal false claims statute, 18 U.S.C. § 287. He was convicted on all 65 counts, as well as on 16 counts of mail fraud. He was sentenced in July 1985 to imprisonment for two years and fined $5000.
Subsequently, the Government brought a case against Halper under the civil False Claims Act. Based on facts established by Halper’s criminal conviction and incorporated in the civil suit, the District Court granted summary judgment for the Government on the issue of liability. The Government sought recovery in excess of $130,000 based on a $2,000 statutory penalty for each of the 65 counts.7 The District Court ruled that a penalty that large had no “rational relation” to the amount of the Government’s loss and thus, in light of Halper’s criminal conviction, would act as a second penalty in violation of the Double Jeopardy Clause.8 “Because it considered the Act unconstitutional as applied to Halper, the District Court amended its judgment to limit the Government’s recovery to double damages of $1,170 and the costs of the civil action.”9
On direct appeal, the Supreme Court agreed “with the District Court that the disparity between its approximation of the Government’s costs and Halper’s $130,000 liability is sufficiently disproportionate that the sanction constitutes a second punishment in violation of double jeopardy.”10 The Court’s holding focused on the relative relationship of the statutory penalty and the actual loss to the government in Halper’s individual case.
This ruling, the singular focus of which differed from previous double jeopardy analysis, raised questions with respect to the government’s and relators’ ability to use the civil false claims act in conjunction with existing or potential criminal actions.11 The Halper decision appeared to state that civil and criminal penalties for false claims violations would amount to a double jeopardy violation. Given the ambiguity of the holding, and the fact that it ran counter to traditional double jeopardy analysis, trial courts tended to interpret the holding narrowly — “when the government can show that the civil penalty is reasonable compensation for its loss, district courts have been reluctant to hold the penalties punitive, despite the Halper decision.”12
B. Hudson v. United States, 118 S. Ct. 488, U.S. LEXIS 7497, 139 L. Ed. 2d 450 (1997).
1. The Facts
Whatever confusion the Halper decision caused was recently clarified in Hudson, where the Supreme Court characterized Halper as “ill considered” and “unworkable”, finally stating that the Hudson Court “disavows Halper’s method of analysis” and reaffirms its previous double jeopardy rule.13
During the early and mid-1980’s, John Hudson was chairman and controlling shareholder of two banks in western Oklahoma. Jack Rackler was president of one of the banks and a board member at the other. Larry Baresel was on the boards of both banks. An examination of the two banks led the Office of the Comptroller of the Currency (“OCC”) to conclude that Hudson, Rackler, and Baresel used their positions within the banks to arrange for a series of improper loans which benefitted Hudson. The OCC pursued administrative remedies and the three men eventually settled with the OCC in 1989 by entering into consent agreements which provided for their debarment. Additionally, the consent agreements provided that Hudson, Baresel, and Rackley would pay assessments of $16,500, $15,000, and $12,500 respectively.
In 1992, the U.S. Attorney’s Office for the Western District of Oklahoma indicted the three men on charges of conspiracy, misapplication of bank funds, and making false bank entries. This criminal indictment was based on the same transaction that formed the basis for the prior OCC administrative proceedings. The District Court initially denied the defendants’ motion to dismiss the indictment on double jeopardy grounds. That decision was appealed, and on remand, the District Court granted the defendants’ motion to dismiss. This time the Government appealed. “[The Tenth Circuit Court of Appeals] held, following Halper, that the actual fines imposed by the Government were not so grossly disproportional to the proven damages to the Government as to render the sanctions ‘punishment’ for double jeopardy purposes.”14 The Supreme Court granted certiorari on the following question: “whether the imposition upon petitioners of monetary fines as in personam civil penalties by the Department of the Treasury, together with other sanctions, is ‘punishment’ for purposes of the Double Jeopardy Clause.”15
2. The Applicable Double Jeopardy Rule
The Court immediately identified the narrow scope of the protection provided by the Double Jeopardy Clause: “[t]he Clause protects only against the imposition of multiple criminal punishments for the same offense.”16 The Court then goes on, relying on the double jeopardy rule enunciated in United States v. Ward, 448 U.S. 242, 248-49, 100 S. Ct. 2636. 65 L. Ed. 2d 742 (1980), to explain how it is to be determined whether or not a statute runs afoul of the Double Jeopardy Clause. First, the court must ask whether the legislature, indicated expressly or impliedly, whether the penalty is civil or criminal. If the penalty is expressly identified as criminal, this ends the analysis. As a second step, however, if the penalty is identified as civil, a court must “inquire further [to determine] whether the statutory scheme was so punitive in purpose or effect as to transform what was clearly intended as a civil remedy into a criminal penalty.”17 In making this inquiry, a court should utilize the seven factors listed in Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168-169, 83 S. Ct. 554 (1963):
(1) “whether the sanction involves an affirmative disability or restraint”;
(2) “whether it has historically been regarded as punishment”;
(3) “whether it comes into play only on a finding of scienter”;
(4) “whether its operation will promote the traditional aims of punishment — retribution and deterrence”;
(5) “whether the behavior to which it applies is already a crime;”
(6) “whether an alternative purpose to which it may rationally be connected is assignable for it”; and
(7) “whether it appears excessive in relation to the alternate purpose assigned.”18
The Court made certain to note, however, “that these factors must be considered in relation to the statute on its face, and only the clearest proof will suffice to override legislative intent and transform what has been denominated a civil remedy into a criminal penalty.”19
3. A Re-Examination of Halper
In its discussion the Court first goes to lengths to re-examine Halper.
As the Halper Court saw it, the imposition of punishment of any kind was subject to double jeopardy constraints, and whether a sanction constituted punishment depended primarily on whether it served the traditional goals of punishment, namely retribution and deterrence. Any sanction that was so overwhelmingly disproportionate to the injury caused that it could not fairly be said solely to serve [the] remedial purpose of compensating the government for its loss, was thought to be explainable only as serving either retributive or deterrent purposes.20
The Court then proceeds to note that the Halper analysis was aberrational in that it deviated from traditional double jeopardy doctrine.21 First, the earlier Court utterly neglected to ask whether the successive punishment at issue was “criminal” in nature. “In so doing, the [Halper] Court elevated a single Kennedy factor — whether the sanction appeared excessive in relation to its nonpunitive purposes — to dispositive status.”22 Secondly, the Hudson Court noted that the Halper Court incorrectly assessed the actual sanctions imposed, rather than evaluating the “statute on its face,” again contravening the precedent set forth in Kennedy.23 The Court found the reasoning in Halper to be flawed. “If a sanction must be ‘solely’ remedial (i.e., entirely nondeterrent) to avoid implicating the Double Jeopardy Clause, then no civil penalties are beyond the scope of the Clause.”
4. The Analysis
In Hudson, the Court found that, under the double jeopardy rule set forth therein, the subsequent criminal proceedings faced by Hudson, Baresel, and Rackley did not violate the Double Jeopardy Clause because: (1) neither money penalties nor debarment have historically been viewed as punishment; (2) the sanctions imposed did not involve an ‘affirmative disability or restraint’ as that term is normally understood; (3) neither sanction comes into play “only” on a finding of scienter; and (4) the fact that the conduct for which the OCC sanctions were imposed may also be criminal is insufficient to render the associated monetary penalties and debarment sanctions criminally punitive. Finally, the Court noting that the issues in Halper are perhaps better addressed by other provisions in the Constitution, pointed out: “[t]he Due Process and Equal Protection Clauses already protect individuals from sanctions which are downright irrational . . . . The Eight Amendment protects against excessive civil fines, including forfeitures.”24
C. Hudson and the FCA
Hudson provides greater incentives than existed under Hapler for relators and their counsel to pursue FCA qui tam cases.25 This framework allows for the cost effetive pursuit of FCA violations where the dollar amount of damages does not adequately account for the resulting harm. This is particularly true in the health care area where patient lives are at stake.
III. THE FCA AND THE MEDICARE ANTI-KICKBACK ACT
In the field of FCA qui tam litigation generally, and more specifically in the area of health care fraud, an issue has developed as to whether or not claims for payment made through federal contracts secured through a kick-back scheme will support an action under the FCA.26 This issue has grown in importance both because of the increased utilization of the FCA generally, and because of the recent additions to, and strengthening of, existing anti-kickback legislation.27 An August 1998 decision in the Southern District of Texas, issued in response to a remand order from the Fifth Circuit Court of Appeals, may prove influential in expanding the scope and type of viable claims relators may bring under the FCA.
A. A History
1. Thompson I — July 1996
In United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 938 F. Supp. 399 (S.D. Tex. 1996) (“Thompson I”), the District Court dismissed the relators’ kickback-based FCA allegations. In this case, the relator is a medical doctor in Texas. He contends that defendant Columbia/HCA Healthcare Corp. (“Columbia”) and its affiliates have “created investment arrangements and provided financial inducements to physicians for patient referrals in violation of the Medicare anti-kickback statute28 and Stark laws29 which has resulted in violations of the FCA.”30
The court identified the crux of the case, stating that, “[t]he main issue for resolution is whether Medicare claims filed for services which were rendered in violation of the anti-kickback statute and/or Stark laws are a fortiori false claims under the FCA.”31 The court ruled that they are not. “Allegations that medical services were rendered in violation of Medicare anti-fraud statutes do not, by themselves, state a claim for relief under the FCA.”32 Additionally, the Court held that Thompson failed to state claims predicated on false certifications or on his allegation that “a statistical study which concluded that forty percent of the services rendered by the payor of kickbacks are for services which are not medically necessary.”33
2. Thompson II — October 1997
In United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 904 (5th Cir. 1997)(“Thompson II”), the Fifth Circuit Court of Appeals affirmed in part, vacated in part, and remanded for further proceedings, the District Court’s dismissal of relator Thompson’s second amended complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6).
First, the appellate court affirmed the district court’s dismissal of Thompson’s contention that approximately 40% of claims submitted for services rendered in violation of the anti-kickback and Stark laws were for services not medically necessary. “Thompson’s allegations, therefore, amount to nothing more than speculation, and thus fail to satisfy Rule 9(b).”34 Then, the Fifth Circuit reversed the District Court’s dismissal of relator’s claims based on the submission of false certifications of compliance stemming from violations of the medicare anti-kickback statute and Stark self-referral laws. While agreeing with the District Court that “claims for services rendered in violation of a statute do not necessarily constitute false or fraudulent claims,” the appellate court found that “where the government has conditioned payment of a claim upon a claimant’s certification of compliance with, for example, a statute or regulation, a claimant submits a false or fraudulent claim when he or she falsely certified compliance with that statute or regulation.”35 The Court found support for this aspect of its decision in a recent Ninth Circuit case, United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) which held that false certifications of compliance create liability under the FCA when certification is a prerequisite to obtaining a government benefit. Finally, the Fifth Circuit instructed the district court to respond to an issue which was raised below, but not addressed in the district court’s order — namely, whether or not the submission of claims for services rendered in violation of the Stark laws are in and of themselves, false or fraudulent under the FCA.36
Thus, the appellate court established the following issues for remand: (1) whether the government’s payment of defendants’ Medicare claims was conditioned on defendants’ certifications of compliance in their annual cost reports; (2) whether claims for services rendered in violation of the Stark laws are, in and of themselves, false or fraudulent claims under the FCA37 ; and (3) if the district court determines that said Stark violations are fraudulent under the FCA, “then the court should also consider whether Thompson has sufficiently alleged that defendants committed separate and independent violations of the FCA [§ 3729(a)(2)] by making false statements to obtain payment of false or fraudulent claims.”38
3. Thompson III — August 1998
In this most recent decision, United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 1998 U.S. Dist. LEXIS 14350 (S.D. Tex. 1998), the District Court, in light of the appellate remand, rules on (1) the defendants’ motions to dismiss, or in the alternative for summary judgment, and (2) the relator’s motion for leave to file an amended complaint. The court denies the defendants’ motions and grants the relator’s motion.
In all the court makes three significant rulings. First, the court specifically rules that “Plaintiffs have stated a claim for violation of the FCA by Defendants’ alleged false certification that the Medicare services identified in the annual hospital cost reports complied with the laws and regulations dealing with the provision of healthcare services.”39
Second, the court finds that the Stark laws’ “express prohibition on payment for services rendered in violation of their own terms make such alleged violations actionable under the FCA.”40 In support of this ruling, the court states that “a pecuniary injury to the public fisc is no longer required for an actionable claim under the FCA.”41
Finally, “[t]he Court further finds that Relator has also stated a claim for violation of the FCA based on the alleged scheme of self-remuneration in violation of the “anti-kickback statute,” the Medicare Anti-Fraud and Abuse Act, 42 U.S.C. § 1320a-7b(a) and (b), which prohibits the making of any false statements, failing to disclose material information, or making false statements or representations to qualify as a certified Medicare provider in applying for Medicare payments.”42 The court states that the relator has “shown injury to the government” and alleged that the government would not have paid these claims had it been aware of the kickbacks and self referrals. Noting that “there is a dearth of case law on point,” the court relies on two cases in support of this last ruling. The first is Peterson v. Weinberger, 508 F.2d 45, 52 (5th Cir.), cert. denied sub nom. Peterson v. Mathews, 423 U.S. 830, 46 L. Ed. 2d 47, 96 S. Ct. 50 (1975). In Peterson, a doctor signed Medicare claims that certified that he had performed the services or that the services were performed under his supervision when another doctor had actually rendered them. The Fifth Circuit held that the knowing submission of Medicare claims for services that were not covered and payable under the Medicare Act was an FCA violation. The second case which the Thompson III court relied on in making this last ruling was United States ex rel. Pogue v. American Health Corp., 914 F. Supp. 1507 (N.D. Tenn. 1996), which it described as “informative in its review of updated, current law, the legislative history, and thoughtful analysis.”43 The Thompson III court endorsed the Pogue court’s conclusion “that the False Claims Act was intended to govern not only fraudulent acts that create a loss to the government[,] but also those fraudulent acts that cause the government to pay out sums of money to claimants it did not intend to benefit.”
B. The Importance of Thompson III
Some might argue that the rulings made in Thompson III, are limited to the case and will not have much influential value, only coming from a district court.44 However, we believe such pundits underestimate this opinion for two reasons. First, this case has already been up on appeal and remanded. The District Court in Thompson III, has already attempted to conform its rulings to the desires and mandates of the Fifth Circuit. Consequently, the rulings are less likely to meet with an appellate panel holding widely divergent views. Secondly, and eventually of greater import, the United States filed an amicus curiae brief in this case in which is set forth its positions on different issues.45 The positions taken in that brief are potentially invaluable for relators (and defendants) around the country. The Government’s brief states the following:
(1) The Government argues that defendants violated 31 U.S.C. § 3729(a)(1) “by submitting claims that were false because they contained false certifications of compliance with applicable Medicare statutes and regulations, including the Anti-Kickback statute and the Stark laws.”46
(2) “[T]he amicus curiae brief contends that Relator has stated a claim in alleging that Columbia Defendants violated 31 U.S.C. § 3729(a)(1) by submitting claims for payment in violation of the Medicare anti-referral statutes, the Stark laws, because they expressly prohibit payment for services rendered in violation of their terms.”47
(3)“[A]ssuming that Columbia’s claims for payment were false or fraudulent based on the alleged facts as discussed above, the government argues that Columbia is liable on a separate and independent ground of knowingly making a statement in order to get a false or fraudulent claim paid, in violation of 31 U.S.C. § 3729(a)(2) . . . . The false statement is Columbia’s certification in its Medicare cost reports that it complied with applicable laws and regulations when it did not.”48
Thus, the government has officially stated that it believes valid FCA claims can be made where a provider who is involved in either a self-referral arrangement or a kickback scheme submits a certificate of compliance, and (2) where a provider who is involved in a self-referral arrangement submits a claim for payment. This type of specific guidance will greatly assist relators and relators’ counsel in developing existing cases and filtering through potential cases.
The high degree of activity in FCA litigation this past year is no doubt part of a continuing trend. Unresolved issues remain in the wake of Thompson III. For example: (1) How important is showing that the Government suffered an actual financial loss?; and (2) Will a claim of “implied certification” support a False Claims Act claim made pursuant to 31 U.S.C. § 3729(a)(1)? The developments in FCA litigation this past year as illustrated in this article underscore the continued importance and vitality of the FCA as a leading edge tool to fight fraud against the federal government.