DOJ Memoranda Ushering in New Era for Health Care Enforcement

08 March 2018 Bloomerg Law Health Law Reporter Publication
Author(s): Lisa M. Noller

In January 2018, the Department of Justice (DOJ) issued two memoranda that, taken together, may usher in a new era of False Claims Act (FCA) enforcement in the health care industry. The first memorandum, dated January 10, 2018 and authored by Michael Granston, the Director of the Fraud Section of DOJ's Civil Division (Granston memo), directs DOJ litigators to consider dismissing meritless FCA cases and provides factors for consideration when evaluating whether dismissal is appropriate. The second memorandum, released on January 25, 2018 by then-Associate Attorney General Rachel Brand (Brand memo), limits the use of noncompliance with agency guidance documents in affirmative civil enforcement (ACE) cases as a basis for suit or as evidentiary proof in ongoing ACE litigation. Although unlikely to be a panacea for health care entities, these two memoranda add to the industry's ability to defend meritless FCA cases in the same way the Supreme Court's landmark decision in Universal Health Services v. United States ex rel. Escobar, 2016 BL 192168, 136 S. Ct. 1989 (2016) (Escobar) framed a new wave of defense arguments.

Granston Memo – DOJ's Important Gatekeeper Role

FCA cases filed by qui tam relators must be filed under seal, providing the DOJ with time to investigate the relator's allegations and decide whether or not to intervene in the lawsuit. Lawsuits brought by qui tam relators (rather than lawsuits originating from DOJ investigations) constitute the overwhelming majority of federal recoveries in civil health care fraud cases—$2.444 billion of the $2.447 billion collected in 2017. The federal government, therefore, is strongly incentivized to encourage whistleblowers to continue to pursue FCA cases. On the other hand, of the $2.444 billion recovered in 2017 qui tam actions, 84% of those recoveries resulted from cases in which the United States intervened or otherwise pursued the case following its investigation into the allegations, illustrating the vastly greater likelihood of success in cases the DOJ determines are worth pursuing.

If after reviewing the complaint allegations, DOJ declines to intervene in an FCA case, DOJ has authority under 31 U.S.C. § 3730(c)(2)(A) to seek dismissal of the case, an opportunity that it historically has exercised sparingly. While acknowledging the need to “avoid precluding relators from pursuing potentially worthwhile matters,” the Granston memo emphasizes that 3730(c)(2)(A) “remains an important tool to advance the government's interests, preserve limited resources, and avoid adverse precedent.”

In furtherance of this aim, the Granston memo provides seven factors for DOJ litigators to apply when evaluating whether to seek dismissal of a qui tam
action. DOJ attorneys should consider dismissal:

  1. When the complaint is meritless, either because the legal theory is inherently defective or the factual allegations are frivolous;
  2. If it would prevent a parasitic or opportunistic qui tam action;
  3. If the action may interfere with an agency's policies or programs;
  4. Where it is necessary to protect DOJ's litigation prerogatives, such as to avoid unfavorable precedent;
  5. If the action may compromise classified information or national security interests;
  6. To preserve government resources, when the expected costs of litigation are likely to exceed the expected gain; and,
  7. When necessary to address egregious procedural errors.

As more and more FCA cases are filed, there is a greater likelihood the lawsuits lack merit and create bad precedent for either the United States or for
providers. DOJ monitors non-intervened cases, which requires staff. With the Granston memo stating that DOJ “plays an important gatekeeper role in protecting the False Claims Act,” regulated entities defending FCA cases may be cautiously optimistic that renewed efforts to seek dismissal of such cases—in addition to declination by DOJ—may be met with greater success. Courts have limited resources, as well, so they are likely to welcome proactive positioning by DOJ in cases that should not proceed for one reason or another.

Brand Memo – Guidance Documents Cannot Create Binding Requirements

Stating that “[g]uidance documents cannot create binding requirements that do not already exist by statute or regulation,” the Brand memo strongly discourages DOJ civil litigators from using noncompliance with agency guidance documents as a basis for suit or as evidentiary proof in ongoing litigation. Because guidance documents do not result from the notice-and-comment rulemaking process required by the Administrative Procedure Act (APA), any guidance documents relied upon by Civil Division litigators must be for “proper purposes,” such as to explain or paraphrase legal mandates. Or, if DOJ has evidence a party read a guidance document, it may be used to demonstrate a party had the “requisite knowledge” of a mandate, and therefore the requisite level of intent to defraud. In other words, the Brand memo prevents guidance documents from creating additional legal requirements at the enforcement level of regulations or statutes, and noncompliance with agency guidance may not be used as conclusive evidence of a legal violation.

This change significantly impacts enforcement actions in the highly-regulated health care industry, which is replete with non-binding sub-regulatory guidance issued by the Centers for Medicare & Medicaid Services (CMS) and the Health and Human Services Office of Inspector General (OIG). Such guidance is often relied upon by qui tam relators and government attorneys in False Claims Act (FCA) cases to allege non-compliance should net treble damages and penalties. As discussed further below, three categories of health care guidance often used in health care enforcement actions include Local Coverage Determinations (LCDs), Medicare billing and benefit policy manuals, and OIG fraud alerts and advisory opinions.

Impact of the Memoranda

The issuance of two agency memoranda memorialize arguments frequently made by defendants in FCA cases, and provide long-sought agency support
for oft-argued defense positions. An evolution of FCA cases and defense strategies following the memos, in several respects, can be expected.

(a) Interplay Between the Memoranda

First, to the extent an FCA case relies heavily on agency guidance that adds legal obligations to applicable law, defendants surely may argue the inappropriateness of citing non-binding guidance under the Brand memo. Under Escobar, a relator may only recover on the government's behalf where a false claim or statement is material to payment. The Brand memo underscores that non-compliance with non-binding guidance may not be material to the government's decision whether to pay a claim. For example, where a contractor does not comply with the letter of LCDs, Medicare Manuals or fraud alerts, and the government itself does not take notice, noncompliance is immaterial. The Brand memo gives defense attorneys long overdue support for pitching this argument to DOJ.

LCDs are determinations by Medicare Administrative Contractors (MACs)—private health insurers that contract with CMS to administer Medicare claims—regarding whether items and services are covered by Medicare. Specifically, LCDs contain information about standards for “reasonable and necessary” items and services, general coding information, and documentation requirements. A network of MACs administer claims on a regional basis throughout the United States. Because LCDs are issued by the individual MACs, they provide coverage requirements only for that region, meaning that coverage requirements may differ from region to region. LCDs have factored into FCA cases in two prominent ways: (i) as a standard for demonstrating claims were not medically necessary; and, (ii) as a means for arguing the documentation supporting the disputed claims was insufficient.

The Brand memo provides additional support for health care providers to defend against FCA claims in these cases, because only statutes and regulations legally establish the standards for medical necessity and documentation. Of course, some courts have held LCDs are interpretive, rather than substantive, and therefore are not subject to the APA's notice and comment requirements. As DOJ applies the Brand memo to new cases, it may decide LCDs are indeed binding rules. Nonetheless, if a defense attorney can demonstrate to DOJ that LCDs do more than explain existing legal mandates—because they add standards not otherwise required under applicable law—they should not be relied upon by DOJ ACE attorneys under the Brand memo.

CMS also maintains many manuals, policies and procedures, and other guidance that specify the parameters of Medicare benefits and establish requirements for submitting valid Medicare claims. This guidance is often relied upon in FCA cases claiming health care providers failed to meet claims requirements, typically arguing documentation is insufficient, claims were improperly coded, or the services did not meet the requirements to establish medical necessity.

As one example, when enforcing documentation requirements for evaluation and management (E/M) visits, CMS and DOJ attorneys rely on CMS’ “Evaluation and Management Services Guidelines” and the Medicare Claims Processing Manual to determine the standards for documentation and the appropriate E/M “level” to bill. Providers bill a higher level for more complex visits. Because Medicare reimbursement increases as the E/M level increases, many government enforcement actions have been premised on allegations that providers fraudulently “upcoded” the E/M level. Although CMS may still rely on its guidance for straightforward administrative overpayment cases, the DOJ and relators (in non-intervened cases) will face a significant hurdle when trying to rely on the same guidance as a basis for establishing noncompliance in FCA cases.

A third source of agency guidance frequently relied upon in FCA cases is guidance issued by the OIG, often in the form of advisory opinions, special fraud alerts, bulletins, and other guidance. These documents range from providing fraud and abuse analyses of individual arrangements or transactions, to highlighting patterns of arrangements that may present substantial risk of triggering liability under the federal Anti-Kickback Statute (AKS), to establishing and defining enforcement initiatives. Often, these documents are used to support the government's position in FCA cases, particularly when the position relies on a complex analysis under the AKS.

While DOJ still may rely on manuals for explanatory purposes, to the extent the guidance defines the legal standard differently or more onerously than set forth in the applicable statutes or regulations, the Brand memo says DOJ will not be permitted to rely on this guidance in ACE cases.

Where DOJ or relators nonetheless sue defendants for false claims based on non-compliance with agency guidance, defendants may rely on both the FCA dismissal provisions and also now the Granston memo to advocate for dismissal of the case. If the case is premised on an improper use of guidance documents under the Brand memo, two of the seven Granston factors may be met: (i) the relator's theory is “inherently defective” and meritless due to its improper reliance on agency guidance documents to create additional legal obligations; and, (ii) allowing relator to proceed with the case would run counter to DOJ's “litigation prerogatives,” because it would conflict with the directives of the Brand memo. Accordingly, noncompliance with the Brand memo may give defendants leverage to argue for a dismissal under the Granston memo—rather than just a declination—in certain FCA cases.

(b) Legislative v. Interpretive Agency Guidance

Relators are likely to counter some of these arguments by claiming agency guidance is merely illustrative and provides clarity about legal requirements, whereas defendants will claim the guidance is legislative in nature, adding strict legal requirements to those set forth in applicable statutes and regulations.

The tension between legislative and interpretive rules is not new. In fact, these arguments routinely arise in the administrative law context when parties debate whether agency rules complied with the APA. It requires agency rules—meaning any “statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy” —to be published in the Federal Register with an opportunity for public notice and comment. 5 U.S.C. § 551, 553. These requirements do not apply, however, to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.” Id. at 553(b).

A number of courts have ruled on the issue of whether a rule is legislative or interpretive in the health care context. For example, in 2011, Alabama brought an action against the Centers for Medicare & Medicaid Services seeking declaration that a letter concerning the federal share of damages in Medicaid fraud suits violated the APA. Alabama v. Cntrs. for Medicare & Medicaid Srvs., 780 F.Supp.2d 1219, 2011 BL 43879 (M.D. Ala. 2011). The court held that legislative rules create laws, which are “usually implementary to an existing law,” whereas interpretive rules are statements as to what the administrative agency believes the statute or regulation means. Applying those requirements, the court found that—despite CMS's characterization of the letter as an interpretive rule—the agency's letter “is much more like an implementation of the Medicaid Act than an interpretation.” Id. at 1231.

More recently, the Western District of Missouri granted the Missouri Hospital Association's (MHA) motion for summary judgment against CMS relating to CMS’ calculation of Medicaid Disproportionate-Share Hospital (DSH) payments. Missouri Hosp. Ass'n v. Hargan, 2018 BL 45873 (W.D. Mo. 2018). Specifically, in 2010, CMS posted frequently asked questions (FAQs) on its website regarding DSH payments that MHA claimed violated the required procedures under the APA. The court agreed, holding that the FAQs substantively impacted the DSH calculation, as opposed to merely interpreting the contours of the statute and regulation. In so doing, the court analyzed the critical distinctions between legislative and interpretive rules, stating that legislative rules create new legal norms, whereas interpretive rules advise the public of the agency's construction of the law. Notably, CMS recently announced it is no longer publishing FAQs.

For now, the Brand memo is most useful as a tool in DOJ pitch meetings, where defendants argue for non-intervention. But as parties in FCA cases grapple with the Brand memo in litigation, this line of cases will be persuasive in defining the boundary between legislative and interpretive rules.

(c) Use of Guidance Documents Post-Escobar

In Escobar, the Supreme Court held that, to be actionable under the FCA, a “misrepresentation must be material” to the government's payment decision. The court's broad outline of the materiality standard in FCA cases—stating that the standard is “rigorous” and “demanding”—has led to increased litigation of the materiality standard. One important insight provided by the court was that “if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

Many courts that have applied Escobar favorably to the defense. For example, Judge Steven Merryday's recently issued a colorful opinion in United States ex rel. Ruckh v. Salus Rehab., LLC, 2018 BL 10554 (M.D. Fla. Jan. 11, 2018) finding “[t]he record suffers an entire absence of evidence of the kind a disinterested observer, fully informed and fairly guided by Escobar, would confidently expect on the question of materiality.” One cannot fault practitioners for having expected a greater reliance on agency guidance materials in FCA materiality analyses to date. In light of the Brand memo, however, such guidance documents necessarily will play a more limited role in FCA materiality analyses. To the extent an agency guidance document elaborates upon existing law and creates additional obligations, under the Brand memo, noncompliance with that obligation cannot be used as evidence of an FCA violation, and, potentially, the creation of that document cannot be used as evidence of the materiality of the additional obligation.


One stated purpose of the Granston memo was to “ensure consistency across the Department” with regard to dismissals of qui tam actions and, presumably, under the Brand memo more consistent treatment of agency guidance documents in FCA cases may be expected. Such consistency, however, will only follow a highly-litigated transition period as parties in health care FCA cases seek to understand and apply the memoranda. Neither the Brand memo nor the Granston memo is a panacea for defendants in health care enforcement actions, but both documents—coupled with the evolution of case law following Escobar—support a host of new defense strategies that are sure to be litigated extensively in FCA cases.

Reproduced with permission from BNA’s Health Law Reporter, 27 HLR 355, 3/8/18. Copyright © 2018 by The Bureau of National Affairs, Inc. (800-372-1033)

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