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Violations of Payment/Participation Conditions as Predicates for False Claims

By Katherine A. Lauer, Jason M. Ohta, and Amy E. Hargreaves – Spring/Summer 2011


Health care providers are regulated by a complicated administrative framework that requires compliance with numerous federal laws and regulations. Many of these rules relate to quality of care and are considered conditions of participation. Failure to comply with a condition of participation can result in sanctions, increased reporting requirements, and eventually, exclusion from participation in the program.


Other rules regulating health care providers are deemed to be conditions of, or prerequisites to, payment for services rendered. Failure to comply with a condition of payment can result in the denial of the claim for payment or, if the payment has already been made, the amount paid on the claims is considered an overpayment that must be refunded under current law.


The distinction between a condition of payment and a condition of participation has been—and should continue to be—of particular significance in actions brought under the federal False Claims Act (FCA). Increasingly, relators have sought to expand the FCA to enforce violations of rules and regulations that are only tangentially related—if at all—to eligibility for payment. Rulings in those cases often hinge on the distinction between conditions of payment and conditions of participation. This article provides an introduction to the cases dealing with conditions of payment and participation with a focus on recent cases discussing the distinction between the two and the implications of that distinction under the FCA.


False Claims Act
The FCA was originally enacted during the Civil War as a response to widespread fraud by government contractors. The act is designed to protect the government from false claims and therefore attaches liability not to the fraudulent activity itself but to the knowing submission of a false claim for payment to the government. U.S. ex rel. Hopper v. Anton, 91 F.3d 1261, 1265–66 (9th Cir. 1996). The act prohibits many activities related to the submission and presentation of false claims, whether it be conspiracy or direct involvement in creating the claim. Any person involved in such an activity can be held liable. Civil penalties under the act range from $5,500 to $11,000 per offense, plus mandatory treble damages. 31 U.S.C. §3729(a)(1) (2006). Under the qui tam provision of the act, a private individual may sue on behalf of the federal government to recover damages sustained by the government.


Legally and Factually False Claims
Courts evaluating FCA suits have recognized two types of actionable false claims: factually false and legally false. In a case predicated on a factually false claim, the claim is false because the contractor submitted an “incorrect description of goods or services provided or a request for reimbursement for goods and services never provided.” U.S. ex rel. Conner v. Salina Regional Health Center, Inc., 543 F.3d 1211, 1217 (10th Cir. 2008) (citing U.S. ex rel. Mikes v. Straus, 274 F.3d 687, 687 (2d Cir. 2001)). Legally false claims, sometimes also referred to as claims based on false certifications, differ in that the claim presented to the government is not false or overstated on its face. Instead, the premise of false certification theory is that the defendant has made “false certifications of statutory or regulatory compliance, or of the existence (or non-existence) of certain conditions, which are alleged to be a prerequisite to the government’s payment.” John T. Boese, Civil False Claims and Qui Tam Actions, §1.06(C). See also Hopper, 91 F.3d at 1266. If, however, the government would have paid the claim “despite knowing that the contractor has failed to comply with certain regulations, then there is no false claim for purposes of the FCA.” Conner, 543 F.3d at 1219.


Increasingly, FCA suits in the health care context involve false certification claims alleging that the claim is false because the provider has failed to satisfy a condition required to participate as a provider in Medicare or some other federal health care program. See, e.g., Mikes, 274 F.3d 687. The outcome of these cases often depends on whether the court treats the underlying rule or regulation as a condition of payment or condition of participation.


Express and Implied False Certifications
Legally false certification claims fall into two categories: express false certifications and implied false certifications. U.S. ex rel. Blundell v. Dialysis Clinic, Inc., 2011 U.S. Dist. LEXIS 4862, *38–39 (N.D.N.Y. 2011). The express false certification theory applies when a government payee “falsely certifies compliance with a particular statute, regulation or contractual term, where compliance is a prerequisite to payment.” Mikes, 274 F.3d at 698. This certification may be any false statement that relates to the claim, as long as it is made through express means. U.S. ex rel. v. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1172 (9th Cir. 2006). An implied false certification claim is based on the theory that the act of submitting a claim for reimbursement itself implies compliance with overarching federal rules that are conditions of payment. When these cases first arose, some courts cautioned against applying the implied false certification theory too broadly in the health care context, given the complicated regulatory scheme in place. For instance, the Second Circuit in the Mikes case, discussed below, held that implied false certification is “appropriately applied only when the underlying statute or regulation upon which the plaintiff relies expressly states the provider must comply in order to be paid.” Mikes, 274 F.3d at 699–700.


The court’s analysis for whether the claim is based on an express or implied false certification often hinges on whether the certification is related to a condition of payment or a condition of participation in the federal health care program. Blundell, 2011 U.S. Dist. LEXIS 4862 at *39.


Conditions of Payment
Conditions of payment are requirements that must be satisfied before the government will pay a claim. Conner, 543 F.3d at 1220. They are distinct from conditions of participation, which are often codified in separate and distinct sections from conditions of payment. Lisa A. Estrada, “A Roadblock for Quality Care Cases under the False Claims Act?” 11 J. Health Care Compl. 17, 19 (2009). Failure to comply with a condition of payment may properly form the basis for an FCA suit under the theory that payment should not have been made on the claim absent compliance with the condition of payment. Mikes, 274 F.3d at 700. Therefore, if the false certification clearly relates to a condition of payment, the courts generally have found that the claim satisfies the “falsity” element of the FCA. Blundell, 2011 U.S. Dist. LEXIS 4862 at *39–40.


Conditions of Participation
In contrast, if the condition or requirement that has not been satisfied relates not to a prerequisite for payment but to a condition of participation in a federal health care program, the outcome is less clear, as a claim may be eligible for payment even if a provider is out of compliance with one or more conditions of participation at the time the claim is submitted. Conner, 543 F.3d at 1220. Conditions of participation are typically minimum health and safety standards focused on quality of care provided. Estrada, 11 J. Health Care Compl. at 20. These requirements are often phrased fairly imprecisely because they are designed to improve the quality of the health care provided, not to enforce specific administrative requirements. Id. at 18.


If conditions of participation are not met, various sanctions may be imposed upon the provider, including a corrective action plan, monetary sanctions, and increased reporting requirements. While a provider may eventually be excluded from the federal health care program, exclusion is relatively rare and only occurs if the provider fails to become substantially compliant during the corrective period. For that reason, a number of courts have recognized that it would be both inappropriate and premature for the government to refuse to pay otherwise appropriate claims on the basis that the provider failed to fulfill all conditions of participation. Conner, 543 F.3d at 1220. In the FCA context, the key issue is whether the failure to comply with a condition of participation can or should constitute the basis of a false claim. Blundell, 2011 U.S. Dist. LEXIS 4862 at *39–40.


U.S. ex rel. Mikes v. Straus (2nd Cir. 2001)
In U.S. ex rel. Mikes v. Straus, a qui tam plaintiff claimed that defendants—three medical doctors and their practice group—submitted government claims containing express and implied false certifications of compliance. Mikes, 274 F.3d at 698. Specifically, the plaintiff alleged that spirometry tests were performed without testing devices being properly calibrated, which made the doctors noncompliant with various Medicare regulations. Id. at 692–93. Defendants had submitted claims on a form that stated: “I certify that the services shown on this form were medically indicated and necessary for the health of the patient and were personally furnished by me or were furnished incident to my professional service by my employee under my immediate personal supervision.” The court noted that both the form on which the claims were submitted and the Medicare regulations stated that certification is a precondition to Medicare reimbursement. Id. at 698.


The court held that defendants’ certification found on the claim form was a precondition of government payment for those claims. However, Mikes’s allegations pertaining to the manner in which spirometry testing was carried out were unrelated to the certification found on the claim form. There was no dispute as to whether the services were medically necessary or whether they were personally furnished by the doctors or their supervised employees. Therefore, although there was an express certification, it was not false. Failure to comply with other Medicare regulations (conditions of participation) pertaining to the quality of care was not sufficient to convert a legitimate certification into a false one.


Mikes also asserted that defendants had submitted implied false certifications of compliance with statutes requiring that procedures be performed at a professionally recognized standard of care. The court found that the standard of care statutes were conditions of participation rather than conditions of payment. Id.at 700. However, when Mikes further alleged that defendants had submitted implied false certifications by performing services that were not reasonable and necessary, the court agreed that these statutes were conditions of payment. The statute contained an “express condition of payment—that is, ‘no payment may be made’”—which linked the statutory requirements to the actual payment for services. Id. Due to this express conditioning language, the court held that these requirements were conditions of payment. Mikes is often cited for the proposition that in an implied certification case, the condition of payment must be expressly stated in the rule or regulation at issue for the violation to be actionable under the FCA.


U.S. ex rel. Hendow v. University of Phoenix (9th Cir. 2006)
In this case addressing FCA liability for false certification of compliance with Department of Education regulations, the Ninth Circuit found that a false promise of future compliance could be the basis for liability under the FCA. However, in so finding, the court explicitly differentiated its holding from Mikes and other cases arising in the health care context. The court noted that “‘Compliance,’ in [the Medicare context], meant maintaining an appropriate standard of care, which was ensured by peer review and extensive monitoring,” not immediate withdrawal of payment for services rendered. Hendow, 461 F.3d at 1176–77.


U.S. ex rel. Landers v. Baptist Memorial Health Care Corp. (W.D. Tenn. 2007)
Landers, a former employee of a hospital owned by the defendant Baptist Memorial Health, filed an FCA action based on Baptist’s alleged failure to comply with four conditions of participation:


(1) having an adequate number of nurses and other personnel to provide nursing care, (2) organizing surgical services appropriate to the services offered, (3) having ‘[p]olicies governing surgical care . . . designed to assure the achievement and maintenance of high standards of medical practice and patient care,’ and (4) providing a sanitary environment.


The plaintiff claimed that Baptist had falsely certified compliance with Medicare’s conditions of participation on three HCFA forms submitted to Medicare and should be liable under the FCA. U.S. ex rel. Landers v. Baptist Memorial Health Care Corp., 523 F. Supp. 2d 972, 978 (W. D. Tenn. 2007). The court found Landers’ claims unpersuasive. Looking to the HCFA forms themselves, the court noted that they did not “expressly or impliedly condition payment upon compliance” with the conditions of participation Baptist allegedly failed to comply with. The court noted that conditions of participation are quality care standards that must be complied with for the provider to continue to participate in the program—not prerequisites to particular individual payments. Id.


Furthermore, although Baptist’s “alleged non-compliance with Conditions of Participation may lead to prospective corrective action or even termination, Plaintiff has not presented any evidence that Defendants would have been ineligible to receive payment of its Medicare claims during a potential period of non-compliance.” Because Baptist could have continued to receive payments even if Landers’s allegations had been true, no liability could attach under the FCA.


Conner v. Salina Regional Health Center, Inc. (10th Cir. 2008)
In U.S. ex rel. Conner v. Salina Regional Health Center, Inc., the court held that if the express certification does not specifically state that compliance is a prerequisite to payment, the court “must look to the underlying statutes to surmise if they make the certification a condition of payment.” The court rejected the notion that a very broad certification of compliance with all health care laws and regulations could satisfy the specific requirements of the FCA. Conner alleged that Salina Regional Health Center (SRHC) submitted false certifications of compliance in its annual cost reports, in which health care providers notify the government of over- and under-payments resulting from Medicare bills submitted throughout the year. The underlying statute regulating annual cost reports did not expressly condition payment on the certification of compliance. Instead, Conner asked the court to find that the compliance certification found in the annual cost report explicitly conditioned Medicare payments on compliance with all applicable Medicare statutes and regulations. Conner, 543 F.3d at 1218.


The court explained that this broad interpretation of the certification requirement could not be reconciled with existing Medicare regulations and enforcement of the FCA:


Although this certification (appearing on the annual cost report) represents compliance with underlying laws and regulations, it contains only general sweeping language and does not contain language stating that payment is conditioned on perfect compliance with any particular law or regulation. Nor does any underlying Medicare statute or regulation provide that payment is so conditioned. Thus, by arguing that the certification’s language is adequate to create an express false certification claim, Conner fundamentally contends that any failure by SRHC to comply with any underlying Medicare statute or regulation during the provision of any Medicare-reimbursable service renders this certification false and the resulting payments fraudulent.


Id.at 1219. The court noted that the Medicare statutes have many ways of enforcing underlying laws and regulations, including a plan of correction, a reasonable time period to address deficiencies, and the opportunity to correct billing practices. If, after these conditions are satisfied, the provider remains substantially noncompliant, Medicare program participation may eventually be terminated. Conditions of payment, on the other hand, “are those which, if the government knew they were not being followed, might cause it to actually refuse payment.” Id. at 1218–1220. Because the court found that the certification in SRHC’s cost report related to conditions of participation, the court held that no false claim had been filed. Id. at 1226.


U.S. ex rel. Ebeid v. Lungwitz (9th Cir. 2010)
In U.S. ex rel. Ebeid v. Lungwitz, a Ninth Circuit case decided in 2010, the plaintiff alleged that defendant was engaging in the illegal corporate practice of medicine, violating the Stark Law’s prohibitions against self-referrals and illegally billing Medicare for services provided by physician employees who had significant financial interests in the billing entity, a home health agency. The court found that Ebeid’s allegations were unsubstantiated by the complaint and affirmed the lower court’s dismissal with prejudice. However, the court also found that the Stark Law and the Medicare regulations implicated in Ebeid’s suit could have formed the basis for an FCA suit if they had been properly pled. U.S. ex rel. Ebeid v. Lungwitz, 616 F.3d 993, 1000–1001 (9th Cir. 2010).


The Stark Law provides that a physician cannot refer Medicare patients to an entity in which the physician has a prohibited financial interest. In part, the Stark Law provides that “no payment may be made” for services rendered because of a prohibited referral. The court found that the Stark Law may serve as a valid basis for an implied certification claim under the FCA because the law itself expressly conditions payment on compliance. Because Ebeid had not pled sufficient details regarding the Stark Law violation, however, the court found her allegations insufficient to survive a motion to dismiss. Id. at 1000.


Ebeid also alleged violations of a Medicare regulation, 42 C.F.R. 424, Subpart B, which prohibits physicians with a financial interest in a home health agency from submitting requests for payment for home health services unless the financial interest falls under one of the permitted exceptions. The court found that this regulation could serve as the basis for an FCA suit “because it provides a condition of payment, not participation.” The court pointed to language in the provision stating that Medicare will pay “for home health services only if a physician certifies and recertifies the need for home health care services.” The court also noted that the provision was found in a section entitled “Conditions for Medicare Payment.” Again, however, the court found Ebeid’s allegations insufficient and affirmed the lower court’s dismissal of the complaint. Id. at 999–1001.


U.S. ex rel. Blundell v. Dialysis Clinic, Inc. (N.D.N.Y 2011)
In this 2011 suit arising out of alleged violations of various statutory and regulatory requirements, Blundell alleged that Dialysis Clinic had made certain implied false certifications based on regulations entitled “Conditions for Coverage for End-Stage Renal Disease Facilities.” Noting that the regulation provided for termination from the Medicare program as an “ultimate sanction,” and that alternative sanctions allowed health care providers to continue to receive Medicare payments during a period of noncompliance, the court found that the language in the statute “clearly establishes a condition of participation, not prerequisites to receiving reimbursement from the government.” If a provider could be noncompliant and continue to receive Medicare payments, then the regulation should be considered a condition of participation, not payment. Blundell, 2011 U.S. Dist. LEXIS 4862 at *54.


U.S. ex rel. Lisitza v. Johnson & Johnson (D. Mass. 2011)
In another recent case discussing conditions of payment and participation under the FCA, a Massachusetts district court determined that compliance with the Anti-Kickback Statute (AKS) was a condition of payment under Massachusetts Medicaid. U.S. ex rel. Lisitza v. Johnson & Johnson, 2011 U.S. Dist. LEXIS 19449 (D. Mass 2011). Lisitza, a pharmacist, accused Johnson & Johnson (J&J) of inducing codefendant Omnicare to promote J&J’s drugs over more cost-efficient alternatives. Id. at *7.


The United States and Lisitza contended that J&J’s activities constituted illegal kickbacks. The plaintiff’s FCA certification allegations were based on Medicaid provider agreements that required compliance with “all state and federal statutes, rules, and regulations applicable to the Provider’s participation” in Medicaid as well as electronic claim submission forms that required certifications of compliance. The electronic claims submission forms apparently also required J&J to certify that there had been no material omissions. Id. at *40.


The court held that compliance with the AKS was material to the government’s decision to pay any claim and not simply a condition of participation in Medicaid. The court’s reasoning occupied a scant two sentences (supplemented by long quotations from the record at oral argument and multiple pages of string citations), but seems to have been based at least in part on a misunderstanding of the line of cases discussed above, as reflected in the court’s assertion that “most courts [have] rejected that distinction between conditions of participation” and conditions of payment. Id. at 40–45. While AKS has been recognized by many courts as a condition of payment, the Lisitza court’s suggestion in what is arguably dictathat there is no distinction between conditions of participation and conditions of payment—co uld prove problematic in future FCA actions.


Conclusion
Expanding the reach of the FCA by conflating conditions of payment with requirements that are actually conditions of participation is neither consistent with established case law nor good public policy. The mechanisms in place for enforcing conditions of participation have been thoughtfully and thoroughly developed by the agencies overseeing the myriad of federal health care programs. Permitting qui tam relators to bring actions purporting to enforce these regulations creates uncertainty among health care providers and will result in additional costly litigation. Parties addressing these issues should focus on those cases that clearly and thoughtfully discuss the distinction between prerequisites for payment and conditions of participation in government programs.


Keywords: litigation, health law, False Claims Act, conditions of payment, conditions of participation


Katherine A. Lauer is a partner and Jason M. Ohta and Amy E. Hargreaves are associates  in the San Diego, California, office of Latham & Watkins LLP.


 
 
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