Kickbacks & The False Claims Act

1. Kickbacks & The False Claims Act The Evolution of Kickback Allegations & Theories of Liability in FCA Litigation Antonia F. Giuliana March 28, 2012

2. Overview of Presentation Part I: The Changing Legal Standards Part II: The Evolution of Kickback Allegations in FCA Cases (1995-2009) Part III: Case Example: United States ex rel. Jamison v. McKesson Corp. et al., Civil Action No. 2:08-cv-214 (N.D. Mississippi). Currently on trial 2

3. The Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b) Enacted in 1972, seven years after Medicare & Medicaid system created to address potential problem of providers making decisions based on their own economic interest Prohibits payment of kickbacks, bribes, or other remuneration for the referral of Medicare or Medicaid patients Strengthened in 1977  Criminal felony punishable by fines up to $25,000 and/or five years in prison (instead of misdemeanor, $10,000 fine, up to 1 year in prison) No private right of action The False Claims Act, 31 U.S.C. §§ 3729-3733 Enacted in 1863 at the height of the Civil War to combat rampant fraud by vendors that sold broken guns, sick horses, rancid food, and other worthless equipment to the Union Army Imposes civil liability for treble damages and penalties on those who submit false claims or make false statements to obtain payment from the government Contains a whistleblower provision that permits private citizens to sue on the government’s behalf Lay relatively dormant until Congress significantly strengthened certain key provisions, including the whistleblower and damages provisions in 1986 Overview of the Federal AKS & FCA 3

4. The Expansion of the FCA to Cover Violations of the AKS 2010 Patient Protection and Affordable Care Act (“PPACA”) Amendments 1. AKS – Intent Standard With respect to AKS violations, “a person need not have actual knowledge of this section or specific intent to commit a violation of this section.” See 42 U.S.C. § 1320a-7b(h). Overturns a series of cases that set a higher standard under which prosecutors had to prove the specific intent to disobey the law. AKS Violation  FCA Violation “In addition to the penalties provided for in [the AKS], a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for purposes of subchapter III of chapter 37 of Title 31 [i.e., the FCA].” See 42 U.S.C. § 1320a-7b(h). 4

5. Consequences of the 2010 PPACA Amendment United States ex rel. Bartz v. Ortho-McNeil Pharmaceutical, Inc. et al. (2012 WL 695886, D. Mass March 2, 2012). Allegations of hidden discounts stated claim for illegal kickbacks. Court held there was no FCA violation predicated on alleged kickbacks because the PPACA Amendment did not apply: “In March 2010, the AKS was amended to state that ‘a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for the purposes of the FCA.’ This amendment expressly applies only to drugs dispensed after July 1, 2010. Bartz’s employment at J&J terminated on April 20, 2007, and Bartz fails to identify any illegal ‘kickback’ allegedly paid to Bartz’s Relator’s claim against McKesson Specialty.” (Id. at 16.) 5

6. Express & Implied Certification Claims Even before the 2010 Amendments to the FCA, plaintiffs asserted that AKS violations may serve as the basis for FCA claims pursuant to “certification” theories of liability. FCA Claim 1st Element: Falsity Factually false – goods or services were never provided or were incorrectly described Legally false – goods or services were provided in violation of a regulation, statute, or prescribed contractual term (despite a certification by the defendant, either express or implied, to the contrary) 6

7. Express & Implied Certification Claims Express Certification Claim Based on a false representation of compliance with a federal statute or regulation, and in some instances, with a prescribed contractual term or specification Majority view: a claim is legally false only if the party certifies compliance with a statute or regulation that is a condition to government payment Implied Certification Claim Based on the notion that the act of submitting a claim for reimbursement itself implies compliance with the governing federal rules that are a precondition of payment Not universally accepted – elements vary circuit-to-circuit (and, at times, within circuits) 7

8. Implied Certification Claims – by Circuit Second, Third, Eighth Circuits Limited to where there is a statute or regulation that is a condition of payment. Eleventh Circuit Can be based on either a condition of payment or a condition of participation in a federal program. D.C. Circuit A violation of a contractual obligation that was “material” to the government’s obligation to pay a claim can form the basis for an FCA claim. Seventh, Fourth, Fifth Circuits Have taken positions that are incompatible with an implied certification theory. First Circuit Rejects certification framework completely. Liability may attach whenever claim “misrepresented compliance with a precondition of payment so as to be false or fraudulent” and misrepresentation was “material.” (See Appendix A for list of cases.) 8

9. Evolution of Kickback Allegations 1995 - 2009 See Appendix B for listing of representative matters

10. Kickback Allegation Trends Increased focus on so-called “Sham Transactions” A seemingly legitimate transaction that is actually a façade for an improper hidden transaction Form of transaction is proper, but substance is allegedly not The types of “sham transactions” the government has been interested in have shifted over time, making potentially problematic conduct difficult to identify (except in hindsight) “data purchase” fees, “scientific study” participation fees More aggressive and creative theories of what types of conduct may constitute a “kickback” Overfill in drug vial, FMV challenges in competitive bidding situations

11. Sources to Assist in Identifying Evolving Standards Corporate Integrity Agreements DOJ Press Releases Announcing FCA Settlements FCA Settlement Agreements FCA Complaints-In-Intervention

12. United States ex rel. Jamison v. McKesson Corp. et al. (N.D. Miss.) 2:08-cv-214 FCA Claim (conduct – 2002 to 2006) Predicated on AKS violation (prior to 2010 FCA amendment) AKS violation relating to illegal remuneration for business referrals in the form of below fair market value pricing or discounts Fifth Circuit law applies (no implied certification theory) The Defendants Beverly defendants (including subsidiary CSMS) large nursing home chain Allegedly induced kickback McKesson defendants (including subsidiary MediNet) National distributor Allegedly provided kickback Did not receive the business referral 12

13. The Jamison Case(the facts) The Medical Supply Contract (the alleged “bait”) Beverly contracted with Gulf South for its medical supplies (alleged $50 million value). Set to expire in 2002. Summer 2002 – MediNet meets with CSMS to (1) pitch contract billing services for enteral products and (2) discuss benefits of using a related company to act as Beverly’s medical supply distributor. MediNet proposed $50 contract billing fee per patient if CSMS gave the medical supply contract to a MediNet-affiliate and a $75 fee without the supply contract. 13

14. The Jamison Case(the facts) The Contract Billing Services Contract (the alleged “kickback”) Four bids submitted during RFP process in Fall 2002: MediNet (defendant) -- $75 w/o supply K/$50 with supply K Pharmerica -- $210 (current provider) NCS -- $50 Proclaim -- $74 CSMS and MediNet further negotiate bid from $75 to $70. MediNet is awarded contract billing services agreement. Beverly re-signed its medical supply distribution contract with Gulf South at the end of 2002. 14

15. The Jamison Case(the allegations) The Government’s Allegations The Beverly defendants “ ‘dangled’ the prospect of McKesson obtaining its DME supply business relating to enteral nutrition services in order to induce MediNet to provide it with the lowest possible billing fees.” MediNet “offered its contract billing services below fair market value in order to induce Beverly to refer the general medical supply contract” to a McKesson-affiliate. Government relies on express certification on DME enrollment and re-enrollment applications by CSMS (a Beverly defendant). 15

16. The Jamison Case (the summary judgment motion) Issue 1: Whether there was any “remuneration”? No  MediNet’s bid was in line with fair market value. Yes  No FMV because each bidder was motivated to bid low in the hopes of landing the lucrative medical supply contract. No  Competitive bidding of the RFP process ensures that MediNet’s pricing was fair market value, regardless of government’s “hindsight calculations.” Yes  During the term of the contract billing agreement, a MediNet financial analyst reviewed its impact to MediNet and determined that at $70 per resident per month, MediNet either lost money, or at best broke even. 16

17. The Jamison Case(the summary judgment motion) Issue 2: Whether the defendants acted knowingly and willfully? Yes  Beverly did not notify MediNet that McKesson was not going to receive Beverly’s supply business until January 2003 – four months after MediNet’s bid was submitted. Yes  MediNet’s $70 bid for contract billing services was unreasonable considering that current provider, Pharmerica, submitted a bid for $210. No  MediNet performed a profit projection analysis prior to entering billing services contract and anticipated $34-38 in costs, well in line with $70 per resident per month fee. No  Beverly defendants negotiations and determination of the best bid was driven by their intent to get the best deal. MediNet was chosen on the basis of other criteria aside from price. 17

18. The Jamison Case(the summary judgment decision) The Holding Deny summary judgment – issues raise questions of fact for trial 18

19. The Jamison Case(parent liability) McKesson Corporation’s Summary Judgment Motion McKesson, contends that, as MediNet’s parent corporation, it is not liable for the actions of its subsidiary. Seeks dismissal from lawsuit because it: Was not a party to any of the transactions Is not a Medicare provider or supplier Does not submit claims to Medicare Does not directly own any MediNet shares No participation or control over MediNet’s actions 19

20. The Jamison Case(parent liability) McKesson Corporation’s Summary Judgment Motion Government contends: McKesson had input into the strategy for securing Beverly’s business A senior McKesson executive was “over the management” of MMS at the time the “Beverly strategy” was implemented The McKesson executive had knowledge of and approved MediNet’s strategy. McKesson had a deliberate corporate strategy to blur MMS and MediNet into the McKesson corporate name as evidence of McKesson’s direct involvement with the fraud Court held: Genuine issue of material fact as to the level of control and input McKesson Corporation had with respect to MediNet’s contract with CSMS 20

21. The Jamison Case(the trial) The Trial Bench trial started in February; will recommence in April Estimated 10-20 days Important Issues Raised Under the AKS and FCA Whether a “discount” that does not result in a price that is below FMV is actionable under the AKS? Whether proof of damages is a required element to prove a violation of the FCA? Assuming an FCA violation is proven, whether civil penalties may be awarded if damages are not proven? If civil penalties may be awarded, how should they be assessed? Per claim submitted? Per express false certification? Whether the applicable standard of proof for the element of an AKS violation is “beyond a reasonable doubt” or “by a preponderance of the evidence”? 21

22. Thank you! March 28, 2012

23. Appendix A

24. Implied Certification Cases by Circuit • First Circuit:New York ex rel. Westmoreland et al. v. Amgen, Inc. etal., 2011 WL 2937420 (1st Cir. July 22, 2011); United States ex rel. Hutcheson et al. v. Blackstone Medical, Inc., 2011 WL 2150191 (1st Cir. June 1, 2011). • Second Circuit:Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001). • Third Circuit: United States ex rel. Wilkins v. United Health Group, Inc., 2011 WL 2573380, at *9 (3d Cir. June 30, 2011). • Fourth Circuit: Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 786-87 n.8 (4th Cir. 1999). • Fifth Circuit: United States ex rel. Steury v. Cardinal Health, Inc., 2010 WL 4276073 (5th Cir. 2010); United States ex rel. Marcy v. Rowan Cos., 520 F.3d 384, 389 (5th Cir. 2008). • Sixth Circuit:United States ex rel. Augustine v. Century Health Services, Inc., 289 F.3d 409 (6th Cir. 2002). 24

25. Implied Certification Cases by Circuit • Seventh Circuit: United States ex rel. Yannacopoulos v.General Dynamics, 2011 WL 3084932, at *3 n.4. (7th Cir. July 26, 2011). • Eighth Circuit:United States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 795–96 (8th Cir. 2011). • Ninth Circuit:United States v. Lungwitz et al., 2010 WL 3092637 (9th Cir. 2010). • Tenth Circuit: United States ex rel. Lemmon v. Envirocare of Utah, Inc., 2010 WL 3025021 (10th Cir. 2010). • Eleventh Circuit: McNutt ex rel. United States v. Haleyville Medical Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir. 2005). • D.C. Circuit: United States v. Science Applications Int’l Corp., 626 F.3d 1257, 1261 (D.C. Cir. 2010). 25

26. Appendix B

27. Evolution of Kickback Allegations (1995-2009)

28. Evolution of Kickback Allegations (1995-2009)

29. Evolution of Kickback Allegations (1995-2009)

30. Evolution of Kickback Allegations (1995-2009)

31. Evolution of Kickback Allegations (1995-2009)

32. Evolution of Kickback Allegations (1995-2009)

33. Evolution of Kickback Allegations (1995-2009)

34. Contact Antonia F. GiulianaPARTNERLitigation Phone: (212) 808-7941agiuliana@kelleydrye.com