The DOJ recently released its annual report on False Claims Act enforcement, and FCA enforcement shows no signs of slowing. Bass, Berry & Sims’ Taylor Chenery, Lauren Gaffney and Anna Grizzle discuss what the report reveals.
2020 marks the 150th anniversary of the Department of Justice (DOJ), and based on a recently released 2019 report, its FCA enforcement efforts show no signs of slowing, with health care fraud recoveries undoubtedly continuing to make up the bulk of recoveries. Not only with respect to health care fraud, but across all types of FCA enforcement matters, the government remains committed to pursuing individuals, companies and all participants responsible for potential fraudulent schemes, even where those participants may not contract directly with the government or if they are multiple steps removed from the submission of actual claims to the government.
The 2019 enforcement report provides insight into DOJ priorities, including the types of health care and procurement fraud cases it is pursuing and its decreasing reliance on qui tam whistleblowers. Beyond this report, businesses can also ascertain clues about future enforcement activity from pending legislation and DOJ guidance that will impact how businesses tread in 2020.
2019 FCA Enforcement Overview
In 2019, the DOJ obtained more than $3 billion in settlements and judgments from civil cases involving fraud and false claims against the government in fiscal year 2019.
Matters involving the health care industry continued to dominate the majority of FCA recoveries, constituting $2.6 billion of the more than $3 billion in total recoveries. Enforcement matters spanned across the health care industry, including matters involving drug and medical device manufacturers, managed care providers, hospitals, pharmacies, hospice organizations, laboratories and physicians.
Beyond health care, other notable enforcement matters in 2019 related to procurement fraud involving entities that contract directly with the federal government and to other fraud schemes where the government allegedly suffered harm due to false certifications or representations, particularly by entities that received federal benefits.
Whistleblowers filed 633 qui tam suits in fiscal year 2019 (an average of 12 per week), and the DOJ recovered over $2.1 billion in those and earlier filed suits. Roughly 70 percent of all settlements and judgments reported by the government in fiscal year 2019 arose from lawsuits filed under the qui tam provisions of the False Claims Act (FCA). During that same period, the government paid out $265 million to the whistleblowers who filed those actions – the lowest total amount rewarded to whistleblowers since 2009.
Health Care Fraud
2019 marked the 10th consecutive year that civil health care-related settlements and judgments exceeded $2 billion, an approximate 5 percent year-over-year increase following a 10-year low in 2018. The DOJ also noted in its announcement that the $2.6 billion figure does not reflect the additional millions of dollars that were recovered for state Medicaid programs.
The top recoveries in 2019 stemmed from matters involving drug manufacturers. Reckitt Benckiser Group PLC (RB) agreed to pay $1.4 billion to resolve alleged criminal and civil liability related to allegations that it misrepresented facts relating to the safety and diversion risk of Suboxone film, a drug used to treat drug dependence. Insys Therapeutics agreed to a settlement of $225 million consisting of a $195 million payment to settle FCA allegations, plus an additional $2 million in fines and the forfeiture of $28 million to settle criminal and civil claims that it engaged in illegal marketing tactics and paid kickbacks to health care providers in an effort to promote Subsys, its fentanyl painkiller spray. The government recovered more than $95 million from Avanir Pharmaceuticals over allegations it paid kickbacks and leveraged false and misleading marketing to persuade long-term care providers to prescribe a drug for behaviors commonly associated with dementia, which allegedly was not an approved use for the drug.
The DOJ also continued to investigate drug manufacturers and their role in funding co-payments of Medicare patients. In 2019, a total of $624 million was paid across seven drug manufacturers to resolve allegations that they illegally paid patient copays for their own drugs through independent foundations. The DOJ also highlighted recoveries related to a pathology lab company, an electronic health record vendor and an inpatient rehabilitation provider.
The DOJ reiterated its commitment to using the FCA and other civil remedies to “deter and redress fraud” by both individuals and corporations, highlighting cases in which separate actions and settlements were brought against chief executive officers, health care operators, owners and even a private equity firm that invested in a health care company.
For example, the DOJ obtained a $21 million settlement involving a private equity fund where the government alleged that the fund knew about and approved marketing activities for one of its portfolio companies that allegedly violated the Anti-Kickback Statute. The portfolio company, Diabetic Care Rx, LLC, and two executives also were included in this settlement. The government’s press release for this case explained that it remains committed to holding all participants responsible and indicated that some of the most significant settlements of the year constituted global resolutions of both civil and criminal claims.
Procurement and Other Fraud
DOJ’s non-health-care FCA enforcement efforts in 2019 involved a variety of matters involving the government’s purchase of goods and services. Those matters spanned numerous industries, from national defense and the United States military to institutions of higher education to government contracts involving environmental regulations.
In relation to national defense and military contracts, five South-Korea-based companies collectively paid over $162 million to resolve allegations that they engaged in anticompetitive conduct targeting contracts to supply fuel to the U.S. military in South Korea, causing the Department of Defense to pay substantially more for fuel supply services than it would have absent the alleged collusion.
Northrop Grumman Systems Corporation paid over $27 million to resolve allegations that it billed the United States Air Force under battlefield communications contracts for labor hours purportedly incurred by individuals stationed in the Middle East who had not actually worked the hours claimed. For $20 million, the majority owner and former CEO of defense contractor ADS, Inc., Luke Hillier, settled allegations that he made false representations to fraudulently secure federal set-aside contracts that were reserved for small businesses and that his company was not eligible to receive.
Institutions of higher education were also subject to FCA enforcement based on federal grants or aid they received. Duke University paid $112.5 million to resolve alleged FCA violations by submitting applications and progress reports to the National Institutes of Health and to the Environmental Protection Agency that contained falsified research on federal grants. By paying $2.5 million, North Greenville University resolved allegations that it submitted false claims to the U.S. Department of Education by compensating a student recruiting company based on the number of students who enrolled in NGU’s programs, in violation of the Higher Education Act’s prohibition on such incentive compensation for institutions that receive federal student aid.
With respect to environmental issues, the government recovered more than $3.5 million from gas marketer B. Charles Rogers (BCR) Gas Ltd. and its owners to resolve allegations that they engaged in a scheme to reduce royalty payments that were due in exchange for their license to remove minerals from federal lands. Another individual who worked with BCR while employed as a gas supply manager at a natural gas distributor paid an additional $800,000 based on his alleged role in the scheme. Omega Protein Corp. and Omega Protein, Inc. paid $1 million to resolve allegations that they by falsely certified compliance with federal environmental laws in order to obtain a federal loan.
The DOJ also announced settlements with entities that were not contracted as directly with the government but nonetheless allegedly caused false claims to be submitted to the government. Aluminum extrusion manufacturer Hydro Extrusion Portland, Inc., formerly known as Sapa Profiles Inc. (SPI), paid $34.6 million for “causing a government contractor to invoice NASA and the Department of Defense’s Missile Defense Agency for aluminum extrusions that did not comply with contract specifications,” according to the DOJ’s report. SPI allegedly altered the results of tests designed to ensure the consistency and reliability of the extrusions and provided the contractor with falsified certifications. For $21.57 million, software development company Informatica LLC resolved allegations that it provided misleading information about its commercial sales practices that was used in contract negotiations with the General Services Administration, which caused the government to be overcharged. Resellers who allegedly received false sales information from Informatica then used that information in negotiations with GSA for government contracts, causing GSA to agree to less favorable pricing and government purchasers to be overcharged.
Looking Further into 2020
While there are no signs of FCA enforcement slowing or any other type of recoveries surpassing the total netted from health care fraud matters, the focus of the enforcement efforts may begin to shift in light of the revisions proposed by Department of Health and Human Services Office of Inspector General (HHS-OIG) and the Centers for Medicare and Medicaid Services to the federal Stark Law and Anti-Kickback Statute. The proposals were issued in late 2019 and would, among other things, add and modify existing key definitions, safe harbors and exceptions – especially those related to value-based care and value-based arrangements. If finalized, these changes could potentially alter the way the government enforces the fraud and abuse laws with the stated goal of moving the health care delivery system from a fee-for-service basis to one that pays for value, quality outcomes and cost efficiency. Final comments were due December 31, 2019, so we would hope to see final rules sometime in 2020.
Based on the HHS-OIG Work Plan and existing matters that have pushed into 2020, it also is likely that we will continue to see settlements and recoveries involving drug distributors and manufacturers, as well as related cases against ancillary providers, such as drug testing laboratories and physician prescribers. The government’s enforcement focus on compound pharmacies is also likely to continue. Based on recent audit activity and findings, the government likely will continue to pursue FCA cases based on violations of health care laws especially for pharmacies, durable medical equipment companies and home health providers.
As noted before, the government remains committed to pursuing all entities responsible for potential fraud. Similarly, it is unclear whether the government will remain focused on private equity investors, but in light of the Diabetes Care Rx matter, private equity funds should take extra caution when determining how involved they get in operational matters related to their portfolio companies.
Finally, the government’s reliance on whistleblowers to bring qui tam suits also will continue. However, the DOJ announcement points out that, during the past year it made “increasing use” of its authority to seek dismissal of qui tam cases to “help prioritize and protect the expenditure of government resources.” In a letter to Senator Chuck Grassley, the DOJ indicated that it has filed motions to dismiss in 45 FCA cases since January 2018, still accounting for less than 4 percent of the 1,170 qui tam suits filed during this timeframe. The U.S. Circuit Courts of Appeals are split on the standard of review for these dismissal motions, so further litigation on this topic is expected in 2020.
With so many changes on the horizon for the health care landscape, health care fraud enforcement in particular will continue to be a fast evolving and expanding area of the law. It will be important to keep up not only with enforcement efforts, but also key regulatory developments that will directly impact the government’s recovery efforts. Other areas, however, should not be overlooked when examining operations; the DOJ’s actions over the past year make clear that the DOJ will be focused on any potential fraud of government contractors across industry sectors.