There are many unknowns as we look toward healthcare law in 2017. But as the First Circuit recently reconfirmed in Hagerty v. Cyberonics, Inc., we can still expect some continuity in the world of the federal False Claims Act (“FCA”). This includes the FCA liability requirement that there be more than merely underlying misconduct; there must be an actual false claim.
The FCA penalizes those who knowingly present or cause to be presented false or fraudulent claims to the United States for payment or approval. Under the FCA, claims may be brought by the government or by a private citizen (a “qui tam relator”) on the government’s behalf. The FCA carries serious civil penalties, yet also incorporates serious safeguards, including, primarily, Federal Rule of Civil Procedure 9(b).
Rule 9(b) requires the government/relator to allege fraud with particularity. Because the FCA offers financial incentives to encourage individuals to expose fraud, it also may create perverse incentives to bring unmeritorious claims. Rule 9(b) helps to cabin these qui tam actions and prevent frivolous claims by requiring an FCA complaint to set out in detail the who, what, when, where, and how of the alleged fraud. That means pleading with particularity both that (a) the underlying misconduct rendered a claim false or fraudulent and (b) the defendant actually submitted or caused the submission of that false claim.
The pleading standard is slightly more flexible if the defendant is alleged to have caused a third party to submit false claims. Alleging such “indirect” false claims requires only factual or statistical allegations “to strengthen the inference of fraud beyond possibility.” This generally means offering evidence of the specific providers who allegedly submitted false claims; the approximate times, locations, and amounts of such false claims; and the specific government programs to which the claims were submitted.
Although seemingly a lower Rule 9(b) hurdle, this standard remains formidable, as Hagerty demonstrated. In Hagerty, the relator alleged that medical device company Cyberonics caused doctors and patients to submit false claims to the government by, among other things, fraudulently encouraging medically unnecessary battery-replacement surgeries for its devices. The relator attempted to satisfy Rule 9(b) by alleging that:
- approximately 50% of Cyberonics’ revenue came from Medicare and Medicaid,
- 16 hospitals performed and billed for these replacements,
- a few particular doctors conducted a number of these replacements in 2010, and
- one such doctor told the relator that a Cyberonics sales representative told doctors to replace the devices prematurely.
The relator then provided a statistical projection that at least 10,000 medically unnecessary replacements had occurred at these hospitals since 2007. He concluded that, if the government covered approximately 50-60% of these procedures, the government had been harmed to the tune of at least $100 million.
The First Circuit held that the relator had failed to meet the demands of Rule 9(b). In particular, there were no factual allegations that the hospitals or doctors submitted claims for replacements that were actually medically unnecessary. Likewise, the complaint failed to allege how many false claims were submitted by these providers to the government, how Cyberonics caused those submissions, and whether any government program covered any of these procedures. In sum, the Court found that the relator had failed to plead sufficient factual and statistical evidence to raise the inference of fraud beyond possibility, and affirmed dismissal of the relator’s complaint.
The persistence of the Rule 9(b) requirement that Hagerty exemplifies provides reassurance to potential FCA defendants about their ability to defeat frivolous FCA cases at the outset. With all of the other uncertainty ahead in federal health care law, that is good news for health care providers, if not for potential relators.