Sixth Circuit Overturns False Claims Act Judgment Based On Ambiguous Regulations Where Provider Made Reasonable Attempts To Comply

Christopher Myers is a Partner and David Schneider an Associate in our Northern Virginia office.

The U.S. Court of Appeals for the Sixth Circuit has reversed a summary judgment that held a business liable for violating the False Claims Act by using regulatory loopholes to maximize profits under the Medicare program. In the decision (United States ex rel. Williams v. Renal Care Group Inc., 6th Cir., No. 11-5779), which was issued on October 5, 2012, the court ruled that a company will not be found to have acted with reckless disregard of its obligations when it actively attempts to comply with and understand the intent behind ambiguous regulations.

Case Background In May 2011, the U.S. District Court for the Middle District of Tennessee granted summary judgment to the Department of Justice (DOJ) in a qui tam action under the False Claims Act against a dialysis provider. The Sixth Circuit reversed based on the company's documented good faith efforts at compliance with what the court held to be regulatory ambiguity in two potentially applicable reimbursement methods. The regulatory ambiguity arose from the distinction between two different Medicare reimbursement schemes for end-stage renal disease Method I and Method II.

Method I provided a uniform composite rate for dialysis equipment and services. Method II provided a fee-for-service, "reasonable charge" basis for reimbursement. Method II was limited only to companies that provide equipment and supplies directly to home dialysis patients and which are not "a provider of services [or] a renal dialysis facility."1 Method II reimbursements became more expensive than Method I reimbursements, causing Congress to cap the rates, except for supplies for certain types of dialysis treatments.2 In 2010, Method II was eliminated completely.

In this case a regulatory ambiguity occurred, where a parent company fell under Method I, while its wholly owned subsidiary was eligible under Method II. Renal Care Group (RCG), the parent, provided dialysis services and supplies to patients, while its wholly owned subsidiary, Renal Care Group Supply Company (RCGSC), provided only equipment and supplies to home dialysis patients and was structured to fall under Method II.

In 2005, two former RCG employees filed a qui tam action under the False Claims Act alleging that RCGSC "'is not a legitimate and independent medical equipment supply company,' but instead is a 'billing conduit' used to unlawfully inflate Medicare...