CIVIL FALSE CLAIMS ACT: Sixth Circuit Reverses $82 Million FCA Judgment That Would Have Punished A Company 'Solely For Seeking To Maximize Profits' Under Federal Regulations

Introduction

In a decision last week, the Sixth Circuit announced a much-needed common sense approach to the application of the civil False Claims Act (“FCA”) in a complex regulatory environment. The decision rejected the government's suggestion, where regulations are ambiguous or unclear, that a business should face FCA liability for seeking to increase its profits under the Medicare program. See United States ex rel. Williams v. Renal Care Group, Inc., No. 11-5779, 2012 WL 4748104 (6th Cir. Oct. 5, 2012). The Sixth Circuit's decision is important and refreshing for a number of reasons. First, in analyzing three separate elements of FCA liability—falsity, materiality, and knowledge/intent—the court made clear that substantial proof is necessary to establish each element. Second, in casting aside the government's attempt to use the FCA to punish a health care provider that lawfully formed a subsidiary corporation in order to increase its profits from Medicare billings, the court expressed sheer wonderment:

Why a business ought to be punished solely for seeking to maximize profits escapes us.

Slip op. at 9. Rather than accept at face value the notion that profit maximization is a fraud indicator, the court analyzed the underlying conduct and concluded that setting up a corporate structure in order to increase Medicare payments did not amount to recklessness under the FCA. In taking this approach, the Sixth Circuit joined other appellate courts that strictly enforce the FCA's knowledge standard. Third, the Sixth Circuit also joined forces with the majority rule that violating the “conditions of participation” in a federal program does not render claims “false” under the FCA.

Importantly, however, the court also emphasized that, in dealing with a complex regulatory scheme, the best defense is exercising good faith in attempting to comply with those regulations. In this case, that meant seeking legal counsel as to the validity of their actions, following industry guidelines, and seeking advice from government officials. The ability to demonstrate such good faith was critical to the rejection of FCA liability in this case.

Background

To appreciate the full import of this decision, some background is needed on the complex scheme the government has set up regarding Medicare's coverage of dialysis equipment and services provided to patients with end-stage renal disease. Initially, Medicare reimbursed providers who supplied dialysis equipment and services to dialysis facilities and to home dialysis patients using a uniform weighted payment (Method I). A fee-for-service form of reimbursement (Method II) was introduced...