Since the Supreme Court’s 2016 unanimous decision on False Claims Act (FCA) materiality in Escobar, the government has successfully argued that compliance with the federal Anti-Kickback Statute (AKS) is material to federal healthcare payment. Under the FCA, the term “material” means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. Materiality “look[s] to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”
Escobar instructs courts to conduct a holistic approach to determining materiality in connection with a payment decision, with no one factor being necessarily dispositive. The Supreme Court identified a variety of factors bearing on materiality, including (1) whether the violation goes to the “essence of the bargain,” (2) whether the violation is “minor or insubstantial,” (3) whether the requirement is a condition of payment, (4) whether the government would likely refuse to pay claims had it known of the violation, and (5) whether the government regularly pays a claim in full despite actual knowledge of the violation.6 Recent court decisions show how these factors are evaluated in determining materiality of AKS compliance.
AKS Compliance Is Critical in the Bargain to Pay Federal Healthcare Claims
AKS compliance is critical to the government’s decision to pay federal health benefits claims. The AKS ensures that the government pays only for conflict-free medical care that is provided in the best interests of the patient. A kickback eliminates any sound basis for such assurance because it taints medical decisions with financial interests. Kickbacks raise four major concerns for federal healthcare programs: (1) corruption of medical judgment, (2) overutilization, (3) increased costs to the federal healthcare programs and beneficiaries, and (4) unfair competition. The “government does not get what it bargained for when a defendant is paid by CMS [the Centers for Medicare & Medicaid Services] for services tainted by a kickback.” AKS compliance is thus a fundamental aspect of what the government purchases when it pays for medical care for federally insured beneficiaries.
AKS Violations Are Criminal, Not Insubstantial
Violation of the AKS is a far cry from an “insubstantial” regulatory violation like requiring “that [government] contractors buy American–made staplers” rather than foreign staplers. Indeed, Congress has made it a felony offense punishable by up to five years in prison. AKS violations can be subject to civil penalties of treble damages (three times the illegal remuneration) plus $50,000 per violation and possible exclusion from Medicare. The Patient Protection and Affordable Care Act (PPACA) also clarified the law to specify that “a claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim.” The purpose of the change was to clarify that a claim resulting from a kickback does not become eligible for payment when an innocent third party submits the claim. Further, “the 2010 amendment made clear that compliance with the AKS is a precondition to the payment of claims submitted to these programs, and not merely a condition of participation in the programs.”
AKS Compliance Is a Material Condition of Payment
While PPACA clarified that AKS compliance is a precondition to the payment of claims effective March 23, 2010, courts have had “no trouble concluding that compliance with the AKS is a ‘material’ condition of payment” before March 23, 2010. Courts have long held that AKS compliance is a condition of payment. For claims prior to the PPACA amendment, courts of appeals had unanimously concluded that claims for medical care that were tainted by a violation of the AKS are “false” under the FCA.
Government Would Likely Take Enforcement Action Against AKS Violations and Refuse to Pay a Claim Known to be a Violation
Information that a hospital has purchased patients by paying kickbacks has a good probability of affecting a repayment decision. The government routinely punishes AKS violations through criminal proceedings and civil proceedings to recoup funds. The U.S. Department of Health and Human Services has for years issued “Special Fraud Alerts” specifically warning about AKS violations in reimbursement requests, such as, for example, for laboratory services. “There can be no question that the government would likely refuse to pay a claim that it actually knows is the result of an AKS violation.”
Court Accepts Jury Instruction That AKS Compliance Is Material, as a Matter of Law
In a recent decision on requested jury instructions in an AKS/FCA case, a South Carolina District Court accepted the government’s proposed jury instruction that AKS compliance is material as a matter of law. The government filed a complaint in intervention against the defendants alleging AKS violations in schemes to induce physicians to order blood tests that were reimbursed by federal healthcare programs. The court denied cross motions for summary judgment on the AKS violations, thereby forcing the parties to prepare for trial and submit proposed jury instructions to the court. The defendants wanted the court to charge the jury, “If you find that the Government knew about the underlying facts about the Defendants’ alleged fraudulent conduct, but continued to pay claims submitted, you must find for the Defendants.” The government argued that even assuming that the United States had actual knowledge of the defendants’ kickback payments and continued to pay claims, such action does not undermine a materiality finding, especially where, as in this case, the government had elected to file an FCA suit against the AKS conspirators demonstrating government action that the defendants’ conduct is material.
The government argued there are “many good reasons, including important public health and safety considerations, why [it] might continue to pay claims.”3As a result, courts have long held that FCA liability is “not automatically exonerated by any overlapping knowledge by government officials.” Likewise, courts have recognized that “Congress intended to allow the government to choose from a variety of remedies, both statutory and administrative, to combat fraud.” According to the government, nothing in Escobar suggests that the government must always cease payment in order to establish that AKS violations are material.
The District Court agreed with the government and held that the “holistic” materiality analysis set forth in Escobar demonstrates that AKS compliance is per se material. Courts have long held that AKS compliance is a condition of payment. Violation of the AKS is not a de minimis regulatory violation, nor is it a mere technical violation of adhesive fine print in government contracts. The government would likely refuse to pay a claim that it actually knows is the result of an AKS violation. Even if the government did pay a claim with actual knowledge of an AKS violation, if the other factors bearing on materiality are present, the court may still find that AKS compliance is material.
AKS compliance is material to federal healthcare payment under the holistic materiality analysis set forth in Escobar. Even if the Government continues to pay healthcare claims with actual knowledge of the kickback violations, FCA liability is not automatically exonerated because the government may choose from a variety of statutory and administrative remedies to combat fraud. Courts find no trouble concluding that compliance with AKS is a material condition of payment. One recent case has since gone further and upheld the government’s proposed jury instruction that AKS compliance is material as a matter of law, thereby allowing the jury no discretion in applying the Escobar materiality analysis. It will be interesting to see whether other courts will make the same determination.
Please click here for the full article as published in American Bar Association.