Susan Hutcheson, the former Regional Manager for Blackstone Medical, Inc., whose 2006 qui tam (whistleblower lawsuit) against her former employer was dismissed by a Boston federal judge, is getting another shot at winning her case.
A federal appeals court in Boston ruled on June 1 that the district federal judge who dismissed her case made a mistake by accepting Blackstone’s arguments that allegations of kickbacks to surgeons could not, according to the law, result in hospitals filing false claims for Medicare reimbursements because the hospitals didn’t know of the kickback allegations. The decision not only gives Hutcheson another bite of the apple, but creates a new legal landscape which expands the responsibilities of everyone involved in the food chain of Medicare reimbursements.
Hutcheson’s Kickback and False Claims Allegations
First, a little background.
After being terminated by Blackstone, now a division of Orthofix International, N.V, in January 2006, Hutcheson filed the whistleblower lawsuit alleging the company engaged in a nationwide kickback scheme to induce physicians to use its devices in spinal surgeries and knew this scheme would cause physicians and hospitals (unwittingly) to present federal healthcare programs with payment claims that contained material misrepresentations.
These kickbacks, Hutcheson alleges, included: “monthly payments under sham consulting agreements; paid development projects; research grants; royalties; exorbitant and sometimes illicit entertainment expenses; high-end travel and accommodations; speaking engagements and seminars[;] and other illegal incentives.”
Hutcheson alleged that Blackstone’s previous management (prior to the company’s purchase by Orthofix) supervised the kickback scheme and knew that Medicare beneficiaries represent a significant percentage of spine surgery patients. As a result of the kickbacks, doctors across the country performed spinal surgeries on Medicare and Medicaid patients using Blackstone’s devices.
She claimed that Blackstone paid surgeons between $1, 666 and $8, 000 a month to make sure they used the company’s implants. Although the alleged payments were officially to recruit surgeons for Blackstone’s “medical advisory board, ” the company expressly linked the payments to sales of its products for the physicians’ surgeries. She further claimed that surgeons who stopped using the devices were admonished by company reps and then dropped from the payment list.
This, argued Hutcheson, was a violation of the federal Anti-Kickback Statute (AKS) and that Blackstone “knowingly” caused hospitals and physicians to submit materially “false and fraudulent” claims to Medicare.
In November 2008, her whistleblower case was unsealed after the U.S. Department of Justice filed a notice saying the government would not intervene at that time because it was still investigating her claims. The government however, filed an amicus (friend of the court) brief in support of Hutcheson’s appeal.
Suit Dismissed
The federal district court dismissed her suit after agreeing with Blackstone’s arguments that there were no false claims because the hospitals submitting claims for payment to Medicare weren’t accused of violating the kickback laws, didn’t know about the alleged kickbacks and therefore couldn’t be held responsible for false claims.
In short, the district court held that the hospital claims were not false, and that while the doctor claims may have been false, those claims were not materially false.
The $50 Million Reserve
When the previous owners of Blackstone Medical, including founders William, Matt and Michael Lyons, sold their company to Orthofix for $333 million, they agreed to set aside in an escrow account a $50 million reserve to pay for future potential penalties or whistleblower settlements arising from any disputes regarding Blackstone’s surgeon consulting arrangements.
What is interesting is that the appeals court ruling comes after a string of at least seven federal court decisions which have required that conspirators expressly acknowledge they are breaking the law when fraudulently applying for reimbursement from the federal government for medical expenses. For all practical purposes, this meant that Medicare would practically have to find a written confession in order to demonstrate false claims. As such, wrote Jim Edwards on bnet.com on June 3, those decisions virtually legalized drug price inflation through fraud and kickbacks.
In this case, says Hutcheson, Blackstone did indeed make the surgeon payments in full knowledge that it was against the law.
Defining “False”
Hutcheson and the government argue that a claim is “false or fraudulent” under the FCA (False Claims Act) if it does not meet a material precondition of payment.
They argue that compliance with the AKS, 42 U.S.C. § 1320a-7b, is a precondition for Medicare reimbursement and thus that Blackstone, in providing the alleged kickbacks, caused the hospitals and physicians to submit false claims.
They argue, moreover, that the hospital and physician claims were materially false because the alleged kickbacks would have been capable of influencing Medicare’s decision whether to pay the claims had it been aware of them.
Blackstone’s attorneys argued “no” saying that a claim can only be false under the FCA if it (1) misstates facts, (2) incorrectly certifies compliance with a statute or regulation, or (3) does not meet an express condition of payment stated in a statute or regulation—and Hutchison’s claim did not meet any of these criteria.
Blackstone also argues that even if the claims were false, they were not materially false because the claims made by hospitals and the services provided by physicians were not influenced by kickbacks.
Factually False/Legally False
The appeals court didn’t buy it.
There is an old saying in law school that says, if the law is against you, argue the facts. If the facts are against you, argue the law. In this case the appeals court admonished the lower court for playing semantics and creating an unsupportable legal construction that a claim is “false or fraudulent” if it is either “factually false” (the facts) or “legally false, ” (the law).
A factually false claim, said the lower court, is a claim “in which the goods or services provided are either incorrectly described, or make [a] claim for a good or service never provided.” A legally false claim, it held, is a claim in which “a party certifies compliance with a statute or regulation as a condition to government payment, but did not actually comply with the statute or regulation.”
“I Didn’t Know” Defense
The appeals court said the lower court found that the hospital claims were not on-their-face false but did not address the possibility that the claims could be based on a false set of facts. The lower court said that the Hospital Cost Reports which were used to claim reimbursement were not specific enough to “create an express certification of compliance with the AKS.” In other words, the Cost Reports did not specifically include a representation that the physicians were compliant with the AKS.
The lower court also ruled that the physician reimbursement claims were not materially false. The reasoning was that the doctors, despite allegedly receiving kickbacks and potentially submitting false certifications of compliance with the AKS, had requested reimbursement for their services, not for Blackstone’s products. As a result, any AKS misrepresentation had not influenced the government’s payment decision.
The appeals court disagreed.
Blackstone’s argument, said the appeals court, that only express statements in statutes and regulations can establish preconditions of payment is not in the text of the FCA. Additionally, the notion that a claim can be false only if the submitting entity knew or should have known it was false also doesn’t cut it.
Goodbye “I Didn’t Know” defense.
Supreme Court: Everybody’s Liable
According to the appeals court, the Supreme Court decided long ago that a non-submitting entity (like Blackstone) may be liable for knowingly causing a submitting entity (like a hospital) to submit a false Medicare claim.
In 1976, the Supremes held that a subcontractor was liable for causing a contractor to seek payment for materials that, apparently unbeknownst to the contractor, were labeled incorrectly.
The False Claims
So, did Hutcheson’s complaint actually identify a materially false claim?
Her complaint says that Blackstone’s customers’ Medicare claims stated that they were compliant with all material preconditions of payment—including that there had been no kickbacks. Blackstone’s attorneys countered saying because the hospital claims related to a diagnosis-related group which does not address a particular service, the claim cannot be false.
Here, again, the appeals court sided with Hutcheson. Specifically it said, Medicare’s rules say that CMS (Centers for Medicare and Medicaid Services) will not pay claims if the hospital asking for reimbursement has—knowingly or not—violated the AKS. “Blackstone seeks to divert attention from this clear language by focusing on whether the hospitals knew of the underlying kickbacks, a fact that has no bearing on Blackstone’s potential liability under the FCA.”
“If kickbacks affected the transaction underlying a claim, as Hutcheson alleges, the claim failed to meet a condition of payment.”
Back to Court
The whistleblower case now heads back to district court under new, less stringent requirements. With the appeals court ruling in her favor, Hutcheson’s attorney’s can now focus on arguing the facts. With the government also stepping in, the stakes have risen beyond the $50 million reserve to an expanded definition of liability. Does this open a new Pandora’s Box of liability for all implant suppliers or hospitals and physicians submitting Medicare claims? Stay tuned.
