United States: Sixth Circuit Applies Strict Precondition Of Payment Requirement To Reverse $11.1 Million FCA Judgment

The U.S. Court of Appeals for the Sixth Circuit, in United States ex rel. Hobbs v. MedQuest Associates, Inc., 711 F.3d 707 (6th Cir. April 1, 2013), recently reversed an $11.1 million False Claims Act ("FCA") judgment, rejecting the government's argument that MedQuest, a diagnostic testing company that operates testing facilities, violated the FCA by failing to meet certain Medicare enrollment requirements. While acknowledging that MedQuest's actions "clearly were at odds with the goals and aims of the Medicare program in several respects," the Court stressed that "the bluntness of the FCA's hefty fines and penalties make them an inappropriate tool for ensuring compliance with technical and local program requirements."

The Sixth Circuit's decision overturned the U.S. District Court for the Middle District of Tennessee's grant of summary judgment to the relator and the government, which had intervened, in 2011. The government argued that MedQuest violated the FCA in two respects: (1) MedQuest used supervising physicians who had not been approved by the Medicare program and the local Medicare carrier to supervise the range of tests offered at two testing facilities, and (2) MedQuest failed to properly re-register a facility it acquired to reflect the change in ownership and continued to use the former owner's Medicare payee ID number to file Medicare claims. The district court granted summary judgment in favor of the relator and the government on both theories on the grounds that MedQuest violated the FCA by expressly and impliedly certifying compliance with Medicare regulations that it had in fact violated. The district court reasoned that MedQuest's Medicare enrollment application "included a certification, and in effect, an agreement that the physicians listed would provide direct supervision for applicable testing." Because some of the MedQuest physicians who supervised testing were not listed, MedQuest's enrollment application constituted a false certification of compliance with Medicare regulations. Likewise, the district court concluded that MedQuest's failure to update the ownership information on its Medicare registration forms when it acquired a facility, which was also required under Medicare regulations, also constituted a false certification. These false certifications, the court held, translated into MedQuest submitting false claims.

The Sixth Circuit reversed, rejecting the district court's connection between these false certifications and actionable "false claims." As an initial matter, the Court explained a foundational distinction for FCA liability based on "false certifications": falsely certifying compliance with a "condition of payment" for Medicare funds supports an FCA claim, while falsely certifying compliance with "conditions of participation" in federal healthcare programs does not. The distinction can be nuanced, but it is critical, because as the Sixth Circuit explained, the latter "do not mandate the extraordinary remedies of the FCA and are instead addressable by the administrative sanctions available." The Sixth Circuit held that, on the government's theory, MedQuest did not violate any conditions of payment and thus could not be held liable under the FCA. The Court reasoned that the Medicare requirement regarding supervising physicians was not a condition of payment. The Medicare enrollment application, on which MedQuest certified compliance with this requirement, did not contain language conditioning payment on such compliance. Moreover, the Medicare regulations regarding payment of claims for diagnostic tests, and the claim form itself, said nothing about supervising physicians. Accordingly, the Sixth Circuit held that "a conclusion that compliance with the supervising-physician requirements is a condition of payment is only possible by weaving together isolated phrases from several sections in the complex scheme of Medicare regulations." Along these lines, the Court also held that a failure to update enrollment information following an acquisition – a requirement also not listed in the regulations or forms regarding payment – is not a violation of a condition of payment and not actionable under the FCA.

Through this ruling, the Sixth Circuit reaffirms its position among several other Circuits in imposing a strict "condition of payment" requirement to false certification claims. See, e.g., United States ex rel. Wilkins v. United Health Grp., Inc., 659 F.3d 295 (3d Cir. 2011), United States ex rel. Conner v. Salina Reg'l Health Ctr., Inc., 543 F.3d 1211 (10th Cir. 2008), United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001). This strict interpretation is not universal, though. In other jurisdictions, such as the First and D.C. Circuits, what constitutes a "condition of payment" is less clear, based more on the facts of the specific case than on the rules and regulations governing Medicare payments. See, e.g., United States ex rel. Westmoreland v. Amgen 652 F.3d 103 (1st Cir. 2011) (explaining that whether Medicare claims misrepresented compliance with a material precondition of Medicare payment is a "fact-intensive and context-specific inquiry."), United States ex rel. Hutcheson v. Blackstone Medical, Inc., 647 F.3d 377 (1st Cir. 2011) (refusing to "adopt any categorical rules as to what counts as a materially false or fraudulent claim under the FCA."), United States v. Sci. Applications Int'l Corp. (SAIC), 626 F.3d 1257 (D.C. Cir. 2010) (holding that to establish the existence of a "false or fraudulent" claim on the basis of implied certification of a contractual condition, FCA plaintiffs need only show that a contractor withheld information about its noncompliance with a material contractual requirement, regardless of whether that requirement was an express condition precedent to payment).

The Sixth Circuit's refusal to impose the FCA's "extraordinary penalties" on violations of technical and local Medicare program requirements represents important precedent for health care providers facing an FCA suit. Nonetheless, the government's willingness to intervene in such a case and the broad interpretation of Medicare preconditions of payment applied in other Circuits indicate that health care providers should remain aware of the risks they face under the False Claims Act.

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