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Continuing Enforcement Addressing Fraudulent Practices Defines the Landscape for 2014

Monday, January 13, 2014
By Stuart I. Silverman

Silverman is an attorney with the Office of the Inspector General for the District of Columbia Government. He can be reached at DISCLAIMER: The views and opinions expressed herein are Silverman's own and cannot be attributed to the OIG.  

In the wake of the long running litigation involving the Tuomey Healthcare System Inc. (United States ex rel. Drakeford v. Tuomey Healthcare Sys., Inc.)1 (17 HFRA 883, 10/2/13), there are several decisions rendered recently that address violations under the Stark law and culpability under the federal False Claims Act.2

Those cases, the subject of pretrial motions, warrant further attention in terms of how they may ultimately be decided by the courts in future proceedings (see related Outlook 2014 Special Report in this issue).

Specifically, on November 13, 2013, the U.S. District Court for the Middle District of Florida ruled in United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc.3 granting partial summary judgment to the government, finding Stark law violations4 by the defendants (17 HFRA 1038, 11/27/13).

However, the court declined to rule in favor of the government on monetary liability under Stark, and denied to award summary judgment for violations under the federal False Claims Act. The challenged practice focused on the compensation arrangement between oncologists and the defendants, Halifax Hospital and its affiliated entity (the hospital).

Six oncologists were hired by the hospital to perform inpatient and outpatient procedures. The employment contract between those physicians and the hospital provided for salary and incentive bonuses. The bonuses were to come from an “Incentive Compensation Pool.”

The compensation arrangement in Baklid-Kunz provided for a bonus equal to 15 percent of the operating margin for the Medical Oncology program, to be derived from outpatient medical oncology services. The revenue consisted of outpatient medical oncology services, physician services, and related outpatient oncology pharmacy charges.

Significantly, defendants admitted that revenue from which bonuses were derived included fees for services not personally performed by the oncologists, and were of the nature of fees for the administration of chemotherapy. There was no dispute that the Stark law implicated the employment arrangements of the six oncologists.

Bona-Fide Employment Exception

However, defendants argued that the bona-fide employment exception to prohibited referrals under Stark was applicable to their employment relationship.

The hospital contended that under the bona-fide employment exception, the requirement that the remuneration not be based on the volume or value of any referrals by referring physicians was itself subject to an exception, allowing for the payment of a productivity bonus based on services performed by the referring physician. The district court rejected the defendants' argument.

The court construed the terms of the incentive bonus program, and explained that the bonus program included revenue from fees for outpatient prescription drugs and outpatient services not personally performed by the referring physicians. The hospital argued that the bonus pool was divided among the oncologists based on each oncologist's personally performed services. Thus, the arrangement fell within the exception.

The court disagreed, writing that the bonus amount itself was based on revenue derived from sources in addition to services personally performed by the oncologists. Such revenue would be from referrals made by the oncologists for designated health services.

While the district court, in granting partial summary judgment for the government, concluded that the compensation arrangement between the physicians and the hospital was not eligible for the bona-fide employment exception, it declined to rule on the damages issue under Stark at the summary judgment stage.

The court also declined to rule on the government's False Claims Act claims, concluding that there remained a disputed issue of whether the hospital knowingly filed false claims in violation of the Stark law.

Thus, following the court's ruling, if it goes to trial, this case will be interesting to follow on the evidence offered by the government to prove the knowledge element under the federal False Claims Act.

Stark Law and Medicaid Services

United States ex rel. Schubert v. All Children's Health Sys., Inc. et al.5 is another case brought under the federal False Claims Act, and challenging a hospital system's compensation arrangement, including a bonus plan, for its physician employees, as noncompliant with the Stark law.

The plaintiff predicated her False Claims Act allegations on alleged false claims filed under the Medicaid program. Thus, plaintiff extended the prohibition against referrals under Stark to the Medicaid program. On November 15, 2013, the U.S. District Court for the Middle District of Florida denied defendants' motion to dismiss the plaintiff's Third Amended Complaint, ruling on several bases (17 HFRA 1082, 12/11/13).

In their motion to dismiss, the defendants argued that the prohibition against referrals under Stark applied only to claims filed for reimbursement under the Medicare program and not claims filed under the Medicaid program. The district court disagreed and ruled that the Stark law extended to Medicaid.

In their motion to dismiss, the defendants also contended that the complaint did not plead fraud with particularity as required under Fed. R. Civ. P. 9(b). The district court read the allegations in the complaint as meeting the particularity requirement.

Defendants also sought dismissal of the complaint arguing that the plaintiff failed to adequately state a claim challenging the legality of the financial relationship that would give rise to a Stark violation. The court disagreed, and with the exception of one of the named physicians, read the allegations as withstanding scrutiny under Fed. R. Civ. P. 12(b)(6).

If it proceeds to trial, the Schubert case will be interesting to follow in that it will provide another opportunity for a court to construe the Stark law, and apply the elements under the False Claims Act, as it relates to a challenge to the compensation arrangement of a hospital vis-a-vis its employed physicians.

It is interesting to observe that on April 16, 2013, the district court in Schubert dismissed plaintiff's Second Amended Complaint, finding that the allegations were not pleaded with particularity, and thus did not comply with Fed. R. Civ. P. 9(b).

FCA Pleading Requirements

The pleading requirements under Rule 9(b) for an action brought under the False Claims Act continue to be a matter of scrutiny by the courts. (SeeUnited States ex rel. Worsfold v. Pfizer, Inc.6 (17 HFRA 1085, 12/11/13).

This issue is now the subject of a petition for writ of certiorari pending before the U.S. Supreme Court, arising from the U.S. Court of Appeals for the Fourth Circuit's opinion in United States ex rel. Nathan v. Takeda Pharm. N. Am.7 (17 HFRA 907, 10/2/13).

In Nathan, the relator alleged violations of the federal False Claims Act based upon allegations of the pharmaceutical company's off-label promotion of a drug. The Fourth Circuit affirmed dismissal of the relator's complaint for failure to meet the pleading requirements of Rule 9(b).


The First, Fifth, Seventh and Ninth Circuits have favored a lenient standard for Rule 9(b) pleading, whereas the Fourth, Sixth, Eighth and Eleventh Circuits have required a more stringent standard for pleading.  


There is a split among the courts of appeals on the particularity requirement under Rule 9(b) for cases brought under the False Claims Act.

The dueling views among the courts of appeals on Rule 9(b) has been characterized as, on one hand, requiring identification of at least one false claim for payment submitted to the government, and, on the other, more flexible allegations pointing to a fraudulent scheme coupled with sufficient reliable indicia to support a strong inference that false claims were submitted.

The First, Fifth, Seventh and Ninth Circuits have favored a lenient standard for Rule 9(b) pleading, whereas the Fourth, Sixth, Eighth and Eleventh Circuits have required a more stringent standard for pleading.

The Fourth Circuit in Nathan focused on the presentment element under section 3729(a)(1)(A) of the False Claims Act. It cited to Ashcroft v. Iqbal ( 556 U.S. 662 (2009)) wherein the Supreme Court ruled that to withstand a motion to dismiss under Fed. R. Civ. P 12(b)(6), the complaint must “state a claim to relief that is plausible on its face.”8

More specifically, for Rule 9(b) purposes, the Fourth Circuit wrote that, for False Claims Act cases, the complaint must allege facts with particularity such that there is a “plausible inference” that false claims were presented to the government.9

Allegations merely averring a private fraud scheme, without more, fall short of the pleading requirements under Rule 9(b). The court wrote that allegations suggesting that defendant's actions “could have led, but need not necessarily have led, to the submission of false claims” are insufficient under Rule 9(b).10(emphasis in original)

The complaint must “plausibly plead[ ] that specific identifiable claims actually were presented to the government for payment.”11 Allegations that merely infer that false claims were presented for payment are insufficient to meet Rule 9(b).

In Nathan, the Fourth Circuit explained the multiple bases for the particularity requirement under Rule 9(b). The court emphasized that the Rule imposes more stringent pleadings requirements so that a defendant is informed of alleged misconduct to prepare a defense, to prevent spurious lawsuits, to avoid fraud actions where the actual fraud is revealed only through discovery, and to avoid harm to a defendant's reputation and goodwill.12

In Nathan, the relator accused Takeda Pharmaceuticals of off-label marketing for its prescription drug Kapidex. Kapidex is approved by the FDA for treatment of certain gastric conditions.

The relator alleged several bases of liability under the False Claims Act. First, the amended complaint accused Takeda of marketing Kapidex to rheumatologists who do not treat conditions for which Kapidex has been approved by the FDA.

Second, the relator alleged that Takeda marketed Kapidex at dosages higher than approved for certain medical conditions. Under Rule 9(b), the Fourth Circuit in Nathan applied a heightened pleading standard, and ruled that the relator's amended complaint was deficient in that it lacked particularity.

Critically, the Fourth Circuit observed that the relator failed to identify a prescription written by a physician who prescribed Kapidex for an off-label use. The relator, moreover, failed to identify Medicare beneficiaries who filled a prescription for Kapidex and sought reimbursement from the government.

The “[r]elator has not plausibly alleged” that Takeda caused a false claim to be presented for payment, as required under 31 U.S.C. § 3729(a)(1)(A).13 By way of example, the court of appeals viewed with disfavor the relator's allegations on prescriptions for Kapidex purportedly written by primary care physicians (PCP) at a 60 mg dose.

The relator contended that certain PCP received free samples of Kapidex at the 60 mg dose, and those physicians wrote 98 prescriptions for that drug that were submitted to the government for reimbursement. The relator concluded that since PCPs do not treat for ailments that require an FDA approved dosage of 60 mg of Kapidex, it must be concluded that the prescriptions written by the PCPs were for off-label use.

The relator arrived at this conclusion by opining that physicians tend to prescribe drugs in the same dose as the drug sample the patient received from the physician, and that the PCPs must have prescribed Kapidex at a 60 mg dose since that was the dosage of the drug that Takeda provided to the PCP as samples.

The relator thus concluded that the 98 prescriptions of Kapidex that the PCP wrote must have been at the 60 mg dose level. Since PCP do not treat patients for ailments for which Kapidex has been approved by the FDA at the 60 mg dosage, the relator alleged that the prescriptions written by the PCP for Kapidex were for off-label use.

When weighed against Rule 9(b) pleading requirements, the court rejected relator's allegations, which were viewed as mere “speculative assertions,” relying on “implausible inference.”14

The issue arising from Rule 9(b) pleading requirements was further highlighted by the U.S. Court of Appeals for the First Circuit's decision rendered on December 6, 2013, in two consolidated cases, United States ex rel. Ge v. Takeda Pharm. Co. (see related item in the Legal News section).15

There, the First Circuit affirmed dismissal of a False Claims Act case against Takeda Pharmaceutical Company. It ruled that the relator's complaint failed to meet the specificity requirement under Rule 9(b) in a case predicated on the alleged failure of the pharmaceutical company to file adverse event reports about the company's drugs to the FDA as required by federal law.

The currently pending writ for certiorari arising from the Fourth Circuit's decision in Nathan has generated wide interest as the Supreme Court has requested the solicitor general to opine on the petition for certiorari (17 HFRA 925, 10/16/13).

This matter is certainly worth following, with the prospect for clarity, and significant impact on pleading requirements under the False Claims Act in health care cases that have potential for billions of dollars in monetary recoveries to the federal treasury.

Credit Card Fraud in Consumer Health Care Market

Lastly, a most recent enforcement action by the Consumer Financial Protection Bureau (CFPB) presents a separate initiative aimed at fraudulent practices directed at consumers of health care. It may well signal increased efforts to reign in unscrupulous practices that harm consumers, with additional cases pursued by the CFPB in the health care sector.

Specifically, on December 10, 2013, the CFPB announced an order it issued against GE Capital Retail Bank and its affiliated unit CareCredit, requiring the company to establish a fund that will enable restitution to consumers who were deceived about the terms of credit cards for medical bills sold by the office staff of doctors, dentists and other medical providers.

At issue in this case were credit cards with terms allowing for deferred interest during a promotional period, often resulting in significant accrual of interest during the deferred period that would become a liability of the card holder if the balance was not paid off in full at the expiration of the promotional period.

Consumers were misled into thinking that the terms of the credit card allowed for an interest free loan. The CFPB criticized the lack of transparency of the credit card terms, and the deceptive promotional practices that were used. In addition to the restitution fund, for up to $34.1 million, the CFPB ordered that more transparent marketing practices be adopted, including enhanced consumer disclosure.

The CFPB action against CareCredit, resulting in a consent order, cited to violations of sections 1031 and 1036 of the Consumer Finance Protection Act of 2010.16 It is clearly worth considering since it may well signal a trend in federal efforts by another federal agency to combat fraud in the health care market.


1 2013 U.S. Dist. LEXIS 141316 (D.S.C. Oct. 2, 2013)

2 31 U.S.C. § 3729, et seq.

3 2013 U.S. Dist. LEXIS 161718 (MD. Fla. Nov. 13, 2013); see also United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., 2013 U.S. Dist. LEXIS 163695 (M.D. Fla. Nov. 18, 2013 (denying defendants' Motion for Summary Judgment in a case challenging a compensation arrangement, base salary and bonus, for neurosurgeons, as noncompliant with the Stark law); United States ex rel. Baklid-Kunz v. Halifax Hospital Medical Center and Halifax Staffing, Inc., 2013 LEXIS 167882 (M.D. Fla. Nov. 26, 2013) (denying relator's Motion for Partial Summary Judgment challenging the incentive bonus payments to oncologists as noncompliant with the Anti-Kickback statute).

4 42 U.S.C. § 1395nn

5 2013 U.S. Dist. LEXIS 163075 (M.D. Fla., Nov. 15, 2013)

6 2013 U.S. Dist. LEXIS 167338 (D. Mass. Nov. 22, 2013)

7 707 F.3d 451 (4th Cir. 2013)

8 556 U.S. 662, 678 (2009)

9 707 F.3d 451, 456-458

10Id. at 457

11Id. at 458

12Id. at 456

13Id. at 459

14Id. at 459

15 2013 U.S. App. LEXIS 24364 (1st Cir. Dec. 6, 2013)

16 12 U.S.C. §§ 5531, 5536

Copyright 2014, The Bureau of National Affairs, Inc.

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