Recently, the United States Court of Appeals for the Fourth Circuit issued two opinions of interest to health care providers, False Claims Act (FCA) litigators, insurance carriers, and other appellate court observers. The first case, U.S. ex rel Complin v. North Carolina Baptist Hospital, shined additional light on a requirement under the FCA that a party "knowingly" presents a false claim. The second case, Affinity Living Group v. StarStone Specialty Insurance Co., provided clarity on whether certain insurance policies can help providers cover the costs of FCA litigation.

Knowledge Cannot Be Implied From Parties' Sophistication

A whistleblower filed a qui tam action in the United States District Court for the Middle District of North Carolina against North Carolina Baptist Hospital and the Charlotte-Mecklenburg Hospital Authority, alleging that the hospitals knowingly engaged in Medicare fraud in violation of the FCA. The whistleblower alleged that they failed to properly disclose or reduce the costs they reported for health care benefits provided to their own employees, and that they provided said benefits through self-funded health benefit plans, administered by a jointly owned entity.

The whistleblower argued that the "Related-Party Rule" requires hospitals to report their costs for providing care to their employees as "related-party transactions," and to only submit their out-of-pocket costs rather than the amount charged for Medicare reimbursement. The whistleblower further argued that, while the Related-Party Rule carves out an exception for plans administered by a third-party administrator, the hospitals could not invoke it because they are more appropriately classified as plan supervisors with ministerial duties. The hospitals filed a motion to dismiss for failure to state a claim. The district court granted the hospitals' motion, and the whistleblower appealed.

In affirming the district court's order granting the hospitals' motion to dismiss, the Fourth Circuit discussed the requisite scienter or knowledge requirement under the FCA. The court explained that the FCA imposes liability only when a party "knowingly" presents a false claim, which requires actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of submitted information. The Fourth Circuit described the requisite scienter as a rigorous and key element of any FCA claim and opined that honest mistakes or incorrect claims resulting from mere negligence would not suffice.

Rather than allege any specific factual allegations in his complaint, the whistleblower asked the district court to infer the requisite scienter requirement because the hospitals were sophisticated entities presumed to know the law. Without ruling on whether the hospitals violated the Related-Party Rule, the Fourth Circuit rejected the whistleblower's argument and found that such an inference was not appropriate, especially in light of the fact that the alleged falsity of the hospitals' submissions turned on a disputed interpretive question. In addition to the failure to sufficiently plead the requisite scienter, the Fourth Circuit noted that the regulatory ambiguity as to whether the Related-Party Rule applied to the transactions in question in the first place—or whether the hospitals qualified for the exception to the rule—made inferring scienter even more unfavorable.

The Fourth Circuit was careful to point out that its opinion did not preclude FCA liability for a violation of an ambiguous regulation in different circumstances. For example, the court stated that evidence that a provider was warned away from its interpretation of an ambiguous regulation prior to the alleged violation might suffice to show actual knowledge of falsity.

Billing Claims May Count as 'Arising Out of Medical Incident' in Triggering Insurance Coverage

In Affinity Living Group v. StarStone Specialty Insurance Co., the Fourth Circuit vacated a decision by the Middle District of North Carolina and remanded it. The underlying litigation concerns allegations of false claims submitted under North Carolina's Medicaid program for personal care services provided to Affinity's residents. Stephen Gugenheim, a qui tam attorney, filed an action against Affinity, an operator of eight assisted living residences, and Affinity's individual owner. Gugenheim alleged that the defendants had violated the federal FCA as well as the North Carolina False Claims Act.

Affinity sought coverage for the lawsuit under its indemnification-and-defense policy with StarStone. StarStone denied Affinity's request for coverage, so Affinity sued StarStone in federal court, identifying four claims: (1) a request for declaratory judgment for breach of coverage; (2) a breach-of-contract claim for StarStone's denial of Affinity's claim; (3) a claim for breach of common law duty of good faith and fair dealing; and (4) a claim under North Carolina's Unfair and Deceptive Trade Practices Act. StarStone filed a motion for judgment on the pleadings as to counts 1 and 2. In turn, Affinity filed a motion for partial summary judgment on the legal issue of whether StarStone had a duty to defend Affinity in the FCA litigation. The district court agreed with StarStone that the policy did not cover the lawsuit, and Affinity appealed. Because the district court decision only addressed two of the four counts, the parties stipulated to a voluntary dismissal without prejudice of the two remaining claims.

Initially, the Fourth Circuit addressed the issue of appealability. Ordinarily, district court judgments are only appealable once they become final—when the litigation is ended on the merits. The Fourth Circuit considered whether the parties had "manufactured" a final judgment in order to obtain review of an otherwise non-appealable, interlocutory order. The Fourth Circuit distinguished this case from other cases in which the Fourth Circuit and the United States Supreme Court have found appellate jurisdiction lacking. The Fourth Circuit noted that the viability of the voluntarily dismissed counts—counts 3 and 4—depended on the merits of counts 1 and 2. In other words, if StarStone did not breach its contract for coverage with Affinity, then it could not have breached the implied duty of good faith and fair dealing or violated the North Carolina Unfair and Deceptive Trade Practices Act.

After determining that the voluntary dismissal created a final, appealable order, the Fourth Circuit turned to the central issue of insurance policy coverage. The StarStone policy covers "damages resulting from a claim arising out of a medical incident." Affinity argues that the FCA action is covered because any damages arise out of a medical incident. StarStone argues, however, that the FCA action does not seek damages for rendering or not rendering service but for submitting claims for Medicaid reimbursement for these services. The parties agree that rendering or failing to render personal care services qualifies as a "medical incident" and that billing Medicaid is not itself a "medical incident." The dispute turns on the interpretation of the phrase "arising out of."

North Carolina courts have interpreted the phrase "arising out of" broadly when used to extend coverage but narrowly when used to exclude coverage. Because the term in the StarStone policy is used to extend coverage, the Fourth Circuit applies a broad interpretation only requiring some causal connection between the conduct and the damages. The allegations in the underlying action relate to billing for personal care services that were not performed. As the Fourth Circuit states: "[B]ut for the failure to provide the services, no claim for damages exists."  Thus, the Fourth Circuit reversed the district court's order and remanded for further proceedings.

Takeaways

The two rulings provide important takeaways for health care providers, insurers, and litigators under the Fourth Circuit's jurisdiction in the Carolinas, the Virginias, and Maryland. While regulatory ambiguity may shield health care providers from liability under the FCA in some circumstances, due diligence should be taken to ensure compliance with Medicare reporting requirements. Providers may be held responsible under the FCA for submitting false reports even when said reports were not submitted with the specific intent to defraud the government.

Additionally, providers and insurers who have policies covering "damages resulting from a claim arising out of a medical incident" now have confirmation that, under the Fourth Circuit's interpretation of North Carolina law, billing of medical incidents counts as part of that policy. Providers should also keep in mind that the Fourth Circuit will broadly interpret language used to extend coverage, at least in cases arising out of North Carolina. It is possible the appeals court would reach a different conclusion in the other states under its jurisdiction based on their traditional approach to interpreting insurance coverage.

Matt Wolfe and La-Deidre Matthews are attorneys at Parker Poe in North Carolina. They can be reached at [email protected] and [email protected].