A recent 6th Circuit decision could help suppress certain False Claims Act (FCA) cases in the health care industry.

In 2006, ex-MedQuest Associates Inc. employee Karen Hobbs filed a whistleblower suit under the FCA, which imposes liability on entities that defraud the government. Hobbs claimed MedQuest, a diagnostic company, used unapproved physicians to monitor patient tests, and therefore the claims the company submitted to Medicare were fraudulent. The Department of Justice (DOJ) later intervened in the case.

A district court found that MedQuest's regulatory noncompliance violated the FCA and awarded the government $11 million. But on appeal, the 6th Circuit overturned the judgment. The court's April 1 decision in USA v. MedQuest Associates Inc. clarifies the scope of the FCA when it comes to Medicare regulatory noncompliance.

Too Harsh

The 6th Circuit's task was to determine whether MedQuest's Medicare violations should be punished under the FCA. In the end, the court found that the company's misdeeds didn't “mandate the extraordinary remedies of the FCA.”

“The court ruled correctly, in my view, that the False Claims Act doesn't reach those types of situations where the questionable conduct deals with whether you complied with a term of participation rather than a condition of payment,” says David Nadler, a partner at Dickstein Shapiro.

The 6th Circuit reasoned that MedQuest's violations dealt with a condition of participation in the Medicare program rather than a condition of payment, the latter of which would have triggered FCA liability.

“The regulations at issue did not state that Medicare wouldn't pay the claims if MedQuest wasn't adhering to the regulations,” says Ellyn Sternfield, of counsel at Mintz Levin. “The company's regulatory violations were violations of conditions of participation in Medicare. But there was nothing indicating that they were conditions of payment rendering the claims for those services false or fraudulent.”

Fried Frank Partner Douglas Baruch says the 6th Circuit's decision is a good illustration of how courts are beginning to push back on recent testing of the boundaries of the FCA. “The 6th Circuit drew the distinction that not all regulatory noncompliance is equal,” he says. “Unless it's a condition of payment, it's not a violation of the False Claims Act. You can't use the False Claims Act to police all instances of regulatory noncompliance.”

But that doesn't mean MedQuest will get off scot free. The 6th Circuit wrote that MedQuest's misconduct could lead to administrative sanctions, including suspension and expulsion from the Medicare program.

Testing Boundaries

Baruch says that as more whistleblowers get into the FCA game and the DOJ expands its use of the act into areas that it's never reached before, the courts will continue to push back. “They're recognizing that this wasn't what was intended under the False Claims Act,” he says. “Boundaries are going to be tested, courts are going to issue conflicting decisions, and these cases will eventually make their way up to the Supreme Court.”

In the meantime, the DOJ's defeat may cause it to think twice about pursuing Medicare-related FCA cases. “The decision is good news for companies that are facing cases in which the Justice Department is taking extreme positions, but this is just one decision,” Baruch says. “Until it takes root more broadly, in-house counsel aren't going to be able to rest easy just yet.”

Experts say MedQuest probably won't stop whistleblowers from bringing FCA claims based on regulatory noncompliance anytime soon. Future cases will likely argue that a company's regulatory noncompliance was a condition of payment. “They'll use the magic words and try to get by a motion to dismiss,” Baruch says.

And although MedQuest may bring some comfort to companies facing FCA cases tied to regulatory noncompliance, in-house counsel must still try to fend off such violations. “If there's evidence that the company is ignoring or is intentionally flouting certain regulations, it shouldn't really matter from an in-house counsel's perspective whether it could lead to FCA liability—they must deal with it,” Baruch says. “The company has to fix the problem. The company can still face administrative sanctions. Other federal laws might apply. Just because the False Claims Act doesn't cover it isn't going to give much comfort to in-house counsel when they're dealing with regulatory noncompliance within their companies.”