Health Law Update – January 28, 2016

Welcome to this week's edition of the Health Law Update.

  • Implied Certification and the FCA: Legally False or a False Legality? The Supreme Court Is Set to Decide
  • 10 Tips to Mitigate or Prevent Wage and Hour Litigation in the Post-Acute Industry
  • Drug Manufacturer Discount Cards: Accept With Caution
  • As Urged by PhRMA and BIO, Supreme Court Agrees to Review Claim Construction Standard Used in Patent Office Trials
  • Our 10 Most Popular Articles of 2015
  • McBride, Allen Author Chapter on Commercial Payer Overpayment Disputes for AHLA Guide
  • Events Calendar

Implied Certification and the FCA: Legally False or a False Legality? The Supreme Court Is Set to Decide

By B. Scott McBride and John W. Petrelli

The United States Supreme Court recently granted certiorari in the case of Universal Health Services, Inc. v. U.S. ex rel. Escobar, No. 15-7, which places implied certification under the False Claims Act (FCA) squarely in the judicial crosshairs. Implied certification is a frustrating theory of liability for providers and contractors that receive government reimbursement, due to the broad, almost limitless liability it can create, and the circuit courts are split on the issue. With this case, the Supreme Court has the opportunity to eliminate, or at least significantly limit, the confusion and breadth of liability that has been created by the application of implied certification.

The Supreme Court’s grant of certiorari in Escobar will address two questions on review. The first is whether implied certification is a valid theory of legal falsity under the FCA. Assuming the first issue is answered in the affirmative, the second issue will be to resolve the split among the circuits that have adopted it. In other words, is the theory of implied certification available only when the contract, statute, or regulation expressly conditions payment on compliance? This will probably be where the Supreme Court draws the line.

The Circuit Split

Implied certification is a judicially created theory under the FCA that establishes liability for a provider or contractor that, although having delivered or performed the materials or services claimed, violated a contract, statute, or regulation as a condition of payment even though the provider or contractor did not expressly certify compliance with the contract, statute, or regulation as a condition of payment.

In most circuits, implied certification has been adopted in one form or another; however, most recently, the Seventh Circuit expressly rejected the theory, noting that it “lack[ed] a discerning limiting principle.” U.S. v. Stanford-Brown, Ltd., No. 14-2506, 2015 WL 3541422, at *12 (7th Cir. June 8, 2015). The Seventh Circuit was the first circuit to outright reject the theory of implied certification altogether.

While other circuits have not rejected it, they have attempted to place some limits on its breadth. For example, the Second and Sixth circuits still enforce a theory of implied certification but do so with some form of transparency and notice for providers and contractors. These circuits recognize that a provider or contractor impliedly certifies compliance with a contract, statute, or regulation for purposes of FCA liability only if the government expressly conditions payment on compliance. In other words, compliance with the legal obligation of the contract, statute, or regulation in question must explicitly be designated as a condition of payment.

However, in circuits such as the D.C., First, and Fourth, implied certification has evolved into its broadest form of liability. In those circuits, a defendant can be found liable under the FCA based on violations of statutes, regulations, and contractual provisions as conditions for payment, even where the contract, statute, or regulation does not expressly identify the legal obligation as a condition of payment. Rather, federal courts in these circuits may find an implied condition of payment without any basis in the text of the relevant contract, statute, or regulation.

The Escobar Case

Specific to Escobar, implied certification was alleged by the parents of a patient who died following treatment in a mental health facility that received federal and state reimbursement through the Medicaid program. Allegations included that the mental health facility failed to properly supervise caregivers and did not employ a board-certified or board-eligible psychiatrist and a licensed psychologist in violation of state health regulations. Relators also alleged that compliance with the regulations was a condition to payment, despite the fact that the regulations were silent on the payment issue.

The district court dismissed the relators’ complaint, but the First Circuit reversed, finding that it was not necessary for defendant to make express certifications or statements of compliance to create FCA liability under legal falsity, nor was it necessary for the contracts, statutes, or regulations to expressly set forth the conditions of payment. The mere allegation of non-compliance with the contractual, statutory, or regulatory terms was sufficient. The fact that the state health regulations relied upon by relators did not contain an express condition of payment was inconsequential for the court.

Considering the vast divergence between the Seventh and First circuits’ interpretation of implied certification, Escobar provides a logical jumping-off point for the Supreme Court to finally decide the issue.

Going Forward

Given the importance and reach of Escobar, the Supreme Court will unquestionably hear from interested parties supporting both sides. Oral argument is expected in April, with a decision to follow by the conclusion of the Court’s term in June. BakerHostetler’s Healthcare Industry team will continue to monitor developments, including the filing of amicus briefs, and will provide periodic updates as the case progresses through the Supreme Court.

10 Tips to Mitigate or Prevent Wage and Hour Litigation in the Post-Acute Industry

By Michael J. Lombardino and Gregory S. Saikin

Wage and hour lawsuits are being filed against employers under federal and state wage and hour laws at a record rate. Most wage and hour claims allege the employer failed to pay employees for off-the-clock work, failed to pay employees for overtime worked, misclassified employees as exempt from overtime pay requirements, or made improper deductions from employee pay. Aggressive plaintiff attorneys use class- and collective-action procedures to pursue these and similar claims on behalf of hundreds, sometimes thousands, of current and former employees. While all industries are at risk, plaintiff attorneys have started targeting the post-acute industry with alarming frequency.

For example, home health agencies (HHAs) are particularly susceptible to wage and hour violations for a variety of reasons. Until just a few months ago, the status of the “companionship services” exemption utilized by so many HHAs had been in limbo for well over a year. Another reason is that the typical workforce of HHAs is composed of hourly employees who do not work in a traditional office setting. And compliance attention by many HHAs is understandably focused on navigating the healthcare laws and regulations governing their industry and not on the wage and hour laws. Just last week, for example, an HHA in New York City got slapped with a wage and hour class action for failure to provide full overtime wages for all hours worked over 40 in a workweek. See Santiago et al. v. Allied Health Services, Inc., Case No. 1:16-cv-00446, in the U.S. District Court for the Southern District of New York.

Attention to wage and hour risks will help prevent lawsuits from being filed or will put employers in a much better position to aggressively and efficiently defend against lawsuits that have little factual or legal merit. In light of this growing trend, we thought it appropriate to provide HHAs and similar employers with 10 preventive strategies to help guard against wage and hour lawsuits.

1. Stay up to date on changes in the law

Federal and state wage and hour laws are constantly changing. For example, HHAs were forced to make fundamental changes to their business models when the U.S. Department of Labor (DOL) amended regulations to reduce the number of workers that qualify for the companionship services exemption. Additionally, HHAs, like all employers, must comply with not just the Fair Labor Standards Act (FLSA), but also state wage and hour laws. Some states impose stricter restrictions on employers than the FLSA does. Be mindful of state wage and hour laws before expanding into a new state.

2. Use an effective time-keeping system

Employees who bring wage and hour lawsuits typically allege that the hours paid were not accurate and that hours worked by the employees were either not reported or under-reported by their employers. HHAs should use a standardized system for employees to record all time in and out, either electronically or with a punch-clock. This is critical for HHAs because a large percentage of their workforce does not work in a traditional office setting. The system should require each nonexempt employee to record, review and sign off on their time for each pay period and provide a signed acknowledgment that the hours reported are accurate and include all time worked for that period. Supervisors should monitor and review time cards of the employees they manage on either a daily or weekly basis. The system should also include a procedure for making and tracking edits to time records as necessary. And it should keep track of what changes are made, by whom, and why, particularly where edits remove or reduce paid time.

3. Implement comprehensive written policies

Employers should also implement and maintain comprehensive but easy-to-understand attendance and timekeeping policies and procedures. At a minimum, these policies should inform employees (1) that they will be paid for all time worked, (2) that they must record their hours accurately, (3) that off-the-clock work is prohibited, and (4) of how to report concerns if an improper deduction was made to their pay or they did not receive all pay owed. Make sure to discipline employees and supervisors who violate the timekeeping policies.

4. Engage outside counsel to conduct a wage and hour audit

Employers are often blindsided by wage and hour complaints and lawsuits alleging violations they never knew existed. HHAs and other employers can hire experienced outside counsel to conduct an audit of their wage and hour practices and procedures. Counsel can help employers identify and address potential wage and hour violations. The attorney-client privilege enables counsel to have a frank and direct conversation with management about potential issues and certain ways they can be resolved. The cost of a wage and hour audit is far less than that of defending a lawsuit.

5. Conduct periodic compliance training

Employers should provide compliance training to supervisors, managers, nonexempt employees, and HR representatives. These individuals are the first (and primary) line of defense for wage and hour issues. Effective training can help identify and prevent wage and hour issues at their source. Do they know, for example, whether employees are recording work done outside of “official” shift times or schedule, or that employees typically should be paid for time spent in training or meetings, or for work done at home?

6. Separate companies are not necessarily separate companies

It is quite common for HHA owners to operate several different companies that do pretty much the same thing. It is also common for employees to work for multiple HHAs that share ownership. Unless each company is truly distinct (i.e., there is no commingling of finances or resources and no shared management or decision-making), both companies could be deemed by the DOL or a court to be “joint employers” of the shared employees. The same issue arises if HHAs “lease” workers from staffing companies. Whenever there is a “joint employment” or “co-employment” situation, each employer is responsible for complying with the FLSA vis-à-vis the employee. And in some situations, the “hours worked” by an employee who works for multiple HHAs that share ownership may need to be combined when calculating hours worked for overtime purposes.

7. A meal break should be treated as a meal break

Under the FLSA, if the company provides unpaid meal breaks to nonexempt employees, the breaks must be at least 30 minutes long and truly uninterrupted (e.g., employees are not restricted from leaving the premises during their break, and are not required to respond to work-related calls, emails, or text messages). State laws may impose stricter requirements. Unless the employee has a truly uninterrupted meal break for at least 30 minutes, he or she should be paid for that time. If possible, avoid making automatic deductions for breaks.

8. Pay attention to employees who work remotely

Although employees usually should not be paid for time spent commuting to and from work, employees typically should be paid for time spent traveling between workplaces or when traveling to and from a client. To further complicate things, technology has blurred the lines of when employees are working and not working. Nonexempt employees should be paid if they make work-related phone calls or if they send or receive work-related emails or text messages while working at home, remotely or otherwise outside normal work hours. Aside from the off-the-clock work issue, permitting employees to access company email or content on their personal phones creates a potential security risk from hackers, competitors, or anyone who wishes to do the company harm, since these devices can easily be lost or stolen.

9. Make sure to properly calculate the “regular rate” of pay

Employers are required to properly calculate employee compensation. Because these calculations can be very complicated, it is easy to make errors. For example, overtime is calculated at a 50 percent premium rate from the “regular rate” of pay for all hours over 40 worked in a workweek. The regular rate of pay includes not only the base hourly wage paid to the employee, but in most cases also includes other forms of nondiscretionary compensation such as certain bonuses, incentive pay, commissions, shift differentials, and retroactive pay increases. Although electronic timekeeping and payroll systems can help companies properly calculate the “regular rate of pay,” they are not foolproof. HHAs and other employers should periodically review their timekeeping and payroll records to ensure that compensation is being properly calculated.

10. Be prepared to defend each employee’s exemption

It is the company’s burden to prove an employee is properly classified as exempt if the exemption is ever challenged. HR and management must be familiar with the criteria for making these determinations. Some positions, such as high-level executives and professionals are obviously exempt. Most of the litigation focuses on “gray area” positions, such as account or sales managers and middle managers (who manage paper, not people). Misclassifying an employee as exempt can have significant financial consequences. When in doubt, treat the employee as non-exempt.

Drug Manufacturer Discount Cards: Accept With Caution

By Robert M. Wolin

Pharmaceutical manufacturer discount card usage by government program beneficiaries has been an active area for government action in recent years. In a September 2014 Special Advisory Bulletin, the U.S. Department of Health and Human Services, Office of Inspector General (OIG) stated, “[t]hese coupons constitute remuneration offered to consumers to induce the purchase of specific items.” The availability of a coupon, according to the OIG, could cause “physicians and beneficiaries to choose an expensive brand-name drug when a less expensive and equally effective generic or other alternative is available,” thus resulting in additional program costs.

Recently, Nashville Pharmacy Services (NPS) and its majority owner entered into a settlement agreement with federal authorities to resolve allegations that NPS pharmacies overbilled the Medicare and TennCare programs in connection with its acceptance of manufacturer discount cards to reduce co-payments and deductibles for Medicare and Medicaid patients. The NPS settlement is based upon the company’s future profitability and will range from $1.25 million to $7.8 million. The settlement also covered the following conduct:

  • Routine waivers of co-payments for Medicare and Medicaid patients without an individualized assessment of the beneficiaries’ inability to pay
  • Dispensing medications after the patient’s death
  • Dispensing without a valid prescription
  • Automatically refilling prescriptions without a request from the beneficiary, in violation of a TennCare managed care organization’s contractual requirements

As many pharmacy providers have discovered, routine co-payment waivers, direct and through the use of coupons or discount card programs, can result in significant penalties under the Anti-Kickback Law and, in some cases, the False Claims Act. Pharmacies should observe the typical warning statement on coupons and discount cards to the effect that the coupon or discount card may not be used by beneficiaries of federal healthcare programs.

As Urged by PhRMA and BIO, Supreme Court Agrees to Review Claim Construction Standard Used in Patent Office Trials

By Laura R. Gordon

Pharmaceutical companies have reason to be pleased with the United States Supreme Court’s recent decision to grant a petition for a writ of certiorari in Cuozzo Speed Technologies, LLC v. Michelle K. Lee, Under Secretary of Commerce for Intellectual Property and Director, Patent and Trademark Office, No. 15-446 (Cuozzo). The Supreme Court has agreed to review the claim construction standard used by the Patent Trial and Appeal Board (Board) in inter partes review (IPR) proceedings, considered by many players in the pharmaceutical industry as posing a significant barrier to protecting intellectual property rights. According to a statistic presented by the petitioners, patent challengers have instituted over 3,400 petitions, resulting in the cancellation of some or all claims in the patent under review in nearly 85 percent of IPR proceedings. Id. at 16. The Supreme Court has also agreed to determine whether the Federal Circuit has the authority to review the Board’s decision to institute an IPR proceeding.

IPR is a form of post-grant review established by Congress in the Leahy-Smith America Invents Act (AIA), Pub. L. No. 112-29, 125 Stat. 284 (2011) (effective Sept. 16, 2012). Under the AIA, IPR proceedings replaced the former system of inter partes reexamination with the goal of “providing quick and cost effective alternatives to litigation.” H.R. Rep. No. 112-98, pt. 1, at 48 (2011). IPRs are trial-like proceedings conducted by the Board, and they involve a novelty or obviousness challenge to an existing patent using prior art consisting of patents or printed publications. 35 U.S.C. § 311(b). The first step in an invalidity analysis is to interpret (or “construe”) the claim terms to determine their meaning to a person of ordinary skill in the art. Unlike federal courts, which employ an “ordinary and customary meaning” claim construction standard, the Board interprets claim terms in an unexpired patent according to their broadest reasonable construction in light of the specification in which they appear. 37 C.F.R. §42.100(b); Office Patent Trial Practice Guide, 77 Fed. Reg. 48756, 48766 (Aug. 14, 2012).

Cuozzo originated as an IPR brought by Garmin International, Inc. and Garmin USA (together “Garmin”) to challenge U.S. Patent No. 6,778,074, owned by Cuozzo Speed Technologies. In construing the meaning of the term “integrally attached,” the Board employed the broadest reasonable interpretation standard. Garmin International, Inc. and Garmin USA, Inc. v. Cuozzo Speed Technologies LLC, No. IPR 2012-00001, Paper 59 at 8 (P.T.A.B. Nov. 13, 2013). The Board’s construction was integral to its finding that all three claims under review were rendered obvious in view of the prior art. Id. at 59.

On appeal, the Federal Circuit ruled that it lacked jurisdiction to review the Board’s decision to institute IPR. In Re: Cuozzo Speed Technologies, LLC, No. 14-1301 at 2 (Fed. Cir. Feb. 4, 2015). In particular, the Federal Circuit determined that the Board properly relied on prior art not identified by Garmin in its petition as grounds for IPR as to two of the three claims. Id. at 5. Moreover, the Federal Circuit detected no error in the Board’s use of the broadest reasonable interpretation claim construction standard. Id. at 2.The Federal Circuit narrowly denied a petition for rehearing of the broadest reasonable interpretation standard issue, with five of the necessary six judges voting in favor of rehearing.

Nine amici briefs were filed urging the Supreme Court to grant certiorari. Of the nine briefs, only two (filed by the New York Intellectual Property Law Association and Trading Technologies International, Inc.) requested review of the Federal Circuit’s authority to review institution of IPR proceedings. The remaining briefs requested review of the Board’s use of the broadest reasonable interpretation standard. The majority of those briefs – filed by entities including the American Intellectual Property Law Association, the Biotechnology Industry Organization, and the Pharmaceutical Research and Manufacturers of America – oppose the use of the broadest reasonable interpretation standard.

The Supreme Court is expected to hear arguments in April and should issue a ruling in June or July.

Our 10 Most Popular Articles of 2015

A highly anticipated Supreme Court decision, organizational pressures leading to compliance failure, regulation of Medicaid managed care, legal challenges to state professional boards, out-of-network billing practices, Stark Law policy changes, reimbursement for hospital off-campus departments, changes to the Common Rule, HIPAA compliance by physician groups and patentable subject matter in biotechnology were among the topics addressed by the Health Law Update’s 10 most popular articles of 2015. As we look into the rearview mirror a final time, we’re reminded that so many of the issues addressed by the top reads of 2015 will undoubtedly continue to be of interest this year!

  1. Medicaid Managed Care Proposed Rules: The Intersection of Private Insurance and Government Programs
  2. The Deeper Dive: Guarding Against Unrealistic Goals and Organizational Pressures That Can Lead to Compliance Failure
  3. My Day at the U.S. Supreme Court: King v. Burwell
  4. “Ring my friend, I said you call Doctor Robert, day or night he'll be there”*
  5. What Constitutes Patentable Subject Matter in Biotechnology? New Federal Circuit Decision Says “Even Less Than You Thought!”
  6. Hello Budget Agreement; Goodbye Provider-Based Status?
  7. HIPAA Fine Underscores OCR’s Focus on Physician Group Compliance
  8. CMS Finalizes Revisions to Stark to Ease Burden on Providers, Refines “Incident to” Requirements
  9. Texas Hospital Strikes Back at Aetna
  10. It’s About Time! 10 Key (Needed) Changes Proposed to the Human Subjects Protection “Common Rule”

McBride, Allen Author Chapter on Commercial Payer Overpayment Disputes for AHLA Guide

BakerHostetler Partner Scott McBride and Associate Darby Allen authored the chapter, “Commercial Payer Overpayment Disputes,” in the American Health Lawyers Association’s recently released publication Health Care Provider and Supplier Audits Practice Guide, First Edition. The guide addresses the intricacies of provider payment disputes in the Medicare, Medicaid, and commercial payer environments in light of recent trends and strategies adopted by payers and their contractors. More information.

Events Calendar

March 5, 2016

Washington, D.C. Partner Lee H. Rosebush will present on “Compounding: The Potential Liabilities: Historical, Current and Future,” in Baltimore, MD.

April 4, 2016

Houston Partner Gregory S. Saikin will participate in a webcast, “FCPA Investigation Cooperation: Avoiding Common Mistakes,” for The Knowledge Group.

Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.