2012 Year-End Health Care Enforcement Update

February 22, 2013

2012 saw a continuation of the trends we have seen in health care enforcement in recent years–wide-ranging enforcement activity, historic settlements, strict settlement terms, and tough penalties for individuals.

State and federal governments recovered an astounding $7.2 billion from the health care industry through settlements in calendar year 2012.  This figure includes the historic $3 billion settlement with GlaxoSmithKline–the largest health care fraud settlement in U.S. history and the largest payment ever by a drug company, according to the DOJ.  The total recovery in 2012 shattered previous records–$3.8 billion[1] in 2011 and nearly $4 billion in 2010.  At the same time, prosecutors are continuing to insist on criminal charges for companies looking to resolve health care fraud allegations.

The unrelenting enforcement efforts over the past year make clear that fighting health care fraud remains a top priority for the government.  In the words of Attorney General Eric Holder, “this Administration has never been more determined to move aggressively in protecting patients and consumers, bringing criminals to justice, and building on what’s already been achieved.”[2]  With health care taking up a significant portion of the federal budget, it should come as no surprise that health care enforcement is viewed as a crucial tool for cutting health care spending.  And there is little question that these enforcement mechanisms are highly effective.  Over the last three years, every dollar spent on health care fraud by the federal government has returned an average of seven dollars to the government.[3]  Health care enforcement is clearly returning a substantial return on the government’s investment.

In 2012, the False Claims Act continued to be used as the primary weapon in the fight against health care fraud.  Indeed, fiscal year 2012 was the second straight year in which the DOJ set a new record for recoveries under the False Claims Act for health care fraud, securing over $3 billion in settlements from the health care industry.[4]  Since January 2009, the federal government has collected $13.3 billion in recoveries under the False Claims Act–the largest four-year total in history, accounting for more than a third of total recoveries since the Act was amended in 1986–and the vast majority of those collections, a staggering $9.5 billion, were from the health care industry.  As in years past, most of the False Claims Act cases in 2012 originated as qui tam actions, brought by whistleblowers on behalf of the government.  Qui tam suits hit a peak of 647 this past year, after hovering in the 300s and low 400s for much of the last decade and rising to 638 in 2011, and accounted for 67% of all False Claims Act recoveries for fiscal year 2012.  As we noted in our 2011 Year-End Update, the Patient Protection and Affordable Care Act (the “Affordable Care Act”) amended the False Claims Act to provide additional incentives for whistleblowers to report fraud.  As such, qui tam actions will surely continue to be an essential component of health care enforcement in the coming years.

Not to be outdone by their federal counterparts, state governments also had significant enforcement victories in 2012.  States, often working in conjunction with the federal government, enjoyed significant recoveries from the health care industry, including a $181 million off-label marketing settlement with Johnson & Johnson which was touted as the largest multi-state consumer protection-based pharmaceutical settlement in history.

It is also becoming increasingly clear that the government is cracking down on health care violations by individuals.  More and more individuals are being hit with harsher penalties, including long prison sentences and hefty fines.  The Health Care Fraud Prevention and Enforcement Action Team (“HEAT”), the interagency effort between the Department of Justice (“DOJ”) and the Department of Health and Human Services (“HHS”), shows no signs of slowing down.  HEAT’s Medicare Fraud Strike Force, now with operations in nine cities, had two significant takedowns in 2012 which led to charges against more than 200 individuals for alleged participation in Medicare fraud schemes.  Indeed, since its creation in 2009, the Strike Force has charged more than 1,200 defendants for fraudulently billing the Medicare program for more than $3.7 billion.[5]  Numerous other individuals, including prominent executives, have faced prison time in connection with government investigations and settlements.  There is little question that this enforcement trend will continue in the coming years.  Indeed, Assistant Attorney General Lanny Breuer has made clear that “the strongest deterrent against corporate wrongdoing is the prospect of prison time.”[6]

Given these aggressive enforcement trends, it remains crucial that health care companies, and their legal and compliance officers, continue to be as relentless in their efforts to strengthen their compliance policies and procedures as regulators and prosecutors are in enforcing health care laws and regulations.

This Update provides a detailed review of notable settlements and judgments in the health care area in 2012 (Section I) as well as significant actions and investigations (Section II), with a primary focus on the efforts of federal prosecutors and regulators.  Section III sets forth an analysis of current trends in health care enforcement and compliance, and Section IV includes a projection of future trends that we anticipate based on the current environment.

I.     Notable Settlements and Judgments

            Off-Label Marketing

            GlaxoSmithKline

In the largest health care fraud settlement in U.S. history and the largest payment ever by a drug company, GlaxoSmithKline agreed to pay $3 billion to resolve criminal and civil liability arising from the company’s alleged unlawful promotion of certain prescription drugs, its alleged failure to report certain safety data, and civil liability for its alleged false price reporting practices.  GlaxoSmithKline agreed to plead guilty to a three-count criminal information, including two counts of introducing misbranded drugs, Paxil and Wellbutrin, into interstate commerce, and one count of failing to report safety data about the drug Avendia to the Food and Drug Administration (“FDA”).  The company agreed to pay $1 billion under the plea agreement.  The company agreed to pay an additional $2 billion to resolve False Claims Act claims related to several drugs including Paxil, Wellbutrin, and Avendia, as well as pricing fraud allegations.  GlaxoSmithKline has also executed a five-year corporate integrity agreement (“CIA”) with HHS’s Office of the Inspector General (“HHS-OIG”).  The plea agreement and CIA include “novel provisions” that require that the company implement and/or maintain major changes to the way it does business, including changing the way its sales force is compensated to remove compensation based on sales goals for territories.[7]  While this settlement was publicized in late 2011 (and reported in our 2011 Year-End Update), it was not finalized until 2012.

            Abbott Laboratories

In connection with sales and marketing of its anti-seizure drug Depakote, Abbott Laboratories finalized agreements to pay $1.5 billion to resolve federal civil and criminal investigations.  After Abbott pled guilty to a misdemeanor misbranding offense for promoting Depakote’s use in controlling behavioral disturbances in dementia patients and for treatment of schizophrenia, the company was ordered to pay a $500 million criminal fine and $198.5 million forfeiture.  According to the plea agreement entered in May 2012, Abbott also will be subject to five years of probation, which will require its CEO and directors to certify personally to the company’s compliance with the law.  Abbott agreed to pay an additional $800 million to federal and state governments to settle civil claims related to off-label promotion of Depakote for a range of psychiatric conditions in adults and children and to enter a five-year CIA with HHS-OIG.[8]

            Amgen Inc.

Amgen Inc. pled guilty to illegally introducing a misbranded drug, Aranesp, into interstate commerce as part of a strategy to gain market share from Johnson & Johnson’s competitor drug Procrit.  The plea is part of a global settlement related to sales and marketing of Aranesp, a drug used for treating anemia, as well as the drugs Enbrel and Neurlasta, and will involve a total payment of $762 million in civil and criminal penalties.  The civil settlement covers allegations that Amgen engaged in off-label promotion of Aranesp for use at dosages other than those approved by the FDA, promoted Enbrel and Neulasta for off-label indications, and inaccurately reported pricing information for its drugs.  In addition to the plea agreement and civil penalties, Amgen entered into a five-year CIA with HHS-OIG.  According to the DOJ, the Amgen settlement is “the single largest criminal and civil False Claims Act settlement involving a biotechnology company in U.S. history.”[9]

            Pfizer

In its third quarter earnings report, Pfizer announced that it would take a $491 million charge related to “an agreement in principle” the company reached with federal authorities to resolve civil and criminal investigations into Pfizer unit Wyeth’s marketing of Rapamune.[10]  Pfizer will also reportedly plead guilty to a misdemeanor misbranding offense.  The investigations began after two former Wyeth account managers brought a whistleblower suit in 2005, alleging that Wyeth illegally marketed the kidney-transplant drug for other types of transplants and that Rapamune was used with other drugs in a process known as “conversion,” which is not approved by the FDA.  Wyeth allegedly used kickbacks and study grants to boost Rapamune prescriptions as well.[11]

Pfizer also agreed to pay $55 million to resolve a DOJ investigation into Wyeth’s promotion of Protonix, a drug approved for treatment of severe gastro-esophageal reflux disease (“GERD”).  The alleged off-label marketing involved the promotion of Protonix for all forms of GERD, when it was only approved for one specific sub-type of GERD.  According to the DOJ, despite a warning by the FDA that Wyeth’s marketing was overbroad, Wyeth trained its sales force to promote the drug for all forms of GERD and conducted continuing medical education programs to advertise that broad use to physicians.[12]

            Boehringer Ingelheim Pharmaceuticals

Boehringer Ingelheim agreed to pay $95 million to resolve allegations relating to the improper promotion of the hypertension drug Micardis, the chronic obstructive pulmonary disease drugs Atrovent and Combivent, and the stroke-prevention drug Aggrenox.  Boehringer allegedly promoted Aggrenox, Combivent, and Micardis for uses that were not medically accepted and not covered by federal health care programs.  In addition, the company allegedly promoted Combivent and Atrovent at doses that exceeded those covered by federal health care programs, knowingly made unsubstantiated claims regarding Aggrenox, and paid kickbacks.  The settlement resolved a qui tam lawsuit filed by a former sales representative who received more than $17 million from the settlement.[13]

            Johnson & Johnson

Janssen Pharmaceuticals, Inc. along with its parent company Johnson & Johnson continued to work towards resolution of the federal probe into Janssen’s marketing of the antipsychotic Risperdal.  In August, Johnson & Johnson disclosed that it had agreed in principle with the DOJ to resolve three civil suits under the False Claims Act regarding sales and marketing of Risperdal and Invega, sales of Natrecor, and allegations that Janssen and Johnson & Johnson provided long-term care pharmacy Omnicare, Inc. with rebates and payments related to Risperdal marketing.  Johnson & Johnson further disclosed that it reached an agreement in principle with the U.S. Attorney’s Office for the Eastern District of Pennsylvania with respect to criminal charges regarding promotion of Risperdal.[14]  The settlement with the DOJ is reported to involve an amount over $2 billion.[15]  

Johnson & Johnson also faces multiple state actions based on the marketing of Risperdal. The company agreed to pay $158 million to resolve allegations of improper marketing and defrauding the Texas Medicaid program.[16]  In addition, Janssen and Johnson & Johnson reached a multi-state $181 million settlement related to allegations of off-label marketing of Risperdal and Invega.  According to the New York State Attorney General, the settlement with Janssen and Johnson & Johnson is “the largest multi-state consumer protection-based pharmaceutical settlement in history.”[17]

            Anti-Kickback Violations

            Sanofi-Aventis

Two U.S. subsidiaries of international drug manufacturer Sanofi (Sanofi-Aventis U.S. Inc. and Sanofi-Aventis U.S. LLC) agreed to pay $109 million to resolve False Claims Act and anti-kickback allegations involving the companies’ alleged distribution of free units of Hyalgan, a knee injection, to physicians.  The government alleged that the companies, facing pressure from a lower-priced competitor, distributed thousands of free samples and trained their sales force to market the “value add” of these units to physicians, constituting illegal sampling arrangements designed to induce the physicians to purchase and prescribe the product.  The government further alleged that the companies submitted an average sales price of the product that did not account for the free samples, causing the reimbursement rate paid by government programs to be set at an inflated amount.[18]

            Freeman Health System

Missouri healthcare provider and hospital system Freeman Health System agreed to pay $9.3 million to resolve investigations into its incentive compensation to physicians.  The DOJ alleged that Freeman violated the Stark Law and the False Claims Act by providing incentive pay based on the revenue generated by a physician’s referrals for certain services performed at its clinics, and that this financial arrangement created an incentive to refer patients for such procedures.  The investigation was prompted by a voluntary disclosure by the company.[19]

            HCA

Hospital giant HCA settled False Claims Act and Stark Law allegations that two Tennessee subsidiaries–Parkridge Medical Center and HCA Physician Services–entered into a series of financial transactions with a physician group intended to induce them to refer patients to HCA facilities.  HCA’s $16.5 million payment resolved claims including above-market rental payments for office space leased from the physician group in order to assist members to meet their mortgage obligations.  The settlement resolves a qui tam lawsuit and the whistleblower will receive an 18.5 percent share of the settlement.  Parkridge Medical Center also entered into a five-year CIA with HHS-OIG.[20]

            New York Presbyterian Hospital

Two individuals and three companies were sentenced and fined for their involvement in an alleged eight-year kickback scheme to defraud New York Presbyterian Hospital out of $2.3 million.  Among the convicted vendors was the owner of two of the companies convicted for their roles in the conspiracy, who was sentenced to serve 60 months in prison and pay a $500,000 criminal fine.  Each of his companies also was sentenced to pay a $1 million criminal fine.  Additionally, the president of an asbestos abatement company that did business at the hospital was sentenced to serve 48 months in prison and pay a $500,000 criminal fine for his role in the conspiracy.  Artech Corp., a company owned by a relative of a former vice president of facilities operations at the hospital, was also sentenced to pay a $1 million criminal fine.  Federal investigators found that the kickbacks were funneled through Artech Corp., an alleged bogus company created to hide the kickbacks.[21]

            Medicare and Medicaid Billing Fraud

            SCAN Health Plan

SCAN Health Plan, a California non-profit HMO, entered into two settlement agreements totaling $324 million.  In the first agreement, SCAN agreed to pay $320 million to California and the federal government in what it characterized as “refunds” for Medicaid and Medicare overpayments.  The overpayments resulted from alleged errors made during California’s rate-setting process, which caused Medi-Cal–California’s Medicaid program–to pay for home-bound long-term care patients at the higher rates set for patients in nursing homes, and to pay for long-term care patients even after they had spent the maximum two months in a nursing home.  The $320 million settlement is the largest recovery ever obtained from a single Medi-Cal provider.  In the second settlement agreement–announced the same day–SCAN agreed to pay $3.8 million to the federal government to settle allegations relating to its diagnostic codes, which are used to determine Medicare payments.  The company allegedly hired an outside firm to retroactively review its claims to see if certain diagnosis codes could be changed.  While such a review might increase accuracy, in this case SCAN’s review allegedly only led to coding changes that would increase reimbursement, not to changes that would decrease reimbursement.[22]

            Average Wholesale Price Litigation

2012 saw several significant settlements in the long-running litigation regarding the alleged manipulation of the “Average Wholesale Price” or “AWP,” a pricing benchmark used to determine drug reimbursement rates.  Most notably, McKesson Corporation–a large drug wholesaler–agreed to pay $190 million to resolve allegations that it violated the False Claims Act by manipulating the AWP, causing Medicaid to overpay for thousands of drugs.[23]  That settlement concerned claims based on the federal share of overpayments only; McKesson later entered into a separate $151 million settlement with 29 states and the District of Columbia.[24]  Several other smaller settlements were also announced.  For example, Mylan Inc., agreed to pay $57 million to resolve AWP claims brought by the federal government and the state of California.[25]  And Louisiana Attorney General Buddy Caldwell announced two new rounds of settlements worth over $54 million.[26]

To date, the federal and state governments have recovered more than $2 billion through the various AWP cases.[27]

            WellCare Health Plans

WellCare Health Plans Inc., a Florida-based managed care provider, agreed to pay $137.5 million to the federal government and nine states to resolve four False Claims Act lawsuits regarding alleged fraud against various state and federal government programs.  The suits alleged that the company engaged in a variety of schemes to submit false claims to Medicare and other government programs, including a plan to inflate the amount of money that it claimed to be spending on patient care in order to avoid paying rebates to Medicaid and other government payors.  WellCare also allegedly engaged in other abusive practices, including “cherry picking” health patients and manipulating performance metrics relating to its call center.  The lawsuits were filed by four whistleblowers, including a former WellCare employee who reportedly wore a wire for 18 months and will receive $20.75 million; the other three whistleblowers will receive $4.66 million.

The company had previously entered into a number of settlement agreements regarding related investigations and lawsuits, including a May 2009 agreement to pay $80 million to resolve criminal charges and an August 2010 agreement to pay $200 million to settle a shareholder class action suit.  In addition, several of WellCare’s former executives–including a former CEO–are scheduled to go to trial next year on criminal fraud charges.[28]

            Kyphoplasty Cases

The DOJ announced a new round of settlements stemming from a long-running investigation into kyphoplasty, a minimally-invasive surgical procedure used to treat spinal compression fractures.  According to the DOJ, kyphoplasty can be performed safely on an outpatient basis in many cases, but hospitals have been performing the procedure on an in-patient basis in order to increase their Medicare billings.  The DOJ had previously entered into settlements with several hospitals, as well as a $75 million settlement with Kyphon Inc., the manufacturer of a device used in the procedure.  In February 2012, the DOJ announced a $12 million settlement with 14 hospitals;[29] it later revealed an additional $1.9 million settlement.[30]  To date, the DOJ has reached settlements with over 40 hospitals, for a total of over $40 million.[31]

            Odyssey HealthCare

Odyssey HealthCare–a subsidiary of Gentiva, a home healthcare provider–agreed to pay $25 million to resolve False Claims Act allegations relating to hospice services.  The company allegedly submitted claims to Medicare for continuous care services–which are reimbursed at a higher rate than other forms of hospice services–when such services were not necessary or were not performed in accordance with Medicare requirements.  These allegations were originally raised by former Odyssey employees in three qui tam lawsuits; the whistleblowers received $4.6 million.[32]

            LifeWatch Services

LifeWatch Services, Inc., an Illinois-based ambulatory health monitoring services company, agreed to pay $18.5 million to resolve allegations that it submitted false claims to Medicare.  The company allegedly submitted improper claims for ambulatory cardiac telemetry services, used a false code to get those claims paid, and provided services that amounted to kickbacks.  The settlement resolved two qui tam lawsuits brought by former LifeWatch sales representatives, who received $3.4 million plus interest.[33]

            AmMed Direct

AmMed Direct, LLC, a diabetic supply company, agreed to pay $18 million to the United States and the state of Tennessee to settle False Claims Act allegations.  The company had allegedly improperly solicited Medicare beneficiaries and improperly billed Medicare and other federal health care programs for diabetes testing supplies and other products.  The case was brought by a whistleblower, who received $2.8 million from the settlement.[34]

            Beth Israel

Beth Israel Medical Center agreed to pay $13 million to settle a False Claims Act lawsuit brought by the United States Attorney for the Southern District of New York.  As part of the settlement, Beth Israel admitted to increasing its fees to obtain more “outlier payments”–payments made by Medicare to hospitals in cases where the cost of care is unusually high–than it otherwise would have received.[35]

            Dava Pharmaceuticals

Dava Pharmaceuticals, Inc. agreed to pay $11 million to settle allegations that it misreported drug prices in order to reduce its obligation to pay rebates to Medicaid.  The settlement also resolved a qui tam action filed by a whistleblower, who received 15% of the settlement’s proceeds.[36]

            Walgreens

Walgreens paid $7.9 million to resolve False Claims Act allegations relating to its gift card and gift check programs.  The company allegedly offered illegal inducements to beneficiaries of several government health programs by offering gift cards to patients who transferred their prescriptions to Walgreens.  The actions were first filed by whistleblowers, who received approximately $2 million.[37]

            AHS Hospital Corp. and Atlantic Health System

AHS Hospital Corp. and Atlantic Health System, Inc., which own and operate Overlook Hospital in New Jersey, agreed to pay nearly $9 million to settle allegations that they submitted inflated bills to Medicare for inpatient treatment of patients who required only observation or outpatient treatment.  The settlement partially resolves a suit brought by former hospital employees under the False Claims Act.[38]

            NextCare

Arizona-based NextCare Inc. reached a settlement over allegations that the company engaged in upcoding and submitted false claims for unnecessary allergy and H₁N₁ testing to Medicare, TRICARE, the Federal Employees Health Benefits Program, and various state Medicaid programs.  NextCare will pay $10 million and enter into a five-year CIA with HHS-OIG.[39]

            Healthpoint Ltd.

Healthpoint Ltd., an operating company of DFB Pharmaceuticals, agreed to pay up to $48 million to resolve whistleblower allegations brought under the qui tam provisions of the False Claims Act.  The company allegedly caused false claims to be submitted to both Medicare and Medicaid for Xenaderm, a bed sore ointment ineligible for reimbursement by those programs because it was not approved by the FDA.  The government alleged that Healthpoint actively promoted Xenaderm as a prescription drug that, unlike non-prescription skin ointments such as Vaseline, was “Medicaid reimbursed,” thus costing nursing homes nothing to administer to Medicaid patients.  The DOJ further alleged that Healthpoint misrepresented the regulatory status of Xenaderm when it submitted quarterly reports to the government and, as a result, knowingly caused false claims to be submitted.[40]

            Hawthorn Pharmaceuticals Inc.

Hawthorn Pharmaceuticals Inc., its CEO, and its parent Cypress Pharmaceutical Inc., settled a civil suit under the False Claims Act for $2.8 million.  The government maintained that the defendants marketed dry-skin and acne treatments that were not approved by the FDA, causing TRICARE and state Medicaid programs to improperly pay for these products.  The government also asserted that reports were submitted to the Centers for Medicare and Medicaid Services (“CMS”) that misrepresented the regulatory approval status of the products.[41]

            HIPAA[42]

            Massachusetts Eye and Ear Infirmary

Massachusetts Eye and Ear Infirmary and Massachusetts Eye and Ear Associates, Inc. (collectively “MEEI”) agreed to pay $1.5 million to HHS to resolve allegations that they violated HIPAA rules by allowing the theft of an unencrypted personal laptop containing the electronic protected health information (“ePHI”) of MEEI patients.  HHS alleged that MEEI failed to undertake necessary compliance, such as conducting a thorough analysis of the risk to the confidentiality of ePHI maintained on portable devices, implementing security measures sufficient to ensure the confidentiality of ePHI, adopting and implementing policies and procedures to restrict access to ePHI to authorized users, and adopting and implementing policies and procedures to address security incident identification, reporting, and response.[43]

            Alaska Department of Health and Social Services

The Alaska Department of Health and Social Services (“ADHSS”) agreed to pay $1.7 million to HHS to resolve allegations that it violated HIPAA rules by allowing the theft of a hard drive containing ePHI.  The HHS investigation, prompted by a breach report required by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act Breach Notification Rule, found that ADHSS had not completed a risk analysis, implemented sufficient risk management measures, completed security training for its workforce members, implemented device and media controls, or addressed device and media encryption as required by the HIPAA Security Rule.  ADHSS also agreed to a corrective action plan and a compliance monitorship.[44]

            Phoenix Cardiac Surgery

Phoenix Cardiac Surgery agreed to pay $100,000 to HHS to resolve allegations that it violated HIPAA rules by posting clinical and surgical appointments for its patients on a publicly accessible Internet calendar.  The HHS investigation found that Phoenix Cardiac Surgery had implemented few policies and procedures to comply with the HIPAA Privacy and Security Rules, and had limited safeguards in place to protect patients’ ePHI.  Phoenix Cardiac Surgery also agreed to a corrective action plan that includes a review of recently developed policies and other actions taken to come into full compliance with the Privacy and Security Rules.[45]

            Individual Sentences

In 2012, the government continued its recent practice of focusing on the prosecution of individuals for violations of the criminal health care statutes.  This continued emphasis appears to be bearing fruit, as the government secured several lengthy sentences in a series of cases.

            City Nursing Defendants

Umawa Imo, Dr. Christina Clardy, and Kenneth Anokam received sentences of 327 months (27+ years), 151 months (12+ years), and 135 months (11+ years), respectively, for their roles in an alleged massive health care fraud conspiracy committed at City Nursing Services of Texas, Inc.  According to evidence presented at trial, City Nursing paid Medicare and Medicaid beneficiaries to sign blank treatment forms, which City Nursing employees later filled out to reflect physical therapy services that were not provided.  And while it billed over $45 million for physical therapy treatment, City Nursing allegedly never employed a single qualified physical therapist.  In fact, one Medicare beneficiary testified that when she asked a City Nursing doctor for physical therapy, she was told that City Nursing did not perform that kind of service.

Imo, the owner of City Nursing, was convicted on one count of conspiracy to commit health care fraud, 39 counts of health care fraud, three counts of mail fraud, and five counts of money laundering.[46]  Anokam, the person in charge at City Nursing, was convicted of one count of conspiracy to commit health care fraud, 27 counts of health care fraud, and four counts of structuring to avoid reporting requirements.[47]  Dr. Clardy was convicted of one count of conspiracy to commit health care fraud, 14 counts of health care fraud, and three counts of mail fraud.[48]  Five other defendants were also convicted, and a ninth defendant remains at large.[49]

            Anthony Valdez

Anthony Valdez–the 57 year old owner of the Institute of Pain Management–was sentenced to 25 years in prison in connection with an alleged $42 million fraudulent billing scheme.  According to evidence presented at trial, Valdez submitted fraudulent claims to Medicare, Medicaid, and TRICARE for procedures that he did not perform or that were not reimbursable.  After a July 2011 jury trial, Valdez was convicted of one count of conspiracy to commit health care fraud, six counts of health care fraud, six counts of false statements related to health care matters, and three counts of money laundering.  In addition, Valdez was ordered to pay more than $13 million in restitution and forfeit more than $1.7 million in cash, as well as two homes and five vehicles.[50]

            George Houser

George Houser–a 64 year old operator of three Georgia nursing homes–was sentenced to 20 years in prison on charges of conspiring to defraud Medicare and Medicaid by billing them for “worthless services” and failing to pay taxes and file personal tax returns.  According to evidence presented at trial, the conditions at Houser’s nursing homes were bleak–patients had to suffer through poor sanitary conditions, staff shortages, and several safety hazards.  And while Houser knew of these problems, he allegedly diverted money from Medicare and Medicaid payments to his own personal use.  Houser’s conviction after a bench trial marked the first time that a defendant had been convicted after a trial in federal court for submitting claims for worthless services, according to the DOJ.  Houser’s wife was sentenced to eight months of home confinement and five years of probation for her role in the scheme.[51]  Houser was also ordered to pay $7.6 million in restitution.[52]

            Christopher Iruke

Christopher Iruke–a 61 year old pastor of the Arms of Grace church and operator of several durable medical equipment (“DME”) companies–was sentenced to 15 years in prison for his role in a scheme to defraud Medicare.  According to evidence introduced at trial, Iruke hired Arms of Grace parishioners to help him run several DME companies that fraudulently billed Medicare for expensive power wheelchairs and other supplies that were not provided or were medically unnecessary (one patient even performed jumping jacks to show agents that he did not need a wheelchair).  Iruke also allegedly engaged in extensive efforts to hide his scheme, including stuffing papers into a toilet and giving employees cellphones to use in order to avoid law enforcement wiretaps.  Iruke allegedly used the money from his schemes to pay for luxury cars, international travel, and millions of dollars of home remodeling expenses.  Iruke was found guilty after a two week trial, along with his wife, Connie Ipokh, who was sentenced to 36 months in prison.[53]  Iruke was also ordered to pay $6.7 million in restitution.[54]

            Henry Jones

Henry Jones–the owner of multiple DME companies in Louisiana–received a 15 year sentence for his role in several schemes to defraud Medicare.  Jones was accused of operating several companies that fraudulently billed Medicare for medical equipment that was either not medically necessary or not provided.  Jones was also charged in connection with his work as a patient recruiter for another DME company engaged in a similar scheme.  After fraud convictions in two jury trials relating to two of the DME companies, Jones pled guilty to charges relating to the remaining companies.  A number of alleged co-conspirators received shorter sentences; most notably, Jones’ ex-wife was sentenced to seven years in prison.[55]  Jones was also ordered to pay $13.4 million in restitution.[56]

            ATC Defendants

Several defendants received sentences for their roles in the alleged $205 million fraud at mental health care company American Therapeutic Corporation (“ATC”).  Most notably, Dr. Mark Willner, Dr. Alberto Ayala, and Vanja Abreu received sentences of 10 years, 10 years, and 9 years, respectively.  According to evidence presented at trial, ATC paid kickbacks and submitted fraudulent claims to Medicare.[57]  As reported in our 2011 Year-End Update, the alleged ATC fraud scheme previously resulted in what the DOJ believes to be the longest sentences ever imposed for health care fraud, as ATC executives Lawrence Duran, Marianella Valera, and Judith Negron were sentenced to 50 years, 35 years, and 35 years, respectively.  To date, 20 individuals have pled guilty or been convicted at trial.

            Serendipity Home Health Defendants

Ariel Rodriguez and Reynaldo Navarro, owners of Miami home health agency Serendipity Home Health Inc., were sentenced to 73 and 74 months in prison, respectively, in connection with their roles in an alleged $20 million Medicare fraud scheme.  They also were ordered to pay $14 million in restitution along with their co-defendants.  In their guilty plea, Rodriguez and Navarro admitted to conspiring to bill Medicare for unnecessary services and bribing patient recruiters to direct patients to Serendipity.[58]

            Healthcare 1 LLC Owner

The owner of Healthcare 1 LLC, Medical 1 Patient Services LLC, Lifeline Healthcare Services Inc., and Rose Medical Inc. pled guilty to one count of conspiracy to commit health care fraud and one count of conspiracy to defraud the United States in connection with an alleged Medicare fraud scheme involving false claims and illegal kickback payments for unnecessary DME.  The companies allegedly hired patient recruiters to obtain prescriptions for DME such as leg braces, arm braces, and power wheel chairs.  Specifically, the patient recruiters allegedly obtained information from Medicare beneficiaries and used the information to acquire prescriptions for DME from the beneficiaries’ primary care physicians.  The recruiters were allegedly paid illegal kickbacks for the DME prescriptions, which were not medically necessary.[59]

            Medical Facilities of America Director

The former director of corporate maintenance and renovations at Medical Facilities of America Inc. was sentenced to 63 months in prison and ordered to pay a total of $698,088 in restitution and additional taxes, penalties, and interest.  He pled guilty to two counts of conspiracy to commit mail and honest services fraud for allegedly steering contracts for the repair, maintenance, and renovation of the company’s facilities in return for kickbacks, and two counts for failing to include the kickbacks and other income he received on his federal income tax returns.  According to the complaint, the former director steered contracts worth over $5 million by creating fictitious competitor bids that were higher than the quotes submitted by the vendors who paid him in order to create the appearance of competition, and directed subordinates to solicit quotes only from vendors who paid him.[60]

            Foreign Corrupt Practices Act (“FCPA”)

            Pfizer

Pfizer resolved investigations by the DOJ and the Securities and Exchange Commission (“SEC”) into alleged violations of the FCPA by a Pfizer subsidiary, Pfizer H.C.P. Corporation, which had allegedly paid bribes to non-U.S. doctors and health care system personnel in exchange for prescribing Pfizer products.  The DOJ brought an action alleging that doctors were paid for writing prescriptions and falsely booking the transactions in Bulgaria, Croatia, Kazakhstan, and Russia.  Pfizer entered into a deferred prosecution agreement (“DPA”) with the DOJ in which it agreed to pay $15 million in criminal fines.  Pfizer also agreed to implement rigorous internal controls and to cooperate fully with the DOJ.  The DOJ described the fine as a “downward departure” from the U.S. Sentencing Guidelines, citing Pfizer’s “extraordinary cooperation” and voluntary self-disclosure.

Pfizer also settled a complaint by the SEC alleging that improper payments were made to foreign officials in Bulgaria, China, Croatia, the Czech Republic, Italy, Kazakhstan, Russia, and Serbia.  The SEC also brought charges against Wyeth LLC, acquired by Pfizer in 2009, for payments for prescriptions in China, Indonesia, and Pakistan.  Pfizer consented to the entry of a final judgment ordering it to pay disgorgement of $16 million in profits and interest of $10.3 million.  Wyeth consented to the entry of a final judgment ordering it to pay disgorgement of $17.2 million in net profits and interest of $1.7 million.[61]

            Eli Lilly & Co.

In December, Eli Lilly agreed to settle SEC claims that it bribed officials in China, Brazil, Russia, and Poland for $29.4 million.  The company stated that it received notification of the FCPA probe in 2003 and cooperated with federal authorities in the investigation.  As part of the settlement, Lilly will undergo a 60 day review by an external consultant of its FCPA compliance program.[62]

            Biomet

Orthopedic manufacturer Biomet Inc. entered into a three-year DPA and agreed to pay a $17.2 million criminal penalty to settle allegations that, between 2000 and 2008, Biomet and its subsidiaries made more than $1.5 million in direct and indirect corrupt payments to employees of state-owned health care providers in Argentina, Brazil, and China and then used fake invoices to disguise the payments.  Under the terms of the settlement, the DOJ agreed to drop the charges against Biomet in three years if the company implements compliance reforms and hires an outside monitor to oversee the process.  Biomet benefited from cooperating with ongoing investigations of other companies and individuals.  In a separate settlement with the SEC, the company agreed to disgorge $4.4 million in profits that it allegedly earned from improper payments and pay an additional $1.1 million in interest.[63]

            Smith & Nephew

Medical device maker Smith & Nephew Inc. agreed to pay a $16.8 million penalty to the DOJ pursuant to a DPA.  This payment resolved allegations that Smith & Nephew paid government-employed doctors in Greece to use its products.  The DOJ and the SEC first made an inquiry in 2007, asking the company to investigate allegedly improper payments to government-employed physicians.  The company disclosed it had been selling its products through a Greek distributor who transferred cash incentives to Greek physicians who used Smith & Nephew orthopedic products for their patients.  Under the terms of the DPA, the company will have to appoint an outside corporate monitor for 18 months, and its reporting obligations are set to last for three years. The DOJ noted that the company cooperated fully in the government’s investigation, voluntarily disclosed the violation, and took remedial measures including implementation of an enhanced compliance program.  Smith & Nephew Inc.’s parent company, Smith & Nephew PLC, also resolved civil SEC charges in a consent agreement under which it agreed to disgorge $5.4 million in wrongful profits to the SEC.[64]

            Marubeni Corp.

Japanese trading company Marubeni Corp. agreed to pay a $54.6 million criminal penalty under a two-year DPA to resolve FCPA charges related to its alleged participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement, and construction contracts to build liquefied natural gas facilities in Nigeria.  To assist in obtaining and retaining the contracts, the primary parties allegedly hired two agents–Marubeni and a United Kingdom solicitor–to pay bribes to a wide range of Nigerian government officials.  Under the terms of the DPA, Marubeni agreed to retain a corporate compliance consultant for a term of two years.  The agreement was reached notwithstanding the fact that Marubeni is a Japanese corporation (its U.S. based subsidiary was not a party to the case) and all relevant actions occurred outside of the United States.  But Marubeni was found liable as an agent of a “domestic concern,” namely Kellogg, Brown and Root, and an agent of an “issuer,” since those two companies were members of the joint venture undertaking the alleged scheme.[65]

            Other Notable Settlements and Judgments

            ADA Enforcement

Several settlements this year involved enforcement of the Americans with Disabilities Act (“ADA”) against healthcare providers.  Michigan’s Henry Ford Health System reached a settlement with the DOJ after a complaint was filed alleging Henry Ford had failed to provide appropriate auxiliary aids and services under the ADA because it did not provide sign language interpreter services for a hearing-impaired patient.  This allegedly deprived the patient of the opportunity to participate in his own health care decisions.  Under the settlement, Henry Ford will provide staff training on ADA requirements, implement policies to provide aids for hearing-impaired patients or their companions, appoint an individual to ensure access to services offered pursuant to the ADA at each of its facilities, and make a payment to the individuals who were denied interpreter services.[66]  The DOJ also reached a settlement related to provision of interpreter services to hearing-impaired individuals with Iowa’s Trinity Health System.[67]

In May, the DOJ announced settlements with Mercy Medical Group and Knoxville Chiropractic Centers, after HIV-positive patients alleged in separate suits that they were subject to discriminatory denial of medical treatment at a facility operated by each provider.  Each settlement requires that the provider pay $60,000 to the complainant along with additional civil penalties.  The providers must also arrange for ADA compliance training.[68]

            Stryker Corporation

Stryker Corporation announced that it recorded a $33 million charge for the second quarter of 2012 after offering that amount to the DOJ to settle an investigation into sales and marketing of the company’s OtisKnee device.  Stryker received a related subpoena in 2010.  According to the company’s SEC filing, no final resolution with the DOJ had yet been reached.[69]

            Medical Device Manufacturer

A medical device manufacturer reached a settlement with the DOJ regarding warranty discounts for the company’s pacemakers and defibrillators.  The device manufacturer will pay $3.65 million to resolve civil allegations that it did not provide the same “credits” it had marketed when pacemakers and defibrillators required replacement while still under warranty.  The government asserted that, as a result, the company submitted invoices to government payors like the Department of Veterans Affairs hospitals that overstated the cost of replacing those devices.[70]

            Omnicare, Inc.

Omnicare, Inc., a leading pharmaceutical provider for senior citizens, will pay a $50 million civil penalty to resolve claims that it violated the Controlled Substances Act.  The DOJ contended that Omnicare, among other things, dispensed controlled substances to nursing-home residents without an appropriate prescription and did not properly document prescriptions that were only partially filled–preventing the U.S. Drug Enforcement Administration from performing an audit.[71]

II.     Notable Investigations and Actions

            Off-Label Marketing

            Johnson & Johnson

Johnson & Johnson disclosed in an August SEC filing that the DOJ had requested information from Janssen Pharmaceuticals, Inc. regarding the marketing and promotion of the antibiotic Doribax.  The same report stated that the U.S. Attorney’s Office for the District of Massachusetts had subpoenaed documents from Acclarent, Inc. related to marketing of Relieva Stratus  Microflow Spacer products, which are used to treat sinus problems.  Both Johnson & Johnson units have provided documents to federal authorities and plan to cooperate with the inquiries.[72]

            Medicare and Medicaid Billing Fraud

            North East Medical Services

The United States elected to intervene in a qui tam suit filed in the Northern District of California against North East Medical Services, Inc. following an investigation by the DOJ Civil Division, HHS-OIG, the U.S. Attorney’s Office for the Northern District of California, and the California Attorney General’s Office.  North East Medical Services is a federally-qualified health center alleged to have under-reported amounts it received for treating Medicaid beneficiaries so that it would receive higher reimbursement.[73]  In its complaint-in-intervention, the United States asserted that North East Medical Services was required to report all payments received from the managed care organizations that contract with Medi-Cal, California’s Medicaid program.  Instead, according to the complaint, North East Medical Services significantly understated payments it had received from those organizations–resulting in the receipt of an inflated year-end payment from Medi-Cal.[74]

            AseraCare Hospice

The United States also intervened in qui tam litigation in the Northern District of Alabama and filed a criminal complaint against AseraCare Hospice.  AseraCare, a national chain with hospice providers operating in 19 different states, is alleged to have submitted claims to Medicare for palliative care given to patients who were not terminally ill.[75]

            HCA

HCA Holdings, Inc., the nation’s largest for-profit hospital chain, disclosed that it had received requests for information from the U.S. Attorney’s Office in Miami regarding “reviews assessing the medical necessity of interventional cardiology services.”  HCA further stated that, pending additional investigation, it believed the types of reviews requested had occurred at approximately ten of its hospitals.[76]  Pursuant to a previous settlement involving alleged Medicare fraud, HCA was operating under a CIA through late 2008.[77]

            Beth Israel Deaconess Medical Center

Beth Israel disclosed that in 2010 it received a subpoena for six years of records from the DOJ and HHS-OIG as part of an investigation into possible billing fraud.  A Massachusetts healthcare union, 1199SEIU United Healthcare Workers East, previously sent a letter questioning what it described as a “high rate of one-day stays” at Beth Israel to the hospital’s board and to the Office of Inspector General in Boston.  The focus of the DOJ and HHS-OIG inquiry is unknown at this time.[78]  

            Actions Against Individuals

            HEAT Medicare Fraud Strike Force Actions

In an action publicized as the largest “one-day takedown” ever orchestrated by the Medicare Fraud Strike Force of HEAT (the Health Care Fraud Prevention & Enforcement Action Team), 107 people were charged in May in locations ranging from Miami to Los Angeles.  The individual defendants were charged with different crimes, including health care fraud, money laundering, illegal diversion of controlled substances, and anti-kickback violations.  In addition to the arrests and charges, HHS announced that payment also would be stopped to 52 health care providers that are suspected of fraud.[79]

The charges stem from unrelated alleged fraudulent schemes involving a range of health care services including home health, mental health, DME (durable medical equipment), and ambulance services.  In Louisiana, defendants were charged with a $225 million fraud related to patient recruitment for a community mental health center (“CMHC”).  The patients allegedly did not receive any services or received inappropriate services through the CMHC.  Ten defendants associated with another CMHC in Miami were charged in connection with $63 million in alleged false billings.[80]

A second major Medicare Fraud Strike Force takedown announced in October 2012 led to charges against 91 individuals for $429.2 million in alleged false billings.  The various, unrelated alleged crimes involved fraud related to home health, mental health, ambulance transportation, and other medical services.  As with the May 2012 Strike Force takedown, HHS also took action to stop payment to health care providers linked to the alleged frauds, pending resolution of an investigation.[81]

Specific charges publicized during the October takedown included fraud counts against three Miami defendants associated with LTC Professional Consultants and Professional Home Care Solutions Inc. for approximately $74 million in alleged false billings.  Four Los Angeles defendants were alleged to have generated $49.2 million in false billings for ambulance services through Alpha Ambulance, Inc.  In Houston, administrators at a CMHC allegedly provided Medicare patients items like cigarettes and coupons redeemable at the hospital’s “country stores”; in exchange for these kickbacks, the beneficiaries allegedly attended partial hospitalization programs, which allowed the CHMC to bill Medicare for services the beneficiaries never received.  One administrator of the Houston CHMC previously pled guilty to paying kickbacks related to this scheme, which led to $116 million in alleged false billings.[82]

            Dr. Dilip Kachare

A grand jury indicted Dr. Dilip Kachare, a physician based in Utica, New York, on charges of mail and healthcare fraud.  The charges followed an FBI and HHS-OIG investigation that allegedly revealed that Dr. Kachare had submitted reimbursement claims to Medicare and Medicaid for such a high volume of services on given dates that they exceeded what could have realistically been performed in one day.  Dr. Kachare pled not guilty to the charges and faces a ten-year sentence on the health care fraud counts.  The government also seeks $12 million in restitution.[83]

            DME Supply Company Owners

Rajinder Singh Paul and Baljit Kaur Paul, the husband and wife owners of a durable medical equipment wholesale supply company, were indicted for submitting invoices to Medicare in excess of the prices at which they actually sold wheel chairs to customers.  The fraud is alleged to total $16.6 million.  If convicted, the Pauls each face a 15-year sentence.[84]

            Dr. Jacques Roy

Texas physician Dr. Jacques Roy was indicted for nine counts of health care fraud and three related conspiracy counts for his alleged lead role in a $375 million fraud–the largest alleged health care fraud operated by a single person uncovered since the inception of the Medicare Fraud Strike Force.  Roy headed an association that certified patients for home health care and also provided home health visits, many of which the government claims were unnecessary.  In addition to charges filed against individuals, 78 home health agencies associated with Roy also received suspensions from CMS.[85]

            Dr. Hicham Elhorr

Dr. Hicham Elhorr, a Detroit-area physician who owned a physician home visiting service, was charged with health care fraud as a result of a Medicare Fraud Strike Force investigation.  Dr. Elhorr allegedly referred Medicare patients for medically unnecessary services and submitted claims through his business to Medicare for services that were never performed.  The fraudulent billings to and reimbursements from Medicare resulting from Dr. Elhorr’s activities are alleged to total $40 million.[86]

            Helene Michele

A New York jury convicted Helene Michele of Medicare fraud totaling over $10 million and wrongful disclosure of private patient information.  The government established at trial that Ms. Michele–the owner of a medical equipment company–stole patient information and used it to submit false claims to Medicare.  The case represents one of the first in the country in which an individual was criminally prosecuted for wrongful disclosure of private patient information under HIPAA.[87]

            FCPA

            Teva Pharmaceutical Industries

Teva Pharmaceutical Industries Ltd. reported that it received a subpoena in July from the SEC relating to an investigation of potential FCPA violations with respect to activities in Latin America.  Teva, the largest maker of generic drugs in the world, reported that it would conduct a voluntary investigation with the assistance of outside counsel into business practices that might relate to the FCPA probe.  The SEC subpoena was followed by additional document requests from the DOJ in October 2012.[88]

            Bristol-Myers Squibb

In April, Bristol-Myers Squibb Co. disclosed that it had received an SEC subpoena regarding the company’s “sales and marketing practices in various countries.”  The company previously reported that it was the subject of an SEC inquiry commencing in 2006 regarding potential FCPA violations involving the company’s German subsidiaries.[89]

            Other Notable Investigations and Actions

            Wright Medical

In August 2012, the U.S. Attorney’s Office for the Western District of Tennessee subpoenaed twelve years of records relating to Wright Medical’s Profemur hip replacement products.[90]

            Allergan

Allergan, Inc. reported that it received a subpoena from HHS-OIG for documents related to the Lap-Band–a gastric banding device used for treatment of obesity.[91]  Earlier in the year, Rep. Henry Waxman and other Congressional members called for hearings to probe promotion and marketing of the Lap-Band device.  Requests for a congressional inquiry came following reports of deaths among patients who underwent procedures at clinics affiliated with the marketing company responsible for the slogan “1-800 GET-THIN.”  In February 2012, Allergan announced that it would discontinue Lap-Band sales to entities affiliated with 1-800-GET-THIN.[92]

III.     Current Trends

            Continuing Reliance on the False Claims Act

The DOJ’s use of the False Claims Act as one of its primary weapons against health care fraud surged in 2012 (see Gibson Dunn’s 2012 Year-End False Claims Act Update).  In the fiscal year, the DOJ secured nearly $5 billion in settlements under the False Claims Act, beating its past record recovery for a single year by over $1.7 billion.  Over $3 billion of the recoveries involved health care fraud.  Nearly $2 billion was recovered in cases involving false claims for drugs and medical devices.  Indeed, since January 2009, the federal government has collected $13.3 billion in recoveries under the False Claims Act, which is “the largest four-year total” in history, and accounts for “more than a third of total recoveries since the act was amended 26 years ago in 1986.”  The vast majority of those collections were in the health care industry, leading to “historic results:  From January 2009 through the end of the 2012 fiscal year, the department used the False Claims Act to recover more than $9.5 billion in federal health care dollars – also a record for any four-year period.”[93]

As noted in our 2011 Year-End Update, the Affordable Care Act amended the False Claims Act to provide additional incentives for whistleblowers to report fraud and strengthened the provisions of the federal Anti-Kickback Statute.  It is thus not surprising that a record $3.3 billion of the $4.9 billion in recoveries for fiscal year 2012 came from suits filed under the whistleblower provisions of the False Claims Act.  In total, 647 qui tam suits were filed.[94]

There are some signs, however, that courts may look to narrow the reach of the False Claims Act.  In a recent decision, a split panel of the Second Circuit Court of Appeals vacated the criminal conviction of a pharmaceutical sales representatives under the Food, Drug, and Cosmetic Act (the “FDCA”) for off-label promotion of a drug.  United States v. Caronia, ___ F.3d ___, 2012 WL 5992141 (2d Cir. Dec. 3, 2012).  Following the Supreme Court’s recent decision in Sorrell v. IMS Health, 131 S. Ct. 2653, 2659 (2011), which held that speech in aid of pharmaceutical marketing is protected by the First Amendment, the Second Circuit held that the FDCA does “not prohibit[] and criminaliz[e] the truthful off-label promotion of FDA-approved prescription drugs” and  “the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.”  Caronia, slip op. at 51.

As we reported in our 2012 Year-End False Claims Act Update, though Caronia‘s immediate reach on the False Claims Act is limited and far from certain, its reasoning may translate into a defense against False Claims Act liability in some off-label cases.  After all, if the First Amendment protects a manufacturer’s right to speak truthfully regarding off-label uses of its product, then how can the exercise of that right cause the submission of legally false claims and why should the manufacturer be burdened by the potential imposition of treble damages plus penalties under the False Claims Act?  Thus, Caronia could alter the dynamics of settlement negotiations with the DOJ.  False Claims Act cases involving pharmaceutical and medical device companies often are investigated in parallel with criminal cases under the FDCA, which allows for misdemeanor criminal liability without any required showing of knowledge or intent.  This low bar for establishing liability, along with the significant collateral consequences of conviction (a misdemeanor conviction under the FDCA can trigger permissive exclusion from federal healthcare programs), offers the DOJ tremendous leverage.  If the scope of possible criminal liability diminishes in the wake of Caronia, manufacturers may have more leverage in negotiations with the government.  Our Year-End False Claims Act Update and a recent client alert provide more detail on the possible implications of the Caronia ruling.

Days after the Caronia ruling, the Ninth Circuit Court of Appeals heard a similar First Amendment challenge to the wire fraud conviction of former Intermune Inc. CEO W. Scott Harkonen for allegedly false and misleading statements made in a press release regarding a clinical study for the drug Actimmune.  See United States v. Harkonen, Nos. 11-10209, 11-10242 (9th Cir.). Though Harkonen was not convicted under the FDCA (he was tried on misbranding charges under the FDCA and wire fraud, but convicted only of wire fraud), a ruling by the Ninth Circuit that echoes the reasoning of the Caronia court may have further implications for FDCA prosecutions and the reach of the False Claims Act.

            Increased Cooperation Among Federal and State Agencies and Private Entities

The record recovery under the False Claims Act as well as other health care fraud prevention is at least in part the result of continued cooperation among HHS, the DOJ, and state and local investigators and prosecutors, and, more recently, private organizations.

HEAT (the Health Care Fraud Prevention and Enforcement Action Team), which was created in 2009 and is directed by the DOJ and HHS, continued to combat health care fraud in 2012.  HEAT touted its “unprecedented, record-breaking successes in combating health care fraud,” and cited the Affordable Care Act as a source for new tools to strengthen its resources.  These include:

• Tougher sentences for health care fraud violations, in particular sentences that are 20 to 50 percent longer for crimes that involve more than $1 million in losses;
• Expanding the work of contractors policing Medicare for waste, fraud, and abuse to Medicaid, Medicare Advantage, and Medicare Part D programs; and
• Increased ability for multi-agency cooperation.[95]

HEAT’s Medicare Fraud Strike Force operations in nine cities led to two significant takedowns in 2012 which brought charges against more than 200 individuals for alleged participation in Medicare fraud schemes; numerous other individuals were charged outside of these two takedowns.  HHS also took administrative action against 30 health care providers, including suspending payments under the Affordable Care Act.

In addition, HHS and the DOJ announced a new public-private partnership among the federal government, state officials, major private health insurance organizations, and other health care anti-fraud groups to prevent health care fraud.  This partnership will allow for the sharing of information and best practices to detect and prevent fraud on the health care system.  It will enable those on the front lines of industry anti-fraud efforts to share their insights more easily with investigators, prosecutors, policymakers, and other stakeholders.  It will help law enforcement officials to more effectively identify and prevent suspicious activities, better protect patients’ confidential information and use the full range of tools and authorities provided by the Affordable Care Act and other essential statutes to combat and prosecute illegal actions.[96]

            Continuing Prominence of the Foreign Corrupt Practices Act

In 2012, U.S. authorities continued to focus on non-compliance of health care sector companies with the FCPA (see Gibson Dunn’s 2012 Year-End FCPA Update).  Because of the nature of the health care systems in many countries, and because physicians in government-operated hospitals are considered government officials, health care companies come into constant contact with government officials internationally.  When combined with the billions in revenue that health care companies generated overseas, it is not surprising that the DOJ, SEC, and HHS continue to aggressively focus on international anti-corruption enforcement.  As the DOJ has stated, “robust FCPA enforcement has become part of the fabric of the Justice Department,” and is “now a reality that companies know they must live with and adjust to.”  Moreover, the government is “cooperating with foreign law enforcement on FCPA cases more closely than ever before.”[97]

The FCPA statute allows the government to essentially apply U.S. anti-kickback laws to foreign conduct that does not directly affect U.S. federal health care programs.  In this way, companies may be targeted under both the FCPA and the Anti-Kickback Statute for similar conduct.

While the full extent of the government’s interest in the health care sector is not known, many of the industry’s heavy-hitters–including Merck, AstraZeneca, Bristol-Meyers Squibb, GlaxoSmithKline, Eli Lilly, Biomet–have been investigated for possible FCPA violations.  Multiple health care companies, including Johnson & Johnson and Smith & Nephew, have spent millions to settle FCPA claims.  As noted above, Pfizer and recently acquired Wyeth paid a combined $60 million to settle FCPA charges brought by the DOJ and the SEC.[98]

            Disclosures of Physician-Industry Relationships

The Physician Payments Sunshine Act, enacted in 2010 as Section 6002 of the Affordable Care Act, requires that health care companies track all cash, in-kind items or services, stocks, consulting fees, honoraria, gifts, entertainment, travel, meals, education research, charitable contributions, royalties, ownership interests, grants, and many other benefits provided to physicians.  The Affordable Care Act establishes a national online registry for all industry payments of $10 or more to physicians, and all cumulative payments of $100 per year per physician.  Beginning on March 31, 2013, companies will be required to make annual public reports of such payments, with a searchable database available as of September 30, 2013.  Fines for failure to comply–whether intentional or not–are severe.  Companies could be fined up to $150,000 per year for inadvertent violations, and up to $1 million for knowing violations.[99]

To carry out the Sunshine Act, the Affordable Care Act mandated that HHS implement procedures to allow manufacturers to submit information on physician payments, and for HHS to make such information available to the public.  HHS delegated this task to CMS (the Centers for Medicare and Medicaid Services), which published a proposed rule on December 18, 2011.  Under the proposed rule, CMS would not require companies to begin collecting data until 90 days after the publication of the final rule.[100]  On May 3, 2012, CMS announced that because of the volume of input it received during the comment period for the proposed rule, it would “not require data collection by applicable manufacturers and group purchasing organizations before January 1, 2013.”[101]

The proposed rule outlined the requirements for the content and organization of payment reports, and mandated that manufacturers maintain books and records for at least five years to enable an audit for compliance with the law.  The proposed rule also expanded the definition of an “applicable manufacturer” to encompass any company that manufactures a covered product for sale in the U.S.  The rule would clarify the definitions of “covered drug, device, biological, or medical supply” and “covered recipients.”[102]

After long delays,[103] CMS completed the Physician Payment Final Rule, sending it to the Office of Management and Budget on November 27, 2012.  The Office of Management and Budget considered the rule’s likely economic impact on industry and the government, and has listed the rule as “economically significant,” meaning that it is “likely to have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy.”[104]  The final rule was issued on February 1, 2013, and was officially published in the Federal Register on February 8, 2013.[105]

            Continued Congressional Scrutiny

The Senate Committee on Finance, which has jurisdiction over the Medicare and Medicaid programs, has continued to focus on fraud in the health care industry.  In particular, Senator Charles Grassley of Iowa, a senior member on the Committee, has continued to focus on the relationships between physicians and the health care industry.  Senator Grassley has been a driving force behind the federal government’s efforts to expose those relationships–ultimately resulting in passage of the Sunshine Act as discussed above.  He also has been active in castigating CMS for its failure to expeditiously implement the Sunshine Act.  Over the past year, Senator Grassley continued to publicize the health care industry’s financial relationships, and expose potential conflicts of interest, including in May 2012, when he initiated an investigation into the connections between drug manufacturers, including Johnson & Johnson, and medical groups and physicians who have advocated the increased use of narcotic painkillers.[106]

Senator Grassley and the Committee have repeatedly spurred legislative investigation of various financial arrangements in the health care arena by capitalizing on media reports and other sources of information identifying potential conflicts of interest.  We expect these efforts to continue gaining steam, as the codification under the Affordable Care Act may alter norms with respect to disclosures, and increase the scrutiny and investigation of additional types of financial arrangements going forward.

IV.     Future Trends

At a time when most federal prosecutors’ budgets are frozen, funding for health care compliance enforcement continues to increase.  In addition to authorizing additional tools and resources for the fight against health care fraud, the Affordable Care Act provides $350 million in funding for the Health Care Fraud and Abuse Control Program. [107]  And in its fiscal year 2013 budget request, the DOJ asked for $71.7 million in program increases to expand DOJ’s investigative and litigation capacity to address health care fraud.  This funding increase would strengthen and expand the Medicare Fraud Strike Forces, support expansion of the DOJ’s civil litigation efforts in addressing health care fraud, specifically in areas such as pharmaceutical fraud and off-label marketing, and bolster Civil Rights Division activities supporting health care fraud such as eliminating abuse in health care facilities.[108]

The increased spending has paid dividends.  Since 2009, return-on-investment for health care fraud enforcement spending has grown from $4.41[109] to $7[110] for every dollar spent.  Moreover, the government has long recognized that the potential budgetary savings that could be realized through eliminating fraud, waste, and abuse are far greater than the money recovered through judgments and settlements.[111]  Of course, fraud, waste, and abuse can only be prevented if companies and individuals face penalties so severe that they cannot account for them as a cost of doing business.  Enforcement officials are keenly aware of this reality and, through the increasingly harsh penalties they are imposing on companies and individuals alike, “seek to disprove the ill-advised notion that health care fraud enforcement is simply the cost of doing business.”[112]

In the coming year, we expect more blockbuster settlements and increased imposition of criminal penalties on companies looking for a resolution.  We expect more enforcement actions and investigations.  We expect increasing focus on the prosecution and conviction of individual defendants, including health care executives, especially as HEAT (and its Medicare Fraud Strike Force) solidifies its role as a formidable presence in the enforcement area.  We expect continuing reliance by the government on the False Claims Act–and in particular the qui tam lawsuits initiated by whistleblowers who may receive up to 30% of any recovery–to detect and expose fraud and to negotiate hefty settlements.

Given the trend toward more onerous corporate and individual penalties, we also expect that companies will increasingly avail themselves of the opportunity to voluntarily disclose instances of fraud.  Of course, companies that decline to do so (because of ineffective compliance programs or otherwise) could face scrutiny based on voluntary disclosures of a competitor, supplier, or customer.

It is clear that the increased focus on health care compliance enforcement is here to stay.  All signs indicate that recent enforcement trends will continue in 2013 and beyond.  Now, more than ever, it is imperative that companies institute and maintain rigorous health care compliance systems and practices.

© 2013 Gibson, Dunn & Crutcher LLP

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.