The Anti-Kickback Statute’s Role in Health Insurance Fraud Cases

Alleged violations of the federal Anti-Kickback Statute (AKS) are more and more often at the heart of actions involving accusations of health insurance fraud brought under the False Claims Act (FCA). Consider, for example, the amended complaint that was just filed by the U.S. Justice Department to add six physicians as defendants to the original action it filed in April, involving alleged kickbacks and improper laboratory testing claims billed to federal health care programs. See https://www.justice.gov/opa/pr/justice-department-files-false-claims-act-complaint-against-six-physicians-texas-relating.

According to the government’s amended complaint, the six physician defendants received thousands of dollars in kickbacks in return for their referrals of laboratory testing. The government alleged that laboratories True Health Diagnostics LLC (THD) and Boston Heart Diagnostics Corporation (BHD) conspired with small Texas hospitals, including Rockdale Hospital d/b/a Little River Healthcare (LRH), to pay physicians to induce referrals to the hospitals for laboratory testing, which was then performed by THD or BHD. As alleged, the hospitals paid a portion of their laboratory profits to recruiters, who in turn kicked back those funds to the referring physicians.

The recruiters allegedly set up companies known as management service organizations (MSOs) to make payments to referring physicians that were disguised as investment returns but that actually were based on, and that were offered in exchange for, the physicians’ referrals. The complaint alleged that laboratory tests resulting from this referral scheme were billed to various federal health care programs, and that the claims not only were tainted by improper inducements but, in many cases, also involved tests that were not reasonable and necessary.

The ultimate resolution of this case, of course, remains to be seen. But the proliferation of similar business arrangements that induce referrals for health care goods and services is forcing more courts to grapple with whether these arrangements amount to knowing or willful violations of the AKS (i.e., whether they constitute kickbacks).

This column first briefly discusses a recent case, United States v. McKesson Corp., No. 15-CV-0903 (RA) (S.D.N.Y. May 5, 2022), that illustrates the kinds of allegations that courts are being asked to evaluate in AKS-related FCA complaints.

In this case, the complaint against McKesson Corporation (which sells pharmaceuticals, medical supplies and related services to health care providers) and against two of its subsidiaries (collectively, McKesson) alleged that McKesson offered business-management tools to specialty oncology practices that joined programs requiring them to purchase a substantial portion of their drugs from McKesson, that doing so violated the AKS, and that claims for reimbursement submitted by these practices to the government were tainted by the alleged kickback scheme and, therefore, violated the FCA.

This column then briefly describes the AKS and the FCA and explores in some detail the essential elements of a claim under those statutes.

Finally, this column examines how the McKesson court applied the law to the allegations in the complaint regarding “renumeration” and “scienter” under the AKS and how it ruled on the defendants’ motion to dismiss.

The McKesson Complaint

The claims against McKesson were based primarily on McKesson’s use of two business-management tools. The complaint alleged that McKesson provided these tools, for free, on a quarterly basis to a number of oncology practices in the Southeast. However, according to the complaint, the tools were not distributed to all of McKesson’s customers. Instead, they allegedly were offered only to practices that contracted to purchase a certain volume of their drugs from McKesson.

McKesson moved to dismiss the complaint, arguing that it:

• Failed to plausibly allege that the business-management tools constituted remuneration under the AKS;
• Failed to plausibly allege that McKesson acted with the requisite scienter; and
• Failed to plead the fraudulent scheme with the particularity required by Federal Rule of Civil Procedure 9(b).

The Statutes

The FCA creates liability for any person who, among other things, “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval [or] knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(A)-(B). A claim is defined in 31 U.S.C. § 3729(b)(2)(A) as “any request or demand for money from an officer, agent, employee, or contractor of the United States.”

The AKS prohibits any individual or entity from “knowingly and willfully offer[ing] or pay[ing] any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person . . . to purchase . . . or arrange for or recommend purchasing . . . any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program.” 42 U.S.C. § 1320a-7b(b)(2)(B). Claims resulting from an AKS violation constitute “a false or fraudulent claim” for purposes of the FCA. 42 U.S.C. § 1320a-7b(g); see also United States v. Novartis Pharmaceuticals Corp., No. 13-CV-3700 (S.D.N.Y. Mar. 24, 2020).

Because FCA claims fall within the express scope of Rule 9(b), a party bringing a civil action under the FCA (known as a relator) must state with particularity the circumstances constituting fraud. See, e.g., Gold v. Morrison-Knudsen Co., 68 F.3d 1475 (2d Cir. 1995). Although the circumstances of the fraud must be pled with particularity, “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally” under Rule 9(b). Rule 9(b) demands specificity, but, as the U.S. Court of Appeals for the Second Circuit has indicated, “it does not elevate the standard of certainty that a pleading must attain beyond the ordinary level of plausibility.” United States ex rel. Chorches for Bankruptcy Estate of Fabula v. American Medical Response, Inc., 865 F.3d 71 (2d Cir. 2017).

When an FCA claim is predicated on a violation of the AKS, courts have ruled that both the FCA and AKS violations must be pled in compliance with Rule 9(b). See, e.g., United States v. Novartis Pharms. Corp., No. 13-CV-3700 (KMW) (S.D.N.Y. Mar. 24, 2020).

Elements of an AKS/FCA Claim

As noted above, “remuneration” is required to establish a violation of the AKS. That term, however, is not defined by the statute. Filling that gap, courts have consistently found that the term “remuneration” has an “expansive scope” and that it can encompass anything of value. See, e.g., State v. MedImmune, Inc., 342 F.Supp.3d 544 (S.D.N.Y. 2018) (collecting cases).

An AKS violation also requires that a defendant acted “knowingly and willfully.” For a number of years, federal circuit courts of appeals were divided as to the mental state required to allege a “willful” violation, yielding different results. See, e.g., United States ex rel. Bilotta v. Novartis Pharmaceuticals Corp., 50 F.Supp.3d 497 (S.D.N.Y. 2014). The circuit split was resolved in 2010 by the Patient Protection and Affordable Care Act, which added the following language to the AKS in 42 U.S.C. § 1320a-7b(h):

Actual knowledge or specific intent not required: With respect to violations of this section, a person need not have actual knowledge of this section or specific intent to commit a violation of this section.

Since this amendment, most courts have understood the term willfully, as used in the AKS, as following the “traditional rule” that “knowledge that the conduct is unlawful is all that is required.” Bryan v. United States, 524 U.S. 184 (1998). At least one court in the U.S. District Court for the Eastern District of New York has expressly adopted this definition, United States v. Novartis AG, No. 04-CV-4265 (NGG) (RLM) (E.D.N.Y. Feb. 8, 2011) (to meet the AKS’s “willfulness’ requirement” the defendant must have “act[ed] with the intent to do something that the law forbids”). Thus, under these rulings, to withstand a motion to dismiss, a complaint must at least give rise to a plausible inference that the defendant knew that its conduct was unlawful, but the complaint need not allege actual knowledge of the AKS or a specific intent to violate it.

The McKesson Court’s Decision

The McKesson court granted the defendants’ motion to dismiss, with leave to amend.

In its decision, the court first found that the complaint plausibly alleged that the two business-management tools offered by McKesson to oncology practices constituted “remuneration” under the AKS. The management tools analyzed the profitability of different drugs based on a patient’s insurer and calculated profit margins for an entire treatment regime. McKesson provided these management tools for free only to “commitment program customers” who were contractually required to purchase a certain volume of drugs from McKesson, rather than to all customers.

McKesson argued that the management tools lacked substantial value because the underlying data was available for free; that the tools did not have value because they provided only potential cost-savings; and that the tools were not independent of McKesson’s product offerings, and thus had no value to non-McKesson customers. The court found these arguments unavailing at the motion to dismiss stage.

In its decision, the court adopted the broad interpretation of remuneration to mean anything of value, explaining that this interpretation accorded with the “plain meaning” of remuneration, and with the purpose of the 1977 amendment that altered the application of the AKS to “bribes, kickbacks, and rebates” by adding the words “any remuneration.” The court explained that the term “any remuneration” was added to ensure that, regardless of the particular type of value exchanged, the substance of an arrangement or service would be controlling rather than merely the form.

The court next considered whether the complaint plausibly alleged that McKesson acted with the requisite scienter. Significantly, the court agreed with the consensus among other courts and ruled that the complaint against McKesson did not have to allege actual knowledge of the AKS or that McKesson had a specific intent to violate the AKS, only that McKesson acted with knowledge that its conduct was unlawful.

The court found that the complaint did not meet that test. The court acknowledged that the complaint alleged that McKesson knew remuneration to induce purchases was prohibited in general, but the court decided that this allegation alone could not support a finding that McKesson knew this particular course of conduct was unlawful.

In other words, the court ruled that absent from the complaint were any allegations that McKesson knew that providing its tools to certain customers as was alleged was unlawful. Accordingly, the court held, the complaint failed to state a claim.

After deciding that the complaint contained allegations sufficient to support an inference that claims were ultimately submitted to the government for purposes of an action asserting a violation of the FCA, the court granted leave for the plaintiff to amend.

Conclusion

The AKS and FCA are two of the most important federal fraud and abuse laws applicable in the health care context and, when acting in tandem, their power is multiplied. We can expect, however, further litigation over what business arrangements constitute renumeration and what type of knowledge is necessary to violate the AKS – and thus what constitutes a kickback paid for referrals of health care services or products. Future complaints and decisions on these issues will shape the fight against health care fraud.

Reprinted with permission from the July 1, 2022, issue of the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.