NO RECKLESS DISREGARD OF THE FALSITY OF CLAIM
By Richard Lieberman, Consultant and Retired Attorney
In an interesting decision, the Sixth Circuit reversed a holding of a lower court that a
Renal Dialysis Company supplying Medicare had violated the Civil False Claims Act.
U.S. ex rel Williams v. Renal Care Group, Inc. et al, 6th Cir. No. 11-5779 (Oct. 5, 2012).
The 6th Circuit found that the District Court had improperly held that the Company acted
either with actual knowledge or reckless disregard of the alleged falsity of their
submissions to Medicare. The case is also interesting because it notes the complexity of
the Medicare regulations, and scolds the District Court, saying that “The False Claims
Act is not a vehicle to police technical compliance with complex federal regulations.”
Under the Civil False Claims Act, 31 U.S.C. § 3729-31 (“FCA”), a person (including a
company) who knowingly submits, or cause another person to submit, false claims for
payment of government funds is liable for up to three times the government’s damages
plus civil penalties of $5,500 to $11,000 for each false claim. To be liable under the FCA,
the person must act knowingly—either by actual knowledge, or by constructive
knowledge because the submitter acted “in deliberate ignorance of the truth” or acted in
“reckless disregard of the truth.” The reckless disregard provision merely requires a
reasonable and prudent duty to inquire, not a burdensome obligation . The False Claims
Act contains “qui tam” provisions, which allow people with evidence of fraud against the
government to sue on behalf of the Government. People who sue under the FCA are
called “relators” or “whistleblowers,” and are eligible for 15 to 30 percent of the amount
recovered. This case was brought by a relator, and the Justice Department then took over
the case. This case involved an $83 million penalty against the contractor which was
assessed by the District court, so the relator (two former employees of Renal Care Group)
was eligible for a significant whistleblower penalty.
The case revolves around two reimbursement methods for renal care by Medicare: (1)
Method I involved a weighted payment for all services including home dialysis; and (2)
Method II applied to companies that provided only equipment and supplies, but not
services, to home dialysis payments. As explained in the case, Method II reimbursements
eventually became substantially higher than Method I reimbursements. Noting the
disparity in Medicare reimbursements, Renal Care decided to try to move patients into
Method II. First, it created a separate, wholly owned subsidiary in order to comply with a
provision of the regulation stating that a joint entity could not receive payments under
Method I and Method II. Renal Care sought clarification from its own counsel and also
from the Health Care Financing Administration (in writing) on whether the wholly owned
subsidiary could act as a Method II supplier, noting that a Government official had
offered an oral interpretation that it was acceptable—but the individual never responded
to Renal Care’s letter.
Copyright 2012 Richard Lieberman, Permission Granted to PTAP
This article does not provide legal advice as to any particular transaction.
The United States asserted that the creation of the subsidiary was improper simply
because it was designed to receive higher Method II payments. The 6th Circuit rejected
this, stating that “Why a business ought to be punished solely for seeking to maximize
profits escapes us. The corporate form need not be disregarded when its adoption was
meant to ‘secure its advantages and where no violence to the legislative purpose is done
by treating the corporate entity as a separate legal person.’” After examining the
legislative history, the 6th Circuit said that the wholly owned subsidiary was not
inconsistent with Congress’s purpose for the payment scheme, and concluded that the
district court was incorrect. The only other question was whether Renal Care Group’s
actions were taken in reckless disregard of the relevant federal statutes and regulations.
The Court concluded they did not.
Renal Care had (1) sought legal counsel on the issue; (2) their counsel had sought written
clarification on the issue from Medicare officials; (3) there had been a positive oral
comment from Medicare officials; (4) Renal Care was aware of large dialysis providers
that had wholly owned subsidiaries; (5) industry publications openly encouraged the use
of Method II to increase profits (6) the subsidiary had its own Medicare number and (7)
Medicare and the Inspector General knew about the wholly-owned subsidiary structure.
The court said the defendants were not in reckless disregard, but consistently had sought
clarification, and met the standard for not being in reckless disregard.
In reversing the finding of civil false claims, the Appeals court said three important
things:
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The False claims Act is not a vehicle to police technical compliance with
complex federal regulations
The Medicare regulations contained “loopholes” that permitted whollyowned subsidiaries to increase profits
Defendants cannot be held to have submitted false claims when the
governmental agency charged with compliance agreed that the defendant
was in compliance with the regulations
The regulations set forth in the United States’s complaint are conditions of
participation, the violation of which do not lead to FCA liability.
TIPS: Contractors should always ensure that they do not run afoul of the criminal or civil
false claims act. If you seek to maximize profits based on a “loophole” be sure to
conduct the due diligence investigation necessary to ensure that the agency either agrees
with you, or does not disagree with you. Renal Care conducted reasonable (but not
exhaustive) due diligence, and was rewarded $83 million for it.
Copyright 2012 Richard Lieberman, Permission Granted to PTAP
This article does not provide legal advice as to any particular transaction.