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New York State recently implemented significant changes to patient consent and payment laws that affect healthcare providers across the state. On October 20, 2024, new laws governing patient consent and payment procedures went into effect, prompting healthcare providers in New York to reassess their current practices. These changes, which are aimed at enhancing patient rights and financial transparency, introduce new requirements that impact how healthcare providers obtain patient consent, discuss costs for medical services, and process payments. As a result of these changes, healthcare providers face the challenge of adapting their policies and operations to ensure compliance. The following overview outlines key changes that providers need to be aware of to effectively comply with these new legal requirements.

Treatment and Payment Consents

The new Section 18-c of the Public Health Law requires that healthcare providers obtain patient consent for treatment, procedures, examinations, or other health care services separately from patient consent to pay for such services. This change forces providers to depart from the common practice of obtaining combined patient consent for treatment and payment. Further, Section 18-c stipulates that providers cannot seek patient consent for payment until two conditions are met: first, there must be a discussion about the costs of treatment, and second, the patient must have already received the healthcare services in question. To ensure compliance with this new law, providers may need to implement new patient consent protocols.

Ultimately, by mandating a cost discussion before payment consent, the law promotes price transparency and may help reduce instances of surprise billing. However, it also creates potential new challenges for healthcare providers, who must now deliver services before securing payment consent.

Restrictions on Pre-Authorization and “Cards on File“

Section 519-a of the General Business Law introduces restrictions on healthcare providers’ billing practices. Specifically, it prohibits providers from mandating credit card preauthorization or requiring patients to keep a credit card “on file” as a prerequisite for receiving emergency or medically necessary services. As a result, this may lead to more conservative treatment approaches, as providers may be hesitant to perform procedures without upfront payment assurance.

New Patient Credit Card Notification Requirements

Section 519-a also requires that healthcare providers educate patients about the potential risks associated with using credit cards to pay for medical expenses. More specifically, providers must inform patients that they may lose certain state and federal protections related to medical debt when using credit cards. In anticipation of these legal changes, the New York State Department of Health issued guidance regarding the specific content of these patient notifications. Such guidance clarifies that patient notifications should include the following components: (i) medical bills paid by credit card are no longer considered medical debt; (ii) by paying with a credit card, patients are forgoing federal and state protections around medical debt; (iii) protections that patients must acknowledge forgoing include (a) prohibitions against wage garnishment and property liens, (b) prohibition against reporting medical debt to credit bureaus, and (c) limitations on interest rates; and (iv) patients must affirmatively acknowledge forgoing these protections by paying with a credit card.

Limitations on Provider Involvement in Medical Credit Applications & Prohibition on Assisting with Credit Card/Loan Applications

Pursuant to Section 349-g of the General Business Law, providers can no longer complete any portion of a patient’s application for medical credit cards and third-party medical installment loans or otherwise arrange for an application that is not completely filled out by the patient. This restriction may significantly impact how healthcare facilities assist patients in managing their medical expenses.

* * *

These new statutes likely require changes to previously existing workflows and documentation processes among health care providers in New York.  In order to ensure compliance with these legal changes, health care providers should audit their consent forms and payment processes, and stay informed about additional anticipated forthcoming guidance. AEL is continuing to monitor these legal changes.  If you have any questions, please reach out to us and we will be happy to assist.

This article was authored by Jarrod Schaeffer and was originally published in Law360’s Expert Analysis Section on June 4, 2024.

The upcoming elections across New York this year will be the first under the state’s new program, launched back in 2022, that provides public financing for state political campaigns.

Features of that program mirror New York City’s long-standing public financing program, including the provision of public funds to match small-dollar contributions.

Intended to increase average voters’ impact on state campaigns, the program also may open the door for greater scrutiny of state campaign finance violations by federal prosecutors.

Public Financing Programs in New York

Concerns over the influence of money in politics are nothing new, though the landscape has shifted markedly in recent decades. As election spending explodes, large contributions by select contributors may dwarf contributions by small donors. See, e.g., Sarah Fischer, U.S. Political Ad Market Projected to Reach Record $16 billion in 2024, Axios (Dec. 8, 2023), available here; Vanderwalker, et al., Analysis Shows Amplification of Small Donors Under New NY State Public Financing Program, Brennan Ctr. For Justice (Jan. 30, 2023), available here (“Last year, the 200 biggest donors to candidates gave almost $16 million, more than all 206,000 of the state’s small donors of $250 or less put together.”).

This shift stems in part from U.S. Supreme Court decisions cabining campaign finance regulation. See, e.g., How Does the Citizens United Decision Still Affect Us in 2024?, Campaign Legal Center (Jan. 15, 2024), available here (observing that political spending has “become a growing problem” following certain decisions “as each respective election cycle has seen record-breaking amounts of spending”). Rejecting concerns regarding large contributions in politics (See, e.g., New York Voters Support New Public Campaign Finance Program, Data for Progress (Feb. 28, 2023), available here (finding that “about 9 in 10 New York voters believe wealthy donors have more influence on politicians than the average voter wealthy donors have more influence on politicians than the average voter”—a belief that was “widely shared across partisanship, with 91 percent of Democrats, 93 percent of Independents, and 90 percent of Republicans saying the same.”)), the court declared in its 2010 Citizens United v. Federal Election Commission decision that “[i]ngratiation and access … are not corruption.” Citizens United v. Federal Election Commission, 558 U.S. 310, 360 (2010). And it has repeatedly curtailed regulation it believes could limit “gratitude” to large contributors or impede “the political access such support may afford,” as articulated in its 2014 decision in McCutcheon v. FEC. McCutcheon v. Fed. Election Comm’n, 572 U.S. 185, 192 (2014). It was not always this way. For many years, the Supreme Court acknowledged concerns that improper influence could result from large contributions. See, e.g., McConnell v. Fed. Election Comm’n, 540 U.S. 93, 143 (2003), overruled by Citizens United v. Fed. Election Comm’n, 558 U.S. 310 (2010) (acknowledging an “interest in combating the appearance or perception of corruption engendered by large campaign contributions”); Nixon v. Shrink Missouri Gov’t PAC, 528 U.S. 377, 389 (2000)) (observing that the Court has “recognized a concern not confined to bribery of public officials, but extending to the broader threat from politicians too compliant with the wishes of large contributors”); Austin v. Michigan Chamber of Com., 494 U.S. 652, 659 (1990), overruled by Citizens United v. Fed. Election Comm’n, 558 U.S. 310 (2010) (recognizing “that the compelling governmental interest in preventing corruption supports the restriction of the influence of political war chests funneled through the corporate form” (internal quotation omitted)); Fed. Election Comm’n v. Nat’l Conservative Pol. Action Comm., 470 U.S. 480, 497 (1985) (“Elected officials are influenced to act contrary to their obligations of office by the prospect of financial gain to themselves or infusions of money into their campaigns.”).

Public financing programs, like those in New York City and now New York state, are one way to address concerns about the effects of large contributions. While these programs survive, the Supreme Court has kept them on a tight leash. See, e.g., Arizona Free Enter. Club’s Freedom Club PAC v. Bennett, 564 U.S. 721, 754 (2011) (striking down a public financing program but stating that “governments ‘may engage in public financing of election campaigns’ and that doing so can further ‘significant governmental interests,’ such as the state interest in preventing corruption,” so long as such programs comport with the Court’s interpretation of the First Amendment); Davis v. Fed. Election Comm’n, 554 U.S. 724, 741 (2008) (holding that providing “level electoral opportunities for candidates of different personal wealth” is not “a legitimate government objective”).

While a state public financing program was a long time coming (for instance, last year a former co-chair of New York’s Moreland Commission to Investigate Public Corruption noted that the commission had recommended in 2013, among other things, that the state create a small-donor public financing system to help amplify the influence of average New Yorkers in the face of large contributions. Milton L. Williams, Don’t Give Up On Public Campaign Financing, City & State (Apr. 8, 2023), available here), New York City has long maintained a public financing program for municipal elections. See Friedlander, et al., The New York City Campaign Finance Act, 16 Hofstra L. Rev., Issue 2, art. 4 (1988) (noting passage of New York City’s Campaign Finance Act and

observing that “[i]n enacting this law, the city of New York has become the fourth, and largest, major local government to have instituted a mechanism for providing public funds to candidates seeking election to local office in return for the candidates’ agreement to abide by restrictions on contributions and expenditures”). A key feature of that program is the availability of public matching funds. Candidates who agree to abide by certain fundraising restrictions can receive public funds to supplement, in varying amounts, small-dollar contributions from New York City residents.

The goal of the program is to incentivize candidates to finance campaigns by engaging average voters over pursuing substantial sums from special interests. Matching Funds Program: How It Works, N.Y. Campaign Fin. Bd. (2024), available here.

The program is administered and policed by a nonpartisan independent agency called the New York City Campaign Finance Board, or CFB. About the CFB, N.Y. Campaign Fin. Bd. (2024), available here. In 2021, it distributed almost $127 million in matching funds to participating candidates. Honan, et al., Public Spending on 2021 NYC Elections Blew Away Previous Records, The City (Sept. 27, 2022), available here.

In 2020, the New York Legislature authorized the New York State Public Campaign Finance Program (Part ZZZ of Chapter 58 of the N.Y. Laws of 2020 (enacting N.Y. Elec. Law, art. 14, tit. 2), which, among other things, created a state-level funds matching program, and established a state Public Campaign Finance Board, or PCFB, to administer the program in a manner roughly comparable to that of the CFB. N.Y. Elec. Law, art. 14, tit. 2 § 14-207.

The state program went into effect as of Nov. 9, 2022 (Part ZZZ of Chapter 58 of the N.Y. Laws of 2020 (providing, inter alia, that the relevant sections “shall take effect on 11/9/2022 and shall apply to participants in the primary and general elections to be held in 2024”)), making the upcoming primary and general elections in 2024 the first to be conducted under the auspices of the state program.

As of early March, over 300 candidates had signed up for the state program (Press Release, N.Y.S. Pub. Campaign Fin. Bd. (Mar. 1, 2024), available here) which has allocated $100 million to distribute to eligible campaigns. See Alyssa Katz, State Campaigns Are About to Rake in $100 Million of Public Funding — While Also Spending All The Private Money They Want, The City (May 1, 2024), available here (“The new state budget provides $100 million for matching funds, nearly one-third of the total New York City has given candidates in the entire 36-year history of its system.”).

Federal Prosecutors and State Campaign Finance Violations

The state program’s implementation may provide new possibilities for federal prosecutors in New York. Elections are regulated through a complicated patchwork of federal, state and local laws. In some areas, such as election financing activities by foreign nationals, federal laws take precedence. 52 U.S. Code § 30121(a)(1) (providing, inter alia, that “[i]t shall be unlawful for . . . a foreign national, directly or indirectly, to make . . . a contribution or donation of money or other thing of value . . . in connection with a Federal, State, or local election”); see also United States v. Singh, 979 F.3d 697, 710 (9th Cir. 2020) (concluding that Congress has authority to regulate state elections as to foreign nationals pursuant to its broad power to regulate immigration and foreign affairs). In most other areas, however, states police their own elections under state law. See, e.g., Oregon v. Mitchell, 400 U.S. 112, 134–35 (1970) (Black, J.) (invalidating federal laws setting the voting age state and local elections to “save for the States the power to control state and local elections which the Constitution originally reserved to them and which no subsequent amendment has taken from them”).

Federal prosecutors are empowered to pursue offenses against the U.S. (28 U.S.C. § 547(1) (providing that “[e]xcept as otherwise provided by law, each United States attorney, within his district, shall . . . prosecute for all offenses against the United States”)), and are not authorized to enforce state or local statutes that undergird nonfederal campaign finance regulations.

There are, however, ways in which federal criminal charges can arise from violations of state or local campaign finance laws. Often, such charges turn not on state or local rules themselves, but on federal statutes targeting corruption and fraud. The most common examples are the federal crimes of bribery, 18 U.S.C. § 666, and mail or wire fraud, 18 U.S.C. §§ 1341, 1343. This article focuses on the fraud statutes and, unless otherwise indicated, refers collectively to the mail and wire fraud statutes “[b]ecause the mail fraud and the wire fraud statutes use the same relevant language” and courts generally “analyze them the same way.” United States v. Schwartz, 924 F.2d 410, 416 (2d Cir. 1991).

One of the most common ways prosecutors deploy those statutes is the investigation and prosecution of fake or straw donations that are used to obtain public matching funds. Such prosecutions frequently focus on efforts to obtain matching funds (although schemes to obtain matching funds are the focus of this article, they are not the only way in which federal prosecutors can bring charges predicated on violations of state or local laws. Depending on the facts of a particular case, other federal statutes may apply without any connection to public matching funds. See, e.g., 18 U.S.C. § 1952(a), (b) (prohibiting, inter alia, interstate travel with the intent to commit certain state law crimes, including “extortion” and “bribery”); 18 U.S.C. §§ 1956(c)(7)(A), 1961(1)(A) (prohibiting money laundering involving proceeds of specified unlawful activities including, among other things, inter alia, state law crimes of “extortion” and “bribery”); see also infra n. xxiv), because attempting to secure those funds makes public money the “object of [a] fraud,” to quote the Supreme Court’s 2020 decision in Kelly v. U.S. Kelly v. United States, 590 U.S. 391, 402 (2020) (quoting Pasquantino v. United States, 544 U.S. 349, 355 (2005)); see also United States v. Xing Wu Pan, 632 F. App’x 15, 16 (2d Cir. 2016) (upholding fraud convictions based on a straw donor scheme and noting that “the necessary result of the straw donor scheme was injury to the New York City Campaign Finance Board”).

In other words, federal prosecutors bring charges based on straw donor schemes that violate state or local campaign finance laws, not because those laws were broken, but because the scheme sought to “obtain[] money or property” in the form of matching funds “by means of false or fraudulent pretenses, representations, or promises” under Title 18 of the U.S. Code, Sections 1341 and 1343. 18 U.S.C. §§ 1341, 1343.

Conversely, prosecutors typically do not bring fraud charges where conduct merely provides false information — e.g., incorrect names, addresses or contribution amounts — to state or local regulators. See, e.g., Ciminelli v. United States, 598 U.S. 306, 309 (2023) (quoting United States v. Binday, 804 F.3d 558, 570 (2d Cir. 2015)) (holding that traditional property rights do not include allegations that a “scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions”). Other federal statues prohibit altering information in ways that may be relevant to violations of state or local laws. See, e.g., 18 U.S.C. § 1519 (prohibiting the destruction, alteration, or falsification of records related to matters under federal investigation). Additionally, there may be circumstances where providing incorrect information causes inaccurate federal reporting, giving rise to other potential enforcement. See 52 U.S.C. §§ 30104 (imposing certain reporting requirements regarding contributions under the Federal Election Campaign Act), 30109 (providing for enforcement).

While accurate campaign finance information may be important, courts have held that the federal fraud statutes “protect[] only [an] … interest as property-holder, excluding protection of a governmental entity in its capacity as regulator,” as articulated by the

U.S. Court of Appeals for the Second Circuit in its 1989 decision in Corcoran v. American Plan Corp. Corcoran v. Am. Plan Corp., 886 F.2d 16, 20–23 (2d Cir. 1989); accord Cleveland v. United States, 531 U.S. 12, 20–21 (2000) (finding no property interest because “the State’s core concern [wa]s regulatory” where Louisiana law focused on “the importance of public confidence and trust” in licensed activities, ensuring such activities “are conducted honestly and are free from criminal and corruptive elements,” and “include[d] the distinctively sovereign authority to impose criminal penalties for violations of the licensing scheme” (emphasis in original)).

Since they primarily embody an interest in truthful disclosure, nonfederal campaign finance regulations likely serve a function “ancillary to … regulation, not to property,” in the words of the Second Circuit’s 1988 U.S. v. Evans decision. United States v. Evans, 844 F.2d 36, 42 (2d Cir. 1988) (concluding, in a case where defendants were charged with conspiring to provide false documents in order to obtain government approval for contemplated transactions, that the government’s right to control the future alienation of arms was not a property right for federal fraud purposes); see also Schwartz, 924 F.2d at 417 (citing Evans and concluding that “[w]hat was fraudulently obtained . . . was the government’s agreement to allow [] proposed transactions to take place,” which did not qualify as a property right because “[w]hether it chooses to use licenses or blanket rules, the government’s purpose is to control the private use of private property”); United States v. Murphy, 836 F.2d 248, 254 (6th Cir. 1988) (explaining that a state’s “right to accurate information with respect to its issuance of [] permits constitutes an intangible right” outside the scope of the federal fraud statutes).

Past federal prosecutions in New York have targeted fraudulent attempts to obtain matching funds administered by the CFB. For example, in U.S. v. Baldeo, the U.S. Attorney’s Office for the Southern District of New York charged a former New York City Council candidate in 2013 with fraud offenses based on a scheme to obtain matching funds during his 2010 municipal campaign. No. S1 13 Cr. 125 (PAC), 2013 WL 5477373 at *1 (S.D.N.Y. Oct. 2, 2013). Baldeo ultimately was acquitted of all fraud offenses at trial, but convicted of multiple obstruction of justice offenses.

The government alleged that Baldeo had straw donors complete contribution cards with their own identifying information, but provided, or had others provide, money orders or cash to fund the contributions. See id. Those cards allegedly were submitted to the CFB to obtain matching funds. Id.

Until the creation of the state program, there was no comparable federal hook regarding violations of state campaign finance regulations, because no state matching funds were available. That is no longer the case.

Providing public funds to eligible candidates through the state program may broaden federal prosecutors’ purview with respect to state campaign finance violations, since schemes that fraudulently attempt to obtain state matching funds likely seek to “obtain[] money or property” from the PCFB “by means of false or fraudulent pretenses, representations, or promises” in the same way that similar schemes sought to obtain matching funds from the CFB. 18 U.S.C. §§ 1341, 1343.

With millions of dollars in public money on the line (Rebecca C. Lewis, First $3.6 Million in New York Campaign Matching Funds Headed Out the Door, City & State (May 16, 2024), available here (noting that “[t]he fledgling New York Public Campaign Finance Board approved nearly $3.6 million in matching funds to 37 candidates last week in the first round of disbursements”)), federal prosecutors in New York may seek to leverage that possibility to combat perceived fraud or corruption.

Conclusion

As a result of New York’s provision of public funds to state campaigns, federal prosecutors may have new ways to bring charges predicated on violations of state campaign finance laws.

Only time will tell whether prosecutors seek to pursue these avenues, but responsible campaigns should consider taking steps early to avoid drawing undue federal scrutiny, including implementing a robust compliance program that looks for common indicia of straw contributions.

Jarrod L. Schaeffer is a partner at Abell Eskew Landau LLP. He previously served as an assistant U.S. attorney and as a senior member of the Public Corruption Unit in the U.S. Attorney’s Office for the Southern District of New York.

The opinions expressed are those of the author and do not necessarily reflect the views of their employer or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

This Article – authored by Jarrod Schaeffer and Scott Glicksman – was originally published on April 4, 2024 in Law360’s Expert Analysis Section. The Law360 version is available here.

Ever since ChatGPT burst onto the scene in November 2022, new tools and applications using artificial intelligence and adjacent technologies have proliferated across multiple industries. See, e.g., Bernard Marr, A Short History of ChatGPT and How We Got to Where We Are Today (Forbes, May 19, 2023), available here.

And while governments and regulators have started implementing frameworks and guardrails for use cases of these technologies, federal criminal enforcement related to or involving AI is still relatively rare. But that may soon change.

Many have commented on how AI might facilitate new kinds of crimes, as well as the use of AI by the U.S. Department of Justice itself to uncover, track and prosecute criminal activity. Some of those efforts will require time and deliberation, such as the evaluation envisioned by the DOJ’s recently launched Justice AI initiative.

But white collar practitioners should also expect to see federal criminal enforcement issues involving AI arise in the near term, including even in pending cases.

DOJ Mobilization Regarding AI

As part of Executive Order No. 14110 on the safe and secure development of AI, issued on Oct. 30, 2023, President Joe Biden directed federal agencies, including the DOJ, to evaluate potential uses and pitfalls of AI. See, e.g., 88 Fed. Reg. 210 at 75191, 75211–75212, §§ 7.1(b)(i)(A)–(C), (F), available here.

General Lisa Monaco signaled that federal criminal law enforcement officials had begun working to implement the president’s directives. Deputy Attorney General Lisa O. Monaco, Remarks at the University of Oxford on the Promise and Peril of AI (Dep’t of Justice Feb. 14, 2024), available here.

Calling AI “a double-edged sword” with perhaps “the sharpest blade yet,” Monaco extolled the technology’s “potential to be an indispensable tool to help identify, disrupt, and deter criminals, terrorists, and hostile nation-states,” while recognizing “that AI can lower the barriers to entry for criminals.” She went on to say that AI was “changing how crimes are committed and who commits them — creating new opportunities for wanna-be hackers and supercharging the threat posed by the most sophisticated cybercriminals.” Id.

To combat those threats, Monaco announced the Justice AI initiative, which, “[o]ver the next six months, … will convene individuals from across civil society, academia, science, and industry to draw on varied perspectives” in order “to understand and prepare for how AI will affect the Department’s mission and how to ensure [it] accelerate[s] AI’s potential for good while guarding against its risks.” Id.

That initiative is expected to provide its findings by the end of this year, and may build on prior work by the DOJ’s existing Disruptive Technology Strike Force.

But Main Justice officials are not the only ones who will have a hand in policing AI misuses. (This article focuses solely on federal criminal law enforcement efforts and does not address civil enforcement efforts undertaken by a variety of by federal and state regulators.) The 94 U.S. attorney’s offices around the country also play important — and, in some cases, leading — roles in addressing new issues and trends in law enforcement. Prosecutors in those offices are unlikely to wait for the DOJ’s overall deliberative process to conclude — in fact, some have already charged cases that target crimes involving AI. See Press Release, Founder of Artificial Intelligence Start-Up Charged With Fraud (Dep’t of Justice, Aug. 15, 2023), available here; see also Press Release, Two Men Charged for Operating $25M Cryptocurrency Ponzi Scheme (Dep’t of Justice, Dec. 12, 2023), available here.

And Monaco’s remarks, combined with recent events, suggest that the DOJ is not asking them to wait.

Likely Areas of Interest for Federal Law Enforcement

Where should practitioners expect to see more immediate efforts targeting AI by federal prosecutors and law enforcement agencies? Considering Monaco’s recent remarks alongside prior clues from DOJ officials — and taking account of modern law enforcement practices and procedures — AI is likely to become an early focus in a few key areas.

First, prosecutors and agents will likely focus on how AI can facilitate the commission of familiar crimes, as well as how prosecutors can deploy existing tools to combat such misuses.

Since AI acts as a powerful force-multiplier for a wide range of activities, federal criminal enforcement tactics developed for traditional offenses may be readily adapted to cases where those offenses are made more serious or effective through AI.

This is where practitioners are most likely to first encounter these issues, whether in pending cases, ongoing compliance reviews or new investigations.

Second, prosecutors and agents will likely focus on areas where AI may enable new kinds of crimes that would not be possible otherwise, such as advanced AI-enabled cyberweapons and other sophisticated national security threats. See, e.g., Staying ahead of threat actors in the age of AI (Microsoft, Feb. 14, 2024), available here (describing how “[c]ybercrime groups, nation-state threat actors, and other adversaries are exploring and testing different AI technologies as they emerge, in an attempt to understand potential value to their operations and the security controls they may need to circumvent.”).

While industry professionals have yet to see examples of this conduct, most expect that it will soon confront law enforcement. See id. Combating these threats is likely to require the development of new law enforcement tools and the recruitment of additional personnel.

Third, prosecutors and agents will almost certainly explore how AI can be used to better uncover, track and prosecute all kinds of criminal activity.

As many attorneys are aware already from personal experience, AI can make aspects of their own practices more effective and efficient through advanced data processing, sophisticated pattern identification, and the automation of rote tasks. Those same benefits may be harnessed by prosecutors and federal agents, including through the use of AI-assisted document and evidence review tools, early versions of which have existed for years in various forms of less advanced technology-assisted review.

Traditional Offenses Utilizing AI

While prosecutors and agents are likely to eventually explore these and other areas, there are several reasons why their efforts may focus first on traditional offenses utilizing AI.

To begin with, focusing on how AI facilitates the commission of familiar offenses requires less expenditure of new resources, because prosecutors and agents can bring to bear the traditional investigatory tools and strategies that they use in other cases.

More drastic adaptations or paradigm shifts, on the other hand, may take longer, because AI is just as new for law enforcement as it is for society. That does not mean big changes will not come — just that they might take longer to have an impact.

More fundamentally, prosecutors are likely to be most comfortable addressing AI misuses through conventional legal frameworks. As Monaco has reiterated, “Fraud using AI is still fraud. Price fixing using AI is still price fixing. And manipulating markets using AI is still market manipulation.” Deputy Attorney General Lisa O. Monaco, Remarks at American Bar Association’s 39th National Institute on White Collar Crime (Dep’t of Justice Mar. 7, 2024), available here.

Prosecutors have a long history of repurposing existing statutes and enforcement tools to combat challenges arising from new technologies. For instance, in U.S. v. Chastain this past year, the U.S. Attorney’s Office for the Southern District of New York — which is often on the front lines of emerging issues — invoked the wire fraud statute, 18 U.S.C. § 1343, first enacted in the 1950s (66 Stat. 722, ch. 879, § 18(a) (July 16, 1952)), to prosecute fraud involving non-fungible tokens (See Press Release, Former Employee of NFT Marketplace Sentenced to Prison in First-Ever Digital Asset Insider Trading Scheme (Dep’t of Justice, Aug. 22, 2023), available here, which have a considerably more recent vintage. See, e.g., Sarah Cascone, Sotheby’s Is Selling the First NFT Ever Minted—and Bidding Starts at $100 (Artnet, May 7, 2021), available here (noting that the first-ever NFT was minted in 2014). More recently, in U.S. v. Austad, the Southern District of New York unsealed charges alleging, among other things, that the defendants “used artificial intelligence image generation tools” to advertise sales of stolen account credentials. U.S. v. Nathan Austad & Kamerin Stokes. See, e.g., Press Release, Two More Men Charged With Hacking Fantasy Sports and Betting Website (Dep’t of Justice, Jan. 29, 2024), available here.

Investigatory and Compliance Considerations

Given the range of traditional offenses where AI may be particularly easy to misuse, practitioners should expect the same ingenuity in investigations and prosecutions going forward.

For example, because AI can be used to quickly generate and distribute cutting-edge deepfakes and other professional-looking content, it might be used to induce fraud victims to purchase nonexistent goods or services through convincing advertising, enable or amplify a scheme to generate false identification materials, facilitate a market manipulation scheme through the dissemination of forged company literature (See, e.g., Brian Fung, U.S. Senators Propose Tough Fines for AI-driven Securities Fraud or Market Manipulation (CNN, Dec. 19, 2023), available here, or sow confusion intended to disrupt the electoral process through AI-generated robocalls. See, e.g., Holly Ramer, Political Consultant Behind Fake Biden Robocalls Says He Was Trying to Highlight a Need for AI Rules (Assoc. Press, Feb. 24, 2024), available here.

In fact, it appears that prosecutors may already have launched new inquiries focused on AI in the context of traditional crimes. In January, for instance, Bloomberg Law reported that “[p]rosecutors have started subpoenaing pharmaceuticals and digital health companies to learn more about generative technology’s role in facilitating anti-kickback and false claims violations.” Ben Penn, DOJ’s Healthcare Probes of AI Tools Rooted in Purdue Pharma Case (Bloomberg, Jan. 29, 2024), available here.

Such developments necessitate additional considerations not only by those responding to federal investigative inquiries, but also by compliance professionals.

As to the former, practitioners responding to subpoenas and other investigatory demands should carefully consider the capabilities of clients’ AI tools, their internal controls or other relevant compliance protocols, and potential misuses that may have prompted an inquiry or stimulate further interest from prosecutors.

Those same considerations are also important for compliance departments and those who develop or utilize AI for valid purposes, as Monaco has explicitly cautioned that prosecutors will assess management of AI-related risks when considering future resolutions of compliance and enforcement matters. Monaco, Remarks at American Bar Association’s 39th National Institute on White Collar Crime, (Dep’t of Justice Mar. 7, 2024), supra.

Implicit in that warning is the possibility that even AI created or utilized for proper purposes can be misused, and that the DOJ expects those who develop or use AI to take preventative measures.

In connection with appropriate investigations or compliance inquiries, practitioners should consider whether AI may have been utilized, regardless of whether the relevant conduct appears technologically sophisticated. Some uses of AI — such as text or code generation — may not be readily apparent, but nonetheless should be carefully evaluated. This is especially important as the public becomes increasingly conversant with widely available tools that have a variety of existing lawful uses, such as generative AI applications that create text and images.

Considerations for Plea Negotiations and Sentencing

The implications of this focus on AI misuses likely will also extend beyond the investigatory phase into plea negotiations and sentencing arguments, as prosecutors are likely to seek increased penalties that reflect any greater harm flowing from AI.

In February, Monaco observed that “[l]ike a firearm, AI can also enhance the danger of a crime,” and “[g]oing forward, where … prosecutors can seek stiffer sentences for offenses made significantly more dangerous by the misuse of AI — they will,” in addition to seeking reforms that provide additional penalties “if … existing sentencing enhancements don’t adequately address the harms caused by misuse of AI.” Monaco, Remarks at the University of Oxford on the Promise and Peril of AI, supra.

Monaco doubled down on this last month at the American Bar Association’s National Institute on White Collar Crime, emphasizing that “[w]here AI is deliberately misused to make a white-collar crime significantly more serious, our prosecutors will be seeking stiffer sentences — for individual and corporate defendants alike.” Monaco, Remarks at American Bar Association’s 39th National Institute on White Collar Crime, (Dep’t of Justice Mar. 7, 2024), supra.

This is a logical place for prosecutors to deploy tools and practices targeting AI misuse. Novel theories may be easier to advance in this context, because prosecutors have a lower burden of proof, evidentiary rules apply less stringently than they do at trial, and many provisions of the U.S. Sentencing Guidelines are intended to encompass a broad range of flexible policy considerations.

And to the extent that plea negotiations incorporate agreements over what enhancements apply, litigation risks for prosecutors regarding new twists on certain enhancements may be significantly reduced.

Practitioners should carefully consider these issues in the context of plea negotiations, while recognizing that prosecutors likely have significant leverage with respect to some traditional guidelines enhancements.

For example, a familiar enhancement for offenses that involved sophisticated means (U.S.S.G. § 2B1.1(b)(10)(C)) has been construed broadly to apply not only where an offense relied on specialized computer knowledge, (United States v. Hatala , 552 F. App’x 28, 30 (2d Cir. 2014) (upholding enhancement where defendant “used his extensive knowledge of computer programming and database systems, as well as self-written codes, to bypass professionally-designed security systems”) but also where an offense involved the use of readily available software. United States v. Calderon , 209 F. App’x 418, 419 (5th Cir. 2006) (rejecting, inter alia, argument that “printing checks using a computer program available for purchase by anyone at a local office supply store . . . did not constitute sophisticated means” because “[e]ven though certain aspects of [the] scheme were not sophisticated, the offense as a whole involved sophisticated means”). Prosecutors may seek to apply this enhancement in cases where an offense was facilitated by AI, even if the actual application used is generally commercially available.

Similarly, enhancements targeting the use of authentication features[25] have been applied to items ranging from forged notary seals (United States v. Sardariani, 754 F.3d 1118, 1122 (9th Cir. 2014)) to voice verification data (See, e.g., United States v. Barrogo, 59 F.4th 440, 446 (9th Cir. 2023) (concluding that an “authentication feature” encompasses “non-physical” means of identification like biometric data, including “voice or retina information”)—all things for which sophisticated AI might generate passable forgeries. See, e.g., Press Release, Gartner Predicts 30% of Enterprises Will Consider Identity Verification and Authentication Solutions Unreliable in Isolation Due to AI-Generated Deepfakes by 2026 (Gartner, Inc., Feb. 1, 2024), available here. Prosecutors may seek to apply these enhancements where AI was used to create deepfakes that circumvent advanced identity authentication measures. Practitioners should carefully consider the application of such guidelines provisions and attempt to anticipate how prosecutors may retool other conventional arguments based on the particular facts of a case. And it is important to consider such issues early in the life of a case, so that practitioners are prepared during plea negotiations that may significantly affect later positions taken at sentencing.

Conclusion

As technologies and applications utilizing AI continue to proliferate and new tools are developed, white collar practitioners should expect to encounter AI in federal criminal enforcement matters sooner rather than later. Even as the DOJ deliberates on an overall approach to AI, prosecutors and agents are likely to forge ahead while repurposing traditional strategies and tools. And because an early focus by those actors is likely to be where the misuse of AI facilitates the commission of conventional offenses, practitioners should carefully consider how clients — even those using or developing AI for lawful purposes, or in existing cases otherwise involving only traditional offenses — may use AI, and the significance it could have for an investigation or prosecution.

This article was originally published in the Expert Analysis Section of Law360 on October 24, 2023, by authors Ken Abell, Scott Glicksman, and Jennie Yu.

For federal white collar defendants facing the likelihood of a custodial sentence, attention is, for good reason, centered on the length of sentence to be imposed upon conviction — an outcome dictated by the charges at issue and applicable U.S. sentencing guidelines, and ultimately determined by the sentencing judge.

Though parole has long been abolished in the federal sentence, federal defendants generally do not serve the full sentence imposed by the sentencing judge. Indeed, the sentence the defendant will likely have to serve, and what amount may be served in alternative custodial settings outside of prison, are impacted by several long-standing and more recent legal developments, especially in the context of white collar offenses. The fraction of the sentence to be served by a defendant is, quite obviously, a no less relevant consideration for those contemplating or negotiating a federal plea involving exposure to a custodial jail term.

In this article, we provide a brief overview of some of the more well-established federal programs widely applicable to white collar defendants that can affect one’s release date from federal prison, including early release to a prerelease facility, home confinement or supervised release under the First Step Act, as well as reductions to one’s total time served through so-called good-time credits.

While programs like good-time credits have been entrenched in statute and Federal Bureau of Prisons policy for years, the implementation of many aspects of 2018’s First Step Act is still evolving. Taken together or apart, the significant impact these programs can have on a white collar defendant’s time served makes plain the need to keep them in mind early in the life cycle of a client’s case than one might think.

Finally, we address two recent updates to this landscape: first, the September 30, 2023 expiration of the First Step Act’s Elderly Offender Home Detention Program, and second, a recent announcement by the U.S. Sentencing Commission to apply the so-called zero-point offender adjustment retroactively, allowing thousands of defendants who were sentenced as first-time offenders to petition courts for a reduction in their prison terms.

Good-Time Credit

Good-time credit is earned for satisfactory behavior, including “exemplary compliance with institutional disciplinary regulations,” according to Title 18 of the U.S. Code, Section 3624(b).

Good-time credit reduces an incarcerated person’s actual time in BOP custody. For each year of an incarcerated person’s imposed sentence, they can earn up to 54 days of good time. All federal prisoners serving a sentence of more than one year are eligible.

When awarded, good-time credit effects a material reduction in someone’s time served in prison, one that is calculated predictably and on an annual basis. The BOP calculates good-time credits 15 days from the last day of each year of the incarcerated person’s sentence.

For example, someone whose sentence began on April 5 should be awarded their good-time credit by April 20 every year after their first year in prison. And although good-time credits are not new, the First Step Act of 2018 amended Section 3624(b) to make clear that people in prison are eligible for a full 54 days of good-time credit for every year of their imposed sentence, rather than every year of their sentence served. Prior to the amendment, the BOP’s interpretation of the provision meant one would in effect only receive at most 47 days of good-time credit per year. See The First Step Act of 2018: An Overview, Congressional Research Service (Mar. 4, 2019), available here (discussing the modification of good time credits under the First Step Act).

That one’s time served could be reduced by roughly 15% is not insignificant information, particularly for those with high guidelines ranges driven by inflated loss amounts, as is commonly the case for federal white collar defendants. For example, consider a defendant with an offense level of 33 who receives a within-guidelines sentence of 135 months. With full good-time credit, the defendant’s resulting time served would be no more than roughly 115 months — the equivalent of a two-level reduction in their offense level under the sentencing guidelines.

Time Credit Under the First Step Act

On Jan. 13, 2022, the BOP published a rule implementing the time credits program that was included in the First Step Act. Under this rule, eligible people in prison can earn 10 to 15 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programs and productive activities. To qualify for earned time credits, inmates must 1) be convicted under the U.S. Code (i.e., a federal offense); 2) not be convicted of a disqualifying offense, as defined under 18 U.S.C. § 3632(d)(4)(D); and 3) be deemed minimum- or low-risk per the BOP’s risk assessment system. Offenses that make inmates ineligible to earn time credits are generally categorized as violent, or involve terrorism, espionage, human trafficking, sex and sexual exploitation; additionally excluded offenses include a repeat felon in possession of a firearm, or high-level drug offenses, that is, generally not white collar defendnats.

The FSA provides that “[a] prisoner shall earn 10 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programming or productive activities.” 18 U.S.C. § 3632(d)(4)(A)(i). An inmate determined to be at a “minimum or low risk for recidivating” who, “over 2 consecutive assessments, has not increased their risk of recidivism, shall earn an additional 5 days of time credits for every 30 days of successful participation in evidence-based recidivism reduction programming or productive activities.” 18 U.S.C. § 3632(d)(4)(A)(ii). “Productive activities” within the meaning of the rule includes a wide variety of programs and activities, such as anger management, cognitive behavioral therapy, post-secondary education and vocational training. For a list of all approved EBRR Programs and Productive Activities, please refer to the FSA Approved Programs Guide, available here.

Using earned-time credits under the First Step Act can amount to a meaningful reduction in the time someone spends in prison while under BOP custody. For every 30-day period that an incarcerated person successfully participates in the evidence-based recidivism reduction programs or productive activities recommended by the BOP based on their risk and needs assessment, they will earn at least 10 days of time credits. Once they have earned-time credits equal to the time left in their sentence — and met certain recidivism-risk requirements under Title 18 of the U.S. Code, Section 3632(d)(4)(A)(ii) — they can then apply those credits to earlier placement in prerelease custody, such as residential reentry centers and home confinement, and apply up to 12 months of credit toward supervised release.

Note that while application to supervised release is limited to the final year of someone’s sentence, they can still use their credits to transfer to prerelease custody earlier. Although earned-time credits under the First Step Act do not reduce one’s imposed sentence, they can have an enormous impact on time spent under BOP custody. Because most white collar defendants are first-time offenders convicted of nonviolent crimes, they are well suited to qualify under the eligibility criteria, which is focused on individuals with a low recidivism risk and excludes many sex-related, drug-related and violent crimes.

Given the program’s criteria and its potential to implicate roughly 30%-50% of a defendant’s sentence, practitioners should advise clients on earned-time credits and evidence-based recidivism reduction programs when considering what a custodial sentence might look like.

Elderly Offender Home Detention Pilot Program Under the First Step Act Expires

The Elderly Offender Home Detention Program was a pilot program introduced as part of the First Step Act in 2018. It permitted eligible people in prison who were at least 60 years old and served at least two-thirds of their total sentence to serve the remainder of their sentence in home confinement.

The pilot, which expired on September 30, 2023, was widely used during its implementation. See 34 U.S.C. § 60541(g)(3). Over 1,219 inmates participated in the program since 2018, see BOP data at p. 32 here. This program had a major impact on the time those thousands of inmates spent incarcerated. For example, even before accounting for good-time credit, earned-time credit and other programs, a 52-year-old sentenced to 135 months could, at age 60, become eligible for the program, and — having served two-thirds of their total sentence — be released to home confinement thereafter.

While the program’s expiration is an unwelcome development in general, it is particularly so for white collar practitioners, whose clients tend to be older than the average federal defendant. Indeed, roughly a quarter of the minimum- and low-security federal prison population, which includes virtually all incarcerated people sentenced for white collar crimes, are age 50 and older, which means that many of them will cross the 60-year-old threshold while in custody and would have qualified for early release to home confinement under this program. See Department of Justice data at p. 48 here (providing data as of 2016 on older offenders in the federal system). Although there have been calls for the program’s reimplementation, as well as a bipartisan proposal under the Safer Detention Act of 2023 that would further expand elderly offenders’ opportunities for home confinement, no actions have been taken since the program’s expiration.

Sentencing Guidelines Reduction for First-Time Offenders Applies Retroactively

The U.S. Sentencing Commission adopted several amendments to its sentencing guidelines in April. One such amendment was Amendment 821, Part B of which created a new Section 4C1.1 that allows for a two-level reduction in the offense level for certain first-time offenders. Part A of Amendment 821 limits the overall criminal history impact of “status points”—i.e., the additional criminal history points given to defendants for the fact of having committed the instant offense while under a criminal justice sentence, including probation, parole, supervised release, imprisonment, work release, or escape status—under § 4A1.1. See USSS here.

In addition to providing certain defendants with no prior criminal history an opportunity to receive a material reduction in their offense level, the amendment also provided others an avenue to argue for a sentence that does not include imprisonment.

This includes revisions to the Section 5C1.1 commentary advising that a sentence other than imprisonment is generally appropriate if a person qualifies for a Section 4C1.1 adjustment and is in Zone A or B of the sentencing table, and that a guidelines departure “may be appropriate if the offender received an adjustment under new § 4C1.1 and the applicable guideline range overstates the gravity of the offense because the offense of conviction is not a crime of violence or an otherwise serious offense.”

On Aug. 24, the U.S. Sentencing Commission voted that Parts A and B of Amendment 821 should be applied retroactively. Although Amendment 821 already promised to significantly reduce the sentencing ranges of future defendants, the commission’s recent announcement on its retroactivity will affect thousands more people who are incarcerated in federal prison.

Although the amendment does not go into effect until Nov. 1 — and court orders reducing terms of imprisonment are not to go into effect until Feb. 1, 2024 — practitioners should be prepared to assess each client’s eligibility for a sentence reduction under the new Section 4C1.1 and closely monitor federal courts’ handling of such motions. Moreover, many federal prosecutors’ offices have begun offering the two-point reduction as part of ongoing plea negotiations, anticipating the implementation and effect of the new rule.

Conclusion

Good-time credit as well as earned-time credit under the First Step Act are central considerations for many federal defendants serving a period of incarceration. But given their potential to materially and somewhat predictably affect the term of incarceration someone ultimately serves, they should be taken into account not only after sentencing, but also during plea negotiations alongside more common considerations, like the statutory maximums and the sentencing guidelines ranges dictated by the defendant’s offense level.

And for those currently incarcerated, the recently announced retroactivity of Amendment 821 can have an additional and meaningful impact on their sentence by effecting a reduction in offense level under those guidelines. The expiration of the Elderly Offender Home Detention Program is no less relevant, and until it or similar reform is reimplemented, its absence can have an equally meaningful impact on a sentence, albeit in the other direction.

Taken together, these programs and developments reveal the broad and dynamic universe of mechanisms at a federal defendant’s disposal when an custodial term is being contemplated. For practitioners, it underscores the need to monitor BOP policy and announcements by the U.S. Sentencing Commission as closely as one monitors case law.

***

Ken Abell is a partner of Abell Eskew Landau LLP and routinely handles white collar criminal and civil enforcement cases, including healthcare fraud cases arising under Title 18, the False Claims Act, and the Antikickback Statute. Scott Glicksman is an associate of Abell Eskew Landau LLP with a practice focused on parallel criminal and civil investigations and cases. Jennie Yu is a paralegal of the Firm.

On July 20, 2022, the Department of Justice (“DOJ”) published a press release discussing a concerted effort to combat specific areas of healthcare fraud, telemedicine, clinical laboratory, and durable medical equipment. The announcement was coupled with criminal charges brought against 36 defendants in 13 federal districts totaling over $1.2 billion in criminal proceeds (over $1 billion of which stem from unlawful telemedicine practices). The Centers for Medicare & Medicaid Services (CMS), Center for Program Integrity’s also brought administrative actions against 52 providers participating in similar allegedly fraudulent schemes, resulting in a departmental seizure of over $8 million in fraud proceeds. The criminal ventures under investigation predominantly include “illegal kickbacks and bribes by laboratory owners and operators in exchange for [patient] referrals,” thereby violating the Anti-Kickback Statute (“AKS”).

In one such case, charges were brought against the manager of “several clinical laboratories” concerning his involvement in a scheme to issue over $16 million in kickback proceeds to marketers who would resultantly pay further kickbacks to “telemedicine companies and call centers in exchange for doctors’ orders.” This scheme revolved around cardiovascular and cancer genetic testing, the results of which were not used in patient treatment, and which led to $174 million in fraudulent claims being submitted to Medicare. Other cases include a domestic and international “telemarketing network” that tricked vulnerable patients (primarily those with elderly and/or disabled identities) into participating in an illegal scheme by opting into cardiovascular and genetic testing.

In response to the recent increase in fraudulent schemes involving telemedicine companies and practitioners, the Office of Inspector General (“OIG”) issued a “Special Fraud Alert” on July 20, 2022, encouraging practitioners to exercise caution when entering into arrangements with telemedicine companies. The Special Fraud Alert identifies several characteristics that are frequently present in fraudulent arrangements. The most obvious red flag highlighted by the OIG is when telemedicine companies arrange with practitioners to order or prescribe medically unnecessary items and services for patients who are solicited and recruited by the telemedicine companies. This is problematic for several reasons: (1) it can lead to an inappropriate increase in costs to federal health care programs, (2) it could harm patients or delay needed care by providing medically unnecessary services, and (3) it can lead to the corruption of medical decision-making.

The OIG’s recent Special Fraud Alert includes a list of “suspect characteristics” that may typify a potentially fraudulent arrangement between practitioners and telemedicine companies. This list is based upon the OIG and DOJ’s lengthy enforcement experience and is illustrative rather than exhaustive. These “suspect characteristics” identified by the OIG are as follows:

1. The patients for whom the practitioner orders items or services were recruited by the telemedicine company or an agent of the telemedicine company for free or low out-of-pocket cost items or services.
2. The practitioner does not have sufficient contact with or information from the patient to meaningfully assess the medical necessity of the items or services ordered or prescribed.
3. The telemedicine company compensates the practitioner based on the volume of items or services ordered or prescribed, which may be characterized to the practitioner as compensation based on the number of purported medical records that the practitioner reviewed.
4. The telemedicine company only furnishes items and services to federal health care program beneficiaries and does not accept insurance from any other payor.
5. The telemedicine company claims to only furnish items and services to individuals who are not federal health care program beneficiaries but may in fact bill federal health care programs.
6. The telemedicine company only furnishes one product or a single class of products, such as durable medical equipment, genetic testing, diabetic supplies, or prescription creams, potentially restricting a practitioner’s treating options.
7. The telemedicine company does not expect practitioners to follow-up with patients, nor does it provide practitioners with the information to follow up with them.

It is critical for practitioners and telemedicine companies alike to be aware of and recognize these characteristics because a fraudulent arrangement may lead to potential liability under various federal laws, including the AKS, the Civil Monetary Penalties Law provision for kickbacks, criminal healthcare fraud statutes, and the False Claims Act (FCA).

This article was authored by Ken Abell and Kate Kulkarni, and originally appeared in the Expert Analysis Section of Health Law360, published on June 28, 2022. The original can be read here.

Pending before the Supreme Court are three certiorari petitions that could resolve the longstanding circuit split over the level of detail that Federal Rule of Civil Procedure 9(b) requires of qui tam complaints in False Claims Act (“FCA”) cases.

Complaints alleging violations of the FCA must meet the heightened pleading standard of Rule 9(b), which requires a party “alleging fraud or mistake . . . [to] state with particularity the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). The question that has historically divided the circuit courts is whether a relator in qui tam actions must plead specific, representative samples of false claims to satisfy the “particularity” requirement of Rule 9(b).

The way the circuit courts answer this question can be boiled down to two distinct buckets, with some variation within those buckets. The first bucket includes five circuit courts that all employ a more defendant-friendly standard, generally requiring a relator to plead specific representative examples of fraudulent claims that were submitted to the government. The second bucket includes six circuit courts that take a far more lenient, relator-friendly approach, allowing the submission of false claims to be inferred from the circumstances.

The Circuits Requiring Specifics

In the first bucket, the most stringent interpretation of Rule 9(b) comes from the Eleventh Circuit, which has historically required a relator’s complaint to specify the time, the place, the fraudulent claim submitted and the identity of the person submitting the fraudulent claim. Unlike in other circuits, the submission of a fraudulent claim cannot be inferred from the circumstances; the complaint must generally plead specific details of fraudulent claims that were, in fact, submitted to the government. See, e.g., U.S. v. ex rel. Clausen v. Lab. Corp. of America, 290 F.3d 1301 (11th Cir. 2002); see also U. S. ex rel. Atkins v. McInteer, 470 F.3d 1350, 1359 (11th Cir. 2006); Carrel v. AIDS Healthcare Found. Inc. Corsello v. Lincare, Inc., 428 F.3d 1008, 1013 (11th Cir. 2005).

As discussed in greater detail below, there is some disagreement over the contours of the circuit split because the Eleventh Circuit does not apply this rule categorically. In U.S. ex rel. Mastej v. Health Mgmt. Assoc., Inc. (2014), the Court expressly noted that “there is no per se rule that an FCA complaint must provide exact billing data or attach a representative sample claim.” U.S. ex rel. Mastej v. Health Mgmt. Assoc., Inc., 591 Fed. Appx. 693, 704 (11th Cir. 2014). And in Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care of Coastal Georgia, LLC et al. (2021), the Eleventh Circuit case pending before the Supreme Court on a writ of certiorari, the Court confirmed that it “do[es] not always require a sample fraudulent claim” and is “more tolerant of complaints that leave out some particularities of the submissions of a false claim if the complaint also alleges personal knowledge or participation in the fraudulent conduct.” Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care of Coastal Georgia, LLC, et al., 853 Fed. Appx. 496, 501 (11th Cir. 2021), citing U.S. ex rel. Matheny v. Medco Health Sols., Inc., 671 F.3d 1217, 1230 (11th Cir. 2012). For instance, in Mastej, the Court said that a relator’s direct, first-hand knowledge of, or participation in, the defendant’s submission of false claims may be a sufficient basis for asserting that the defendants actually submitted false claims. U.S. ex rel. Mastej, 591 Fed. Appx. at 704, citing U.S. ex rel. Walker v. R & F Properties of Lake Cnty., Inc., 433 F.3d 1349, 1360 (11th Cir. 2005). Ultimately, though, in practice a complaint is likely to be dismissed in the Eleventh Circuit unless it pleads representative samples of fraudulent claims.

The Fourth, Sixth, and Eighth Circuits follow a similar approach, generally requiring details of specific claims while recognizing that other allegations might be sufficiently reliable to show that the defendant submitted false claims to the government. Like the Eleventh Circuit, the Eighth Circuit held in U.S. ex rel. Thayer v. Planned Parenthood of the Heartland (2014) and in U.S. ex rel. Joshi v. St. Luke’s Hosp., Inc. (2006), that it  might excuse the absence of specific examples of false claims if the relator has personal, first-hand knowledge of the submission of false claims. U.S. ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 917 (8th Cir. 2014); U.S. ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 556-57 (8th Cir. 2006). In U.S. ex rel. Prather v. Brookdale Senior Living Cmtys, Inc. (2016), the Sixth Circuit held that, in the absence of representative samples, a relator might survive a motion to dismiss if, by virtue of the relator’s position, he or she has personal knowledge of the defendant’s billing practices which supports a strong inference that particular claims were submitted to the government for payment. U.S. ex rel. Prather v. Brookdale Senior Living Cmtys., Inc., 838 F.3d 750, 769-60 (6th Cir. 2016); see also U.S. ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905, 920 (6th Cir. 2017). And, the Fourth Circuit held in U.S. ex rel. Nathan v. Takeda Pharmacies North America, Inc. (2013) that a complaint might be otherwise sufficient if the defendant’s actions as alleged would have necessarily led to the submission of false claims; it is not enough when a defendants’ actions as alleged in the complaint could have led to the submission of false claims. U.S. ex rel. Nathan v. Takeda Pharmacies North America, Inc., 707 F.3d 451, 453-54 (4th Cir. 2013).

The bottom line is that a relator who can plead representative false claims will better withstand a motion to dismiss in the Fourth, Sixth, Eighth, and Eleventh Circuits; in the absence of such allegations, the relator must have some personal or special knowledge of the defendant’s billing practices to aver that false claims were submitted. In U.S. ex rel. Duxbury v. Ortho Biotech Prod. (2009), the First Circuit adhered to the more stringent approach but with slightly more nuance; it stated that it would require a relator to plead representative samples, but if the action involved the inducement of third parties to file false claims, the Court would allow a relator to satisfy Rule 9(b) by providing “factual or statistical evidence to strengthen the inference of fraud beyond possibility.” U.S. ex rel. Duxbury v. Ortho Biotech Prod., L.P., 579 F.3d 13, 29 (1st Cir. 2009); see also U.S. ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29, 38-39 (1st Cir. 2017).

The Circuits Requiring Less

In stark contrast to the more defendant-friendly standard employed by the First, Fourth, Sixth, Eighth, and Eleventh Circuits, the second bucket includes the Third, Fifth, Seventh, Ninth, Tenth, and D.C. Circuits, which allow for the submission of claims to be inferred from the circumstances. A relator filing a qui tam complaint in these circuits need not identify specific false claims or allege that the relator had personal knowledge of the defendant’s billing practices.  For example, in Foglia v. Renal Ventures Mgmt., LLC (2014), the Third Circuit articulated and adapted the more lenient standard employed by its sister circuits, finding it sufficient for plaintiff to “provide particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 156-57 (3d Cir. 2014), citing Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010) and U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009); see also U.S. ex rel. Health v. AT&T, Inc. 791 F.3d 112, 126 (D.C. Cir. 2015) (same); U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1172 (10th Cir. 2010); United States v. United Healthcare Ins. Co., 848 F.3d 1161, 1180 (9th Cir. 2016).  

There are three pending certiorari applications that could allow the Supreme Court to decide which circuit court approach to Rule 9(b) is the best: an appeal from an Eleventh Circuit opinion, Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care LLC, et al. (2021), an appeal from a Sixth Circuit opinion, U.S. ex rel. Owsley v. Fazzi Assoc. Inc. et al. (2021), and an appeal from the Seventh Circuit, U.S. ex rel. Prose v. Molina Healthcare of Ill., Inc., et al. (2021). Estate of Debbie Helmly, et al. v. Bethany Hospice & Palliative Care LLC, et al., 853 Fed. Appx. 496 (11th Cir. 2021); see also U.S. ex rel. Owsley v. Fazzi Assoc. Inc. et al., 16 F.4th 192 (6th Cir. 2021); see also U.S. ex rel. Prose v. Molina Healthcare of Ill., Inc., et al., 17 F.4th 732 (7th Cir. 2021).

Consistent with its precedent,the Eleventh Circuit in Bethany Hospice found the complaint insufficient where, among other things, the relators failed to allege any specifics about actual false claims submitted to the government.  The Court noted that while it “do[es] not always require a sample fraudulent claim,” the relators did “not attempt to provide any particular facts about a representative false claim” or “have the personal knowledge or level of participation that could give rise to some indicia of reliability.” Bethany Hospice, 853 Fed. Appx. at 501-02.   

Nor is there anything particularly surprising about the Sixth Circuit’s opinion in Owsley.  The Court adhered to its standard application of Rule 9(b), finding that the relator failed to identify any specific claims that the defendant submitted pursuant to the fraudulent scheme or otherwise allege facts based on personal knowledge of billing practices to support a strong inference that particular claims were submitted to the government. Owsley, 16 F.4th at 196-97.  On the other side of the circuit split, in Molina Healthcare, consistent with its precedent, the Seventh Circuit deemed a complaint sufficient even though it did not identify any specific false claims; it was enough that the complaint contained information that “plausibly support[ed]” the inference that the defendant made false representations. Molina Healthcare, 17 F.4th at 741. The fraudulent scheme was pled with sufficient particularity, so there was no need to also plead the details of claims that were submitted for payment. Id. at 740.

Disagreement Over the Split Itself

In all three certiorari applications, the relators highlighted the deeply rooted circuit split regarding Rule 9(b)’s pleading requirements and stressed the importance of resolving the split.  The U.S. Government, however, does not agree.  In Bethany Hospice, the Solicitor General’s office submitted a brief arguing that certiorari should not be granted because the circuits are converging on a more flexible rule that evaluates each complaint under Rule 9(b) case-by-case.  The Relator shot back in reply, rebuking the notion that there is consistency amongst the circuits.

Notwithstanding the government’s position, there is, indeed, an outcome-determinative circuit split that needs to be addressed, even if it is not as well-defined as it was previously.  Admittedly, the circuits that once applied a categorical rule requiring the identification of specific false claims have retreated from that stringent interpretation of Rule 9(b) in every case.  

But there is still no single uniform rule.  The default rule in the Eleventh, Fourth, Sixth and Eighth Circuits is that a relator must plead specific false claims but those Circuits also recognize that detailed allegations regarding a relator’s intimate level of knowledge of, and involvement in, the submission of false claims might be enough in certain cases.  There can be no question that the application of that standard will continue to result in a much higher rate of qui tam dismissalsthan in the Third, Fifth, Seventh, Ninth, Tenth, and D.C. Circuits, which do not require examples of specific fraudulent claims.

The Supreme Court Should Weigh In

The fact that the viability of qui tam actions will vary significantly depending on the Circuit in which the complaints are filed is a significant problem that warrants the Supreme Court’s intervention.  A standard that is too stringent might result in premature dismissal of cases where fraud clearly occurred but in which the relator cannot yet articulate the false claims with requisite specificity; conversely, a standard that is too relaxed might allow for meritless cases to squeak past motions and proceed, to the detriment of the defendant. 

FCA cases carry draconian repercussions – treble damages and up to a $25,076 penalty on each fraudulent claim submitted – and they often spawn or are accompanied by parallel criminal prosecutions.  Given the severe consequences of FCA actions, it seems unjust to allow the same complaint to proceed in one circuit while subject it to dismissal in a sister circuit.  Yet, that is the reality litigants face today.  Relatedly, the split is problematic because it encourages forum shopping, especially in national cases in which the defendant is subject to suit in any circuit.  A uniform and consistent approach amongst the circuits would help resolve these issues and promote fairness in the institution and prosecution of FCA cases. 

On March 22, 2022, the Department of Health and Human Services (HHS) issued a guidance statement (GL-2022-03) to clarify covered entities’ obligation to ensure that their business associates comply with HIPAA regulations.

The need for clarification arose from various complaints alleging that HIPAA business associates were failing to comply with various HIPAA Administrative Simplification requirements – which are standards for electronic transactions, code sets, unique identifiers, and operating rules in an effort to reduce paperwork and streamline business processes across health care systems. With this clarification, it is now clear both that: (1) business associates are indeed required to comply with HIPAA administrative simplification requirements; and (2) covered entities can be held responsible for their business associates’ noncompliance with such requirements.

HIPAA Covered Entities and Business Associates

By way of background, HIPAA is a federal law that creates a set of national standards for the protection of certain health information. Only certain organizations, namely, “covered entities” and their “business associates” must comply with the HIPAA Privacy Rule.

HIPAA covered entities include health plans, health care clearinghouses, and health care providers who transmits any health information in electronic form in connection with a transaction for which a standard has been adopted. See 45 C.F.R. § 160.103. A HIPAA business associate is a person (including a partnership, corporation, or other public or private entity) that performs certain services or conducts transactions on behalf of a covered entity (excluding members of a covered entity’s workforce, who are not considered to be business associates). There are four types of HIPAA Administrative Simplification Standards. These requirements, also known as Electronic Data Interchange (“EDI”) Standards, are set forth in 45 C.F.R., Part 162, and: (1) regulate transactions for pharmacy and health care administrative information, including claims; (2) impose operating rules to support standard transactions; (3) require unique identifiers for health plans, providers, and employers; and (4) require code sets (which help classify medical diagnoses, procedures, diagnostic tests, treatments, equipment, and supplies) for clinical diagnoses and procedures.  While the regulations state “covered entities” must comply with the administrative simplification standards,” they are silent on whether they apply to business associates.  Hence the need for clarification by HHS.

Key Takeaways from the Guidance Statement

In the Guidance Statement, HHS made clear that business associates are indeed required to comply with HIPAA Administrative Simplification Requirements, even though business associates are not “covered entities.” This means that when a covered entity engages a business associate, such as an accountant, IT contractor, or billing company to conduct a transaction for which a standard has been adopted on behalf of the covered entity, the business associate, and any agents or subcontractors thereof, must also comply with the requirements, and that those requirements are not just applicable to covered entities (as had previously been believed by many).

HHS also concluded that covered entities are responsible if their business associates do not comply with applicable HIPAA Administrative Simplification Requirements. There are two takeaways from this guidance.  First, covered entities are not relieved from compliance responsibility simply because they engage a business associate to provide services for, or on their behalf. Second, because a “business associate’s actions or inactions are imputed to the covered entity,” a covered entity can be held directly responsible for the failures of their business associates even if they themselves are in full compliance. 
Given these clarifications, it is more critical than ever that covered entities not only ensure that they remain in compliance with HIPAA Administrative Simplification Requirements, but that their business associates do as well.  Covered entities that have previously relied on business associates to meet certain requirements so that they do not have to will no longer be able to do so, and may face HIPAA enforcement exposure if they or their business associates fail to comply with the rules.

How can we help

AEL are expert healthcare lawyers who have significant experience with HIPAA compliance issues. Read more about our Healthcare Regulatory & Compliance Counseling and Data Privacy & Security Practice Areas. Scott R. Landau is a partner and Raquel Frier is an associate of the Firm. If you are a covered entity such as a health plan, health care clearinghouse, or health care provider, or are a business associate to covered entities, we can help you navigate the HIPAA regulations and avoid noncompliance.  If you have any questions please reach out to us.

The following article was originally published on March 10, 2022 in the Expert Analysis section of Law360 and was authored by AEL partner Scott R. Landau.

It has long been the conventional wisdom that the safe harbors to the Anti-Kickback Statute (AKS) protect certain payment practices from liability, regardless of the intent of the parties. A February order issued by the U.S. District Court for the Central District of California in U.S. v. Medtronic PLC, a False Claims Act (FCA) qui tam case predicated on alleged AKS violations, however, casts doubt on this view, and could trigger the erosion of the very protections the safe harbors are meant to provide.

The AKS and the Safe Harbors

The AKS is a federal criminal law that prohibits the knowing and willful payment of remuneration to induce or reward patient referrals or the generation of business involving any item or service payable by federal health care programs. 42 U.S.C. § 1320a-7b. AKS violations are subject to criminal penalties and administrative sanctions including fines, imprisonment and exclusion from participation in federal healthcare programs. See 42 U.S.C. § 1320a-7b(b); 42 U.S.C. § 1320a-7. Claims for payment from federal health care programs that are tainted by AKS violations are also actionable civilly under the FCA. See 42 U.S.C. § 1320a-7b(g).

Because of the broad reach of the AKS, following its implementation concerns were raised that certain commercial arrangements that should be outside its purview “were technically covered by the statute and therefore were subject to criminal prosecution.” See Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute, 64 FR 63518-01 (Nov. 19, 1999). As a result, in 1987 Congress enacted the Medicare and Medicaid Patient and Program Protection Act. See Public Law 100-93 (section 1128B(b)(3)(E)); 42 U.S.C. 1320a-7b(B)(3)(E)). The act tasked the U.S. Department of Health and Human Services to develop safe harbor provisions to “specify various payment and business practices that would not be subject to sanctions under the anti-kickback statute, even though they may potentially be capable of inducing referrals of business under the Federal health care programs.” Medicare and State Health Care Programs: Fraud and Abuse; Electronic Health Records Safe Harbor Under the Anti-Kickback Statute, 78 FR 79202-01 (Dec. 27, 2013).

Based on that mandate, HHS promulgated regulations establishing a number of safe harbors for certain arrangements that remove them from the scope of the AKS. United States ex rel. Baklid v. Halifax Hospital Medical Ctr. , No. 6:09-cv-1002-Orl, 2013 WL 6196562, *6 (M.D. Fla. Nov. 26, 2013). The regulations, codified at Title 42 of the Code of Federal Regulations, Section 1001.952, identify certain so-called payment practices that “shall not be treated as a criminal offense under … the Act and shall not serve as the basis for an exclusion” so long as the criteria enumerated therein are met. Id.

Importantly, in establishing the regulations, HHS “sought to specify particular safe harbors, that, despite the potentially unlawful intent, would protect non-abusive relationships.” Medicare and State Health Care Programs: Fraud and Abuse; Issuance of Advisory Opinions by the OIG, 62 FR 7350-01 (Feb. 19, 1997). According to HHS, the final safe harbors “describe practices that are sheltered from liability, even though unlawful intent may be present” and where the “actual intent of the parties is entirely irrelevant.” Id.; see also Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the OIG Safe Harbor Anti-Kickback Provisions, 59 FR 37202-01 (July 21, 1994) (noting that the regulations “describe payments that would be prohibited, where the unlawful intent exists, but for the safe harbor protection that has been granted”).

The safe harbors were thus meant to provide parties with assurance that certain types of business practices would not be subject to enforcement actions under the AKS, regardless of intent. Medicare and State Health Care Programs: Fraud and Abuse; OIG Anti-Kickback Provisions, 56 FR 35952-01, 35983 (July 29, 1991).

Medtronic

In Medtronic, an action brought pursuant to the qui tam provisions of the FCA, see 31 U.S.C. § 3730(b) (permitting whistleblowers known as “relators” to sue persons or entities on behalf of the U.S. for defrauding the government), the relator, Dr. Kuo Chao, alleged that Medtronic, a medical device manufacturer, caused false claims to be filed for services payable by government health care programs by paying kickbacks to physicians to induce and/or reward them for using certain Medtronic devices, in violation of the AKS. See Docket in Civil Action No. 2:17-cv-01903-ODW-SS (hereinafter “Docket”), Entry No. 102.

After the government declined to intervene, and following motion practice regarding the complaint and first amended complaint, the relator filed a third amended complaint that Medtronic moved to dismiss. Id. In its motion, Medtronic argued, inter alia, that the relator’s claims should be dismissed for failure to plead that the subject payments fell outside the AKS’ safe harbors — specifically, the personal services safe harbor, which shelters certain service and management arrangements from liability so long as they meet the requirements set forth in the regulations. See Docket, Entry No. 106, at pp. 16-18. At the time of the alleged violations (prior to the January 2021 amendments to the AKS personal services safe harbor), the requirements of the personal services safe harbor were as follows: (1) the agreement is set out in writing and signed by the parties; (2) the agreement covered all the services the agent provides to the principal and specifies the services to be provided; (3) the agreement specifies exactly the schedule of intervals for services to be provided on a periodic or sporadic basis; (4) the term was not for less than one (1) year; (5) the aggregate compensation was set in advance, consistent with FMV, and was not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made under any federal health care program; (6) the services did not involve the counseling or promotion of any arrangement or activity that violated any law; and (7) the services did not exceed those which were reasonably necessary to accomplish the commercially reasonable business purpose of the services. See 42 C.F.R. § 1001.952(d) (effective prior to Jan. 19, 2021).

Though the U.S. had declined to intervene — leaving the relator to litigate on his own pursuant to Title 31 of the U.S. Code, Section 3730(c)(3) — it did submit a statement of interest in response to Medtronic’s motion. See Docket, Entry No. 108. In the statement, the government argued that the motion should be denied because lack of fair market value is not an element of the AKS, and because “FMV, standing alone, is not a defense to the AKS.” Id. at p. 6-8. In urging the court to deny the motion, the government also quoted what it described as the HHS Office of Inspector General’s long-standing warning that under the AKS, “neither a legitimate business purpose for the arrangement, nor a fair market value payment, will legitimize a payment if there is also an illegal purpose.” Id. at p. 7 (citing OIG Supplement Compliance Program Guidelines for Hospitals, 70 Fed. Reg. 4848, 4864 (Jan. 31, 2005)).

The Order Denying Medtronic’s Motion to Dismiss

In an order dated Feb. 24, the court denied Medtronic’s motion to dismiss, agreeing that the relator was not required to set forth the negation of one or more of the elements of the personal services safe harbor with particularity at the pleadings stage, and held that it was plausible that the safe harbor does not apply. See Docket, Entry No. 119, at 10-13.

In so holding, the court embraced many of the government’s assertions from its statement of interest, including that:

As the United States points out, even some fair market value payments will qualify as illegal kickbacks, such as when the payor has considered the volume of reimbursable business between the parties in providing compensation and otherwise intends for the compensation to function as an inducement for more business.

Id. at 12.

The court also stated that the relator’s allegations regarding Metronic’s intent — to reward doctors for using Medtronic devices — if true, would take the payments out of the AKS safe harbor. Id. In reaching its conclusions, the court expressly referenced the long-standing warning cited by the government in the statement of interest. Id.

Analysis

The notion that fair market value on its own is not enough to insulate an arrangement from AKS liability is not controversial — as fair market value is but one of seven requirements that must be met for the personal services safe harbor to apply. The court’s conclusion that improper intent can take the payments out of the safe harbor, however, is notable.

For starters, the personal services safe harbor does not contain an intent element; parties can thus achieve compliance without consideration of subjective intent so long as they meet all the other requirements of this safe harbor. The court’s conclusion here is also contrary to the purpose of the safe harbors — to “describe practices that are sheltered from liability, even though unlawful intent may be present” and where “[t]he actual intent of the parties is entirely irrelevant.” Medicare and State Health Care Programs: Fraud and Abuse; Issuance of Advisory Opinions by the OIG, 62 FR 7350-01, 7351 (Feb. 19, 1997). The order thus challenges the very premise of the safe harbors — the sheltering of certain arrangements from enforcement, regardless of intent.

The Medtronic court’s conclusion regarding the impact of intent on safe harbor protection is based, at least in part, on certain propositions set forth in the government’s statement of interest. In particular, the court appears to have been moved by what the government called “the HHS-OIG’s longstanding warning” that neither legitimate business purposes nor fair market value payment matter if there is also an illegal purpose. See Docket, Entry No. 119, at. 12; see also Docket, Entry No. 108, at 7, citing OIG Supplement Compliance Program Guidelines for Hospitals, 70 Fed. Reg. 4848, 4864 (Jan. 31, 2005). Interestingly, that statement originated from a 2005 document issued by HHS titled “OIG Supplemental Compliance Program Guidance for Hospitals,” in which HHS suggested so-called useful inquiries for hospitals in analyzing arrangements or practices for AKS compliance before taking steps to reduce or eliminate risk — such as ensuring safe-harbor compliance. Id. at 4864. The statement was thus taken out of context and is in fact inapposite, as it relates only to the analysis of arrangements prior to considering the application of potential safe harbors.

While the government did not expressly cite it to support the proposition that improper intent can vitiate safe harbor protection, its reliance thereupon — and its statement of interest generally — certainly implies a more expansive view than HHS’ longer-standing one — that “[t]he actual intent of the parties is entirely irrelevant” to safe harbor analysis.” Id. Regardless, in concluding that improper intent can take a payment out of the safe harbor, the Medtronic court embraced the more expansive view, effectively interpreting the safe harbors as rebuttable presumptions — that can be overcome upon a showing of improper intent — rather than safe harbors that provide assurances against enforcement when met.

Although the order was issued on a motion to dismiss and pertained only to the sufficiency of the pleadings, and though this conclusion itself is arguably dicta, it will no doubt be cited by parties in future cases as standing for the broad proposition that intent can eliminate safe harbor protection. If that happens, this — incorrect — view will thereafter creep into the AKS safe harbor jurisprudence, and in time, could lead to their erosion. The AKS safe harbors were so named intentionally — to provide safety from AKS enforcement for certain otherwise non-abusive arrangements even though unlawful intent may be present.

If courts embrace the view that intent can vitiate safe harbor protection even when the requirements of a safe harbor have been met, the safe harbors will no longer provide meaningful assurances that the business practices they cover are safe from enforcement. Their protections will be upended and ultimately rendered unsafe, despite their name to the contrary.

Yesterday, the U.S. Department of Justice (DOJ) released its annual report of False Claims Act (FCA) settlements, in which it announced that the government obtained more than $5.6 billion in settlements and judgments in civil false claims and fraud cases in 2021.  Remarkably, of the $5.6 billion recovered, a staggering $5 billion — nearly 90% of the total amount recovered — came from settlements in healthcare matters involving nearly every type of player in health care, including drug and device manufacturers, hospitals, physicians and physician practices, clinical testing laboratories, hospice, long term care, and skilled nursing providers, and managed care companies. 

The FCA was designed to prevent “false claims for federal funds and property involving a multitude of [] government operations and functions,” and is not limited just to the healthcare field.  FCA cases extend across a variety of industries and practices, including defense contracting, oil and natural gas, customs duties, non-competitive bidding practices, and Federal Housing Administration loans.  Essentially, the FCA covers anyone – entities and individuals – in the business of submitting claims for payment to the federal government. 

That healthcare recoveries constitute the overwhelming majority of FCA recoveries in given year is nothing new. Quite the contrary, save for 2014 (when FCA settlements largely stemmed from the housing and mortgage crisis), healthcare has been the primary source of FCA recoveries in recent years, with total recoveries since 2015 totaling as follows:

2015 – Healthcare comprised $1.9 billion (54.29%) of $3.5 billion total

2016 – Healthcare comprised $2.5 billion (53.19%) of $4.7 billion total

2017 – Healthcare comprised $2.4 billion (64.87%) of $3.7 billion total

2018 – Healthcare comprised $2.5 billion (89.29%) of $2.8 billion total

2019 – Healthcare comprised $2.6 billion (86.67%) of $3 billion total

2020 – Healthcare comprised $1.8 billion (81.82%) of $2.2 billion total

So, while 2021’s figures are not necessarily surprising, DOJ’s primary focus in the false claims and civil frauds space continues to be on the healthcare industry. And despite statements from DOJ’s regarding increased scrutiny on industries other than healthcare (such as cybersecurity and government procurement), it seems unlikely that this pattern will change anytime soon, especially considering the historic levels of emergency funding that were provided by federal agencies to healthcare providers in response to the COVID-19 pandemic, as well as the cases and individuals who have already been charged (and in some cases, sentenced) related to Paycheck Protection Program (PPP) and/or Economic Injury Disaster Loan (EIDL). Quite the contrary, all indications are that the trend of continued scrutiny of and enforcement against healthcare providers – both from DOJ directly and from whistleblowers in “qui tam” actions – will continue to surge in the coming years.

AEL are expert healthcare lawyers and have significant experience navigating providers healthcare adjacent concerns through the complicated and often treacherous waters of FCA cases and parallel criminal and civil proceedings. We also specialize in healthcare related regulatory counseling, both in transactions and day-to-day healthcare operations, so that our clients can proactively and confidently identify legal/regulatory issues before they arise and avoid FCA exposure down the road.  If you have any questions or we can assist you in any way please reach out to us to discuss.

The SEC suffered a rare defeat last week in SEC v. Christopher Clark when U.S. District Judge Claude M. Hilton, from the Eastern District of Virginia, entered a directed verdict midtrial in the agency’s civil insider trading case before any defense was offered by the defendant.

The defendant, Christopher Clark (alleged tippee), was accused of trading on insider information about the potential acquisition of CEB Inc., an IT advisory firm where his brother-in-law (alleged tipper) was controller. The SEC pointed to Clark’s risky trading in the leadup to the acquisition announcement and drew attention to the fact that Clark started purchasing call options for a combined $33,050 during this time, noting it was “the first time in more than five years that Clark took a bullish position on CEB.”  Clark also financed these CEB trades by borrowing money, including through a line of credit and taking out a loan on his car, as well as liquidating part of his wife’s IRA. As further circumstantial evidence, the SEC stated that some of Clark’s trades followed phone conversations and other interactions with his brother-in-law, including while Clark coached their daughters’ basketball team and at family holiday gatherings for Christmas Eve and Christmas.

But Judge Hilton was unpersuaded by the SEC’s evidence. Although he did not issue a written opinion, according to court transcripts, Judge Hilton rejected the notion that the “improbable success rate” of Clark’s trades, which the SEC argued was evidence of him getting insider information, was evidence of anything at all. “I mean, the government can speculate that he made a little too much money, he was a little too successful or more successful than he ought to be, so therefore he’s getting insider information, but there’s no evidence of it.” The Judge was equally unmoved by the fact of frequent communications between Clark and his brother-in-law. “Of course he would talk to his brother-in-law, and vice versa.”

In short, the Court insisted on definitive evidence of improper communications regarding material non-public information (“MNPI”) and rejected the notion that inferences alone can suffice. To many, the ruling stands as a rebuke to the SEC’s regular practice of bringing insider trading cases based on statistical data—that is, circumstantial evidence of suspicious trading that gives rise to an inference that the trade was on the basis of MNPI. The SEC’s statements at last week’s hearing indicate it may appeal the ruling, although it has yet to do so. 

* * *

AEL is a premier boutique law firm specializing in complex fraud and parallel criminal and civil investigations and cases, including in the areas of healthcare fraud, securities fraud, qui tam/whistleblower litigation, False Claims Act (FCA) cases, and computer fraud. AEL partners Kenneth Abell and David Eskew handle securities cases on both the criminal and civil sides and recently obtained the dismissal of a securities class action against an AEL client, the former Chief Financial Officer (CFO) of a publicly-traded company.

*** This article was originally published in the Expert Analysis section of Law360 on November 10, 2021 ***

There has long been a circuit court split over the standard that applies to Government-initiated motions to dismiss qui tam actions under the False Claims Act (FCA). Until last year, there were two approaches: the Swift standard, which derives from the D.C. Circuit’s ruling in Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003), and the Sequoia Orange standard, which stems from the Ninth Circuit’s ruling in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp, 151 F.3d 1139 (9th Cir. 1998).

While the Swift standard affords the Government an “unfettered right” to dismiss a qui tam FCA action, see Swift, 318 F.3d at 252, the Sequoia Orange standard requires the Government to identify a “valid government purpose” and then show a “rational relation” between its purpose and the dismissal of the case, see Sequoia Orange, 151 F.3d at 1145-46.

Last year, the Seventh Circuit carved out a third standard that treats the Government like any private party plaintiff under the Federal Rules of Civil Procedure. See United States ex rel. CIMZNHCA, LLC v. UCB, Inc., 970 F.3d 835, 845 (7th Cir. 2020). The Court determined that the standard applicable to Government-initiated dismissal motions is the one provided by Rule 41(a), which governs voluntary dismissal of a plaintiff’s claims in garden-variety civil practice. Id. at 849-50.

The Third Circuit Weighs In

On October 28, 2021, the Third Circuit added its view to the circuit split. In Polansky v. Executive Health Resources, Inc., No. 19-3810, 2021 WL 4999092 (3d Cir. 2021), the Third Circuit unanimously declined to follow either of the two more established standards – Swift and Sequoia Orange – and elected instead to adopt the recently-articulated approach of the Seventh Circuit. In doing so, it issued two significant holdings.

First, the Third Circuit held that, when the Government declines to move forward with a relator’s FCA action, and the relator elects to proceed on his or her own, the Government must intervene before it can move to dismiss. The Court held that the Government can seek leave to intervene at any point in the litigation upon a showing of good cause. Notably, the Government in Polansky did not actually file a separate motion to intervene; the Court construed the Government’s motion to dismiss “as including a motion to intervene” and deemed that sufficient to allow the Government to be heard in the case. Polansky, 2021 WL 4999092 at *11. Thus, although going forward it will be safer for the Government to file a separate motion to intervene before or alongside a motion to dismiss, a free-standing motion to dismiss seeking intervention and showing good cause will likely suffice. As the Court in Polansky noted, good cause is a “uniquely flexible and capacious concept,” which simply means a “legally sufficient reason.” Id. at *7, quoting Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 934-35 (10th Cir. 2005).

Second, the Court held that a government-initiated dismissal motion in a qui tam action should be governed by Rule 41(a) of the Federal Rules of Civil Procedure. Polansky, 2021 WL 4999092 at *7. In so holding, the Court determined that the Government should be treated the same as any private party plaintiff would be treated when seeking to dismiss a civil case. The Court reasoned that because Rule 41(a) functions “[s]ubject to . . . any applicable federal statute,” Fed. R. Civ. P. 41(a)(1)(A), the governing standard should be a blend of Rule 41(a) and the provisions of the FCA.

Traditional Rule 41(a) analysis turns on whether the defendant has already filed a responsive pleading when the plaintiff seeks to dismiss the action. If a responsive pleading has not yet been filed, the plaintiff may move to dismiss the action as of right and without a court order. Fed. R. Civ. P 41(a)(1). On the other hand, if the defendant has already filed a responsive pleading, the plaintiff may only dismiss the action “by court order, on terms that the court considers proper.”  Fed. R. Civ. P. 41(a)(2).

In FCA actions, the analysis will operate as follows: the relator must receive notice of the Government’s motion to dismiss and an opportunity for a hearing, regardless of when the Government’s motion is filed. See 31 U.S.C. § 3730(c)(2)(A). If the Government moves to dismiss a relator’s FCA case before the defendant has filed a responsive pleading, and the relator has had the opportunity to be heard, the Government is entitled to dismissal unless it has engaged in unconstitutionally arbitrary conduct. See Fed. R. Civ. P. 41(a)(1)(A); 31 U.S.C. § 3730(c)(2)(A). Of course, very few cases will rise to the level of unconstitutionally arbitrary government conduct. After all, “only the most egregious official conduct can be said to be arbitrary in the constitutional sense,” and such conduct must amount to an “executive abuse of power” that “shocks the conscience.” Polansky, 2021 WL 4999092 at *9 n.17, quoting Cnty. of Sacramento v. Lewis, 523 U.S. 833, 846 (1998) (internal quotation omitted).

Conversely, if the Government moves to dismiss a relator’s case after the defendant has filed a responsive pleading, then dismissal will only be granted on terms the court considers proper. Fed. R. Civ. P. 41(a)(2). The Court in Polansky offered no insight into the kinds of factors that would justify dismissal by court order under Rule 41(a)(2) but suggested that dismissal should be encouraged, even at this later stage, unless the defendant will suffer prejudice beyond the prospect of a second lawsuit. Polansky, 2021 WL 4999092 at *9. Insight can also be gleaned from the Court’s review of the District Court’s dismissal order. In that regard, the Court noted that the District Court had engaged in a “thorough examination and weighing of the interests of all parties,” and thus, “did not abuse its discretion in granting the Government’s motion to dismiss on the terms that it did.” Id. at *12. In particular, the Court noted that the District Court had “exhaustively examined the interests of the parties, their conduct over the course of the litigation, and the Government’s reasons for terminating the action,” which included the litigation costs that Polansky’s suit imposed on the Government. Id. Further, the Court found that the District Court had adequately considered the prejudice to the non-governmental parties, even though the “litigation was at an advanced stage and significant resources had been expended on it by both parties.” Id.

Takeaways From the Polansky Decision

Read as a whole, there can be no question that the Third Circuit recognized the right of the Government to dismiss an action brought in its name, especially in the early phases of litigation. Indeed, after Polansky, it is essentially a given that the Government will win on a dismissal motion if it files the motion before the defendant files a responsive pleading. The Third Circuit made clear that the Government has an absolute right to dismiss a qui tam action at that early stage of the litigation. Providing that the relator has had the opportunity to be heard, the Government will succeed on its dismissal motion unless it has engaged in unconstitutional misconduct. And it is worth noting that Government motions to dismiss will most often be filed when the case is unsealed and before the defendant has filed a responsive pleading. Thus, as a practical matter, most of these motions will be analyzed under the extremely deferential Rule 41(a)(1) standard.  

Relators, however, will likely fare better in fending off government motions to dismiss if the Government files the dismissal motion after the defendant has already filed a responsive pleading. At that point, the Government no longer has an absolute right to dismissal and the court will have greater latitude to decide whether to grant the motion.

Ultimately, by following the standard promulgated by the Seventh Circuit, the Third Circuit chose the least Government-friendly approach to dismissal of a qui tam action under the FCA in cases where the motion is not filed right away. A motion seeking to dismiss pursuant to Rule 41(a)(2) will naturally face a greater hurdle to success than a dismissal motion filed by the Government under the Swift standard in the D.C. Circuit, which gives the Government an unfettered right to dismiss.

The governance of Rule 41(a)(2) over dismissal motions is also more restrictive than the rational relation standard in Sequoia Orange, which is grounded in constitutional principles. In fact, the Third Circuit in Polansky critiqued that approach, finding that the “right against arbitrary government action may provide a constitutional floor, but the Federal Rules of Civil Procedure are built above it, and the Ninth Circuit’s approach omits that structure entirely.” Polansky, 2021 WL 4999092 at *12. Because a Government-initiated motion to dismiss in the Third Circuit will be governed by both the Federal Rules of Civil Procedure and constitutional principles, it will be subject to greater scrutiny than motions to dismiss filed in the Ninth and Tenth Circuits.

In sum, the Third Circuit’s decision in Polansky further widens the long-standing circuit split over the standard to apply to Government-initiated motions to dismiss in qui tam actions. Although all three standards are largely deferential to the Government, the approach initially articulated by the Seventh, and recently adopted by the Third Circuit, evinces an increasing level of scrutiny for Government-initiated motions filed after the defendant has entered the fray.

More About AEL and the Authors

AEL is a boutique law firm that specializes in parallel criminal/civil healthcare fraud investigations, with a particular expertise in the False Claims Act (FCA) and Antikickback Statute (AKS), among others. Read more about our white collar practice, FCA expertise, and government investigations practice on this website. Ken Abell is a partner and co-founder of the Firm. Kate Kulkarni is an associate of the firm.

Following years of debate and delay, in late December 2020, Congress passed the “No Surprises Act,” to protect patients against “surprise bills” for services provided by out-of-network providers at in-network facilities.  Recently, in July 2021, the Departments of Health and Human Services (HHS), Labor, and Treasury published an interim final rule (“IFR”) implementing certain provisions of the Act. Below is a high-level summary of the key provisions of Act and the IFR, as well as a list of takeaways for providers to consider going forward.

Surprise Billing

Surprise billing occurs when a patient receives a bill after unknowingly receiving care (in both emergent and non-emergent settings) from a provider who does not participate in their health plan network.  Many states, including New York and New Jersey, instituted surprise billing prohibitions over the last few years, with varying and sometimes conflicting provisions and protections.  See, e.g., McKinney’s Financial Services Law § 603(h).  Among other things, the inconsistencies between state-level surprise billing prohibitions led to the birth of a federal solution, the No Surprises Act (the “Act”).

The No Surprises Act

The Act prohibits balance billing for non-emergency services furnished by out-of-network providers during a patient’s visit at an in-network facility unless the patient “waives” their rights under the Act by consenting to receive services from (and be billed) by an out-of -network provider (more on this below). The Act is intended to “protect patients from surprise medical bills and promote fairness in payment disputes between insurers and providers.” Importantly, the Act is not intended to preempt “state-level solutions already on the books” so long as such “solutions” do not prevent the application of federal requirements.

The Interim Final Rule

The IFR prohibits surprise billing in the following three circumstances:

• When a patient receives emergency services from an out-of-network provider. Under the IFR, “emergency services” include services that may be required if the patient ends up being admitted to the hospital.
• When a patient receives non-emergency services from an out of network provider at an in-network facility.
• For air ambulance services.

Under the IFR, patients may waive their rights under the Act and consent to balance billing for services rendered by an out-of-network provider. A valid waiver requires both voluntary and informed consent. To ensure proper consent, the government created a standard notice and consent form; the form requires some customization, including the provider’s name and a good faith estimate of the amount charged for the services provided, and must be made available to patients in the 15 most common languages in the provider’s geographic region.

The IFR also sets forth specific timing protocols. The notice and consent form must be given to the patient either (1) at least 72 hours before their scheduled appointment or (2) on the day of their appointment at least three hours before services are provided. Patients may request a copy of the notice and consent form in any format they select (i.e., e-mail, printout, mail). If a patient signs a notice and consent form, the out-of-network provider is required to send a copy to the patient’s health plan.

If the IFR applies, patients only need to pay their in-network cost share responsibilities for the services received. Where a patient’s cost share amount is based on a percentage of charges, the in-network percentage is applied to the “recognized amount.” The recognized amount is determined, in order of priority, as follows: by (1) An All-Payer Model Agreement, (2) specified state law, or (3) the lesser of (a) the amount billed by the out-of-network provider or (b) the Qualifying Payment Amount (“QPA”). The IFR does not contain time limits as to when a complaint regarding a violation of the Act must be made. The government is, however, currently seeking public comments and suggestions on this issue, and will presumably update the IFR (or make it a non-interim Final Rule at some point) when determinations are made on this issue.

What Do You Need to Know?

Though the IRF is an “interim” rule, it is also a “final” rule –meaning that unlike a proposed rule, it is now in effect. So while additional regulation on open issues is likely to issue in the coming months, provider compliance with the No Surprises Act and its implementing regulations in the IFR is now required.  Providers should thus take steps now to ensure compliance with the IRF, including:

• Adjusting patient schedules, if needed, to comply with the IFR’s timing protocols regarding notice and consent requirements.
• Consideration of how the law and rules impact decisions regarding payor network participation.
• Updates to websites to ensure that they contain the required surprise billing disclosures prior to 1/1/2022.
• Collaboration with payors to ensure timely communication.

AEL is of course continuing to monitor the landscape and will provide updates as they become available.  In the meantime, if you have any questions about compliance with the No Surprises Act or any state-level surprise billing rules and regulations, please reach out to us and we will be happy to assist.

The following article was originally published in the American Bar Association’s Litigation Journal, Vol. 47 No. 2 (Winter 2021) and was co-authored by AEL partner David M. Eskew and Teitler & Teitler partner Paul Murphy. You can read the article in its full form through the link here, in the post below, or by subscribing to the ABA Litigation Journal.

“He did it before, do you really think he didn’t do it this time?”

This is the stuff of a defense lawyer’s nightmares. Lawyers lose sleep over the notion that, despite all their hard work defending the specific charges in a case, their client’s prior sins will nevertheless be admitted into evidence and take on outsize importance in shaping the jury’s impressions of the client. And for good reason. Evidence of a person’s propensity to act in a certain way can be utterly devastating. Jurors may focus unduly on the prior acts of misconduct to the exclusion of the government’s heavy burden of proof, and they may be more willing to accept other evidence offered against the defendant because it makes more sense, given that, in their minds, the defendant is a bad actor. The converse is often a motivating factor behind the tactic of many white-collar defendants who have otherwise been pillars of the community to parade character witnesses before the jury in fraud cases to testify about the defendant’s reputation for honesty. These witnesses, by design, are selected because they know the defendant as a person and are completely ignorant of the facts of the case. The defense is of course hoping that the jury will conclude that the defendant is trusted by other upstanding members of his or her community so they will be inclined to discredit certain evidence offered against the defendant or to credit certain defenses.

In a slightly different use of propensity evidence, defendants often use what is referred to variously as reverse 404(b) evidence or reverse “other acts” evidence in an effort to lay the blame for the crime they are charged with committing at the doorstep of a third party. They hope that by showing evidence that the third party has committed criminal conduct in the past that is similar to what the defendant is charged with, the jury will have a reasonable doubt as to the culpability of the defendant. The potential for the jury to draw these types of inferences from “other acts” evidence is real. After all, it is human nature to think that we all act consistently with our character traits. Not only does the average person feel these sentiments in their gut, but the concept that an individual may be inclined to act   in accordance with his or her “bad” or “good” character traits is embedded in some of the most consequential areas of criminal law. In the federal system, for instance, a defendant’s prior criminal history is part of a complex calculation used to determine a defendant’s sentencing guidelines range. More generally, federal district courts are obligated to consider a defendant’s “history and characteristics” when fashioning an appropriate sentence. Prosecutors will lean on prior criminal offenses not only in connection with the technical calculation of a defendant’s criminal history score but also as evidence that a greater sentence is needed to promote respect for the law, protect society from further crimes of the defendant, and deter the defendant from future crimes. It would be fundamentally unfair to permit prior criminal acts, both as evidence of a defendant’s general character and as a predictor of future conduct, to increase jail time if there were not some correlation between prior bad acts and future conduct. Defense attorneys attempt to paint a wholly different picture of a defendant by submitting character reference letters designed to persuade the court that a defendant’s crimes of conviction were an aberration not likely to be repeated in the future. In short, propensity is relevant.

But “propensity” is a dirty word when it comes to trial practice. Rule 404(b) of the Federal Rules of Evidence states that “evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.” Many states have similar rules. These rules apply equally in criminal cases and in civil cases, although the balancing of the probative value against the potential for unfair prejudice may vary between criminal cases and civil ones, especially civil cases that end up in bench trials. One constant, though, is that the rules make it improper to introduce evidence of a defendant’s other bad acts solely to show the defendant’s propensity. Countless court cases and scholars agree on this point, and it is not open for serious debate. Evidence of other bad acts of a defendant may not be used for the sole purpose of showing that a defendant did it before, so he must have done it again. The devil, of course, is in the details, and the real question is whether we practice what we preach. What’s said to be kept out of evidence with a padlock on the front door is regularly let in through the back door. We would be fooling ourselves if we really thought that propensity evidence was not regularly part of trial practice. It is.

This is not to say that prosecutors are acting with unchecked abandon, defying the rules of evidence and asking juries to con- vict purely on the grounds of a defendant’s propensity to be a bad guy. Nor are trial judges necessarily asleep at the switch in permitting such evidence to be admitted in trials. To the contrary, such evidence is expressly permitted by the rules of evidence in appropriate circumstances. Evidence of prior bad acts that is also intrinsic to a charged crime makes a fact that is material to the outcome more likely and therefore is directly relevant to proving the offenses charged. As such, it is generally admissible unless the defense can convince the trial judge that its probative value is substantially outweighed by the danger of unfair prejudice, confusion, or waste of time. Even where it is not intrinsic to the crimes charged, “other acts” evidence is admissible if it satisfies one of the delineated exceptions in Rule 404(b), which expressly permits the admission of “other acts” evidence if such evidence is “admissible for

another purpose,” including “motive, opportunity, intent, prepa- ration, plan, knowledge, identity, absence of mistake, or lack of accident.” These exceptions are expansive. Indeed, commentators have taken the view that the exceptions to the general rule against propensity evidence long ago swallowed the rule. Concepts such as motive, intent, plan, knowledge, and identity are in play in many criminal cases. In cases requiring proof of specific intent, like willfulness, “absence of mistake” and “lack of accident” are often critical parts of the government’s proof.

In determining the admissibility of “other acts” evidence, a federal court employs a well-accepted four-part test: First, the evidence must have a proper evidentiary purpose; second, the evidence must be relevant; third, the evidence must not be more prejudicial than probative; and, fourth, the evidence must be accompanied by a limiting instruction if requested. Despite the safeguards built into the rules of evidence to try to avoid the prejudice that naturally flows from propensity evidence, one would be well within his or her rights to question whether evidence admitted for a proper, non-propensity purpose is nevertheless grounded in what we regularly think of as “propensity.” Regardless of the label affixed to it or the purpose for which it is legitimately offered, the fact is that all such evidence is relevant because it raises inferences that are based on a defendant’s propensity to act in a certain way. There is no way to completely avoid it. If, for instance, “other acts” evidence is offered to show that, on a prior occasion a defendant used a similar method to knowingly defraud someone, in order to show that on the occasions charged the defendant knew he was committing  a fraud and was not acting in good faith, isn’t that just another way of asking the jury to conclude that he did it before and he must have known it was wrong this time?

“Other Acts” Evidence Has Become Routine in Criminal Trials

How has “other acts” evidence become such a routine part of criminal trials? The answer is multifaceted. First, evidence of other bad acts is often cast as direct or intrinsic evidence. Prosecutorial charging decisions can shape what counts as relevant evidence. Charging a case as a conspiracy or crime premised on a scheme or pattern, for instance, may allow prosecutors to offer into evidence other acts of misconduct by a defendant that would otherwise have been thought of as propensity evidence because such evidence becomes inextricably intertwined with the charged offenses. In this way, uncharged acts of securities fraud or health care fraud, when characterized as part of an overarching charged scheme or conspiracy, are generally admissible to prove the scheme or conspiracy. Likewise, “other acts” evidence may be admitted to complete the story of the charged crime without being subject to the scrutiny of Rule 404(b). Even if the

evidence is not intrinsic to the charged offenses or necessary to complete the story, a defendant’s other acts are often admitted to show knowledge, motive, a particular modus operandi, or to blunt a defense—especially where a defendant claims that what she did was simply a mistake, an aberration, or otherwise done without criminal intent. Casting prior bad acts evidence as rel- evant to prove knowledge or intent—an element in nearly every criminal offense—brings such evidence into play in almost every conceivable case.

In federal courts, “other acts” evidence regularly becomes an issue in white-collar fraud prosecutions due to the heightened mental state required to prove such crimes beyond a reasonable doubt. Securities fraud, health care fraud, and other federal fraud offenses generally are specific-intent crimes requiring a showing of knowing and willful acts done with an intent to defraud. Conduct is not willful or committed with fraudulent intent if the defendant “acted through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law.” Such crimes are particularly susceptible to defenses of good faith, honest mistake, and lack of fraudulent intent.

This is regularly on display in the corporate fraud context. Senior executives of successful multinational corporations, who in the normal course are prone to hold themselves out as masters of the universe, regularly present defenses in criminal securities fraud prosecutions that are based on the notion that they were unable to fully grasp pertinent concepts of finance, accounting, and law. Instead, they contend that they relied in good faith on professionals such as accountants, finance executives, and lawyers to assure them that what the corporation did was legal. The defense is often some combination of lack of knowledge of the operative facts and a good-faith belief that the corporation was not, in fact, cheating.

These types of defenses were prominent in the wave of ac- counting fraud scandals that followed the implosion of Enron. Executives began pleading ignorance of the fraudulent aspects of various earnings management practices. Roundtrip transactions where no risk was transferred and other accounting gimmicks used to prop up quarterly earnings and financial statements were said to have been blessed by armies of high-paid accountants and lawyers. These defenses can be difficult to penetrate be- cause corporate chieftains often insulate themselves from the dirty work that happens in their organizations. The government chips away at the defenses in a variety of ways. One is through evidence of other acts of misconduct tending to show that the executives knew they were cheating and were inclined either to break the rules or turn a blind eye to obvious problems. Indeed, the government sought to introduce 404(b) evidence against Enron chairman and chief executive officer Kenneth Lay relating to his knowledge of a prior fraud scheme involving deceptive trading at an Enron subsidiary over a decade earlier to show his knowledge, intent, absence of mistake, motive, and modus operandi concerning the securities and other fraud charges that led to the downfall of Enron. It is worth noting that corporate fraud defendants have had at least some success in keeping “other acts” evidence out of trials by convincing the trial court that the evidence would be marginally relevant and unduly prejudicial and would risk diverting the jury’s attention from the central issues by creating a trial within a trial.

Criminal Tax Fraud Cases

Nowhere is the government’s burden higher than in criminal tax fraud cases, which the Supreme Court has held require the government to prove beyond a reasonable doubt that the defendant knew he was breaking the law. The Court held that even a mistaken and inherently unreasonable belief that the law did not require taxes to be paid on income would be a defense if the jury found that the defendant in good faith believed it to be the state of the law. Cheek v. United States, 498 U.S. 192, 203 (1991). Given the government’s high burden, tax cases regularly involve what would otherwise be considered “other acts” evidence. Imagine a case in which the defendant is charged with tax fraud for filing false tax returns for the calendar years 2018 and 2019. The government must not only prove that the defendant acted knowingly in 2018 and 2019, those tax years charged directly in the indictment, but must also be prepared to blunt the defense that the defendant was negligent, sloppy, unwitting, disorganized, or just plain ignorant. As a result, the government can be expected to mine the defendant’s prior tax filings to find some evidence that the defendant was aware of some requirement not met in the charged tax years. Perhaps the defendant previously recognized some revenue in connection with a Schedule C business that she did not in the charged tax years or did not take a deduction or credit that is now claimed in the charged tax years. In this scenario, the government will likely argue that the prior tax returns are intrinsic evidence—not 404(b) evidence  at all—necessary to prove that the taxpayer defendant had the requisite knowledge and understanding of the tax laws to satisfy its burden of proving willfulness. More to the point, if the prior tax returns show a similar pattern as the charged tax years, the government will seek to introduce the tax returns from prior years as evidence that the defendant acted knowingly and willfully with respect to the years charged.

Sexual Assault Cases

More recent developments in the area of “other acts” evidence demonstrate that society is especially unwilling to allow defendants with prior histories of particularly heinous acts to cloak themselves in defenses of mistake and the like. Sexual assault cases have been found to warrant this type of special consideration. In federal sex crime cases, the rules clearly favor the admissibility of “other acts” evidence. Specifically, Federal Rules of Evidence 413 and 414 expressly permit the introduction of evidence of prior bad sex acts in sexual assault cases. States have recently demonstrated a willingness to entertain more of this type of “other acts” evidence in cases involving sexual assault, applying their existing rules in a seemingly broader way to permit such evidence.

Recent high-profile trials arising out of the #MeToo movement relied heavily on evidence of other acts of sexual assault. These cases illustrate the manner in which other bad acts evidence may be introduced at trial and the devastating effect of such evidence in sexual assault cases.

Harvey Weinstein, for instance, was charged with rape and sexual assault against two victims. The indictment also included a count charging him with being a sexual predator, making the testimony of a third victim directly relevant to prove the predatory aspect of the charge, an element of the offense that the prosecution was required to prove beyond a reasonable doubt. The prosecution also sought to offer the testimony of three additional witnesses to testify about their allegations that Weinstein sexually assaulted them. This testimony did not result in charged offenses but clearly fell into the category of “other acts” evidence of the defendant. After a pretrial hearing that was closed to the public, the trial court permitted the government to call these additional witnesses.

In New York, where Weinstein was tried, such witnesses are known as Molineux witnesses after the seminal 1901 New York Court of Appeals case that spawned much of the law nationwide concerning “other acts” evidence. In the Molineux case, the court reversed the conviction of a doctor charged with the very 19th-century crime of murder by poisoning because the trial court had permitted testimony about another similar incident. The importance of such evidence to a conviction is illustrated by that very case. The defendant there was convicted at his first trial when the trial court allowed evidence of a prior effort by him to commit another murder using the same pattern. Reporting indicates that, after the conviction was reversed, the defendant was tried a second time without the prior acts evidence, and the jury acquitted.

In Harvey Weinstein’s trial, the “other acts” evidence was likely of a similar value to the prosecution. Public reporting about the Molineux witnesses there indicated that they offered highly damaging testimony against the defendant. His counsel has said publicly that they intend to make the introduction of these three additional witnesses a central focus of their appeal.

While the nature of our system is such that we rarely learn why the jury chose to do what it did, one interesting aspect of the Weinstein trial is that the jury acquitted him of the count of being a sexual predator, where it would have had to accept the testimony of the third sexual assault victim beyond a reasonable doubt because her testimony was effectively an element of a count of the indictment. But the jury did not necessarily have to apply the same standard of proof to its evaluation of the Molineux witnesses’ accounts in order to use their testimony to support the conclusion that Weinstein was guilty. This is so because a defendant’s involvement in other bad acts generally need not be established beyond a reasonable doubt for a jury to consider it. In the federal system, the Supreme Court has held that, to admit the “other acts” evidence, the district court need find only that the trier of fact could conclude that the evidence demonstrates by a preponderance that the other acts occurred and that the defendant participated in them. See Huddleston v. United States, 485 U.S. 681, 685 (1988).

The value of such propensity evidence was also on full display in the case against Bill Cosby. Cosby’s first trial ended in a hung jury after the trial court permitted only one “prior act” witness to testify about another uncharged instance of sexual assault by the defendant. At the retrial, the court permitted the prosecution to call five other victims who testified about similar, uncharged conduct by the defendant. This evidence was offered to show that Cosby engaged in a common plan, scheme, or design—essentially, that Cosby had engaged in a particular modus operandi when committing the offense charged—and that their testimony demonstrated that his conduct was not the product of a mistaken belief that the sex was consensual. With this additional evidence reflecting other criminal acts, the jury convicted on the retrial. And the intermediate appellate court in Pennsylvania recently upheld the conviction against a challenge based in large measure on the introduction of this “other acts” evidence. Propensity evidence can raise its head in less traditional, but equally damaging ways. Prosecutors can capture other acts of the defendant by simply charging other bad acts in separate counts of the indictment, even if only loosely related to the top counts.

Doing so places additional pressure on the defendant and nearly ensures that damaging and possibly highly prejudicial evidence against the defendant will be admissible at trial.

“Joe Exotic” and Propensity Evidence

The manner in which other seemingly unrelated acts can be charged in a single indictment can be observed in the trial of Joseph Maldonado-Passage, also known as “Joe Exotic,” the so-called “Tiger King” from the wildly popular Netflix documentary of the same name. Federal prosecutors initially charged Maldonado-Passage with two counts of using an interstate facility to commit murder for hire in connection with his alleged efforts to murder a conservationist who had for years dogged Maldonado-Passage’s operation of a “roadside zoo” in Oklahoma. A few months after his initial indictment and in advance of trial, the government added 19 additional counts, all related to Maldonado-Passage’s alleged mistreatment of exotic animals at his zoo. The wildlife counts were supported by gruesome evidence, including tiger skulls excavated from the zoo’s property that belonged to big cats Maldonado-Passage was said to have euthanized and buried.

Though loosely related to the top count, the additional counts ensured that the government would be able to introduce extensive and detailed evidence regarding Maldonado-Passage’s mistreatment, breeding, and sale of numerous exotic cats. Though of lesser severity than the murder-for-hire plot (certain of the counts under the Endangered Species Act were misdemeanors), the animal mistreatment counts were, no doubt, supported by much stronger evidence than the murder-for-hire plot and were highly prejudicial. As noted by a journalist covering the trial, “[i]n the news, we talk about shootings and killings every day. But people will protest and they will not tolerate animal abuse. It was almost strategic to bring all of these charges at the same time.”

Arguing against the admissibility of such evidence is a tall task that is most often unsuccessful. Defense attorneys are limited to arguing that the introduction of certain “intrinsic” evidence or the joinder of certain counts is merely pretextual and that the government is attempting to shoehorn propensity and otherwise inadmissible “bad character” evidence into its case in chief. For example, in the “Tiger King” trial, defense attorneys argued that the murder-for-hire counts should be severed from the so-called wildlife counts. In their motion, defense attorneys contended that the evidence in support of the wildlife counts “would not be admissible in the government’s case in chief in the trial of the murder for hire charges” and that “[s]uch evidence will ir- reparably prejudice the jury beyond any curative effect of a jury instruction.” The defense went on to argue that “[t]he prejudicial effect of evidence relating to alleged slaughter of beloved ani- mals in a trial for a murder for hire plot is clear and substantial, particularly when Mr. Maldonado-Passage’s public identity is well known as an operator of an exotic zoo.”

But the rules regarding the joinder of counts and relevance generally are permissive, and relief is rarely granted. In the “Tiger King” case, defense counsel’s motion played out in a familiar unsuccessful pattern. The government opposed the motion, arguing that the murder-for-hire counts and the wildlife counts were part of a common scheme and plan, all of which were related to Maldonado-Passage’s long-standing feud with the conservationist victim, including her efforts to collect on civil judgments she had obtained against him, and the defendant’s efforts to profit from his roadside zoo that featured and bred big cats. By tying the more severe murder-for-hire counts with Maldonado-Passage’s businesses, finances, and long-standing feud with conservationist groups, the government was easily able to articulate a basis for charging all of the conduct together in a single indictment. The court agreed that the counts were interconnected and properly joined and denied the defendant’s pretrial motion.

The government also used “other acts” evidence during the “Tiger King” trial. In that case, the government introduced testimony about prior conversations Maldonado-Passage had with others regarding the victim’s assassination, along with a litany of social media posts and videos that Maldonado-Passage had made about his would-be conservationist victim. In the posts, Maldonado-Passage was alleged to have used direct and graphic language, repeatedly referring to her murder, including bizarre and grisly methods such as venomous snakes and decapitation. As the prosecutor noted in the documentary, “[i]t was part of the government’s evidence that we showed the jury a variety of the social media postings that Mr. Passage had made that referenced [the victim] in a violent way—having her killed, or wishing her dead.” The justification for the admission of such evidence was that the evidence showed the defendant’s motive, intent, and plan related to the charged murder-for-hire plot.

As can be seen from the examples above, the “proper purposes” for the admission of “other acts” evidence are numerous and the standards of relevance are broad. For that reason, there are many avenues for the admission of such evidence, and the standard for admission is often easily satisfied. While courts do what they can to police the use of this type of evidence, the reality is that once “other acts” evidence comes in—even for a stated non-propensity purpose—there is no controlling how a jury will view it. Limiting instructions are likely only to confuse the jury and cause them to fall back on what comes naturally to them—if the defendant did it before, he’s more likely to have done it again. Courts, including the Supreme Court, and commentators have long questioned the effectiveness of limiting instructions in situations where compliance with such an instruction would require a particularly difficult form of “mental gymnastics.” It could be argued that it is simply too much to ask human beings to put aside everything they have used over the course of their lives to evaluate people—namely, judging them by what they have done in the past. This is especially evident when jury instructions also separately advise juries to use their common sense when judging, among other things, the weight of the evidence. People view others as liars because they have lied in the past. Others are considered cheats because they have cheated in the past. We ask jurors to bring their common sense and life experience to the courtroom to judge the facts of a case, but when it comes to propensity evidence, we ask them to do exactly the opposite. Put aside your life experience and your tried-and-true methods of judging circumstances and people, and limit how you think about the fact that the defendant com- mitted the very crime he is charged with on a prior occasion. Do we really think that everyday people can put these issues aside?

What the Defense Can Do

What is a defense lawyer to do? Given the potential prejudice inherent in this type of evidence, defense counsel must make every effort to persuade a trial judge that the evidence is not properly admissible. Step one of course is a challenge to the proper purposes the government seeks to offer it for and to take aim at the relevance of the evidence. Courts do often reject government bids to offer “other acts” evidence on the threshold ground that it does not actually satisfy one of the exceptions in Rule 404(b) or that it is simply not relevant to the issues charged in the case. Failing that, the best argument defense counsel can deploy is that the “other acts” evidence will be unfairly prejudicial.

In the federal system, Rule 403 is the rule that gives a trial judge wide discretion to preclude otherwise relevant evidence onthe grounds of “unfair prejudice, confusing the issues, mislead- ing the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” Defense lawyers must hammer away at the unfairness of the prejudice. Facts such as remoteness in time, infrequency of conduct, a lack of similarity between the “other acts” and the charged conduct, intervening conduct or events, and the need for extensive additional testimony or evidence—the so-called “trial within a trial”—are all powerful arguments that the other acts sought to be admitted are more prejudicial than probative and are likely simply to confuse the issues and the jury. Indeed, it is often the case that the prosecution’s proof of the defendant’s involvement in the other bad acts is somewhat diffuse or the proofs of the other acts thin. But it is not enough to argue that evidence is prejudicial. It must be “unfairly” prejudicial. In other words, counsel must make the case that the “other acts” evidence would cause the jury to base its decision on something other than the evidence in the case. For this point, counsel can argue that the evidence would confuse, distract, or incite the passions of the jury to such an extent as to taint their consideration of the core issues in the case. In sum, defense counsel needs to be constantly vigilant to try to keep out “other acts” evidence. This should be done through carefully crafted pretrial motions and a clear trial plan that avoids opening any doors to such evidence. Some “other acts” evidence may be truly harmless and weak by nature, so the worry that the jury will do anything with it is overstated. But when it comes to highly damaging prior acts of a defendant, the admission of such evidence for a proper evidentiary purpose has the potential to carry such damaging effects that counsel should make all efforts to keep such evidence out. Counsel should not hold anything back at the trial level, as appellate courts will review a district court’s decision to admit such evidence for an abuse of discretion. In the federal system, if a district court considers all the evidence and arguments when weighing the probative value against the prejudicial impact and decides to admit the evidence, an appellate court will be loath to overturn a guilty verdict on that ground. And if such evidence is admitted, the defense counsel must work hard to limit the prejudicial impact of the evidence. Point out the weaknesses in the proof regarding those prior bad acts, and argue the dangers of reading too much into other acts that are not directly related to the charged offenses. And maybe, just maybe, tell the jury, “Just because he did it before, doesn’t mean he did it again.”

Yesterday, much to the dismay of lawmakers, providers, and my fellow “Stark nerds,” CMS gave itself yet-another year to finalize long-anticipated and much needed changes to regulations promulgated under the Physician Self-Referral Law (a/k/a the “Stark” law).  With this additional delay, it is now beyond question that the U.S. Department of Health and Human Services’ (HHS) so-called “Regulatory Sprint to Coordinated Care” is really more of a “mosey.” 

As currently structured, the Stark regulations and those promulgated under its cousin the Antikickback Statute (AKS) aim to prevent fraud and abuse concerns inherent in a fee-for-service based payment system (such as overutilization and overbilling). These rules were not only built for what is fast becoming an outdated system as we shift from fee-for-service to value-based payment, they actually discourage providers from pursuing innovative quality and value-based delivery and compensation models (I’ve previously described them as “analog regulations for a digital world”). And it is not tenable to mandate, by law (the Accountable Care Act, among others), that healthcare providers transition to a value-based system when the regulations still on the books inhibit them from doing so.

Recognizing this dilemma, in 2018 HHS launched its “Regulatory Sprint to Coordinated Care” with the laudable goal of reducing the regulatory hurdles prohibiting innovate value and quality-based delivery arrangements and care-coordination activities. Soon thereafter, HHS requested public comments on ways that the Stark and AKS regulations could be improved and modified to encourage care coordination and value-based care, and it seemed like things were quickly moving in the right direction. 

But then, nothing.   

It took almost a whole year from the request for comments for CMS and HHS to issue proposed rules to “modernize and clarify” the Stark and AKS regulations, which they did in October 2019.  And though the proposed rules included new value-based exceptions and safe-harbors and modified and clarified many others that are frequently relied upon by providers, many  commentators noted that the proposed changes did not go far enough to provide the relief providers needed to encourage them to explore innovate arrangements and effect systemic meaningful change. Those who voiced concerns were proven right when the COVID-19 crisis hit, and HHS had to issue blanket waivers of certain Stark law prohibitions (and corresponding yet aggravatingly-impotent AKS “enforcement discretion”) in order to permit providers to pursue innovative arrangements designed to expand care delivery to patients.  Yet despite overwhelming support for regulatory reform from all sides – including providers, facilities, patients, and policymakers – all of whom agree that paving the way for providers to participate in payment models where physicians and facilities can share financial rewards for delivering lower cost and higher-quality care, no permanent changes have yet to be made.  And so, the old “analog” rules remain in place.

Earlier this week, more than 70 members of Congress wrote to HHS and the White House Office of Management and Budget (OMB) asking them to “finalize already” (not a direct quote) the proposed Stark and AKS rule changes in order to allow for increased coordination and improved care for patients.  In response, the next day CMS issued its notice indicating that final updates to the Stark regulations would not be issued until August 2021.  Though there is no official word yet regarding timing of finalizing changes to AKS regulations, it seems likely that those efforts will be delayed as well, as the proposed Stark and AKS rule changes were proposed in tandem and in many ways are interrelated. 

We recognize that the COVID crisis necessarily delayed these processes and understand that regulators are still “working through the complexities of the issues.”  We also appreciate that regulators can exercise enforcement discretion in certain situations.  But such discretion can only go so far, and without actual, meaningful regulatory reform, providers will remain discouraged from fully and whole-heartedly pursuing value and quality-based care delivery and payment arrangements, and the costs associated with vetting innovative arrangements for compliance with antiquated regulations will continue to be incurred.  And ultimately it is patients who will suffer without fully coordinated care, and taxpayers who will bear the costs of our increasingly inefficient systems. 

We will of course continue to monitor the landscape and provide updates as soon as they are available.  But unfortunately, our hopes for regulatory reform anytime soon are fast-fading. 

It goes without saying that the COVID-19 pandemic has changed the healthcare delivery landscape in America.  Since the March 6, 2020 public health emergency declaration (PHE), providers have, out of necessity, pivoted from primarily providing services via in-person visits to providing services via telehealth modalities — so they can continue to care for patients while at the same time reducing exposing healthcare workers to the disease, preserving personal protective equipment (PPE), and minimizing the impact of patient surges on facilities.  But even though telehealth has proven so critical and useful over the last few months, the question still remains: is telehealth here to stay, or is it just another passing fad like the KE diet, or Beanie Babies??

Telehealth – which includes a broad range of technologies for providing patient care and improving healthcare delivery via “remote” means (including “telemedicine,” which is a subset of telehealth that refers solely to the provision of clinical services via interactive two-way communication) – has actually been around, in one form or another, for decades.  Over the past 10 or so years, significant technological advances have resulted in increased telehealth acceptance and usage by providers and patients alike.  It was even becoming a “hot target” for government enforcement pre-pandemic, with two large “takedowns” (in April 2019 and September 2019) related to telehealth kickbacks and other billing fraud schemes (and when something becomes the target of government enforcement actions, you know it is has become ubiquitous, as the government is often the last to the party).

But, as we previously reported back when we were much better about writing regular blog posts, pre-pandemic services delivered by telehealth modalities were only reimbursed by Medicare under limited circumstances (mostly involving rural providers and patients), and thus, were relatively underutilized.  Following the March 6, 2020 PHE declaration and CMS’ March 16, 2020 “1135 waivers” (which relaxed many of the prior restrictions on Medicare reimbursement for telehealth services), however, telehealth usage by Medicare beneficiaries and patients covered by Medicaid, as well as patients with coverage through commercial payors (who largely followed Medicare’s lead and adopted coverage and reimbursement for telehealth in alignment with federal and state mandates) boomed.  According to new data from Fair Health’s tracking tool, from May 2019 to May 2020, telehealth claim lines increased by 5,680% nationally, from 0.15% of medical claim lines in May 2019 to 8.69% in May 2020.  And though telehealth usage appears to have plateaued since May, it remains a critical tool in the providers’ toolbox as the COVID-19 crisis continues to cause havoc across the land.

Ultimately what will become of the myriad waivers and regulatory flexibilities implemented by the government post-PHE remains to be seen and is the subject of speculation and debate in the healthcare world.  Recent government actions, however, seem to suggest that many longstanding restrictions on telehealth usage and reimbursement will continue to be “relaxed” post-pandemic and may even be discontinued altogether – allowing Telehealth to become a more permanent feature of healthcare delivery in America. Specifically, in just the last few weeks, the government has taken the following important actions impacting Telehealth usage and reimbursement:

• Effective July 25, HHS renewed the COVID-19 PHE.  Had the PHE not been renewed, the pandemic-related Telehealth would have expired and things (Telehealth related things, anyway) would have gone back to “normal.” With this most recent renewal, the PHE is extended for another 90 days and will now expire on October 23, 2020 unless renewed again (which seems likely) or if the HHS Secretary terminates it earlier.

• On August 3, President Trump signed an executive order to expand access to Telehealth services in rural communities and make certain Telehealth services permanent once the COVID-19 public health emergency (PHE) ends. The order seeks to build upon CMS’s previous Telehealth expansions permitting providers to provide telehealth services across state lines and boosting reimbursement rates.  Additionally, the order: (1) requires HHS to implement a new payment model designed to meet the needs of rural communities; and (2) calls for the government to deploy a “joint initiative focused on improving healthcare infrastructure in rural areas.

• On the heels of the August 3 executive order, CMS issued a proposed rule announcing policy changed for Medicare payments under the Physician Fee Schedule (PFS) for calendar year (CY) 2021, and other Medicare Part B issues.  With respect to telehealth, the proposed rule, which is 1353 pages long (no, we did not read the whole thing), proposes, among other things: (1) Expanding Medicare beneficiary access through Telehealth to carry out, among other things, home visits for evaluation and management (E&M) services and some visits for individuals with cognitive impairments; and (2) Temporarily continuing payment for telehealth services for emergency department visits and other services to give the healthcare community “time to consider whether these services should be delivered permanently through telehealth outside of the” PHE. It also calls for suggestions for other telehealth services that should be reimbursed by Medicare, to be submitted via comments by October 5,

• The HEROES Act, which was passed by the House of Representatives in May, includes direct funding and other provisions aimed at increasing telehealth access and infrastructure, and the plan proposed by Senate leadership seeks to extent telehealth waivers and increase access and benefits to employees who do not work full time or may not otherwise qualify for employer coverage. 

Clearly these are all steps towards making telehealth a larger and more permanent feature of the U.S. healthcare system.  That said, expansion of telehealth by both government and commercial payors, however, is not without its hurdles – including technology costs, operational challenges, provider comfort with virtual modalities, and training needs.  There is also the issue/question of fee rates, with many payors viewing telehealth as a way to save money relative to in-person visits (in states where there are no telehealth “parity” laws), while providers — many of whom are already facing rate reductions and increasing expenses – fear (rightfully) that fee disparities will only further disrupt the already delicate economics of running hospitals, healthcare institutions, and professional practices.

Additionally, in order for telehealth to become a permanent feature of healthcare in America, significant legal changes (on both the federal and state levels) will be needed.  While some of this can be done “administratively” via executive action and agency rulemaking and guidance, at the end of the day, real change will ultimately require congressional action via legislation, as CMS’ regulatory authority outside of the PHE is largely limited to what types of services can be provided via telehealth, and CMS cannot make telehealth reimbursement available permanently or permanently expand the list of providers authorized to provide services via telehealth.  As CMS Administrator Seema Verma has stated, “telemedicine can never fully replace in person care, but it can complement and enhance in-person care by furnishing one more powerful clinical tool to increase access and choices” for patients.  To what extent telehealth will become a permanent “complement” to in-person services, however, remains an open question, and one to which there is likely not a “one size fits all” answer.  We will of course continue to monitor the landscape and provide updates as they become available.  And if you have any questions about telehealth/telemedicine, please reach out to us and we will be happy to assist.

It seems self-evident that a whistleblower, known as a “relator” in False Claims Act (“FCA”) parlance, should not be able to derive a financial benefit by bringing to the government information of which the government is already aware or which already exists in the public domain.  That principle is enshrined in the so-called “public disclosure bar” of the FCA, which was most recently amended in 2010 by the Patient Protection and Affordable Care Act (“ACA”). In sum and substance, the public disclosure bar states that a relator’s qui tam action under the FCA is not viable if the essence of the allegations or transactions at issue have been publicly disclosed in court actions, government reports or news media.

There is, however, a critical and oft-utilized exception to this rule: notwithstanding the fact that the information at issue is in the public domain, a relator can assert a viable qui tam action if he is the “original source” of that information. It is this exception that recently caused the Second Circuit in United States ex rel. Hanks v. Florida Cancer Specialists et al. to vacate and remand a long-running FCA action for further and more specific consideration by the district court for the Eastern District of New York.

A Brief Historical Look at the Public Disclosure Bar and First-to-File Rule

Since its passage in 1863, the FCA has been amended several times.  Prior to 2010, and the passage of the ACA, it is important to note that the public disclosure bar within the FCA was jurisdictional.  Accordingly, a district court did not have jurisdiction over qui tam actions “based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or from the news media.”

As mentioned, there existed (and still exists) an exception to this bar for relators who are the “original source” of the information upon which the qui tam action was based. Prior to the ACA, “original source” was defined as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”

Under the ACA, the public disclosure bar was amended in a few significant ways.  First, the public disclosure bar is no longer jurisdictional, although if established, it provides a valid and explicit ground for dismissal.  In addition, the ACA broadened the definition of “original source,” which is codified in 31 USCS § 3730(e)(4)(B). Now, in order qualify as an original source, the relator need not have “direct and independent knowledge” of the information, and the relator is not required to provide the information on which the action is based.  Instead, in order to qualify as an original source under the new definition, the relator must simply “materially add” to the publicly disclosed transactions on which the claims are based.

An important corollary to the public disclosure bar is the FCA’s “first-to-file rule,” which essentially states that no person other than the government can bring a subsequent qui tam action based on facts alleged in a previously-filed action. Unlike the public-disclosure bar, however, the first-to-file rule has never been expressly jurisdictional (circuits have been split on that question) and applies even if the relator in the subsequent action would otherwise qualify as an “original source.”  The logic behind the rule is that once a qui tam suit has been filed, the government has the knowledge it needs to seek appropriate recourse.

The Second Circuit’s Focus on the Original Source Exception in Hanks

The Second Circuit’s recent decision in Hanks highlights the ongoing relevance of the original source analysis.  This appeal, in a more-than-decade old qui tam action by a former sales representative for Amgen, Inc., took issue with the district court’s dismissal of relator’s fifth amended complaint against a certain subset of remaining defendants.  The dismissal was based on, among other things, the first-to-file rule on the ground that the central allegations had, in the court’s view, been alleged in previous lawsuits by other plaintiffs.

The ultimate problem with the decision, from the Second Circuit’s perspective, is that it “elided” the core question of whether the public disclosure bar applied in the first instance, which, because the case was filed pre-ACA, would have expressly deprived the district court of jurisdiction. If the bar applied, of course, the district court would have had no basis to reach the first-to-file rule or other arguments pertaining to Fed. R. Civ. P. 9(b).  Although the Circuit stated that “it is hard to fault the district court’s critique of the pleading,” it gently chastised the district court for not squarely addressing the jurisdictional question upfront and head-on.

Thus, without taking a position on the ultimate merits of the appeal, the Second Circuit sent the case back to the district court to specifically analyze whether it had jurisdiction in light of the public disclosure bar.

How Hanks May Impact Future Qui Tam Actions

Astute observers might minimize the relevance of the Hanks decision given that the public disclosure bar is no longer jurisdictional post-ACA.  They could feasibly argue that the decision would have come out differently but for the fact that the underlying case in Hanks was filed way back in 2008, and the Circuit was forced to focus on a jurisdictional issue that no longer exists.  That argument should not, however, be read too broadly.

Hanks serves as an important reminder – for relators’ counsel and defense counsel alike – that the question of whether a relator is an original source is a threshold question on which the courts will continue to focus in determining the viability of qui tam actions.  Indeed, since the public disclosure bar still provides an express ground for dismissal, it remains critical for FCA practitioners to pay specific attention to precisely how relators came across the information on which their claims are based.  Without doubt, it is a question better addressed at the outset of a case than after years, or even decades, of hard-fought litigation.

As the owners of a small business, my partners and I have been following closely aid and stimulus packages passed by the Government.  The largest one, of course, is the “Paycheck Protection Program” or “PPP,” which is the centerpiece of the massive stimulus and aid package known as the CARES Act that was recently passed by Congress and signed into law by the President.  The PPP was designed as an amendment to Section 7(a) of the Small Business Act, 15 U.S.C. § 636(a), and seeks to serve as a lifeline to eligible businesses by providing a forgivable loan to pay for temporary payroll costs, employee benefits, rent, utilities, and mortgage interest. 

As the first wave of hundreds of billions of dollars under the PPP was exhausted in a matter of weeks, questions arose about who was eligible for the loans and the somewhat strict requirements under the statute to obtain loan forgiveness.  Additionally, amidst backlash over some of the early recipients of the loans, the Government promised routine audits for larger dollar amount loans, and federal prosecutors charged the first two individuals with fraud in connection with the PPP.  If the months and years following passage of the Troubled Asset Relief Program or TARP, the centerpiece of the last huge government stimulus, is any teacher, and recent warnings of Government officials are to be believed, fraud schemes involving the PPP and other CARES Act programs will be extensive and investigative and enforcement efforts by the government robust.  As a result, business owners can expect a fair amount of “Monday morning quarterbacking” by agency officials, especially for larger loan applications.  With that in mind, this post dissects the PPP provisions most likely to cause compliance headaches for business owners and summarizes the likely areas of focus of potential government enforcement action down the road.

What is At Stake?

On May 5, 2020, the U.S. Attorney’s Office for the District of Rhode Island announced the first criminal case related to PPP fraud.  In that case, two defendants – David Butziger and David Staveley – were charged in separate three-count criminal complaints with: in count one, conspiring to make false statements in order to obtain an SBA loan (15 U.S.C. § 645(a) and 18 U.S.C. § 371); and in count two, conspiring to commit bank fraud (18 U.S.C. §§ 1344, 1349).  Each of the defendants was also charged in a third count; Butziger with a substantive count of bank fraud (18 U.S.C. § 1344) and Staveley with aggravated identity theft (18 U.S.C. § 1028A).  The Government alleged in the affidavits filed in support of the criminal complaints that defendants falsified forgivable loan application documents and necessary tax forms to claim hundreds of thousands of dollars under the PPP for payroll expenses for 73 employees of 4 different businesses.  See Affidavit, dated May 4, 2020.  But, according to the affidavits, the businesses were not going concerns and the employees were fake.  One of the businesses had not been open since 2018 and was in disrepair.  Another closed in March 2020.  A third business was owned by someone else entirely, and the fourth business had never filed any tax documents and the purported employees did not work there.  It is, perhaps, the brazen nature of the fraud scheme – fake businesses, fake forms, and fake employees – that explains the dizzyingly swift government enforcement action.  Indeed, similar prosecutions under the Troubled Asset Relief Program, or TARP, following the last huge government stimulus package, took years to ferment. 

But, one does not need to fabricate businesses and lie about employees to potentially run afoul of the eligibility and use rules under the PPP.  As summarized in more detail below, the PPP has specific rules about which businesses qualify for assistance, how to calculate the loan amount, restrictions on how the funds may be used, and how the funds need to be used in order for the loans to qualify for full forgiveness.  Moreover, the loan application and attendant rules regarding the PPP require a substantial “good faith certification” that relates to both eligibility and use of the funds.  The certification language carries, as it almost always does, warnings of potential criminal penalties.  As stated in the Interim Final Rule 1, effective April 15, 2020, the SBA may direct the repayment of any PPP funds “[i]f you use PPP funds for unauthorized purposes[.]”  85 Fed. Reg. 73, at 20814 (April 15, 2020), available here.  The Interim Final Rule further warns, “[i]f you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.”  Id.  So, with the specter of disgorgement and criminal and civil penalties, what are the most likely areas of compliance headaches for those who have applied for, received, or are thinking of applying for PPP loans?

Can I Make the Good Faith Certification Regarding Loan Necessity?

Whenever and wherever money can be obtained on the basis of a signed and certified form, you can be sure fraud prosecutions will follow.  This is especially true when the standard to which the applicant is certifying is somewhat vague.  The PPP includes a substantial certification regarding aspects of eligibility for and use of the PPP funds.  The most concerning of the bunch is the “necessity” certification, in which “an authorized representative of the applicant must certify in good faith . . . [that c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”  Interim Final Rule 1, 85 Fed. Reg. 73, at 20814 (April 15, 2020), available here; see generally 15 U.S.C. § 636(a)(36)(G)(i)(I).  Neither the words “uncertainty” nor “necessary” are defined terms, which begs the question, what is enough uncertainty to make the loan necessary? 

Early disbursements under the PPP, which contributed to the first 300+ billion dollars of PPP funds being exhausted in a matter of weeks, created even more uncertainty.  Indeed, as was recently reported in the Washington Post, “[n]early 300 public companies have reported receiving money from the [PPP],” including “43 companies with more than 500 workers, the maximum typically allowed by the program.”  Many of the recipients also did not immediately appear to be in any desperate need for the funds; as reported by the Washington Post, “[s]everal . . . recipients were prosperous enough to pay executives $2 million or more.”  In total, more than $1 billion was paid out to publicly-traded companies while approximately 80% of applicants did not receive any money. Outrage over the disbursements prompted many of these larger companies to return some of the funds.  In the cognitive dissonance that has become a hallmark of Washington politics, the Treasury Department hailed the program as a success and at the same time issued stern warnings regarding forthcoming audits.  Treasury Secretary Steve Mnuchin stated, “[t]his was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity.”  Mnuchin promised audits by the SBA for any loan over $2 million, and warned of potential criminal liability.  The Treasury Department also created and then extended a deadline to return funds to May 14, 2020.  Interim Final Rule, dated May 8, 2020.   

In an apparent attempt to clarify questions around the “necessity” requirement, the Treasury Department posed and answered the following “Frequently Asked Questions” (FAQ) in an FAQ document it is periodically updating: “[d]o businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  Though a simple “no” might have actually clarified the issue, the Government opted to dance around the margins of the answer, offering some guidance, but little clarity.  The answer stated, “all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.”  Hardly enlightening.  The answer goes on to state that, while borrowers need not show that they are unable to obtain any financing elsewhere, “borrowers still must certify in good faith that their PPP loan request is necessary . . . taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”  In what may be the only piece of actual guidance in the answer, the document states “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”  So, big profitable companies probably don’t qualify, but maybe they do.  Not a revelation, and not particularly helpful to the smaller, nonpublic companies that must also make the necessity certification.

Importantly, applicants should not assume that if they apply and receive the money, all is well.  Indeed, it is a common experience in other contexts that the borrower answers questions honestly and is told by the lender whether they are eligible for a loan and in what amount.  For instance, when taking a home equity loan, borrowers submit the necessary documentation and the bank, after a review, appraisal and underwriting process, tells the borrower what amount can be lent.  But, with the PPP, the language of the certification and the rules make clear that the onus of compliance is squarely on the borrower.  It is the borrower who must make the “good faith” certification that the loan is needed, and lenders may rely on the borrower’s representation.  As stated in Interim Final Rule 1:

SBA will allow lenders to rely on certifications of the borrower in order to determine eligibility of the borrower and use of loan proceeds and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for loan forgiveness. Lenders must comply with the applicable lender obligations set forth in this interim final rule, but will be held harmless for borrowers’ failure to comply with program criteria; remedies for borrower violations or fraud are separately addressed in this interim final rule.

85 Fed. Reg. 73, at 20812.

Just today, on May 13, 2020, the Treasury Department once again updated their FAQ document in an apparent effort to provide some comfort to applicants on the issue of the necessity certification.  Question # 46 asks, “[h]ow will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”  The answer has two main parts: one for loans under $2 million and one for loans over $2 million.  First, Treasury today announced a “safe harbor” for loan amounts under $2 million, stating “[a]ny borrower that . . . received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”  In other words, if your loan amount is less than $2 million, you will be deemed to have made necessity certification in good faith. 

Second, for loans over $2 million, Treasury provided a bit of cold comfort.  While the Government did not clarify what necessity means for these larger loans (other than to reiterate that eligibility determinations should be “based on . . . individual circumstances in light of the language of the certification and SBA guidance”), the Government did state as follows:

If SBA determines . . . that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.  If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

Based on this guidance, applicants for larger PPP loans still lack specific guidance on the appropriate circumstances justifying necessity, but are now assured that ineligible loans will be disgorged and that administrative enforcement and potential criminal referrals will not follow if the ineligible loans are returned after SBA notification.      In light of all this, what should businesses do in assessing their own need for a PPP loan?  As the above discussion indicates, it is not entirely clear.  But two concepts do emerge from Treasury’s guidance: current business activity and access to other sources of liquidity.  First, if you are going to apply for a PPP loan, be sure that you can document, if asked, negative impacts to your business activities caused by COVID-19.  Was there a sudden downturn in business precipitated by the health crisis?  For most small to medium-sized businesses – the local coffee shop, restaurants, construction companies, franchisees, fitness gyms, retailers – the answer will be an easy yes and the financial documentation readily available to show it.  The financials need not be so bleak as to present an existential threat to the business.  However, there should be sufficient enough dislocation to suggest that a loan is needed to effectuate its own stated goals, that is, to maintain current payroll levels and to support the business’s ongoing operations.  Second, be sure that your business does not have an alternative source of liquidity.  In an effort to discourage public companies from applying for the loan, the Treasury guidance specifically referenced market value and access to capital markets as two examples of alternative sources of liquidity, but one could imagine that it might also be hard to make the necessity certification if your business had available to it, before onset of the health crisis, a large line of credit.

How Much Money Am I Eligible to Take?

Beyond the obvious certification issues, there are also compliance questions around the amount of the loans.  The PPP statute sets out calculations to be used in determining the amount of the loan that is based upon aggregate payroll data from either the prior 12 months or the calendar year 2019.  Newer businesses may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.  There is a $100,000 salary cap for payroll calculations, and borrowers have to provide backup for their payroll claims, including tax forms from the prior tax year.  Businesses are generally eligible to obtain 2.5 times the amount of their monthly eligible payroll, up to $10 million.  Once again, the PPP largely places the onus of compliance on the borrower.  As stated in question #1 of the Treasury FAQs, “[p]roviding an accurate calculation of payroll costs is the responsibility of the borrower, and the borrower attests to the accuracy of those calculations on the Borrower Application Form.”  Again, “lenders may rely on borrower representations, including with respect to amounts required to be excluded from payroll costs.”  The recent enforcement action in Rhode Island indicates that the Government is prepared to swiftly look behind a business’s claims about number of employees and purported tax filings.  Thus, while the specificity of the loan calculation formulas avoids the risk of uncertainty in how to calculate the loan amount, it does raise the need for careful documentation to support payroll claims.  And, perhaps this should go without saying, but if you are reluctant to submit your company to a full audit by federal regulators, consider whether it is appropriate for you to apply for the loan at all.

How Do I Use the Funds in a Way that Ensures My Loan Will be Forgiven?     

Perhaps the most attractive feature of the PPP is that, if used in accordance with the statutory requirements, the loans will be fully forgiven.  But, the loan forgiveness provisions have strict rules regarding how the loan must be used in order to be eligible for forgiveness, and mechanisms that may reduce the amount of loan forgiveness depending on the actions of the borrower during the 8-week period following origination of the loan.  Moreover, the statute provides that “[n]o eligible recipient shall receive forgiveness . . . without submitting to the lender that is servicing the covered loan the documentation required under subsection (e)” of the statute.  See Pub. Law 116-136, § 1106(f).  Thus, if borrowers hope to have their loans forgiven, compliance with the use restrictions is a must and good record-keeping and documentation an absolute necessity. 

First, PPP loans will be forgiven “in an amount equal to the sum of” the following four business expenses for the 8-week period beginning on the date of loan origination: (1) payroll costs; (2) payment of interest on any covered mortgage obligation; (3) payment on any covered rent obligation; and (4) covered utility payments.  See Pub. Law 116-136, §§ 1106(a)(3) and (b)(1)-(4).  It is, therefore, imperative for businesses to use their loans only for these four approved uses, and to document such uses carefully. 

Second, not all costs were created equal under the PPP.  Interim Rule 1 set out limits on non-payroll costs that can be forgiven.  Specifically, the rule states, “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.”  85 Fed. Reg. 73, at 20813.  As explained in the Interim Rule:

While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75 percent is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed.          

85 Fed. Reg. 73, at 20813-14.

Given these restrictions, loan recipients will also have to carefully calibrate how the loan funds are disbursed within their business in order to ensure that the loans will be forgiven. Third, loan forgiveness is “based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.”  PPP Overview, available here.  More specifically, the statute sets out formulas that serve to reduce the amount of loan forgiveness if the number of employees on payroll during the 8-week period following loan origination decreases as compared to the average number of employees during the same period in 2019, see Pub. Law 116-136, § 1106(d)(2), or if salaries and wages decrease.  Seeid. at § 1106(d)(3).  Exemptions for such reductions apply if employees are re-hired during the period after the business received the loan.  Id. at § 1106(d)(5).  Accordingly, loan applicants should be keenly aware of the payroll claims they are making in connection with their application, and have a plan in place to bring payroll back up to the appropriate levels in order to avoid loan forgiveness reductions under the statute.

Final Thoughts

The PPP provides a much-needed lifeline to “small businesses” across the country that are currently suffering as a result of dislocation brought on by the COVID-19 crisis.  If businesses carefully comply with the eligibility and use requirements in the statute and attendant rules, the PPP could help thousands of businesses keep their doors open and their employees employed without taking on any additional long-term debt.  But, as with any large Government stimulus program, there are strings attached.  The statute contains detailed eligibility and use restrictions, a fulsome borrower certification, and the statute places the burden of truthfulness and accuracy firmly on the borrower.  Thus, non-compliance with the statute’s requirements can trigger penalties, including disgorgement, civil and criminal penalties, and loan forgiveness reductions.  As small business owners, our partners have studied the PPP closely and are ready to offer advice and guidance.  If you own or operate a business that has applied for, received loan funds, or are thinking of applying for a loan under the PPP, reach out to us for compliance counseling and guidance.

On April 24, 2020, the Office of Inspector General for the U.S. Department of Health and Human Services (“OIG”) issued responses to frequently asked questions (“FAQs”) regarding application of its administrative enforcement authority (under the Antikickback Statute (“AKS”) and the Civil Monetary Penalties law (“CMP”)) to certain COVID-19 related financial arrangements. With all due respect to OIG, its responses here were so cumbersome and equivocal that they failed to give healthcare providers the clarity and assurances they need to nimbly and creatively provide efficient patient services in this constantly-evolving regulatory environment.

OIG’s Specific Responses to FAQs

OIG’s stated purpose in responding to the FAQs was to “ensure that health care providers have the regulatory flexibility necessary to adequately respond to COVID-19 concerns.”  While this is a laudable and important goal, many of OIG’s responses to questions submitted by stakeholders are simply too convoluted and oblique to provide actual meaningful guidance.

For example, in response to a question regarding whether mental health and substance use disorder providers can accept donations to “fund cell phones, service or data plans” for patients who are financially needy for purposes of furnishing medically necessary services during the COVID-19 outbreak, OIG offered a lengthy and meandering response regarding the importance of technology and the fact that different relationships between donors, providers, and patients present different fraud and abuse risks, among other things. Ultimately, and with multiple caveats, OIG went on to state that the proposed arrangement “likely presents a sufficiently low risk of fraud and abuse” so long as the arrangement complied with 8 specific “safeguards” enumerated in the response.  OIG further cautioned that its response related only to the “financial relationship” between the provider and the patient, and that risks that may arise regarding financial relationships between donor and provider needed to be “separately assessed.”

Similarly, in response to another question regarding whether or not providers can furnish services “for free or at a reduced rate” to “assist skilled nursing facilities (SNFs) or other long-term care providers that are facing staffing shortages,” OIG again recited the history of its “longstanding” guidance that the provision of free goods or services to actual or potential referral sources may violate the AKS. Following this lengthy, punctation-less walk back in time, OIG eventually, indirectly, and equivocally concluded that “we believe that these circumstances likely would present a low risk of fraud and abuse” under the AKS and CMP so long as the services complied with 6 additional “safeguards” that would need to be followed.

And again, in response to a query as to whether hospitals can provide access to their web-based telehealth platforms for free to independent physicians on their medical staffs so they can furnish telehealth during the COVID-19 emergency period, instead of just responding “yes,” OIG again engaged in a lengthy recital of its longtime guidance before disguising its equivocal response (that the arrangement would present a “low risk” of fraud and abuse assuming implementation of 6 additional safeguards) in the middle of a lengthy paragraph.

While we recognize (as discussed below) that these FAQ responses constitute only “informal” and non-binding guidance, they are far from a beacon of clarity, and in many cases raise additional questions to which the answers remain unknown.

Further Caveats and Limitations on OIG’s Responses to the FAQs

Federal agency guidance often contains overarching caveats and limitations. OIG’s responses to the FAQs follow this form, and in addition to the specific caveats and limitations included in each response, they also contained multiple” “blanket limitations as well.

Most notably, OIG cautioned that: (1) its specific responses to the FAQs; and (2) responses to inquiries and questions submitted via email and outside of the formal advisory opinion process generally, constitutes “informal feedback” that “does not bind or obligate HHS, the U.S. Department of Justice, or any other agency.” Here, OIG reminded parties that the “advisory opinion process” remains available for parties seeking more formal, binding guidance, and that favorable answers provided in “informal feedback” in response to questions submitted via email will not result in “prospective immunity or protection from OIG administrative sanctions . . . or protection under Federal criminal law.” Though ostensibly “cold comfort” for providers seeking guidance in a pinch, we believe that the government would be hard-pressed to seek sanctions and/or prosecute COVID-19 related arrangements upon which OIG had previously favorably opined, even if only equivocally, in “informal,” non-binding guidance like this..

OIG further cautioned that its FAQ responses apply only to arrangements in existence “solely” during the time period subject to the COVID-19 Declaration, and that it may take “different” positions on arrangements that are “the same or similar that existed before the effective date of the COVID-19 Declaration or after the time” the declaration ends. In other words, while OIG may exercise its discretion not to enforce the AKS and/or CMP regarding certain arrangements in place during the COVID-19 crisis, those very same arrangements may still be subject to enforcement if they were in place before the crisis began or if they remain in place after it ends.

Additionally, OIG noted here that it is expressing no opinions regarding the application of any federal or state laws or rules other than the AKS and CMP, including but not limited to the Stark law. OIG further cautioned that its FAQ responses should not be read as opining on the liability of any party under the Federal False Claims Act or federal criminal laws regarding improper billing, claims submission, cost reporting, or “related” conduct. In other words, OIG’s “guidance” here relates only to its enforcement authority (and its discretion to exercise such authority) under the AKS and the CMP.

With those caveats in mind, OIG still invites the health care community to submit inquiries regarding the application of OIG’s enforcement authority under the AKS and the CMP during the COVID-19 crisis to [email protected]. OIG asks that all submissions provide “sufficient facts to allow for an understanding of the key parties and terms of the arrangements at issue,” and will continue to respond to questions submitted and update the FAQ site as it responds to additional questions.

Final Thoughts

We understand that OIG cannot issue full-throated, binding commentary outside of the formal “advisory opinion” process. That said, the length of OIG’ responses to the FAQs combined with their unusually high level (even for a government agency) of equivocation significantly diminishes their utility to front-line healthcare providers – who in this time of crisis need  straightforward guidance so that they can most efficiently and effectively deliver patient care services. While issuing FAQ responses like these certainly creates work for attorneys like us (who then have to interpret it for our provider clients), it gives little direct, practicalguidance to providers, and thus cannot enable them to be as nimble as possible during these current emergent circumstances.    All that said, if you still wish to submit questions to OIG regarding COVID-19 related arrangements through the “informal” submission process, we will be happy to assist you. Please contact us at [email protected] for more information.

As we previously reported here, on March 30, 2020, CMS issued 18 “blanket” Stark law waivers designed to put “patients over paperwork” and permit providers to engage in certain transactions meant to aid in the fight against COVID-19 but which might otherwise run afoul of technical requirements of Stark law.  The blanket waivers (“Blanket Waivers”) sought to relax certain regulatory requirements for purposes “solely related to COVID-19” response,” including waiving the requirement that payments from hospitals and providers to rent equipment or receive services from physicians (or vice versa) be within “fair market value.”

Following issuance of the Blanket Waivers, providers raised a plethora of questions and concerns. In response, on April 22, 2020, CMS issued “Explanatory Guidance” relating to the “scope and application of the blanket waivers to certain financial relationships,” and to address certain issues and queries raised by stakeholders about the waivers.

Interestingly, in the introduction to the Explanatory Guidance, CMS appears to suggest that the intent of the parties will be considered by the government in False Claims Act (FCA) cases alleging Stark law violations for arrangements that may be covered by the Blanket Waivers. Specifically, CMS stated here that “the Secretary [of HHS] will work with the Department of Justice to address False Claims Act relator suits where parties using the blanket waivers have a good faith belief that their remuneration or referrals are covered by a blanket waiver.” Given that the Stark law is a “strict liability” statute under which intent is ordinarily irrelevant, this could be a significant development limiting the specter of FCA cases based on alleged Stark law violations in the wake of the COVID-19 crisis. 

In the Explanatory Guidance, CMS also addressed the following specific issues related to the Blanket Waivers:

• Compliance with Non-Waived Requirements of an Applicable Exception: Here, CMS clarified that while the Blanket Waivers eliminate or amend only some requirements of existing Stark law exceptions, providers still have to satisfy all non-waived requirements of an applicable exception.

• Amendment of Compensation Arrangements (During Emergency Period): Here, CMS clarified that if parties amend the remuneration terms of an existing arrangement during the “emergency period” based on the “Blanket Waivers,” (1) the amended arrangement still must satisfy all non-waived requirements of the applicable Stark exceptions(s), and (2) that following expiration of the emergency period the renumeration terms may again be modified to return to the original terms or to effectuate additional necessary modifications.

Interestingly, CMS used this opportunity to state that, contrary to many providers’ (and attorneys) belief, that it interprets the preamble guidance in the Fiscal Year 2009 Inpatient Prospective Payment System (FY 2009 IPS) final rule (73 FR 48434) to allow amendments to the remuneration terms of compensation agreements even within the first year after an initial amendment of the remuneration terms of the arrangement, provided that: (1) each time the remuneration terms are amended all requirements of an applicable Stark exception are still satisfied; (2) the amended remuneration is determined before the amendment is implemented; (3) the formula for the amended remuneration does not take into account the volume or value of referrals or other business generated by the referring physician; and (4) the overall arrangement remains in place for at least 1 year following the arrangement. This additional nugget – in particular the statement that CMS expects such arrangements to “stay in place” rather than be for “terms” of at least 1 year – is itself confusing, and is bound to lead to more questions regarding this “guidance” in the future.

• Applicability of Blanket Waivers to Indirect Compensation Arrangements: Here, CMS clarified that while the Blanket Waivers only related to “direct” compensation arrangements under the Stark law, parties “may request an individual waiver” with respect to “indirect” compensation arrangements.”  CMS further noted here that arrangements where physicians own the subject physician organization, the arrangement may not need to be analyzed as an “indirect” compensation arrangement and instead should be analyzed as a “direct” arrangement based on the “stand in the shoes” provisions of the Stark law.

• Repayment Options for Money Loans Between a DHS Entity and a Physician (or the Immediate Family Member of a Physician): Blanket Waivers # 10 and # 11 address remuneration in the form of loans with interest rates below FMV or on terms that are unavailable from lenders not in a position to make referrals to or generate business for the party making the loan. Regarding these waivers, CMS responded to providers’ inquiries about form of loan repayment by stating that cash payments are not required to satisfy the debts and that instead, borrowers could repay the loans through in-kind payments (including potentially through the provision of office space, items, or service to the physician lender) so long as the aggregate value of in-kind repayments are consistent with the amount of the loan balance being reduced through the in-kind payments and are commercially reasonable. CMS cautioned here, however, that Blanket Waivers # 10 and # 11 do not waive sanctions related to referrals and claims related to the repayment of the loan. In other words, the loans must be repaid (whether through cash or in-kind payments), and loan forgiveness may form the basis for liability under the Stark law (and the Antikickback statute as well).

• (Timing of) Repayment of Loans, Rent Abatement, or Other Amounts Due Following the End of the Emergency Period: Here CMS clarified loans, rent abatements, or for other items (such as office space, equipment, items, or services) provided at below fair market value do not have to be repaid prior to the termination of the Blanket Waivers and that, instead, appropriate repayment obligations agreed to prior to termination of the Blanket Waivers may continue beyond such termination without running afoul of the Stark law.

• Restructuring of Existing Recruiting Arrangements with Income Guarantees: In response to inquiries about restructuring existing physician recruiting arrangements such as income guarantees to address practice interruptions, CMS clarified that the Blanket Waivers do not address or relax the requirement that the terms of a physician recruitment arrangement cannot be altered once the physician has relocated his or her practice. However, CMS did note that Blanket Waivers # 5 (waiving sanctions for referrals related to below FMV rental charges) and # 10  (waiving sanctions for loans to physicians with below FMV interest rates) may be available to waive sanctions for remuneration from hospitals (or other entities) to assist physicians whose medical practices experience interruption from the COVID-19 outbreak in order to maintain the availability of medical care and related services for patients and the community during the national emergency.

If you have any questions about the Explanatory Guidance or the Blanket Waivers generally, please contact us and we will be happy to assist.

April 13, 2020

As we discussed in some of our past updates below, Attorney General Barr has directed the Department of Justice (DOJ) to prioritize the detection, investigation, and prosecution of illegal conduct related to the COVID-19 pandemic.  DOJ has already announced a number of enforcement actions related to COVID-19 fraud, including action against a company selling fake coronavirus “vaccine kits” on the internet, and all indications are that the federal government will continue to vigorously investigate and prosecute Coronavirus-related fraud.

Along with increased government-initiated actions, we also expect an increase in whistleblower, or “private attorney’s general” actions under the federal False Claims Act (FCA) as a result of COVID-19-related healthcare fraud and abuse.  While there has already been much written on increased “direct” FCA activity stemming from COVID-19 related fraud, precious little has been written on the potential for provider liability under the “reverse” false claims provisions of the FCA for failure to timely investigate, report, and return overpayments to the government during the current state of emergency. In this post, we briefly explore the concept of “reverse” false claims in the healthcare context, and explain how the current “state of emergency” appears to automatically extend providers’ deadlines for investigating, reporting, and returning “retained overpayments.”

Reverse False Claims in the Healthcare Context

In typical “direct” FCA claims regarding healthcare services, a whistleblower alleges that a healthcare provider submitted claims to the government for services that were either: (i) not performed or (ii) were performed so deficiently, that payment should not have been made to the provider for the services.  “Reverse” false claims, or “retained overpayment claims,” however, are premised not on the submission of claims to the government, but rather, on providers’ allegedly retaining and failing to repay payments that were improperly made to them by the government.  The most common example in the healthcare context is when the government inadvertently or accidentally overpays the provider for healthcare services provided to covered patients and the provider does not return the overpayments to the government. Prior to 2009, the “reverse” false claims provisions of the FCA imposed liability on a person who “knowingly made, used, or caused to be made or used” a “false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the [g]overnment.” Under this standard, claims could only be the subject of FCA claims if they were knowingly false at the time they were submitted to a government payor – which required that a party either falsify information during a reconciliation period or otherwise act knowingly and improperly to avoid a repayment and thus precluded liability under the FCA for unintentional “retained overpayments.” This significantly limited the ability of the government and whistleblowers to hold providers liable for “retained overpayments” under the FCA.

FERA Amendments to the FCA – the “60 Day Rule“

So, in 2009, Congress passed the Fraud Enforcement and Recovery Act (“FERA”) which, inter alia, extended and broadened the scope of those provisions by creating the “60 Day Rule” under which overpayments can become “false claims” if not repaid within 60 days of “identification.” Under the 60 Day Rule, if such funds are not repaid within 60 days of “identification,” on the 61^st day the failure to repay becomes a “false” claim” under the FCA.

Unfortunately, Congress did not define the term “identification” in FERA or the ACA, which left whistleblowers, the government, and providers uncertain as to when a potential overpayment would be considered “identified” for purposes of the FCA. Specifically, while the government and whistleblowers proposed that an overpayment was “identified” at the first indication there might be an overpayment, providers proffered that an overpayment could not be “identified” until it had been expressly verified with the exact amount of the overpayment determined.  This debate ultimately came to a head in U.S. ex rel. Kane v. Continuum Health System, an FCA case brought in the Southern District of New York in which the whistleblower claimed that the Continuum Health System (Continuum) failed to timely “identify” certain overpayments that had been accidentally made to Continuum as a result of a software glitch. In that case (in which, in full disclosure, your author was one of the attorneys representing Continuum), SDNY District Judge Ramos held, in denying Continuum’s Motion to Dismiss, that an overpayment is “identified” (so as to start the 60-day clock) when a provider is put “on notice” of a potential overpayment and that where there is an “established duty” to pay money to the government, FCA liability will attach even if the precise amount due has yet to be determined. In so holding, the Court held that Continuum’s alleged failure to act quickly enough to report and return overpayments could have fallen outside the “60-day” period, and thus, that the case could not be dismissed pre-discovery.

CMS Issues “Provider Friendly” Final Rule That Broadens Definition of “Identified” and Extends Time For Returning Overpayments in “Extraordinary Circumstances“

A few months after the Court’s decision in the Continuum case, in February 2016, CMS issued a new final rule (42 C.F.R. § 401.305) that adopted a more provider-friendly interpretation of the term “identified.” In the Final Rule, CMS expressly disavowed the “all deliberate speed” benchmark that had previously been proposed for adoption, and instead established that providers must refund overpayments no more than 60 days after the amount of the overpayment is quantified if the entity acted with “reasonable diligence, which is demonstrated through the timely, good faith investigation of credible information which is at most 6 months from receipt of the credible information, except in extraordinary circumstances.”  If an entity does not act with “reasonable diligence,” however, overpayments must be returned within 60 days after the entity “learned” that an overpayment “may have” occurred.”

Critically for our current purposes, CMS’s comments to the Final Rule go on to state that “a total of 8 months (6 months for timely investigation and 2 months for reporting and returning) is a reasonable amount of time, absent extraordinary circumstances affecting the provider, supplier, or their community.”  Id. at 7662 (emphasis added). According to CMS, “[w]hat constitutes extraordinary circumstances is a fact specific question” but that it “may include . . . natural disasters or a state of emergency.”  Id.

Given this explicit language, savvy healthcare attorneys (like the partners of AEL, for example) will argue that the present circumstances – a global pandemic and a declared national state of emergency – constitutes “extraordinary circumstances” permitting providers additional time beyond the ordinary “8 month period” for investigating, reporting, and returning overpayments, without fear of “reverse” false claims act liability.  We think that a reasonable interpretation under the circumstances would be that the 8-month period was “tolled” as of March 13, 2020, the day “President” Trump announced the state of emergency, and that once that declaration is lifted, the period for investigating, reporting, and returning overpayments would resume.

So, fear not, healthcare provider friends — for while the potential liability for “reverse” false claims can be quite high, there is an argument that the time periods you have to investigate, report, and return overpayments appear, by the plain language of the applicable rule, to be extended during the current state of emergency.  Those ongoing internal investigations into overpayments can thus go on the “back burner” while you focus on the more pressing matters of coronavirus response and direct patient care, and can come back to the fore once the current state of national emergency is lifted (at which point, if you need the assistance of expert outside counsel experienced in internal overpayment investigations and disclosures, AEL will be happy to assist!).