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Contractors of Department of Health and Human Services Receive Additional Guidance for Disclosing Violations to OIG

Broadly speaking, organizations that enter into contracts with the Department of Health and Human Services (HHS) are generally considered government contractors. As government contractors, organizations also have mandatory disclosure requirements, which are separate and apart from other, voluntary disclosures that health care providers or suppliers might make to the Office of the Inspector General (OIG) for HHS. For example, contractor disclosure is mandatory when there is “credible evidence” (which is a higher standard than “reasonable grounds to believe”)  of a violation  the False Claims Act, or a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18.

To this end, OIG-HHS recently posted an (8) page guidance document to its website, Guidance for Submitting a Contractor Self-Disclosure, providing a road map for submitting a contractor disclosure to OIG.

The Guidance document contains the standard government disclaimer which clarifies that: “Contractor self-disclosures are made with no advance agreement regarding possible OIG resolution of the matter and with no promises regarding potential civil or criminal actions by the Department of Justice. Prompt disclosure, full cooperation, completed access to necessary records, restitution, and adequate corrective actions are key indicators of an attitude of contractor integrity even in the wake of self-disclosures of potential criminal liability.”

Further, the Guidance document contains (3) Sections which merit additional discussion.

Section E – Disclosure

Provide a full description of the nature of the violation being disclosed, including the period during which the violation occurred, the names of individuals involved, and an explanation of their roles in the alleged conduct and the relevant periods of their involvement. This field must be completed to submit a disclosure.

Comment: It is not uncommon to see these types of requirements as part of a disclosure (e.g. OIG Provider Self-Disclosure Protocol) or as a condition of a deferred prosecution agreement (DPA). The Contractor should therefore expect to make these types of disclosures if the contractor wants to continue doing business with the government. The Contractor should also expect that counsel for the individuals “involved” might challenge the descriptions provided in the self-disclosure assuming counsel is able to obtain a copy of the disclosure provided to OIG.

Section F – Overpayments

Did an Overpayment Occur?

Comment: Contractors should broadly construe the word “overpayment” to include all overpayments and not just overpayments that result from violations of the False Claims Act. Read literally, a contractor might be permitted to simply write “yes” or “no” in its disclosure. But, if the overpayment results from a violation of the FCA, then perhaps an additional description of the circumstances surrounding the violation should be included in the disclosure either in this Section or Section E.

Estimated Amount of Overpayment

Comment: Again, this leaves open the possibility that the Contractor can simply write in a number since it does not expressly require the Contractor to undertake any analyses or implement any specific method for calculating the overpayment.

Nonetheless, where an overpayment is not easily quantifiable, the Contractor should adopt a reasonably acceptable method for calculating the overpayment and should attach any corresponding reports to support the overpayment noted in the disclosure. Although OIG may take issue with the method used to calculate the overpayment, the report and the analyses contained in the report will demonstrate to OIG that the Contractor has made a good faith effort to calculate the overpayment.

Finally, while the Guidance Document recommends a workable format for submitting a disclosure and does not provide any guidance on when, or how, to reimburse the government for an overpayment, the Contractor might consider submitting a check with the overpayment report and determination since the preamble to the Guidance document specifically references “restitution” as one of the “key indicators of an attitude of contractor integrity..”

Section G – Company Internal Investigation

Has an investigation been conducted?

Comment:This Section reinforces the importance of conducting an internal investigation. Further, conducting an internal investigation is already a factor that the Suspension and Debarment Official (SDO) and HHS will consider in deciding whether a contractor is sufficiently responsible to continue to do business with the government. Likewise, this is consistent with OIG’s Provider Self-Disclosure Protocol, which requires a provider to conduct an internal investigation.

Enter a description of the records reviewed and the number and positions of the employees interviewed.

Comment:Answering this question ensures that the internal investigation was thorough, complete, and, hopefully, independent.

Is the Company Willing to Provide a Copy of the Investigative Report?

Comment: Providing the investigative report is certainly a factor that the Suspension and Debarment Official (SDO) will consider in deciding whether the contractor is “presently responsible,” but it also may contain attorney-client communications. Thus, a decision to provide the Report may also be a decision to waive attorney-client privilege communications, which might apply to a wide variety of communications, (e.g. internal emails) which are not included in the Investigative Report.

Measures Taken to Prevent Recurrence

Comment: The measures taken to prevent recurrence will depend on the particular violation and the size of the organization. Was the violation continuous and egregious? Was it committed by senior members of the organization? Or, was the violation an isolated incident that can be easily resolved without significant changes to the organization?

Disciplining or terminating wrong-doers, even if they are in senior management positions, will demonstrate to the SDO that the contractor is serious about its commitment to a culture of compliance. Similarly, making significant changes internally to the organization’s system of reporting and the organization’s internal audit policies and procedures, should send the proper message to the SDO. And, where appropriate, the organization might ask whether the organization needs to strengthen its compliance program by hiring a new chief compliance officer.

 Employee Exception is a Jury Issue in Criminal Anti-Kickback Trial

In United States v. Novak, Case No. 13-CR-00312 (June 30, 2014), the district court’s recent denial of defendants’ motions to dismiss the government’s superseding indictment reinforces that as long as the four corners of the indictment adequately allege a violation of a federal criminal statute, a motion to dismiss will likely be denied. In Novak, this was true even though defendants argued that they were entitled to an affirmative defense (statutory bona fide employee exception) to a violation of the Federal Anti-Kickback Statute.

Facts

More specifically, in Novak, government filed a superseding against several medical doctors and a podiatrist alleging that, among other things, they violated the Federal Anti-Kickback Statute. The crux of one of the government’s kickback allegations against one of the co-defendants, Dr. Venkateswara Kuchipudi (“Dr. Kuchipudi”), is that a physician assistant (listed as Employee A and likely a government witness) working for Sacred Heart hospital received checks which were, indirectly, paid to Dr. Kuchipudi in return for Dr. Kuchipudi referring patients, i.e., Medicaid and Medicare business, back to Sacred Heart.

In response to the kickback allegations in the indictment, Dr. Kuchipudi and his co-defendants filed motions to dismiss the indictment contending that the Counts in the indictment alleging violations of the Federal Anti-Kickback Statute fail to state an offense because any remuneration (including the checks) received by the physicians constitutes remuneration received by employees. Therefore, as employees, they are entitled to the protections provided by the statutory exception to the Federal Anti-Kickback statute, which states that violations of the Federal Anti-Kickback Statute “shall not apply to …any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services. . . .” See 42 U.S.C. § 1320a-7b(b)(3)(B).

District judge Matthew F. Kennelly of the Northern District of Illinois, however, was not convinced and underscored:

Their [Defendants’] contention is that the indictment fails to negate, or affirmatively concedes, the application of the safe harbor [Note: the district judge is mistakenly referring to the regulatory safe-harbor for employees found at 42 C.F.R. § 1001.951(i) as opposed to the statutory exception for employees found at 42 U.S.C. § 1320a-7b(b)(3)(B)]. A great deal of ink has been spilled on these motions, but their resolution, in the Court’s view, is fairly simple.

It is settled law that an indictment is sufficient if it states all the elements of the crime charged, adequately informs the defendant of the nature of the charges so that he may prepare a defense, and allows him to plead the judgment as a bar to future prosecutions. (other citation omitted). The offense charged in the counts at issue is violation of the anti-kickback statute. There is no question that the government has alleged each of the elements of an offense under the pertinent provision and that it has done so by essentially adopting the language of the statute itself

Takeaway

Affirmative Defense in Pre-Trial Motion to Dismiss. While defendants will very likely raise the employee exception or employee safe-harbor as an affirmative defense at trial, the district court in Novak further demonstrates that an indictment that ‘parrot[s] the language of a federal criminal statute’ is sufficient except in extraordinary circumstances.

Comparison to False Claims Act.In a civil False Claims Act action, defendants would have an opportunity to depose witnesses and to develop their affirmative defense that defendants are bona fide employees to position themselves to potentially prevail on a motion for summary judgment pursuant to Federal Rule of Civil Procedure 56. Here, however, as the district court strongly emphasized, “for better or worse there is no such thing as a motion for summary judgment in a criminal case” and the employee defense raised in the motion was premature.

Jury Instructions. In light of the recent Halifax trial where the jury was permitted to extensively analyzed the employee exception to Stark, defense counsel should be granted substantial flexibility in fashioning jury instructions that concisely convey what constitutes a bona fide employee so that the jury may properly render a verdict. Also, two questions remain: (i) whether, and to what extent, the court will permit the jurors to methodically review each and every factor relevant to a determination of whether a person is a bona fide employee and (ii) whether defense counsel will also request an alternative instruction with respect to the employee safe harbor. 

The Securities and Exchange Commission (SEC) Recently Charged a West Palm Beach, Florida based Hedge Fund with Fraud

The Securities and Exchange Commission (SEC) recently charged a West Palm Beach, Florida based hedge fund with fraud. According to the complaint, Weston Capital Asset Management LLC, and its founder and president Albert Hallac engaged in fraud by illegally draining more than $17 million from a hedge fund they managed and transferred the money to a consulting and investment firm known as Swartz IP Services Group Inc.  The transaction went against the hedge fund’s stated investment strategy and wasn’t disclosed to investors, who received account statements falsely portraying that their investment was performing as well or even better than before.  Weston Capital’s former general counsel Keith Wellner assisted the activities. The SEC further alleges that out of the transferred investor proceeds, Hallac, Wellner, and Hallac’s son collectively received $750,000.00 in payments from Swartz IP.  Weston Capital and Hallac also wrongfully used $3.5 million to pay down a portion of a loan from another fund managed by the firm.

“Investment advisers owe their clients a fiduciary duty of utmost good faith and full disclosure about what they’re doing with their money,” said Eric I. Bustillo, director of the SEC’s Miami Regional Office.  “Weston and Hallac dishonored that duty with Wellner’s assistance by secretly steering investor proceeds to a third party and then pocketing some of those funds.”

Weston Capital, Hallac, and Wellner agreed to settle the SEC’s charges along with Hallac’s son Jeffrey Hallac, who is named as a relief defendant in the SEC’s complaint for the purposes of recovering ill-gotten gains in his possession.  Wellner and Jeffrey Hallac each also agreed to pay $120,000 in disgorgement.

Takeaway

While this settlement is by no means a large settlement in financial terms – especially given some of the recent SEC settlements involving fraud, FCPA violations, and other egregious conduct – the settlement is a strong reminder that the SEC will continue to examine more registered investment advisers, including advisers attached to private equity and hedge funds.

Further, in this case, the fund’s general counsel appears to have been actively involved in the fraud.  In fact, indictments of general counsels are becoming increasingly common-place, e.g.,  general counsel’s of GlaxoSmith Kline and Detroit’s Pension Fund. Indeed, Laura Stevens, the assistant general counsel for GlaxoSmith Kline, was acquitted after suffering through two separate indictments, but after resigning from GSK Ms. Stevens cautioned: “I think the criminalization of the practice of law is here, and I don’t think it’s necessarily going away…The government will continue to be aggressive in looking at in-house counsel.” Recognizing that this case did not involve allegations of criminal conduct, the message is the same: general counsels may wind up in the cross-hairs of a civil enforcement action or a criminal investigation.

The SEC press release is available here

Special Fraud Alert Relating to Laboratory Payments to Physicians

The Office of the Inspector General for the Department of Health and Human Services (HHS-OIG) issued its first Special Fraud Alert relating to Laboratory Payments to Physicians. The Alert addressed two specific high risk arrangements which implicate the Federal Anti-Kickback Statute and, by extension, the False Claims Act: (1) blood specimen collection, processing and packaging arrangements and (2) registry arrangements.

Blood Specimen Collection, Processing, and Packaging Arrangements

OIG stated that it has become aware of “arrangements under which clinical laboratories are providing remuneration to physicians to collect, process, and package patients’ specimens” which typically involve payments from laboratories to physicians for certain specified duties which may include collecting the blood specimens, centrifuging the specimens, maintaining the specimens at a particular temperature, and packaging the specimens to avoid damage during transport. Often these arrangements involve a per-specimen or per-patient fee structure and include highly specialized tests.

OIG then set forth some of the characteristics of these arrangements that may be “evidence of unlawful purpose” as follows:

• Payment exceeds fair market value for services actually rendered by the party receiving such payment.
• Payment is for services for which payment is also made by a third party, such as Medicare.
• Payment is made directly to the ordering physician rather than to the ordering physician’s group practice, which may bear the cost of collecting and processing the specimen.
• Payment is made on a per-specimen basis for more than one specimen collected during a single patient encounter or on a per-test, per-patient, or other basis that takes into account the volume or value of referrals.
• Payment is offered on the condition that the physician order either a specified volume or more tests performed using different methodologies that are intended to provide the same reimbursable clinical information), or tests that otherwise are not reasonable and necessary or type of tests or test panel, especially if the panel includes duplicative tests (e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information).
• Payment is made to the physician or the physician’s group practice, despite the fact that the specimen processing is actually being performed by a phlebotomist placed in the physician’s office by the laboratory or a third party.

OIG clarified, however, that physicians may still use CPT Code 36145 (blood draw/venipuncture collection fee) and CPT Code 99000 (preparing a specimen to send to a laboratory) in connection with the collection, processing, and transport of blood specimens.

Patient Registry Payments

In addition to blood specimen collection arrangements and attendant fees, the Special Fraud Alert underscored that OIG has become aware of “arrangements under which clinical laboratories are coordinating or maintaining databases, either directly or indirectly or through an agent, purportedly to collect data on the demographics, presentation, diagnosis, treatment, outcomes, or other attributes of patients who have undergone, or who may undergo, certain tests performed by the offering laboratories,” generally, specialized expensive tests. Labs that participate in these types of registry arrangements boast that they are intended to advance clinical research to promote treatment, to provide physicians with valuable knowledge for patients with similar disease profiles, and to provide other benefits to physicians generally.

According to OIG, characteristics of such registry arrangements that may implicate the Federal Anti-Kickback Statute are as follows:

• The laboratory requires, encourages, or recommends that physicians who enter into Registry Arrangements perform the tests with a stated frequency (e.g., four times per year) to be eligible to receive, or to not receive a reduction in, compensation.
• The laboratory collects comparative data for the Registry from, and bills for, multiple tests that may be duplicative (e.g., two or more tests performed using different methodologies that are intended to provide the same clinical information) or that otherwise are not reasonable and necessary.
• Compensation paid to physicians pursuant to Registry Arrangements is on a per-patient or other basis that takes into account the value or volume of referrals.
• Compensation paid to physicians pursuant to Registry Arrangements is not fair market value for the physicians’ efforts in collecting and reporting patient data.
• Compensation paid to physicians pursuant to Registry Arrangements is not supported by documentation, submitted by the physicians in a timely manner, memorializing the physicians’ efforts.
• The laboratory offers Registry Arrangements only for tests (or disease states associated with tests) for which it has obtained patents or that it exclusively performs.
• When a test is performed by multiple laboratories, the laboratory collects data only from the tests it performs.
• The tests associated with the Registry Arrangement are presented on the offering laboratory’s requisition in a manner that makes it more difficult for the ordering physician to make an independent medical necessity decision with regard to each test for which the laboratory will bill (e.g., disease-related panels).

Federal Health Care vs. Non-Federal Health Care Business

Another significant takeaway from the Alert is that OIG concerns are not abated when these arrangements apply only to specimens collected from non-Federal health care program beneficiaries since arrangements that “carve out” Federal health care program business may still violate the Anti-Kickback statute. Indeed, if the remuneration from non-federal health care business is designed to influence future referrals related to Federal health care program business, that arrangement may well implicate the Anti-Kickback Statute. According to OIG, “[b]ecause physicians typically wish to minimize the number of laboratories to which they refer for reasons of convenience and administrative efficiency, [arrangements] that carve out Federal health care business may nevertheless be intended to influence physicians’ referrals of Federal health care program business to the offering laboratories.”

The Special Fraud Alert is available here