September 5, 2017

Healthcare Law Update: September 2017

Holland & Knight Update
Nathan A. Adams IV | Michael E. Hantman | Andrew I. Namkung | Melissa A. Wong

OIG Advisory Opinions

Manufacturer's Free Replacement of Spoiled Pharmaceutical Products Authorized

By Andrew I. Namkung

On Aug. 25, 2017, the U.S. Department of Health and Human Services' (HHS) Office of Inspector General (OIG) published Advisory Opinion 17-03, allowing under the Federal Anti-Kickback Statute (AKS) a pharmaceutical manufacturer (requestor) to offer physicians, clinics and hospitals (customers) free replacements of the manufacturer's products that become spoiled. The requestor is a manufacturer of biologics and other pharmaceutical products (products) that require specific handling, such as the maintenance of a certain temperature or the avoidance of exposure to direct sunlight.

Specifically, under the arrangement, the requestor would replace for free products that become unusable or spoiled after the customers' purchase due to (1) mishandling or breaking, (2) improper storage, (3) admixture error, or (4) an unforeseen patient condition or the patient missing an appointment. The replacement would be not available if the product was already administered or billed for, and there would be quantity limitations on how many products may be replaced. The OIG began by observing that the arrangement would not qualify for the regulatory safe harbor or statutory exception for warranties because the arrangement is for products that were spoiled due to circumstances other than a defect or the requestor's failure to meet specifications. Rather, the arrangement is for replacement of products spoiled after the sale.

The OIG nevertheless approved the arrangement under the AKS because, first, the arrangement increases patient safety and quality of care by decreasing the risk that a customer might administer spoiled products to patients to avoid financial loss. Second, because the arrangement only replaces products that were already selected and intended to be used but were not administered or billed for, the risk of overutilization or increased costs to federal health care programs is low. Third, because the arrangement also includes quantity limitations, the risk of a customer choosing these products over other similar pharmaceutical products is low. Finally, the OIG noted that just as a homeowner would not act recklessly in reliance of a homeowner's insurance policy, the arrangement would not unduly influence the customer into diminishing efforts to maintain the quality of the product or otherwise abuse their rights under the arrangement. As a result, the OIG concluded that it should not impose administrative sanctions under the AKS for the arrangement.


Claimed Purchase of Unapproved Drug Ingredient Leads to FCA Claim

By Nathan A. Adams IV

In United States ex rel. Campie v. Gilead Sciences, Inc., 862 F. 3d 890 (9th Cir. 2017), the court of appeals reversed the district court's order dismissing relators' claim against their former employer, alleging it violated the False Claims Act (FCA) by allegedly making false statements about its compliance with U.S. Food and Drug Administration (FDA) regulations regarding certain HIV drugs, and by firing one of the relators who discovered and reported the violations. The relators alleged that the defendant in its new drug application to the FDA represented that it would source the active ingredient emtricitabine from specific registered facilities, but actually contracted with another facility for the ingredient. The defendant sought FDA approval for this roughly two years later, but allegedly falsified or concealed data in support of this application. The defendant allegedly never acknowledged nor notified the FDA about certain bad test results or contamination and adulteration problems. The defendant argued that a claim for nonconforming goods is limited to situations where, in contrast to this case, the goods had no value or an express specification in a payment contract between supplier and government is violated. The court disagreed and found that the relators adequately alleged a factually false certification by claiming the defendant supplied "misbrand[ed]" goods; and the defendant adequately alleged an implied false certification by claiming the defendant submitted claims for payment or reimbursement for the HIV drug, thereby implicitly representing that it provided medications approved by the FDA manufactured at approved facilities and not adulterated or misbranded. The district court rejected the relators' claims in part because the alleged fraud was directed at the FDA, rather than the payer, and because payment was not conditioned on the falsity, but the court of appeals considered this irrelevant. The court of appeals also disagreed with the district court about materiality: "Mere FDA approval cannot preclude False Claims Act liability, especially where, as here, the alleged false claims procured certain approvals in the first instance."

Claimed Defects in Metal-on-Metal Hip Replacement Device Gives Rise to Indirect False Claim Submission

By Nathan A. Adams IV

In United States ex rel. Nargol v. Depuy Orthopaedics, Inc., No. 16-1442, 2017 WL 3167622 (1st Cir. July 26, 2017), the court of appeals ruled that relators who brought a qui tam action under the FCA and various state analogues, stated a claim for indirect false or fraudulent submission, but not direct false or fraudulent submission or the design defect theory of fraud. Relators claim to be experts in hip replacement techniques and devices. They claim that the defendant made a series of false statements to the FDA and doctors, and that but for these misrepresentations, the FDA would not have approved the defendant's metal-on-metal hip replacement device or would have withdrawn its approval, and doctors would not have certified the devices for government reimbursement. They also claim that the defendant falsely palmed off devices that, due to latent manufacturing defects, materially deviated from the design specifications of the FDA-approved device. The relators claim that the defendant made direct claims to the federal government and various state governments for payment and were indirectly responsible for the claims for payment that healthcare providers submitted for reimbursement for the devices.

The district court dismissed the relators' third amended complaint with prejudice due to their lack of particularity. The court of appeals agreed with the district court in dismissing relators' design-defect theory of fraud. The court distinguished Campie on the grounds that the FDA was not alleged to have ever withdrawn its approval, even long after it acquired full knowledge of the relators' claims as in this case: "absent some action by the FDA, we can see no plausible way to prove to a jury that FDA approval was fraudulently procured." The court also concluded that the relators pled insufficient allegations that the defendant directly submitted false claims for payment to the government. But, the court of appeals reversed the district court ruling as related to indirect fraudulent submission because of a "more flexible" Rule 9(b) standard pursuant to which the plaintiff showed that it is statistically certain that the defendant caused third parties to submit false claims to the government over a five-year period involving thousands of Medicare and Medicaid recipients and doctors without reason not to submit claims for reimbursement for noncompliant devices.

EMTs State Retaliation Claims, But Courts Disagree Whether They Must Allege Presentment of False Claims with Specificity

By Nathan A. Adams IV

In United States ex rel. Chorches v. American Medical Response, Inc., No. 15-3930, 2017 WL 3180616 (2d Cir. July 27, 2017), the court of appeals vacated and remanded a district court order dismissing the qui tam claims of a former employee of an ambulance company and the trustee of his bankruptcy estate that the company made false statements and submitted false claims to the government for reimbursement under Medicare and Medicaid, and that the company retaliated against him for his refusal to falsify a document. The plaintiff alleged that the defendant's supervisors instructed fellow EMTs falsely to certify ambulance transports as medically necessary and submitted claims that the defendant knew were not properly reimbursable under Medicare. When the plaintiff refused to falsify a report, the defendant fired him. The district court dismissed the plaintiff's retaliation claim on the grounds that his refusal to falsify a report did not constitute protected activity. The court of appeals reversed on the ground that the plaintiff's action was "intended and reasonably could be expected to prevent the submission of a false claim to the government."

The court of appeals also reversed the district court's dismissal of the plaintiff's qui tam claim for failure to satisfy Rule 9(b). First, it ruled that the FCA's so-called "public disclosure bar" is not jurisdictional and was waived by the failure to raise it as an affirmative defense or in its motion to dismiss. Second, the court of appeals ruled that the complaint adequately alleges (1) that billing information was peculiarly within the knowledge of the defendant and unavailable to EMTs, and (2) a basis for a strong inference that specific false claims were indeed submitted to the government. The plaintiff made particularized allegations of a scheme to falsify records. Without personal knowledge of submission, the plaintiff alleged that he was informed that the revisions he made to the reports were required to qualify runs for Medicare reimbursement. According to the court, the defendant failed to diffuse the strong inference this established. In so holding, the court found that a qui tam complaint can satisfy Rule 9(b) by making plausible allegations "on information and belief," instead of exclusively allegations on personal knowledge.

The facts of United States ex rel. Sharpe v. Americare Ambulance, No. 8:13-cv-1171-T-33AEP, 2017 Wl 2840574 (M.D. Fla. July 3, 2017) are similar. As in Chorches, the plaintiff alleged that the defendant's supervisors instructed fellow EMTs falsely to certify ambulance transports as medically necessary and submitted claims that the defendant knew were not properly reimbursable under Medicare. After the plaintiff informed a supervisor that he thought the company was committing Medicare fraud, the defendant allegedly falsely accused him of taking company files and sabotaging the company's computer network and terminated him. The district court found the following allegations sufficient to support the plaintiff's retaliation claim: that he " 'refused to write reports according to Americare's directives and informed management that [1] Americare was knowingly committing fraud,' which resulted in lower performance evaluations," and (2) " 'he filed a complaint with the government informing the government that Americare was committing Medicare fraud,' which resulted in his termination." But the district court dismissed the former EMT's FCA claims because the plaintiff failed to allege presentment of a false claim with particularity and failed to connect the alleged transportation scheme to the actual submission of a false claim. The district court emphasized that the plaintiff must allege more than that it is "likely" that claims were submitted to the government. The district court also ruled that the plaintiff failed to allege the element of falsity with particularity.


DOJ States Antitrust Claim Due to Hospital's Anti-Steering Insurance Provisions

By Matthew R. Goldfarb

A federal district court has denied a motion to dismiss filed by the Charlotte-Mecklenburg Hospital Authority d/b/a Carolinas Health Care System (CHS) in response to the U.S. Department of Justice (DOJ) Antitrust Division and the State of North Carolina's June 2017 complaint alleging that anti-steering provisions in CHS's insurer contracts violate Section 1 of the Sherman Act. United States v. Charlotte-Mecklenburg Hosp. Auth., No. 3:16-cv-00311, 2017 WL 1206015(W.D. N.C., Mar. 30, 2017).

The DOJ alleges that CHS maintains and enforces steering restrictions in insurer contracts, ranging from outright prohibitions on steering to provisions granting CHS the right to terminate if the insurer steers patients. The DOJ alleges that such practices insulate CHS from competition, allowing CHS to maintain higher prices in violation of applicable antitrust laws.

The district court, in denying CHS's motion to dismiss, concentrated its review on whether the DOJ's complaint sufficiently alleged anticompetitive effects in the relevant market, such as increased prices, reduced output and reduced quality. These can be shown through either an actual adverse effect on competition (direct harm) or sufficient market power to cause an adverse effect on competition (indirect harm).

The district court concluded that the DOJ's complaint did indeed sufficiently allege allegations of both direct and indirect harm by alleging that, as a result of such restrictions, "individuals and employers in the Charlotte area pay higher prices for health insurance coverage, have fewer insurance plans from which to choose, and are denied access to consumer comparison shopping and other cost-saving innovations and more efficient health plans that would be possible if insurers could steer freely."


Medicare Advantage and Part D Audit and Enforcement Update

By Melissa A. Wong

The Centers for Medicare & Medicaid Services (CMS) will be issuing its last round of audit engagement letters to Medicare Advantage organizations and Part D sponsors (collectively, the sponsors) by Sept. 25, 2017. Once these 2017 program audits are complete, approximately 46 percent of all sponsors, representing a total of 94 percent of all enrolled Medicare Advantage and Part D beneficiaries, will have been audited by CMS since 2015. CMS program audits are comprehensive and include in-depth examination of key program areas, including compliance program effectiveness, drug formulary and benefit administration, and coverage determinations, appeals and grievances handled under both the Medicare Advantage and Part D benefits. The average time between the issuance of an audit engagement letter and CMS's final program audit report spanned 181 days in 2016. The average time before a full audit closeout, based on 2015 data, took another 262 days, mostly due to the sponsor's use of independent auditors to perform audit validations. Most of the audits conducted in 2016 still remain open.

CMS has the authority to impose a variety of enforcement actions as a result of program audit violations, including the issuance of civil monetary penalties (CMPs) and even termination of a Medicare Advantage or Part D plan. Of the 37 sponsors audited in 2016, 46 percent of sponsors received an enforcement action based on the results of their program audits, totaling almost $7.3 million in CMPs. Notably, unlike past years, CMS did not impose any intermediate sanctions in 2016, which would have suspended a sponsor's ability to market to or enroll new Medicare Advantage or Part D beneficiaries.

As recommended by CMS, most sponsors perform practice audits throughout the year to prepare for an actual program audit and to identify problem areas in time to address them. It is also important for sponsors to review common trends in CMS program audit findings to proactively target the most frequent audit deficiencies. Although overall and program area audit scores improved markedly in 2016 compared to 2015, the following are certain program audit "pitfalls" that continue to appear year over year:

  • CMS may identify program deficiencies so severe that immediate corrective action is required (ICAR). For example, this may occur in situations where the identified deficiency results in a lack of access to care or poses a threat to beneficiary health and safety. Of the 10 most common ICARs that result from CMS program audits, nine are directly related to the sponsor's prior authorization and coverage determination process. The most common deficiency, resulting in 21 ICARs across all sponsors audited in 2016, stemmed from the sponsor's failure to appropriately auto-forward coverage determination and appeal requests to an independent review entity within required timeframes. The second most common deficiency, resulting in 19 ICARs, involved the misclassification of coverage determination and appeal requests as grievances or customer service inquiries, impacting required timeframes to render a decision on coverage.
  • Although such deficiencies do not rise to ICAR status, the most common audit finding among sponsors resulted from the issuance of coverage determination denial letters that failed to meet regulatory requirements for providing an adequate rationale for the denial in a way that is easily understandable to beneficiaries. This audit condition affected 43 percent of sponsors in 2016 under the Part D benefit and 80 percent of sponsors under the Medicare Advantage benefit.
  • From a compliance program effectiveness perspective, 32 percent of sponsors were cited for failing to review OIG and General Services Administration (GSA) exclusion lists for new employees and contractors prior to hire and on a monthly basis. Although sponsors may have OIG and GSA exclusion check processes in place, it is important to ensure that screening extends not only to employees, but also to contractors, temporary employees, volunteers, consultants, key executives and members of the sponsor's governing body. Such screening must also be performed at the first-tier, downstream and related-entity level for any delegated entities and personnel providing health or administrative services for a Medicare Advantage or Part D beneficiary.
  • Another frequent audit deficiency involves the proper administration of CMS's transition policy for any beneficiaries newly enrolled in the Medicare Part D benefit, or for those who switch between Part D plans or are negatively impacted by drug formulary changes. CMS requires a process to allow for and facilitate a "transition fill" in these circumstances. Forty-six percent of sponsors were cited for this audit condition in 2016.

Audits, whether self-administered or conducted by CMS, remain the primary method to measure a sponsor's compliance with CMS requirements and identify areas of improvement. Sponsors should continue to monitor CMS audit guidance and key audit findings in preparation for their own Medicare Advantage and Part D program audits.

Healthcare Litigation

No Small Feat: Preparing the Medical Doctor to Testify

By Daniel I. Small and Michael E. Hantman

Medical doctors are generally highly intelligent, well educated, caring and articulate. But they often flop as witnesses because their lawyers fail to suitably prepare them or they reject their counsel. The process of serving as a witness is difficult for anyone, but especially for doctors due to the "curse of the intelligent witness."

The daily work of many doctors bears no resemblance to trial practice. Trials are about retrospective blame, whereas doctors engage in prospective problem-solving. They work together in an atmosphere of mutual respect and attempt to find the best course for the patient, and implement a plan often grounded in agreement. Many doctors are not familiar with an environment where they are attacked and where conscientious conclusions are not paramount.

Generally speaking, three key concepts explain why doctors have problems as witnesses: environment, expertise and emotions.


Doctors work in a collegial, problem-solving environment. They are respected, in control and dedicated to the patient's needs. It is hard for them to accept that much of that takes a backseat in litigation. After getting sued, the doctor has lost control. Lawyers questioning the doctor will be ready to challenge the witness, after having read the relevant literature, closely examining the facts and consulting with experts. The questioner will not hear an answer, nod favorably and move on. The doctor must accept these dynamics and understand that not just mastery of the facts, but also strategies for being a disciplined witness, are what count.

A doctor should have a degree of control over the testimony, but it is control only gained through discipline and rules: slow down, speak carefully, be patient, don't try too hard, don't answer incomprehensible questions, don't guess and don't volunteer information. Much of this is counterintuitive to doctors, so preparation is a challenge.

In their daily lives, doctors solve problems by working with others and searching for consensus. Agreement is not always reached, but the process is collegial and respectful. In litigation, doctors have difficulty appreciating they will never convince the other side that they acted properly. They fail to appreciate that constant attacks are intended to lead to feelings of doubt, fear, frustration or anger, and they must not play that game. Patience and persistence are the only helpful responses: no matter how many times a question is asked, the answer remains the same.

The doctor must grasp that the search for truth in trial happens in an adversarial setting: The goal is to convince the factfinder of the appropriateness of the original decisions, not to explore options or to wax philosophic.


One of the toughest lessons for doctors as witnesses to learn is that their expertise, background and good intentions are not overriding. Intentions at the time of the event take a backseat to the opinions of others who may have never met the patient. In many cases, doctors have done their best. Now they are suddenly confronted with the notion that their actions will be governed by an expert the doctor has never met. Their actions may be called into question by literature they have not read. This is difficult for doctors to accept.

Doctors cannot be their own experts. Expert help is needed to assist counsel to anticipate the other side's tactics and prepare the doctor. Then, the doctor must learn the core role of the expert: express an independent expert opinion devoid of emotion, passion and sentiment.

Doctors are trained using an entirely different process. They are comfortable defending themselves during peer reviews. When they approach litigation, they bring these same tactics to the table. They still think that it is up to them, that they can be their own experts and that they will be able to explain their conduct. What they don't understand is that it is much better at trial for others to make their case.

Most of the doctor's job at trial is to know the record. The quickest way for a doctor to be discredited is by failing to know the record. Ignorance of the facts will cause the jury to decide the doctor does not care about the case or patient. And, similarly, the doctor must know the deposition transcripts. Few things are more damaging than the doctor changing his or her story.


Doctors are trained not to be emotional about other people's problems. They have a tough time when their own conduct is questioned because they lack similar training or experience. Typically, they get emotional and do not know how to cope. When personally sued, their emotions run the gamut from fear and denial to self-doubt and anger. Their emotional inexperience can result in going too far and being too definitive, or not going far enough and being too defensive. Both are problems.

The cure? Be relentlessly polite. This is a rule for all witnesses, but especially for doctors. Anger is dangerous. Unpleasantness hurts the witness more than the questioner. The doctor should be warned to never be patronizing or sarcastic and to avoid arguing. Winning a minor point is a shallow victory if, in the process, the factfinder considers the doctor difficult.

Some doctors deal with emotion by diving into science and jargon. They risk coming across as cold, unfeeling automatons. The goal is to come across as caring and sincere. Avoid the blame game. Unless it has been agreed on as a clear strategy, finger-pointing benefits the plaintiff.

Appearance is paramount. No one wants to be told how to behave. Yet, when venturing into the courtroom, doctors should be told to look, act and talk like the caring professionals they are. Attire should be neat and conservative. Attitudes should always be professional, caring and respectful, especially when discussing patients. Failing to display compassion is dangerous.

Keeping things simple is a virtue, not a vice. When professional judgment is questioned, a doctor's natural response is to overcompensate and try to impress. But, it is more important for the doctor to keep testimony simple and not volunteer data. A deposition is not a conversation.

Proper testimony follows a somewhat stilted pattern of question, pause, answer, stop. There are no shortcuts. Doctors as witnesses must follow that fixed rhythm, speak in plain English and avoid jargon. When jargon must be used, the doctor should stop and explain it in lay terms.


Although a doctor may believe he or she is smarter and better trained than all the other people in the courtroom, these "other people" are the judges of that doctor's competence. Consequently, the doctor has no choice but to value their roles. Litigation is unnatural. The doctor serving as a witness must get used to speaking in an odd setting where the language of questions and answers and witness discipline is paramount. The entire case depends upon it. 


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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