Health Law Daily Mere negligence is not enough to allege FCA violation
Tuesday, June 16, 2020

Mere negligence is not enough to allege FCA violation

By Jeffrey H. Brochin, J.D.

Hospitals’ failure to properly disclose or reduce the costs they reported for their self-funded employee healthcare benefits program did not amount to a knowing violation of the related-party rule that would constitute knowingly committing fraud for FCA purposes.

A federal appeals court for the 4th Circuit has affirmed the dismissal of a False Claims Act (FCA) (31 U.S.C. §3729 et seq) lawsuit filed by a former employee against two North Carolina hospitals. The relator alleged that the hospitals knowingly submitted fraudulent cost reports to Medicare, failing to properly disclose or reduce the costs they reported for healthcare benefits provided to their own employees, and that this conduct constituted a knowing violation of the FCA. He also claimed that in response to the filing of his qui tamaction, one of the hospitals – his former employer – retaliated against him by pressuring a subsequent employer to fire him years later. The appeals court agreed with the circuit court that the relator failed to establish the requisite scienter (U.S. ex rel Complin v. North Carolina Baptist Hospital, June 15, 2020, per curiam).

Related-party rule and TPA exception. The hospitals that the Relator complained of provide medical care and services to their own employees through self-funded health benefits plans, administered by a jointly owned entity, MedCost Benefit Services, LLC (MedCost). According to the relator, the hospitals’ plans are subject to the related-party rule (42 C.F.R. § 413.17), which requires hospitals to report their costs for providing care to their own employees as related-party transactions, and to submit for Medicare reimbursement only their actual, out-of-pocket costs rather than the amount charged. There is an exception to the related-party rule for plans administered by a third-party administrator (TPA), but the relator claimed that the TPA exception should not apply because MedCost was merely a plan supervisor and not an entity that qualifies as a TPA.

Post-termination retaliation. The relator also filed a claim for retaliation, alleging that long after his 2007 separation from North Carolina Baptist Hospital (NCBH), upon learning of his qui tam action in 2011, NCBH convinced a subsequent employer to fire him in 2013. The district court dismissed the FCA claim upon a finding of lack of scienter by the hospitals, and it dismissed his purported retaliation claim after finding that the facts alleged did not meet the statutory definition for protected activity and related termination. The relator then appealed.

Scienter a rigorous key element. The appeals court restated that the FCA imposes liability only when a false claim is "knowingly" presented, establishing a scienter element that requires actual knowledge of falsity or deliberate ignorance or reckless disregard of the truth or falsity of the information provided. Honest mistakes or incorrect claims submitted through mere negligence are not enough. In the instant case, the relator’s complaint lacked any specific factual allegations that could support a finding of scienter, but he asked the court to infer scienter from the alleged regulatory violation itself. He argued that because the hospitals were sophisticated entities presumed to know the law, their failure to comply with the related-party rule could only have been done purposely. The appeals court rejected the argument. Even assuming there had been a violation of the related-party rule, that fact alone was not sufficient to plausibly allege scienter in the FCA context. Furthermore, that insufficiency was especially true given regulatory ambiguity as to whether MedCost was or was not a TPA, and, whether the related-party rule even applied to the transactions in question. Accordingly, the appeals court found a lack of scienter and affirmed the district court’s dismissal of the FCA claim.

Retaliation claim dismissed. The appeals court also examined the facts surrounding the relator’s firing from an unrelated job several years after his separation from NCBH and two years after the filing of his qui tam action. The district court had rested its dismissal on two alternative and independent grounds: the relator’s failure to plead facts that would establish the necessary causal nexus between his protected activity and his termination by his new employer in 2013; and its conclusion that the FCA’s retaliation provision does not provide a remedy where, as here, the alleged retaliation is against a former rather than current employee. The appeals court agreed with the analysis and affirmed the dismissal of the.

The case is No.: 19-1243.

Attorneys: William Paul Lawrence, II (Waters & Kraus, LLP) for the United States. Sandra L.W. Miller (Womble Bond Dickinson LLP) for North Carolina Baptist Hospital and Charlotte-Mecklenburg Hospital Authority d/b/a Carolinas HealthCare System.

Companies: North Carolina Baptist Hospital; Charlotte-Mecklenburg Hospital Authority d/b/a Carolinas HealthCare System

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