Conditions of participation vs. conditions of payment – a recent trend in False Claims Act cases

Conditions of participation vs. conditions of payment – a recent trend in False Claims Act cases

In Brief

  • Recently, several courts have dismissed False Claims Act suits after determining that the allegations involved “conditions of participation” rather than “conditions of payment” and therefore did not involve “false” claims for purposes of the False Claims Act.
  • Although the distinction between “conditions of payment” and “conditions of participation” is fact-specific and better defined in some jurisdictions than in others,  defendants facing a False Claims Act lawsuit should consider whether an argument that the allegations are mere conditions of participation could prove a successful defense.

Recently, several courts have dismissed False Claims Act suits on the basis that the allegations involved conditions of participation, rather than conditions of payment.  The rationale of these courts is that a claim for payment is only “false” for purposes of the False Claims Act when the alleged misconduct involves compliance with statutes or regulations that are a condition of governmental payment of that claim.  When, instead, the alleged misconduct involves compliance with statutes or regulations that are conditions of participation in a federal health care program, there is no false claim for payment that can be regulated by the False Claims Act.  For defendants facing False Claims Act allegations, then, arguing that the allegations involve conditions of participation could prove a valid defense in some cases.

Two recent decisions – United States ex rel. Fox Rx Inc. v. Omnicare Inc. and United States ex rel. Escobar v. Universal Health Services Inc. – illustrate this trend.

United States ex rel. Fox Rx Inc. v. Omnicare Inc., Civ. A. No. 12cv275 (DLC) (S.D.N.Y.)

On August 12, 2014, the U.S. District Court for the Southern District of New York dismissed a False Claims Act suit against three pharmacies and a pharmacy benefits administrator.  The defendants provide pharmacy services to long-term care facilities and dispense drugs to 1.4 million facility residents.  The suit was brought by Fox Rx, Inc., which sponsored prescription drug plans pursuant to the Medicare Part D prescription drug benefit program.  

Sponsors, like Fox, contract with Medicare to administer prescription drug plans; they work with pharmacies to provide the needed drugs to their enrolled beneficiaries.  When a prescription is filled, the pharmacy presents a claim to Fox, which, in turn, notifies Medicare and Medicaid.  Fox alleges that for some of these filled prescriptions, the defendant pharmacies (1) failed to substitute generic drugs for brand names in states that mandate such substitution, and (2) dispensed drugs beyond the national drug code termination date in states that prohibit dispensing drugs after their shelf-life expiration dates.  Fox’s theory for a False Claims Act suit, then, was that the defendants had falsely indicated that the dispensed drugs were “covered” by Medicare and had overcharged Medicare and Medicaid, as a result.

The court viewed the allegations as conditions of participation that could not support a False Claims Act theory. The court reasoned that the regulations at issue were “‘irrelevant’ to the Government’s disbursement decisions” and that no other regulations or statutes conditioned reimbursement on the substitution of generic drugs or on national drug code termination dates.

United States ex rel. Escobar v. Universal Health Services Inc., Civ. A. No. 11-11170-DPW (D. Mass.)

In March 2014, the U.S. District Court for the District of Massachusetts dismissed a False Claims Act lawsuit brought by two individuals, Carmen Correa and Julio Escobar, who alleged that the defendant had provided their daughter with mental health services conducted by unlicensed counselors.  Correa and Escobar’s theory was that the defendant’s claims for government reimbursement of these mental health services were false because the defendant was “systematically violating” state health regulations.

The court scrutinized the regulations cited by Correa and Escobar and concluded that they failed to establish that the claims at issue were “false” because the allegations involved conditions of participation, rather than conditions of payment.  In other words, the False Claims Act is designed to police financial fraud on the government; without such fraud, the False Claims Act is not an appropriate mechanism for policing general regulatory compliance.

Recently, however, the Massachusetts Attorney General filed an amicus brief asking the First Circuit to reverse the lower court’s decision.  In the Attorney General’s view, the lower court too rigidly applied the distinction between conditions of participation and conditions of payment.  The Attorney General seeks additional “clarity regarding the legal test for ascertaining when a claim can be considered ‘false.’”  

Whether the First Circuit will reverse in the Correa and Escobar case remains an open question.  Additionally, the distinction between conditions of payment and conditions of participation is fact-specific and better defined in some jurisdictions than in others.  Nonetheless, a defendant facing a False Claims Act lawsuit should consider whether an argument that the allegations are mere conditions of participation could prove a successful defense.