Process Improvements Not a Basis to Establish Scienter: District Court Grants Summary Judgment to Defendants
In a January 10, 2019, decision, the US District Court for the District of Arizona granted summary judgment to Defendants because Relators failed to raise a genuine issue of material fact on the issue of “knowledge” under the False Claims Act (FCA) which, as everyone knows by now, includes deliberate ignorance or reckless disregard. The decision is significant for the simple fact that courts can be reluctant to address scienter on summary judgment, and in many cases prefer to simply let the issue go to trial. Moreover, the court’s opinion makes clear that corrections to claiming issues and improvements to systems that result in better claims submission do not function as evidence of knowledge or recklessness under the FCA. In tort law parlance, “remedial measures” are not evidence of fraud.
In Vassallo v. Rural/Metro Corp., a qui tam lawsuit in which the government declined to intervene (but filed a statement of interest attempting to support the Relator’s opposition to summary judgment), the allegations primarily concerned Defendants’ transition from using internal coders to an outside coding vendor to code claims for ambulance transports. There were some alleged issues with the coding performed by the outside coding company, which Defendants worked to improve and correct during and after the transition. Notably, Defendants had been operating under a Corporate Integrity Agreement (CIA) during the time period at issue, and consistently received positive results from the Internal Review Organization (IRO) with respect to coding, billing and claims submission.
The district court held that no reasonable jury could have found that Defendants acted with deliberate indifference or reckless disregard. Relators contended, among other things, that Defendants’ transition to the outside coding vendor was reckless, and that they completed the transition despite knowing about the vendor’s coding and billing errors and issues. In response, Defendants pointed to evidence regarding their training and oversight efforts, their instructions that the vendor’s coders should undercode if they had any doubt about the correct code to be used, their positive results under the CIA, and their retention of Deloitte to address any continued issues with the vendor’s coding.
The government’s statement of interest took issue with Defendants’ reliance on their CIA compliance, arguing that using the level of compliance found by the IRO under the CIA effectively lowered the standard of compliance to which Defendants should adhere as a regulatory matter. The court rejected the government’s argument, finding that the Defendants were pointing to the CIA “not as an excuse from their regulatory obligation to report and return overpayments, but as evidence of efforts to monitor and improve compliance, and thus, of a lack of recklessness.” Moreover, “Relators’ claim concerns Defendants’ decision to outsource their coding and billing operations, not an alleged failure to reimburse Medicare for overpayments discovered during CIA-related audits. The Government’s input is of limited use then.”
With respect to Relators’ claims, the court first observed that “[t]he quintessential examples of reckless disregard or deliberate indifference in the healthcare context involve a provider’s failure to take reasonable steps to ensure the accuracy of its claims for government reimbursement.” The court held that Relators had not produced the necessary evidence to survive summary judgment. Rather:
The undisputed facts show that Defendants conducted a multi-month transition to [the vendor and to new billing software], instructed coders to err on the side of under-coding, limited coders to one or two markets, relied on an account manager and project coders who had received ambulance billing certifications, worked … to provide onsite trainings during the transition, and engaged in continued training and compliance efforts after the transition was complete. Relators’ evidence does little more than second-guess the wisdom of these efforts.
Implicit in this decision is the recognition that when issues are discovered with respect to billing or other compliance issues, most companies take steps to address them. The fix is not always immediate, but instead is a process. The notion that reasonable steps taken as part of an improvement process can somehow be used to establish fraud under the FCA is antithetical to the purpose of the statute itself, and would deter corrective measures of the type Defendants undertook here. The court got this right.